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Flashcards in Chapter 1 Deck (22):
1

Capital budgeting

Deciding in whether to expand a manufacturing plant

2

Capital Structure

Deciding whether to issue new equity and use the proceeds to retire outstanding debt

3

Capital management

Modifying the firm's credit collection policy with its customer

4

Types of businesses

Sole proprietorship
Partnerships
Corporations

5

Agency Problems

Management may act in its own or someone else's best interests, rather than those of the shareholder's .

In these events occur, this may cause them to contradict the goal of maximizing the share price of the equity of the firm.

6

What is the goal of financial management ?

To maximize the current market value (share price) of the equity of the firm (whether it's publicly-traded or not)

7

Corporate ownership

-shareholders are the owners
-shareholders elect board of directors
-BOD elects management
- separation can cause agency problem

8

Chartered banks

Accept deposits and issue commercial loans, corporate loans, personal loans and mortgages

9

Trust companies

Accept deposits and make loans, but also engage in fiduciary activities such as managing assets for estates, registered retirement savings plans, etc.

10

Investment dealers

Non-depository institutions that assist firms in issuing new securities

11

Insurance companies

Engage in indirect financing by accepting funds in a form similar to a deposit and making loans

12

Pension funds

Invest contributions from employers and employees in securities offered by financial markets

13

Mutual funds

Pool individual investments to purchase a diversified portfolio

14

Hedge funds

Cater to sophisticated investors and seek high returns by using aggressive financial strategies prohibited by mutual funds

15

Money markets

Financial markets where short-term debt instruments are bought and sold

16

Capital markets

Financial markets where long-term debt and equity securities are bought and sold

17

Derivatives market

Where options and futures are traded on financial instruments and commodities

18

Primary markets

Are where securities are sold for the first time (I.P.O)

19

Secondary markets

Are where outstanding securities are sold

20

Indirect finance

Funds are transferred from suppliers of capital to demander of capital through a financial intermediary.

Life insurance companies engage in indirect finance by accepting funds in a form similar to deposits and making longs.

21

Direct finance

Funds are transferred from suppliers of capital to demander of capital but financial intermediaries are bypassed.

22

Financial Engineering

The creation of new securities or financial processes.. This engineering could be used to package and sell risky assets to investors; for examples, banks can package and sell mortgages into mortgage backed securities and sell these on to other investors