FINC 200 Chapter 1 – Flashcards
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Finance
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Essentially the study of pricing and pricing relationships
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Financial management
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Concentrates on valuation from the firms perspective
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Personal finance
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Focuses on maintaining and expanding individual wealth
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Successful financial markets
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allow a flow of funds from individuals looking to increase wealth to businesses who want to expand their operations
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Borrower-lender relationship
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The relationships between the individual holding funds and the businesses who want to expand
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Liquidity
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The property of a strong financial system connecting the two groups (lenders and borrowers) quickly and at low costs
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What does high liquidity lead to?
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growth in the economy and employment opportunities once a firm has expanded
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Strong economies have __________ financial systems.
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Strong
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4 types of of individuals in a theoretical financial system
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Type 1: no money, no ides Type 2: Money, no ideas Type 3: No money, ideas Type 4: money and ideas Firms or individuals can more between groups through time
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Type 2
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Money, no ideas Want to invest in companies and individuals that will be profitable Look to asses the value of future cash flows, which is payments made to the firm for products or services lend their money to type 3 can be individual investors, banks, or even other corporations by lending money, type 2s inherently take on risks and want to be compensated for those risks
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Firm cash flow expectations
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high expected cash flows= safe investment low or uncertain cash flows= risky
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Type 3
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Ideas, no money (think shark tank pitchers) can be individuals entrepreneurs or large companies with R and D departments
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Type 4
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All companies and individuals want to be type 4 this is part of the reason companies hold retained earnings.
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Retained earnings
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Profits that are held by the company and no distributed to share holders If a company has retained earnings, it can invest in projects without issuing debt or equity
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What does the value of a financial asset depend on?
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cash lows, but they are typically uncertain in the beginning financial assets can be grouped into asset classes based on return characteristics
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Sole propreitership
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a single business owner that takes on unlimited liability most common type of business in the US relatively easy to start due to lighter regulation and paperwork owner has complete control over business activities and is responsible for all firms profits and losses considered unlimited liability because there is no distinction between business assets and personal assets businesses do not typically lend to sole proprietorship due to the riskiness involved S.P.s can raise capital from venture capitalists in exchange for a percentage of the firm (equity)
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General partnership
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Partners own the business together and are personally liable for legal actions and debts unlimited liability for the partners partners can own different percentages of company and are entitled to that percentage of profit banks are more likely to lend to partnerships multiple individuals are responsible for paying back debt in order to raise substantial capital, partners may have to give up equity
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Public corporation
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A legally independent entity separate from its owners. Corporations tend to have many owners in the form of shareholders. Corporate owners are stockholders, but day to day responsibilities are given to managers (CEO) Considered limited liability since shareholders can own lose the amount paid for their stock
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Maximization of shareholder wealth philosophy
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View that management's primary consideration is to consider the interest of shareholders in decision making Academics favor this shareholder wealth maximization
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Stakeholder maximization
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business should maximize total satisfaction (includes bondholders, consumers, etc)
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Adam Smith's invisible hand
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individuals acting in own self interest leads to efficient outcome
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Who is a firm's highest level financial manager?
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Chief financial officer
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What type of business organization is relatively easy to start, and it is subject to much lighter regulatory and paperwork burden than other business forms?
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Sole proprietership
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What type of business organization is entirely legally independent from its owners?
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Public corporations
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As individual legal entities, corporations assume liability for their own debts, so the shareholders hold:
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only limited liabilty
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For corporations, maximizing the value of owner's equity can also be stated as:
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maximizing the stock price
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This should be the primary objective of a firm as it may actually be beneficial for society in the long run
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Maximizing shareholder value
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This is the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control
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Corporate governance
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This group is elected by stockholders to oversee management in a corporation
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Board of directors
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These individuals help firms access capital markets and advise managers about how to interact with those capital markets
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investment bankers
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These individuals examine a firms financial strength for debt holders
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Credit analysts
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Individuals who provide small amounts of capital and expert business advice to small firms in exchange for ownership in the firm
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angel investors
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The portion of a company's profits that are kept by the company rather than distributed to the stockholders as cash dividends
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retained earnings
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The overall goal of the financial manager is to
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maximize shareholder weath
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Maximizing owner's equity value means carefully considering:
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how to best bring additional funds into the firm which projects to invest in how best to return profits from those projects to the owners over time DOES NOT INCLUDE: how best to increase the firm's risk
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The most common type of business in the US
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Sole propreitership
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The biggest disadvantage of the sole proprietorship
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unlimited liability
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Advantages to organizing a corporation as a business organization
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limited liability easy access to capital easy to transfer ownership
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Which of the following statements are correct: 1. Sole proprietorship are easy to start. 2. If the sole proprietorship gets sued, the owner is not liable. 3. It is relatively easy for sole proprietorship to raise money. 4. Profits from the sole proprietorship are subject to double taxation
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sole proprietorship are easy to start
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From a taxation perspective, the form of business organization with the highest level of taxes is the:
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corporation
