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31 Cards in this Set

  • Front
  • Back

Ch.1

ch.1

Capital budgeting

The decision making process used to analyze potential investments in fixed assets. Used for long term investment.

Capital structure

How to finance the investment. The mix of long-term sources of funds used by the firm. How should the firm raises money?

Financial Markets

Mechanisms that allow people to easily buy and sell financial claims

Working capital management
Management of day to day operations and decisions related to working capital and short-term financing. How the firm manages cash flows.

Corporation

Typically used if very large sums of money are needed. A business entity that legally functions separate and apart from its owners(shareholder or stockholders). pg. 6. As a result the corporation can individually sue and be sued, purchase, sell, or own property, and its personnel are subject to criminal punishment for crimes committed in the name of the corporation. Owners liability is limited to what they invest in. The shareholders elect a board of directors who appoint management. Subject to double taxation (dividends, and profits).

Debt

Money that is owed. Money that has been borrowed and must be repaid. this includes such things as bank loans and bonds.

Dividends

The portion of corporation's earnings that are distributed to its shareholders.

Equity

The ownership interest in corporation. It is the stockholders investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet.


General partner (limited partnership)

A member of a general partnership or a member of a limited partnership who actually runs the business and faces unlimited liability for the firm's debts.

General partnership

Association of two or more persons who come together as co-owners for the purpose of operating a business for profit. A partnership in which all of the partners are fully liable for the indebtedness incurred by the partnership. Profits are taxed as personal income. Benefits from access to more financing (multiple owners).

Limited liability company (LLC)

A business organizational form that blends elements of the partnership and corporate forms. (no double tax, and limited liability). Unlimited in number of owners.

Limited partner (Limited partnership)

A member of a limited partnership who is only liable up to the amount invested by that member.

Limited Partnership

A partnership in which one or more of the partners has limited liability that is restricted to the amount of capital he or she invests in the partnership. Difficult to transfer ownership. Limited partner can transfer shares to another owner. Life based on general partner.

Partnership

An association of two or more individuals joining together as co-owners to operate a business for profit.

Shareholders

The owners of the firm; those who own shares of stock in a corporation.

Shares

units of ownership.

Sole proprietorship

A business owned by a single individual. Who is liable to all debt (may lose personal assets). Very limited to financing (usually personal investment or bank loans.). Easy to form.

Stockholders

The owners of the corporations stock. The corporation is legally owned by its current set of stockholders, or owners, who elect a board of directors.

What are the five principles of finance

Money has a time value, there is a risk-Return tradeoff (more risk needs more expected returns), cash flows are the source of value(actual money), Market prices reflect information, and individuals respond to incentives.

What is ethics in finance

Fundamental notion of trust. It is doing the right thing.

Agency Problem

Conflicts that arise out of the separation of management and ownership of the firm.

Opportunity cost

The value of the next best alternative that is foregone as a result of making a decision.

Finance

Study of how people and businesses evaluate investments and raise capital.

Chief financial Officer (CFO)

responsible for seeing the firm's finance related activities.

Treasurer

Works under the CFO. Handle cash and credit, raising money, financial plans, managing any foreign currency, capital structure, and capital budgeting.

Controller

Responsible for the firm's accounting duties, which include producing financial statements, paying taxes, gathering and monitoring financial data, and auditing.

Financial manager

Works for the share holders, sets goals, guides team, plans, set intermediate goals, and goal assessment.

Company goal

Maximizing shareholder wealth by driving up the price of stock.

Sarbanes-oxley act (SOX)

Inspired by Enron, holds any advisors to legal accountability for instances of misconduct. It aims to improve the accuracy and reliability of corporate disclosures.

Problem of maximizing profits

Time value of money is often ignored. Risk is ignored. Equity cost is ignored.