Financial Management 1

3 Main areas of finance
1. Finance Management
2. Capital Markets
3. Investments
1. Security Analysis
2. Portfolio Theory
3. Market Analysis
Sarbanes-Oxley Act
A law passed by congress that requires the CEO and CFO to certify that their firm’s financial statements are accuracte
The current stock of a company reflects…
The amount that market participants are willing to pay to purchase a share right now
The primary goal of a financial manager according to our textbook is…
Maximize shareholder wealth
The intrinsic value of a company’s stock is defined as…
An estimation of the stock’s true value based on accurate risk and return data
Is a stock’s true long-run value more closely related to its intrinsic value to its current stock price?
Intrinsic value
If you would like to purchase a stock as an investment, which of the following stocks would you rather purchase?
A stock whose intrinsic value is greater that its market price
Advantages of proprietorship
1. Easy and cheap to form
2. Few gov regulations
3. Lower income taxes
Disadvantages of proprietorship
1. Unlimited personal liability
2. Business lasts as long as the owner
3. Difficult to make a lot of capital
Intrinsic Value
An estimate of a stock’s true value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely.
Market Price
The stock value based on perceived by possibly incorrect information as seen by the marginal investor
Marginal Investor
An investor whose views determine the actual stock price
The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock
Stockholder-manager Conflicts
1. Compensation packages
2. Direct stockholder intervention
3. Managers’ response
Spot markets
The markets in which assets are bought or sold for on the spot delivery
Future markets
The markets in which participants agree today to buy or sell an asset at some future date
Money markets
The financial markets in which funds are borrowed or loaned fro short periods (less than 1 year)
Capital markets
The financial markets for stocks and for intermediate- or long term- debt (one year or longer)
Primary markets
Markets in which corporations raise capital by issuing new securities
Secondary markets
Markets in which securities and other financial assets are traded among investors after they have been issued by corporations
Private markets
Markets in which transactions are worked out directly between two parties
Public markets
Markets in which standardized contracts are traded on organized exchanges
Any financial asset whose value is derived from the value of some other underlying asset
Investment bank
An organization that underwrites and distributes new investment securities and helps businesses obtain financing
Commercial bank
The traditional department store of finance serving a variety of savers and borrowers
Financial services corporations
A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking
Hedge funds
Similar to mutual funds because they accept money from savers and use the funds to buy various securities, but they are important differences
Exchange traded funds
Similar to mutual funds and are often operated by mutual fund companies
Actively managed funds
To outperform the overall markets
Indexed funds
Designed to simply replicate the performance of a specific market index
Private equity companies
Organizations that operate much like hedge funds; but rather than purchasing some of the stock of a firm, private equity players buy and then manage entire firms

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