FM: Chapter 1 goals and activities of financial management

Financial capital
real capital
long-term plant and equipment
capital structure theory
the study of the relative importance of debt and equity
increase of prices
slowing down of price increases
credit default swaps (CDS)
created as insurance against borrowers defaulting on their loans (i.e. Lehman Brothers, Washington Mutual)
Dodd-Frank Act
promote financial stability by improving accountability and transparency in the overall financial system; protecting taxpayers by improving the stability of large, diversified financial institutions, and protecting consumers from abusive practices in the financial services industry
Impact of the Internet
Business to consumer model (B2C); business to business model (B2B)
Forms of Organization
Daily: credit management, inventory control, receipt and disbursement of funds
Occasional: stock issue, bond issue, capital budgeting, dividend decision
Profitability: trade-off; risk
Goal: maximize shareholder wealth
Sole proprietorship
single-person ownership makes all the decisions. unlimited liability to owner.
two or more ownerships able to raise more capital and share ownership responsibilities. formed through Articles of Partnership. Unlimited liability for owners
shareholder ownership; limited liability; formed through Articles of Incorporation;
S Corporation
Similar to corporation; only pay income tax
limited liability; can be taxed as sole, partnership, or corp
Agency Theory
examines the relationship between the owners and the managers of the firm
institutional investors
(pension funds and mutual funds) own large percentage of stock in major US companies; ability to vote majority of board of directors
Sarbanes-Oxley Act
responsible for establishing auditing standards within companies, controlling the quality of audits, and setting rules and standards for the independence of the auditors. Make sure that public companies are accurately presenting assets, liabilities, and equity and income
Shareholder wealth maximization
goals for financial manager
Insider trading
occurs when someone has information that is not available to the public and then uses this information to profit from trading in a company’s publicly traded securities
Public financial market
national, state, local governments (borrowers of funds for highways, education, welfare, and other public activities)
Corporate financial market
i.e. Coca-Cola, Nike, and Ford
money market
markets dealing with short-term securities that have a life of one year or less
capital markets
markets dealing with long-term securities that have a life of more than one year (intermediate market: 1-10 yrs; long-term: >10 yrs)
primary market
corporation uses financial markets to raise new funds; IPO (sold to institutions and individuals)
secondary market
securities traded between investors; prices change as investors buy & sell based on expectations of corporation’s prospects
result in changes in the capital structure (liabilities and equity on the balance sheet)

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