finance
the study of applying specific value to things we own, services we use, and decisions we make
financial markets
the places and processes that facilitate the trading of financial assets between investors
type 1
no money and no ideas
type 2
money, but no ideas
type 3
no money, but ideas
type 4
both money and ideas
1
_____ participants will be asked to step aside from financial markets.
4
_____ individuals are self-funded and do not need financial markets, so they must step aside from them.
2, 3, 2, 3
Individuals of type _____ and _____ are the real financial role players, since type _____ people can lend money to type _____ people in a mutually advantageous exchange.
investors
In most developed economies, type
2
participants are usually individual _____.
investors
those who buy securities or other assets in hopes of earning a return and getting more money back in the future
retained earnings
the portion of company profits that are kept by the company rather than distributed to the stockholders as cash dividends
retained earnings and taxes
two sources of friction that in returning money to investors
investment
the analysis for and the analysis of making financial decisions in the business context
investments, financial management, financial institutions and markets, international finance
the four subareas of finance
investments
the subarea of finance that involves methods and techniques for making decisions about what kinds of securities to own, which firms' securities to buy, and how to pay the investor back in the form that the investor wishes
financial management
the process for and the analysis of making financial decisions in the business context
financial management
the subarea of finance that deals with a firm's decisions in acquiring and using the cash that is received from investors or from retained earnings
financial institutions and markets
the subarea of finance dealing with two dynamic entities working in different ways to facilitate capital flows between investors and companies
international finance
the subarea of finance that has to be much more innovative and sensitive to changes in other countries
financial institutions and markets
the organizations that facilitate the flow of capital between investors and companies
international finance
the use of finance theory in a global business environment
instantaneous, guaranteed
Cash flows are neither _____ nor _____.
risk
a potential future negative impact to value and/or cash flows
risk
often discussed in terms of the probability of loss and the expected magnitude of the loss
financial asset
a general term for securities like stocks, bonds, and other assets that represent ownership in a cash flow
real assets
physical property like gold, machinery, equipment, or real estate
real markets
the places and processes that facilitate the trading of real assets
time value of money
the theory and application of valuing cash flows at various points in time
accounting, finance
_____ tends to focus on and characterize the past, while _____ focuses on the present and future.
treasurer
typically responsible for managing cash and credit, issuing and repurchasing financial securities such as stocks and bonds, deciding how and when to spend capital for new and existing projects, and hedging against changes in foreign exchange and interest
treasurer and controller
Which two positions report to the CFO?
defined benefit plan
a retirement plan in which the employer funds a pension generally based on each employee's years of service and salary
defined contribution plan
a retirement plan in which the employee contributes money and directs its investment, and the amount of retirement benefits are directly related to the amount of money contributed and the success of its investment
401k plan
a defined contribution plan that is sponsored by corporate employers
contribution
The 401k is a defined _____ plan.
Individual Retirement Account (IRA)
a self-sponsored retirement program
benefit, contribution, 401k, Individual Retirement Accounts
Most companies have switched from providing defined _____ retirement plans to offering defined _____ plans (such as the _____) and self-funded plans like _____.
sole proprietorship
a business entity that is not legally separate from its owner
unlimited liability
a situation in which a person's personal assets are at risk from a business liability
unlimited liability
The biggest disadvantage that
sole proprietorships
carry relative to other organizational forms is that they have _____.
equity
an ownership interest in a business enterprise
angel investors
individuals who provide small amounts of capital and expert business advice to small firms in exchange for an ownership stake in the firm
venture capitalists
similar to angel investors except that they are organized as groups of investors and can provide larger amounts of capital
general partnership
a form of business organization where the partners own the business together and are personally liable for legal actions and debts of the firm.
public corporation
a company owned by a large number of stockholders from the general public
double taxation
a situation in which two taxes must be paid on the same income (corporate level and personal level)
limited liability
the limitation of a person's financial liability to a fixed sum or investment
hybrid organizations
business forms that have some attributes of corporations and some of proprietorships/partnerships
partnerships, sole proprietorships
Banks are more willing to lend to _____ than to _____ since
all
partners are liable for repaying the debt.
limited liability
Shareholders (owners) in public corporations have only _____, so they cannot lose more money than they originally paid for their shares of stock.
small
The US government typically restricts hybrid organization status to relatively _____ firms.
maximization of shareholder wealth
a view that management should first and foremost consider the interests of shareholders in its business decisions
stakeholder
a person or organization that has a legitimate interest in a corporation
maximize shareholder wealth, social responsibility, profitability
In the owners' view, the goal of an organization is to _____. In the stakeholders' view, _____ and _____ are emphasized.
invisible hand
a metaphor used to illustrate how an individual pursuing his own interests also tends to promote the good of the community
stock price
the price of a share of stock trading on a stock market
stock price
For corporations, maximizing the value of owners' equity can also be stated as maximizing the current value per share, or _____ of existing shares.
maximizing net income, minimizing costs, maximizing market share
Common alternatives to maximizing stock price are _____, _____, and _____.
agency relationship
whenever one party (the principal) hires someone else (the agent) to work for him or her
agency problem
the difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions
perks (perquisites)
A good deal of research literature suggests that allowing the manager a certain amount of such _____ might actually enhance owner value, in that such items may boost managers' productivity.
perks/perquisites
nonwage compensation, often in the form of a company car, golf club membership, etc.
option
the opportunity to buy stock at a fixed price over a specific period of time
employee stock option plan (ESOP)
an incentive program that grants options to employees (typically managers) as compensation
ignore, monitor, equity stake
Three approaches to minimize the agency problem: 1. _____ it, 2. _____ the managers' actions, 3. offer managers an _____ in the firm so that management participates in any equity value increase.
corporate governance
the set of laws, policies, incentives, and monitors designed to handle the issues arising from the separation of ownership and control
board of directors
the group of directors elected by stockholders to oversee management in a corporation
auditor
a person who performs an independent assessment of the fairness of a firm's financial statements
investment analyst
a person who analyzes a company's business prospects and gives opinions about its future success
investment banks
banks that help companies and governments raise capital
ethics
the study of values, morals, and morality
credit analysts
a person who analyzes a company's ability to repay its debts and reports the findings as a grad
fiduciary
a legal duty between two parties where one party must act in the interest of the other party
restricted stock
a special type of stock that is not transferable from the current holder to others until specific conditions are met
subprime mortgage borrowers
borrowers charged higher interest rates because of their higher chance of default
securitization
a process where loan originators sell the rights to the payments on the loans to other financial institutions or investors
mortgage-backed securities
securities that represent a claim against the cash flows from a pool of mortgage loans