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41 Cards in this Set
- Front
- Back
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Identify the functions performed by a firm's financial managers.
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The major responsibility of financial managers is to develop and implement a financial plan for their organization. The firm's financial plan is based on forecasts of expenditures and receipts for a specified period and reflects the timing of cash inflows and outflows. The financial managers systematically determine their company's need for funds during the period and the most appropriate sources from which it can obtain them. In short, the financial manager is responsible for both raising and spending money.
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Define finance and explain the role of the financial manager.
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Finance deals with planning, obtaining, and managing a company's funds to accomplish objectives efficiently and effectively. The financial manager is the executive who develops and implements the firm's financial plan and determines the most appropriate sources and uses of funds.
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What are the three questions on which a financial plan is based?
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A financial plan revolves around the answers th three questions: How much money will the firm require for a specific period of time? Where will the necessary funds come from? When will the company need additional funds?
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Describe the characteristics a form of money should have, and list the functions of money.
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Money should be divisible, portable, durable, difficult to counterfeit, and stable in value. Money in countries with modern economies have all of these characteristics. The functions of money are as a medium of exchange, a store of value, and a unit of account.
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WHat characteristics should money have?"
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Money should be divisbile, portable, durable, difficult to counterfeit, and stable in value.
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List the three basic functions of money.
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The functions of money are as a medium of exchange, a store of value, and a unit of account.
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Identify the various measures of the money supply.
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The two most commonly used measures of the money supply are M1 and M2. M1 is defined as anything generally accepted as payment for goods and services, such as coins, paper money, and checks. M2 consists of M1 plus other assets that are almost as liquid as money but do not function directly as a medium of exchange, such as savings deposits and money market mutual funds. The use of credit cards--also known as plastic money--has increased sharply in recent years. While credit cards are convenient and easy to use, they are a very expensive source of consumer and business credit.
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Explain the differences between M1 and M2.
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M1 consists of anything that is generally accepted as payment for goods and services. M2 consists of M1 plus other assets that are almost as liquid as currency and demand deposits but do not function directly as a medium of exchange.
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Who issues Vias and MasterCard credit cards? Explain the difference between a credit card and a charge card.
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All Visa and MasterCard credit cards are issued by banks. A credit card gives the holder the option of paying part or all of the balance due each month. Finance charges are levied on the portion of the balance not paid each month. A charge card requires that the balance be paid in full each month.
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Explain how a firm uses funds.
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Organizations use funds to run their day-to-day operations, pay for inventories, compensating employees, paying suppliers, making interest payments on loans, paying dividends to shareholders, and purchasing new assets.
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Why do organizations need funds?
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Companies need funds for a variety of purposes, including paying for daily operations, compensating employees, paying suppliers, making interest payments on loans, paying idividends to shareholders, and purchasing new assets.
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List several alternatives to holding large cash balances.
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Many financial managers hold excess cash balances in marketable securities, because these securities pay interest but are easy to convert into cash. Examples of marketable securities include Treasury bills, commercial paper, repurchase agreements, and large certificates of deposit.
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Compare the 2 major sources of funds for a business.
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Debt capital and equity are the 2 major sourcdes from which businesses acquire funds. Debt capital represents funds obtained through borrowing. Equity capital comes from several sources including the sale of stock, additional investments by the firm's owners, and reinvested earnings.
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Do different companies take different approaches to the mix between debt and equity capital?
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Yes, some companies rely more on debt financing than other companies.
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Identify the likely sources of short and long-term funds for business operations.
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Sources of short-term funds include trade credit (accounts payable), unsecured loans, secured loans (for which the firm must pledge collateral), and sales of commercial paper by large, financially sound firms. Sources of long-term funds include long-term loans repaid over one year or longer, bonds, equity funds (ownership obtained from sellin stock, accumulating additional contributions from owners, or reinvesting earnings in the firm). Leverage--the use of borrowed funds--increases the potential returns to shareholders (owners) but also increase risk.
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List 3 sources of short-term funds.
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The 3 sources of short-term funds are trade credit, loans from financial institutions such as banks, and commercial paper.
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Define leverage and explai how leverage increases both potential returns and potential risks to owners.
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Leverage is the tecnhique of increasing the rate of return on owners' funds through the use of borrowed funds. As long as the company's earnings are higher than its interest payments, leverage increases the return to owners. However, if earnings are less than interest payments, the owners lose some of their original investments.
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Describe the financial system and the major financial institutions.
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The financial system is the process by which funds are transferred between savers and users of funds. Funds can be transferred either through the financial markets or through the financial markets or through financial institutions. Depository institutions--commercial banks, savings banks, and credit unions--accept deposits from customers that can be redeemed on demand. Depository institutions are closely regulated by state and federal authorities. Nondepository institutions include pension funds and insurance companies. Nondepository institutions invest a large portion of their funds in stocks, bonds, and real estate.
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Describe the financial system. How are funds transferred between savers and borrowers.
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The financial system is the process by which funds are transferred between savers (households, businesses, and governments) and users (also households, businesses and governments). While funds can move directly between savers and users, most funds are transferred indirectly through the financial markets of through financial institutions.
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What is the difference between a depository financial institution and a nondepository institution? Give an example of each.
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A depository institution accepts deposits that are payable on demand--such as checking accounts. Nondepository institutions do not accept these types of deposits. A commercial bank is an example of a depository institution; a life insurance company is an example of a nondepository institution.
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Who regulates commercial banks?
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Banks with federal charters are regulated by the Federal Reserve; banks with state charters are regulated by state banking authorities. Any bank--regardless of charter--that is a member of the FDIC is subject to FDIC regulation as well. Virtually all banks are members of the FDIC.
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Explain the functions of the Federal Reserve System and the tools it uses to control the supply of money and credit.
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The Federal Reserve System is the central bank of the US. It regulates banks, performs banking functions for the US Treasury, and acts as the banker's bank (clearing checks, lending money to banks, and replacing worn out currency). It controls the supply of credit and money in the economy to promote growth and control inflation. The Federal Reserve's tools include reserve requirements, the discount rate, and open market operations. Selective credit controls and purchases and sales of foreign currencies also help the Federal Reserve manage the economy.
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How is the Federal Reserve Organized?
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The Federal Reserve System divides the nation into 12 districst, each with a district bank. The governing body is the board of governors, consisting of 7 members appointed by the president and confirmed by the Senate. The governors serve for staggered terms and are headed by the Fed chair. Another important part of the Fed is the Federal Open Markets Committee, consisting of the seven Fed governors plus 5 district bank presidents (who serve on a rotating basis). The Fed has its own sources of revenue and doesn't depend of congressional appropriations.
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List and briefly explain the various methods by which the Fed can control the supply of money and credit. Which method is used most frequently?
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The Fed has 3 policy tools to control the supply of money and credit: reserve requirements (the percentage of deposits banks must maintain as reserves), the discount rate (the rate the Fed charges member banks for loans), and open market operations (adding or subtracting bank reserves through the sale of US gov. securities). The Fed relies most frequently on open market operations to control the supply of money and credit.
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Describe the global financial system.
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Large US banks and other financial institutions have a global presence. They accept deposits, make loans, and have branches throughout the world. Foreign banks also operate worldwide. The average European or Japanese bank is much larger than the average American bank. Virtually all nations have central banks that perform the same roles as the US Federal Reserve System. Central bankers often act together, raising and lowering interest rates as economic conditions warrant.
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How does the size of US banks compare to the size of banks located in other countries?
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Only 3 of the world's 20 largest banks are located in the US. The others are in Japan and Europe.
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Do other countries have organizations that play roles similar to those played by the Federal Reserve?
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Virtually all countries have central banks that function essentially like the US Fed. Reserve and perform the same functions.
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Risk Return Trade-off
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Optimal balance between the expected payoff from an investment and the investment's risk.
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Financial plan
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document that specifies the funds a firm will need for a period of time, the timing of inflows and outflows and the most appropriate sources and uses of funds.
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equity capital
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Funds provided by the firm's owners when they reinvest earnings, make additional contributions, or issue stock to investors.
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Bond
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certificate of indebtedness sold to raise long term funds for a corporation or government agency.
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Monetary policy
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using interest rates and other tools to control the supply of money and credit in the economy.
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Vice president for financial management
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respobsible for preparing financial forecasts and analyzing major investment decisions.
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Treasurer
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responsible for all of the company's financing activities, including cash management, tax planning and preperation, and shareholder relations.
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Controller
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keep the company's books, prepare financial statements, and conduct internal audits.
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Private placements
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new stock or bond issues that aren't sold publically but rather to a small group of large investors such as pension funds and insurance companies.
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Venture capitalists
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raise money from wealthy individuals and institutional investors and invest these funds in promising firms.
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Electronic Funds Transfer Systems
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(EFTSs)computerized sustem for conducting financial transactions over electronic links.
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Underwriting
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process used by insurance companies to determine whom to insure and what to charge.
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Discount rate
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the interest rate at which Federal Reserve banks make short-term loans to member banks. If the Fed wants to show growth rate in the money supply, it increases the discount rate.
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open market operations
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the technique of controlling the money supply growth reat by buying or selling US Treasury securities.
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