Chapter 1 Finance

Front 1

What is finance?

Back 1

is the study of how people and business evaluate investments and raise capital to fund them

Front 2

What is the role of finance in business?

Back 2

1. LT investments should the firm undertake
2. Raise the money for investments
3. How to manage money from day to day

Front 3

Primary focus of Finance 3310

Back 3

-From the CFO's standpoint

Front 4

What are the advantages of a corporation?

Back 4

1. Owners have limited liability
2. Ownership is easily transferred
3. Unlimited Life
4. Easier to raise capital

Front 5

What are the disadvantages of a corporation?

Back 5

1. Double Taxation - personal tax and tax on profits
2. Separation of ownership and management (Owners are not managers)
Agency Problem

Front 6

What is the goal of any firm?

Back 6

goal is to maximize shareholder wealth
1. Maximize the value per share of common stock
2. Maximize common Equity

Front 7

Real Values v. Stock Price

Back 7

- dont focus on real values because they are based in the future
-focus on stock prices

Front 8

What are other goals of the firm?

Back 8

- maximize economic profits
- accounting profits

Front 9

What are the five principles of finance?

Back 9

1. Cash is what matters
2. Money has a Time Value
3. Risk requires a Return
4. Markets are generally right
5. Conflicts of interest cause the agency problem

Front 10

Money has time value

Back 10

money is worth more now than in the future
-lose value in the future

Front 11

Risk requires a return

Back 11

have to take a risk if you want a reward

Front 12

Markets Prices are generally right

Back 12

market prices for stock
-indicator of what the expectations are

Front 13

Conflicts of interest cause the agency problem

Back 13

align values of shareholders to the managers