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FIN3000 > Module 1 > Flashcards

Module 1 Flashcards

1
Q

Financial Managers

A

act on behalf of the firm’s owners by making operating and investment decisions whose benefits exceed their costs

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2
Q

Goal of Financial Managers

A

managers should aim to maximize the value of the firm and thereby maximize the wealth of its owners

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3
Q

Finance

A

science and art of how individuals and firms raise, allocate, and invest money

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4
Q

Profit maximization does not lead to the highest possible share price

A
  1. Timing
  2. Profits and cash flows are not identical
  3. Risk
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5
Q

Key Determinants of Share Price

A

Risk and return

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6
Q

Business Ethics

A

the standards of conduct or moral judgment that apply to persons engaged in commerce

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7
Q

Sarbanes-Oxley Act of 2002

A

requires firms to disclose whether they have a code of ethics in place, and firms must report any waivers of those codes for senior management

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8
Q

Investment Decisions

A

how a company will spend its financial resources on long-term projects that ultimately determine whether the firm successfully creates value for its owners

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9
Q

Capital Budgeting

A

identifies investment opportunities for which benefits exceed costs

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10
Q

Financing Decisions

A

determine how companies raise the money needed for investment opportunities

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11
Q

Capital

A

money raised by firms to finance their activities

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12
Q

Working Capital Decisions

A

the management of a firm’s short-term resources

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13
Q

Principles That Guide Financial Manager’s Decisions

A
  1. time value of money
  2. tradeoff between return and risk
  3. cash is king
  4. competitive financial market
  5. shareholder’s interest
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14
Q

Principal–Agent Problem

A

the owners of a firm and its managers are not the same people

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15
Q

Marginal Cost–Benefit Analysis

A

managers should base financial decisions on the marginal benefits and costs associated

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16
Q

Sole Proprietorship

A

a for-profit business owned by one person

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17
Q

Unlimited Liability

A

liabilities are the entrepreneur’s responsibility and creditors can make claims against the entrepreneur’s personal assets if the business fails to pay its debts

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18
Q

Partnership

A

two or more owners doing business together for profit

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19
Q

Corporation

A

business entity owned by individuals, but the corporation itself is a legal entity distinct from its owners

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20
Q

Stockholders

A

ownership, or equity, takes the form of common or preferred stock

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21
Q

Limited Liability

A

are not personally liable for the firm’s debts

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22
Q

Stock

A

security that represents an ownership interest in a corporation

23
Q

Dividends

A

periodic distributions of cash

24
Q

Limited Liability

< 100 owners

A

limited partnership (LP), S corporation (S corp), limited liability company (LLC), and limited liability partnership (LLP)

25
Q

Agency Costs

A

costs that shareholders bear because managers pursue their own interests

26
Q

Corporate Governance

A

the rules, processes, and laws by which companies are operated, controlled, and regulated

27
Q

Stock Options

A

allow managers to buy shares of the company’s stock at a fixed price

28
Q

Restricted Stock

A

shares of stock that do not fully transfer from the company to the employee until certain conditions are met

29
Q

Individual Investors

A

own relatively few shares and as a result do not typically have sufficient means to influence a firm’s corporate governance

30
Q

Institutional Investors

A

investment professionals paid to manage and hold large quantities of securities on behalf of individuals, businesses, and governments

31
Q

Activist Investors

A

wealthy individuals or institutional investors controlling a large pool of capital, specialize in influencing management

32
Q

Financial Institutions

A

serve as intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments

33
Q

Net Suppliers and Demanders

A

Suppliers: individuals
Demanders: firms, governments

34
Q

Commercial Banks

A

financial institutions that provide savers with a secure place to deposit or save funds for future use

35
Q

Investment Banks

A
  1. assist companies in raising capital
  2. advise firms on major transactions such as mergers or financial restructurings
  3. engage in trading and market-making activities
36
Q

Shadow Banking System

A

group of financial institutions that engage in lending activities but that do not accept deposits and are not subject to the same regulations

37
Q

Financial Markets

A

suppliers and demanders of funds can transact business directly

38
Q

Money Market

A

short-term debt instruments, marketable securities

39
Q

Capital Market

A

long-term securities: bonds and stocks

40
Q

Private Placement

A

the sale of a new security directly to an investor or group of investors

41
Q

Public Offering

A

the sale of either bonds or stocks to the general public

42
Q

Primary Market

A

sells stocks or bonds to investors and receives cash in return

43
Q

Secondary Market

A

securities trading between investors

44
Q

Money Market

A

market where investors trade highly liquid securities with maturities of 1 year or less

45
Q

Capital Market

A

enables suppliers and demanders of long-term funds to make transactions

46
Q

Bonds

A

long-term debt instruments used by business and government to raise large sums of money

47
Q

Common Stock

A

units of ownership, or equity, in a corporation

48
Q

Preferred Stock

A

promise to pay stockholders a fixed periodic dividend, must also pay dividends to preferred before they pay to common

49
Q

Market Maker

A

securities dealer who offers to buy or sell securities at stated bid/ask prices

50
Q

Broker Market

A

execute the trade at the midpoint of the bid/ask spread

51
Q

Dealer Market

A

execute the buy/sell market orders using their own inventory of securities

52
Q

Securities Exchanges

A

organizations that provide a physical marketplace where traders can buy and sell securities

53
Q

Market Price

A

determined by the interaction of buyers and sellers

54
Q

Market Capitalization

A

total market value of the firm’s outstanding stock

FIN3000 (2 decks)

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