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