WGU C214 Financial Management Topic 1

Corporate Finance

focuses on financial decision making by a firms management

Investments

various types of financial instruments (stocks, bonds, etc)

Banking or Financial Institutions

make money by paying depositors a smaller interest rate than the interest rate charged to borrowers

Treasury Securities

generally bonds that are issued by the US government

Corporate Bonds

firms borrowing from the public

Stocks

a share of ownership in a company

Primary financial markets

markets where securities are first issued

Syndicate

a group that is temporarily formed to handle a bond or stock issue: generally large investment bank or institutional investors

Underwriter

responsible for determining the value of the security; may purchase all the securities & then resale to investors

Competitive sale

underwriters submit bids offering highest price/lowest interest rate; underwriter resales a slightly higher price

Negotiated sale

underwriters submit bids, go thru interview to be selected

Initial Public Offering (IPO)

first time selling of stocks to the public; occurs in primary market

Secondary financial markets

where securities are traded after the initial offering (stock market)

Auction market

has a physical location & prices are determined by the highest price an investor is willing to pay (New York Stock Exchange)

Dealer market

no physical location- securities are bought & sold thru a network of dealers that trade for themselves; multi dealers per stock (NASDAQ)

Role of financial markets

they reduce the cost of borrowing from the public or selling ownership to the public

Role of Specialist (NYSE) or Dealers

to provide liquidity for a fair & orderly market; may increase the spread to do so (charge a lower price to seller and a higher price to buyer)

Bid-ask spread

difference between the bid price & asking price (specialist/dealer's compensation)

Financial market liquidity

the ease of trading in the market (high frquency traders)

Market orders

time sensitive; sales at current bid price/buys at current asking price when order is placed-immediately

Limited orders

price sensitive; sell occurs when price of stock matches order price

Role of price

convet information to consumers; affect incentives &affect the distribution of income

Dollar Returns

Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash flow-coupons for bonds/dividians for stocks)

Percentage Returns

Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2)
(figure for dollar return and divide into bought price)

Goal of company/firm

to maximize shareholder value or maximize profit

Agency costs

costs that are incurred when management doesn't act in the best interests of shareholders

Profit maximizarion

the potential effect of focusing soley on profits