Financial Management Test 1 Chapter 1

Money Markets

Deals w/short-term securities that have a life of one year or less, securities in these markets include: commercial paper sold by corporations to finance their daily operations.

Functions of financial management

Financial Management is concerned with managing an entity's money. Functions: allocate funds to current and fixed assets, obtain the best mix of financing alternatives, develop an appropriate dividend policy w/in the context of the firms objectives

Modern issues in Finance

Focus has been on: Risk-return relationships, maximization of return for a given level of risk, portfolio management, capital structure theory. New financial products w/focus on hedging are being widely used.

Corporation

Legal entity unto itself, formed through articles of incorporation, owned by shareholders, continual life. Key Feature: Easy divisibility of ownership interest by issuing shares of stock. Disadvantage: potential of double taxation of earnings

Primary goal of Financial Management

Maximization of profit. Drawbacks: a change in profit may also represent a change in risk, fails to consider the timing of the benefits. impossible task of accurately measuring the key variable "profit"

Broader goal of Financial Management

Maximizing Shareholder wealth, achieving the highest possible value for the firm

Management and Stockholder Wealth

Only way to retain power in long run is by becoming sensitive to sharholder concerns, sufficient stock option incentives to motivate achievement of market value maximization, powerful institutional investors are making management more responsive to shareholders

Economics

Provides a broad picture of the economic environment for decision making in many important areas

Sole Proprietorship

Represents single-person ownership. Advantages: Simplicity of decision making, low organizational and operational costs. Drawback: unlimited liability to the owner. Profits and losses are taxed as though they belong to the individual owner. you are the business-limited life.

Secondary Market

Securities are bought and sold amongst the investors, prices of securities keep changing continually, financial managers are given a feedback about their firms' performance

Forms of Organization

Sole proprietorship, partnership corporation

Valuation Approach

The ultimate measure of performance- how the earnings are valued by the investor. Investor will consider the: risk inherent in the firms operation, time pattern over which the firms earnings increase or decrease, uality and reliability of reported earnings.

Partnership

Two or more owners. Unlimited liability for the owners

Inflation

a key variable in financial decisions

Internationalization of Financial Market

allocation of capital and a search for lower-cost sources of financing in global market; the impact of international affairs and technology has resulted in the need for future financial managers to understand: international capital flows, computerized electronic funds transfer systems, foreign currency hedging strategies

Technological Impact on Capital Markets

cost reduction in trading securities.

Capital markets

deals w/securities that have a life of more than one year. long term markets. common stock, preferred stock, corporate and government bonds

Significant to financial managers during decision making:

effects of inflation and disinflation on financial forecasting, required rates of return for capital budgeting decisions, cost of capital

Agency Theory

examines the relationship between owners and managers of the firm

institutional investors

have more to say about the way publicly owned companies are managed

S Corporation

income is taxed as direct income to stockholders and is thus taxed only once as normal income

Financial Markets

indicators to maximization of shareholder value and any ethical or unethical behavior that may influence the value of the company.

Risk-Return Trade-Off

influences operational side (Capital vs. Labor / Product A vs. Product B); influences financial mix (Stock vs. Bonds Vs. Retained earnings)

Return Maximization and risk minimization

investors can choose risk level that meets their objective and maximizes return for that given level of risk, Companies that are rewarded w/high-priced securities can raise new funds in money markets and capital markets at a lower cost compared to competitors

Finance

links economic theory with the numbers of accounting

Limited Partnership

one or more partners are designated general partners and have unlimited liabiity for the debts of the firm, other partners are designated limited partners and are liable only for their initial contribution. Not all financial institutions extend funds to a limited partnership firm

Accounting

the language of finance, provides financial data through: income statements, balance sheets, statemetn of cash flows

Recent financial crisis is due to:

unwarranted extension of credit, creation and sale of mortgage-backed securities, losses from credit defaults in excess of a banks capital in many cases

Insider Trading

using information that is not available to the public and making undue profit from trading

Primary Market

when a corporation uses the financial markets to raise new funds, the sale of securities is made by way of a new issue called an initial public offering (IPO)

Sarbanes-Oxley Act

5 member Pulic Company Accounting Oversight Board (PCAOB). Responsibility for: Auditing standards w/in companies, controlling the quality of audits, setting rules and standards for the independence of the auditors. MAJOR FOCUS= make sure publicly traded companies accurately present their, assets, liabilities, equity and IS.