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33 Cards in this Set
- Front
- Back
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4 basic areas of Finance
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1. Corporate Finance
2. Investments 3. Financial Institutions 4. International Finance |
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Why study Finance?
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Marketing - budgets, market research
Accounting - preparation of financial statements Management - strategic thinking, profitability Personal - budgeting, retirement planning |
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Financial management decisions
financial manager concerned with 3 basic types of questions |
1. Capital budgeting
2. capital structure 3. working capital |
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capital budgeting
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process of planning and managing a firm's long term investments
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capital structure
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mixture of debt and equity maintained by a firm
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working capital
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a firm's short-term assets and liabilities
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Forms of Business Organization
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1. Sole Proprietorship
2. Partnership 3. Corporation |
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sole proprietorship
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a business owned by a single individual
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Advantages of Sole Proprietorship
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-easiest to start
- least regulated -owner keeps all profits - taxed once as personal income |
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Disadvantages of Sole Proprietorship
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- limited to life of owner
- equity capital limited to owner's personal wealth - unlimited liability - difficult to sell ownership |
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Partnership
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a business formed by 2 or more individuals or entities
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Advantages of a Partnership
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- two or more owners
- more capital available - relatively easy to start - income taxed once as personal income |
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Disadvantages of a Partnership
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- unlimited liability
- partnership dissolves once one partner dies or wishes to sell - difficult to transfer ownership |
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Types of Partnership
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1. general partnership - all partners share gains/losses and have unlimited liability for all partnership debts
2. limited partners - one or more general partners will run business and have unlimited liability, but there will be one or more limited partners |
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Corporation
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a business created as a distinct legal entity owned by one or more individuals or entities
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Advantages of a Corporation
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- limited liability
- unlimited life - separation of ownership and management - transfer of ownership is easy - easier to raise capital |
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Disadvantages of a corporation
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- agency problem
- double taxation: income taxed at the corporate rate and then dividends taxed at personal rate |
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Goal of Financial Management
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to maximize the current value per share of the existing stock
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Sarbanes-Oxley Act
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- Aftermath of Enron incident
- main headline: CFO, president has to now signoff on finance sheet - it's a 1500+ page doc |
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Agency Relationship
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principal hires an agent to represent their interest
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Agency Problem
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conflict of interest between owners (principal) and management (agent)
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How to manage managers (avoiding agency costs)
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1. Managerial compensation - incentives can be used to align management and stockholder interests
2. Corporate control - threat of takeover may result in better management |
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stakeholder
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someone other than a stockholder or creditor who potentially has a claim on cash flows of the firm
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different types of cash flows
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1. operating
2. financial 3. investing |
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The person who is in charge of cash management and capital expenditures is called the ___________________.
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TREASURER
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The top financial officer in a firm is commonly referred to as the ________.
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CHIEF FINANCIAL OFFICER (CFO)
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The legal papers which designate a firm’s name, nature of business, and intended life are called the _________.
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ARTICLES OF INCORPORATION
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The rules which outline how a corporation will regulate itself are referred to as the _________.
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BYLAWS
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A limited liability company can be defined as a _____________.
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cross between a partnership and a corporation.
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The original sale of securities by the issuer is called the _______.
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PRIMARY MARKET
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The market for trading securities after the original sale is called the __________.
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SECONDARY MARKET
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Over-the-counter markets are __________ markets
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DEALER MARKET
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A securities market with a physical location that is designed to match buyers with sellers is called a(n) __________ market.
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AUCTION MARKET
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