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86 Cards in this Set
- Front
- Back
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Define Finance. |
The art (behavioral finance) and science of managing money |
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What is finance concerned with? |
Finance is concerned with the process, institutions, markets, and instruments involved in the transfer of money among individuals businesses, and governments. |
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What are the Major Areas and Opportunities in Finance? |
Financial Services, Career Opportunities, and Managerial Finance |
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What is the purpose of Financial Services? |
Design and delivery of advice and financial products |
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List all 6 Career Opportunities. |
Banking, Personal Financial Planning, Investments, Real Estate, and Insurance |
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Managerial Finance: What are financial managers in charge of? |
Manages firm's financial affairs Developing corporate strategy and improving the firm's competitive position Managing cash flows in different currencies and protecting against the risks inherent in international transactions |
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What is the job of a Financial Analyst? |
Primarily prepares the firm's financial plans and budgets |
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What is the job of a Capital Expenditures Manager |
Evaluates and recommends proposed long-term investments |
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What is the job of a Project Finance Manger |
In large firms, arranges financing for approved long-term investments. |
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What is the job of a Cash Manager? |
Maintains and controls the firm's daily cash balances. |
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What is the job of a Credit Analyst/Manager? |
Administers the firm's credit policy by evaluating credit applications, extending credit, and monitoring and collecting accounts receivable. |
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What is the job of a Pension Fund Manager?
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In large companies, oversees or manages the assets and liabilities of the employees' pension fund. |
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What is the job of a Foreign Exchange Manager? |
Manages specific foreign operations and the firm's exposure to fluctuations in exchange rates. |
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Which legal form of business organization receives all profits and have low organizational costs? |
Sole Proprietorship |
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What can partnership do more than sole proprietors? |
Raise more funds |
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How are the three forms of Business Organizations taxed? |
Sole Proprietorship: Income included and taxed on proprietor's personal tax return Partnership: Income included and taxed on partner's personal tax return Corporation: Taxes are generally higher, because corporate income is taxed, and dividends paid to owners are also taxed (at a maximum 15% rate) |
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What is the most expensive form of Business Organization? |
Corporation |
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Unlimited Liability is in which organization(s)? |
Sole Proprietorship and Partnership |
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Limited Liability is in which organization(s)? |
Corporation |
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What happens to the partnership when one of them dies? |
It dissolves |
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What happens to sole proprietorship when proprietor dies? |
Lacks continuity when proprietor dies |
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____ benefits with secrecy while ___ lacks secrecy. Why does this organization lack secrecy? |
Sole Proprietorship Corporation, because stockholders must receive financial reports |
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Define Limited Partnership (LP). |
One or more partners have limited liability while at least one has unlimited liability. |
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Define S Corporation (S Corp). |
A tax-reporting entity that allows certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. |
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Define Limited Liability Corporation (LLC).
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The LLC gives its owners limited liability and taxation as a partnership. (Like S Corp) The LLC can own more than 80% of another corporation, and corporations, partnerships, or non-U.S. residents can own LLC shares. (Unlike S Corp) |
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Define Limited Liability Partnership (LLP). |
A partnership permitted in many states; governing statutes vary by state. All LLP partners have limited liability. They are liable for their own acts of malpractice, but not for those of other partners |
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How are LLPs taxed as? |
Partnerships |
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Who frequently uses LLPs? |
Legal and Accounting Professionals |
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In Corporate Organizations, who are the owners? |
Stockholders and Board of Directors |
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How are the Board of Directors chosen?
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Elected by stockholders |
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What is the highest managerial position in Corporate Organization?
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President (CEO), hired by the Board of Directors |
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If a decision affects the finance of a business, then it is known as a _______ decision. |
Corporate Finance |
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In small businesses, who generally may be responsible for the finance function? |
The President or the Accounting department |
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Define Economics. |
The study of how limited resources are allocated to produce various commodities. |
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Define Finance. |
The study of how individuals and firms allocate resources over time. |
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Why are there opportunity costs? |
People have to make choices due to scarce resources.
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This is the primary economic principle used by financial managers to assess their marginal benefits and marginal costs. |
Marginal Cost-Benefit Analysis |
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Define Marginal Costs. |
The additional costs of undertaking some activity. |
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Define Marginal Benefits |
The additional benefits of undertaking some activity. |
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Although the firm's finance (treasurer) and accounting (controller) functions are closely-related and overlapping, what is one major difference between the two in regards to their approach? |
Accountants generally use the accrual method while in finance, the focus is on cash flows. |
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How do Finance and Accounting differ with respect to decision-making? |
Accounting is primarily concerned with the presentation of financial data Finance is primarily concerned with analyzing and interpreting this information for decision-making purposes. |
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Current Assets and Fixed Assets are generally used to make _____ decisions, whereas Current Liabilities and Long-Term Funds are generally used to make _____ decisions. |
Current Assets & Fixed Assets for Investment Decisions Current Liabilities & Long-Term Funds for Financial Decisions |
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What are the three goals of a firm? |
1. Stock Price Maximization 2. Stockholder Wealth Maximization 3. Firm Value Maximization |
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Which goal/objective function of a firm is the MOST restrictive? Why? |
Stock Price Maximization. It requires that managers take decisions that: 1. Maximize stockholder wealth 2. Bondholders be fully protected 3. Markets be efficient 4. Social costs be negligible. |
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Which goal/objective function of a firm is the LEAST restrictive? |
Firm Value Maximization. It DOES NOT require that bondholders be protected. |
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Which goal/objective function of a firm does not require markets to be efficient? |
Stockholder Wealth Maximization. |
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Which goal/objective function of a firm does not require that bondholders be protected? |
Firm Value Maximization. |
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What is the objective function in corporate finance for a private firm? Why? |
Maximization of firm value. This is because firm value via stock prices is not observable and has to be estimated. |
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What is the objective function for a non-profit organization? |
The objective has to be stated in terms of cost efficiency. |
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Why is the traditional corporate financial theory focused on maximizing stockholders' wealth? |
1. Stock price is easily observable and constantly updated. 2. If the investors are rational, stock prices reflect the wisdom of decisions, both instantaneously short term and long term. 3. The objective of stock price performances and its theories |
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What are the theories of the objective of stock price performances focused on? |
1. Allocating resources across scarce uses: which investments to take and which ones to reject 2. How to finance these investments 3. How much to pay in dividends |
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Define The "Stakeholder View". |
Prescribes that the firm makes a conscious effort to avoid actions that could be detrimental to the wealth position of its stakeholders. Such a view is considered to be "socially responsible" |
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Define Corporate Governance |
The system used to direct and control a company. Defines the rights and responsibilities of key corporate participants (i.e. shareholders, the board of directors, officers, managers, etc.) |
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Who tend to have a much greater impact on corporate governance? |
Institutional Investors |
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Define Ethics. |
The standards of conduct or moral judgment. |
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This potentially exists whenever a manager owns less than 100% of the firm's equity. |
Agency Problem |
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Define Agency Costs. |
The costs borne by stockholders to maintain a corporate governance structure that minimizes agency problems and contributes to the maximization of shareholder wealth. |
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Define Market Forces. |
Market Forces such as major shareholders and the threat of a hostile takeover act keep managers in check. |
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Define Stock Option. |
An incentive to purchase stock at fixed market price. |
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Define Performance Plans. |
Tie compensation to EPS growth and performance. |
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TRUE OR FALSE: Recent studies have found that there is a strong relationship between CEO compensation and share price.
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False. Recent studies have failed to find a strong relationship between CEO compensation and share price. |
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In theory, the stockholders have significant control over management; in practice, however, the theory is not very effective. Why? |
The annual meeting acts as a disciplinary venue. Stockholders hold power but becomes diluted. |
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Why are the stockholders' power in the annual meeting being diluted? |
1. Most small stockholders do not go to meetings. 2. Incumbent management starts off with a clear advantage when it comes to the exercise of proxies. Proxies that are not voted becomes votes for incumbent management. 3. For large stockholders when confronted by managers that they do not like, they walk away. |
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In theory, financial markets are efficient. Managers convey information honestly and in a timely manner to financial markets, and financial markets make reasoned judgments of the effects of this information on "true value"; however, in practice, what assumption occurs? |
The Efficient Markets assumption |
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What is the Efficient Markets assumption? |
Because managers control the release of information to the general public, sometimes information (especially negative) is suppressed or delayed by managers seeking a better time to release it. Also in some cases, firms release intentionally misleading information about their current conditions and future prospects to financial markets. |
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What are some critiques of market efficiency? |
1. Prices are much more volatile than justified by the underlying fundamentals. Earnings and dividends are much less volatile than stock prices. 2. Financial markets overreact to news, both good and bad. 3. Financial markets are manipulated by insiders; Prices do not have any relationship to value. 4. Financial markets are short-sighted, and do not consider the long-term implications of actions taken by the firm. |
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Define Social Cost/Benefit. |
A cost/benefit that accrues to society as a whole and not to the firm making the decision. |
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What are the three ways firms can be obtained?
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1. Banks or other financial institutions 2. Financial markets 3. Private placements |
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What is the role of financial institutions |
Intermediaries that channel the savings of individuals, businesses, and governments into loans or investments. |
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Who are the key suppliers and demanders? |
Individuals, businesses, and governments |
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Who are the net suppliers? |
Individuals |
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Who are the net demanders? |
Businesses and governments |
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What are the two key financial markets and what do they concern? |
1. Money Market: short-term marketable securities
2. Capital Market: long-term securities |
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Where are securities first issued? |
Primary markets |
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Where are securities traded? |
Secondary markets |
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Define Eurocurrency Market. |
A market for short-term bank deposits denominated in U.S. dollars or other marketable currencies -equivalent to the US MM. |
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Define The Capital Market. |
A market that enables suppliers and demanders of long-term funds to make transactions. |
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Define Bonds. |
Long-term debt instruments |
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Define Broker Markets. |
National and regional securities exchanges |
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Define Dealer Markets. |
Shares of smaller firm shares are sold and traded |
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What are the three international capital markets? |
1. Eurobond Market 2. Foreign Bond Market 3. International Equity Market |
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Define Eurobond Market. |
Bonds denominated in dollars sold to investors outside the U.S. |
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Define Foreign Bond Market. |
Bonds denominated in investor's home currency and sold in the investor's home market. |
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Define International Equity Market. |
Allows corporations to sell blocks of shares to investors in a number of different countries simultaneously. |
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What are the two types of income? |
Ordinary and Capital Gains Income |
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How is ordinary income earned? |
Through the sale of a firm's goods or services and is taxed at certain rates. |
