Chapter 1: The Goals and Activities of Financial Management

Information Technology & Changes in the Capital Markets

- Proliferation of Electronic Communication Networks caused NYSE to merge Archipelago -People using the internet to conduct retail stock trade Charles Schwab, TD Ameritrade causes headaches for Merrill Lynch & Morgan

Housing Bubble Bursting

1) Extension of credit to high-risk borrowers 2) Financial Engineers creating mortgage-backed securities of risky loans 3) Unregulated Credit Default Swaps created as insurance but failed

Solution to the Housing Bubble Bursting

1) Federal Reserve provided $540 billion to help the money markets in 2008 2) Congress agreed on $780 billion stimulus package in 2009 Financial institutions forced to pay attention to risk controls

Dodd-Frank Act (2010)

1) Promotes financial stability by improving accountability and transparency in the overall financial system 2) Contains the Volker Rule, which limits amount of speculative investing federally insured depository institution can engage in 3) Created the Bureau of Consumer Financial Protection

Corporation

20% of U.S. businesses, yet generates 83% sales, 70% profits

Internationalization of Financial Markets

A trend that will continue; e.g., Sony, Coca Cola, McDonalds; etc. Foreign companies have their shares listed on the NYSE (New York Stock Exchange) - most recent: Ali Baba

Pros/Cons of Corporations

A) Pros: - Owned by shareholders, liability limited to invest only - Has continual life, not dependent on any one shareholder - Shareholders equates shares of issued stock - Shareholders interests are managed by board of directors - Separate legal entity that reports & pays taxes on its own income - Shareholders earn dividends B) Cons: - Potential double taxation of earnings

Pros/Cons of Partnership

A) Pros: Possibility of raising more capital and share ownership B) Cons: Unlimited Liability

Pros/Cons of Sole Proprietorship

A) Pros: Simplicity of decision making, low organizational and operational costs B) Cons: Unlimited liability

Restructuring

Changes in the capital structure and equity on the balance sheet) in order to improve a corporation's financial standing

Main point of the Sarbanes-Oxley Act

Created in 2002, the focus is to make sure that publicly traded corporations, accurately present their assets, liabilities, equity, and income on their financial statements

Agency Theory

Examines the relationship between owners and managers of the firm

S Corporation

Income taxed only once as direct income to shareholders

Social Responsibility & Ethical Behavior

It is consistent with SWM? If so, the firm can attract capital, provide employment, and offer benefits to the community. If not, you can end up like Bernie Madoff

Money Markets

Markets dealing in the short-term securities that have a life of one year or less

Capital Markets

Markets where securities have a life of more than one year; can be deemed intermediate market (1 - 10 years) or long-term (greater than 10 years)

Financial Market

Meeting place for people, corporation, and institutions that either need money or have money to lend or invest - Public Financial Markets (infrastructure) --> national, state, local -Corporate Financial Markets --> Coca Cola, Nike, Ford

Limited Liability Company (LLC)

Not a corporation, but can be taxed as a sole proprietorship, partnership, or an S Corporation (depends on the owners)

Limited liability partnership

One/more partners are designated general partners and others are designated as limited partners

Sole Proprietorship

Single person ownership

Shareholder Wealth Maximization (SWM)

The Financial Manager should attempt to maximize the wealth of the firm's shareholders through achieving the highest possible value for the firm

Primary Market

The market for raising of new funds

Secondary Market

The market for securities that have already been issued

Goal of Financial Management

To maximize shareholder wealth a) (Daily) --> Credit management inventory control and receipt and disbursement of funds b) (Occasional) --> Stock issue, Bond issue, Capital budgeting, Dividine decision c) (Profitability) --> Trade-off

Partnership

Two or more owners

Insider Trading

When someone uses information that isn't available to the public to profit firm trading in a company's publicly traded securities