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Finance > Unit 1 Lecture > Flashcards

Unit 1 Lecture Flashcards

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1
Q

Classical Microeconomics view point

A

Inputs–|Production Function|–Output

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2
Q

Legal Viewpoint

A

Dealing with the legalities of ownership and control

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3
Q

Sole Ads

A

easier to start, least regulated, owner keeps all profits, taxed once

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4
Q

Sole Dis

A

limited life to owner, equity capital limed to personal wealth, unlimited liability, difficult to sell

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5
Q

Partner Ad

A

two or more owners, more capital available, easier to start, taxed once

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6
Q

Partner Dis

A

unlimited liability, dissolves when one dies or wishes to sell, difficult to transfer

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7
Q

Corporation Adv

A

limited liability, unlimited life, sep of owner and management, transfer is easy, easier to raise capital

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8
Q

Corporation Dis

A

Sep of management and ownership (agency problems), double taxation

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9
Q

Latin word for corporation

A

corpus, which means body

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10
Q

Backstory of limited liability

A

Took hold in 1811 in corporate law in NY, represented significant invention

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11
Q

Limited Liability

A

a corporation that guarantees that you as a shareholder will not be liable for the debts of the company

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12
Q

Goal of the firm

A

Maximize the market value of the existing owners equity

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13
Q

Finance

A

The study of valuation and management of risk

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14
Q

Finance points (5)

A

Pillar of civilized society, a structure, allocating resources, incentivizing people to do productive things, managing risks

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15
Q

Basic areas of finance

A

Behavioral, Financial engineering, financial econometrics, and market microstructure

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16
Q

Behavioral finance

A

study of influence of psychology on the behavior of investors or financial analysts

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17
Q

Financial Engineering

A

use of mathematical techniques to solve financial problesm

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18
Q

Financial econometrics

A

application of statistical methods to financial market data

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19
Q

market microstructure

A

the study of financial markets and how the operate

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20
Q

Corporate finance should answer questions in which three areas

A

Capital budgeting, capital structure, and working capital managment

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21
Q

Capital budgeting Q

A

What long term investments should the firm take on

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22
Q

Capital Structure Q

A

Where will we get the long term financing to pay for the investment

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23
Q

Working capital management Q

A

How will we manage the everyday financial activities of the firm? How much inventory should the firm carry? What credit policy is best? Where will we get our short-term loans?

24
Q

Principles 1-3

A

Risk-Return Trade-Off, The time value of money, Cash-Not profits-Is king

25
Q

Principles 4-6

A

Incremental cash flows, the curse of competitive markets, efficient capital markets

26
Q

Principes 7-9

A

The agency problem, Taxes Blas business decisions, All risk is not equal

27
Q

Principal 10

A

Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance

28
Q

Asset

A

A physical property or intangible right that has economic value

29
Q

Real asset

A

a physical property that provides owner with physical service

30
Q

The material wealth of a society is determined by

A

the productive capacity of its economy

31
Q

Capacity

A

a function of the real assets of the economy

32
Q

real assets generate

A

net income to the economy

33
Q

financial assets define the

A

allocation of income or wealth among investors

34
Q

Financial instrument

A

written legal obligation of a transfer of something of value from one to another, at a future time with certain conditions

35
Q

Legal obligation

A

Financial instruments are backed by government rules and regulations

36
Q

financial instruments will dicatate

A

the payments of money from one person/ firm to the other

37
Q

Financial assets of householders are

A

liabilities of the issuer of securities

38
Q

when we aggregate over all balance sheets these claims cancel out leaving

A

only real assets as the net wealth of the economy

39
Q

Reasons for the existence of financial assets

A

because the savings of various economic units during a time differ from their investment in real assets

40
Q

Saving-surplus (deficit) economic units

A

economic units whose current savings exceed (are lower than) their investment in real assets

41
Q

two channels

A

financial intermediaries and financial markets

42
Q

Financial intermediaries

A

institutions that borrow and pool funds from savers and sell them to borrowers

43
Q

Financial intermediaries ex

A

commercial banks, credit union, finance companies

44
Q

Primary markets

A

those in which newly issued claims are sold to initial buyers and sellers

44
Q

Secondary Markets

A

those in which claims that have already been issued are sold by one investor to another

45
Q

Capital Markets

A

consists of the institutions and procedures that provide for transactions in long term financial instruments

46
Q

Money Markets

A

consists of the institutions and procedures that provide for transactions in short-term debt insturments

47
Q

Risk sharing (diversification)

A

savers hold many assets, reducing uncertainty

48
Q

Liquidity services

A

a measure of how easily an asset can be converted into cash

49
Q

information services

A

the collection and communication of information or facts about borrowers and expectations about returns on financial assets

50
Q

the financial system is essential to assure

A

adequate capital formation and economic growth in a modern economy

51
Q

investment

A

the current commitment of money or any other resource in the expectation of reaping future benefits

52
Q

Financial assets provide

A

a ready vehicle to transfer consumption through time

53
Q

The problem at the heart of financial markets

A

asymmetric information and principal-agent problem

54
Q

Asymmetric information “information failure”

A

when one party to an economic transaction possesses greater material knowledge than the other party (information inequality)

55
Q

Principal-agent problem

A

the scale of enterprise has grown and owners are no longer managers; now owners (the principal) have to monitor managers (their agents) to ensure that they are not misbehaving

Finance (8 decks)

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