Financial Management Chapter 1

Sarbanes-Oxley Act

A law passed by Congress that requires the CEOs and CFOs of publicly held corporations to certify that their firm's financial states are accurate.

Corporation

A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.

Limited Liability Company (LLC)

A popular type of organization that is a hybrid between a partnership and a corporation.

S Corporations

A special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.

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.

Marginal Investor

An investor whose views determine the actual stock price.

Proprietorship

An unincorporated business owned by one individual.

Partnership

An unincorporated business owned by two or more persons.

CEO

Chief Executive Officer, sometimes chairperson of the board, under Chairperson.

CFO

Chief Financial Officer, generally a senior VP and third-ranking officer, in charge of accounting, finance, credit policy, decisions regarding asset acquisitions and investor relations, which involves communications with stockholders and the press.

COO

Chief Operating Officer, serves under the CEO, directs the firm's operations, which includes marketing, manufacturing, sales, and other operating departments

Security analysis

Deals with finding the proper values of individual securities.

Portfolio theory

Deals with the best way to structure portfolios or baskets of stocks and bonds.

Market analysis

Deals with the issue of whether stock and bond markets at any given time are "too high," "too low," or "about right."

Areas of finance

Financial management, capital markets and investments.

Financial management or corporate finance

Focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value.

Chairperson and Board of Directors

Generally highest ranking individual and top governing body.

Corporate raiders

Individuals who target corporations for takeover because they are undervalued.

4 Forms of Business Organizations

Proprietorships, partnerships, corporations, limited liability companies and limited liability partnerships.

Investments

Relate to decisions concerning stocks and bonds and include a number of activities.

Capital markets

Relates to the markets where interest rates, along with stock and bond prices, are determined.

Limited Liability Partnership (LLP)

Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It provides personal asset protection from business debts and liabilities but is taxed as a partnership.

Finance

System that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities.

Hostile takeover

The acquisition of a company over the opposition of its management.

Shareholder Wealth Maximization

The primary financial goal for managers of publicly owned corporations implies that decisions should be made to maximize the long-run value of the firm's common stock.

Equilibrium

The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock.

Market Price

The stock value based on perceived but possibly incorrect information as seen by the marginal investor.

Behavioral finance

Where investor psychology is examined in an effort to determine whether stock prices have been bid up to unreasonable heights in a speculative bubble or driven down to unreasonable lows in a fit of irrational pessimism.