finance
participants are segmented into what 2 dimensions?
"extra" money and economically viable ideas
what does international finance involve? (2)
(1) applies all other sub areas of finance in a global setting (2) examines ER, political risk, international investment, risk managment
SAF - what does financial institutions and markets include? (3)
(1) capital flows between investors and firms (2) interest rates (3) financial institutions such as banks, mutual funds, pension funds
what are examples of inside monitors of a company?
Board of Directors - hire CEO, evaluate management, design compensation plans
to estimate an asset's value, one estimates what 3 things?
CF for each period, N life of the asset, K appropriate discount rate
who is the highest level financial office? what 2 are under he/she?
CFO - Chief Financial Officer Controller and Treasurer
"where companies PUT/INVEST money"
assets
what are examples of outside monitors of company?
auditors, analysts, banks, credit rating agencies
Accounting looks ____ while financing looks ____.
backwards; to the future (making decisions based on economic analysis, valuation)
owners of corporation elect ____ who then hires_____
board of directors; managers of firm
what's an example of an action that may cause an increase in earnings, yet a decrease in stock price
buying another company --> risky (earnings increase, stock price decrease)
the treasurer is responsible for managing what?
cash, credit, financing, capital budgeting, risk management
who oversees the accounting functions?
controller
SAF - examines firms decisions
financial management
"where companies GET money"
financing (liabilities and net worth)
general partners vs limited partners
general partners make firm decisions and are liable for debt, limited partners only liable for their own investment (can't materially participate in firm's operations)
what does a high P/E ratio mean?
high growthrate, investors like that company
what 4 things does financial management involve?
how to organize, what type of capital to raise, which projects to fund, how much capital to retain and how to pay back providers of capital
what are the 3 ways to minimize the conflict of interest of agency problem?
ignore it (if money is small, such perks may enhance productivity) monitor the managers (accountants and debt holders), align incentives by making the managers owners (equity stakes, stock options, ESOP - Employee Stock Ownership Plans (trusts)
why is maximizing profits not a good purpose of a company?
ignores time and risk
SAF - studies the methods and techniques needed to make appropriate decisions about what kind of securities (b&s) to own
investments
what are the 4 sub areas of finance?
investments, financial management, financial institutions & markets, international finance
how do you "zero out" a corporation?
make taxable income zero; move expenses around, increase salary, increase contribution to corporate pension plan
what is the basic purpose of a company?
maximize stockholder wealth/ maximize company value
equation: EPS
net income/number of shares outstanding
is stock price maximization the same as profit maximization?
no despite a high correlation among stock price, eps, and cash flow
do corporations really pay "double taxation?" why?
no, bc... small, 1/2 don't pay taxes, and zeroing out corporation
what is the agency theory?
one party (principal) hires another party (agent) to work for them and agent is supposed to act in the principal's best interest
what is the P/E based on?
past rate of growth
equation : P/E ratio
price of stock/ EPS
what are the 3 factors that affect stock price?
projected cash flows to shareholders, timing and riskiness of cash flow stream
stock price automatically adjusts for what 2 things?
riskiness and timing
how do you measure stockholder wealth?
stock price (long - term trend)
finance is the study of valuation of what?
stocks/bonds, mortgage payments, companies, projects, business decisions
what is finance
study of VALUATION
financial management focuses on valuing things from the perspective of what?
the company
what is the most important principle in finance?
time value of money
the US government allows for some businesses to have single taxation and limited liability, why?
to promote the growth of small businesses
when does an agency problem arise?
when the (managers) best interest doesn't align with the (shareholder) goal EX: CEO buying jet instead of flying commercial