Unit 1 Lecture

Question 1

Classical Microeconomics view point

Answer 1

Inputs–|Production Function|–Output

Question 2

Legal Viewpoint

Answer 2

Dealing with the legalities of ownership and control

Question 3

Sole Ads

Answer 3

easier to start, least regulated, owner keeps all profits, taxed once

Question 4

Sole Dis

Answer 4

limited life to owner, equity capital limed to personal wealth, unlimited liability, difficult to sell

Question 5

Partner Ad

Answer 5

two or more owners, more capital available, easier to start, taxed once

Question 6

Partner Dis

Answer 6

unlimited liability, dissolves when one dies or wishes to sell, difficult to transfer

Question 7

Corporation Adv

Answer 7

limited liability, unlimited life, sep of owner and management, transfer is easy, easier to raise capital

Question 8

Corporation Dis

Answer 8

Sep of management and ownership (agency problems), double taxation

Question 9

Latin word for corporation

Answer 9

corpus, which means body

Question 10

Backstory of limited liability

Answer 10

Took hold in 1811 in corporate law in NY, represented significant invention

Question 11

Limited Liability

Answer 11

a corporation that guarantees that you as a shareholder will not be liable for the debts of the company

Question 12

Goal of the firm

Answer 12

Maximize the market value of the existing owners equity

Question 13

Finance

Answer 13

The study of valuation and management of risk

Question 14

Finance points (5)

Answer 14

Pillar of civilized society, a structure, allocating resources, incentivizing people to do productive things, managing risks

Question 15

Basic areas of finance

Answer 15

Behavioral, Financial engineering, financial econometrics, and market microstructure

Question 16

Behavioral finance

Answer 16

study of influence of psychology on the behavior of investors or financial analysts

Question 17

Financial Engineering

Answer 17

use of mathematical techniques to solve financial problesm

Question 18

Financial econometrics

Answer 18

application of statistical methods to financial market data

Question 19

market microstructure

Answer 19

the study of financial markets and how the operate

Question 20

Corporate finance should answer questions in which three areas

Answer 20

Capital budgeting, capital structure, and working capital managment

Question 21

Capital budgeting Q

Answer 21

What long term investments should the firm take on

Question 22

Capital Structure Q

Answer 22

Where will we get the long term financing to pay for the investment

Question 23

Working capital management Q

Answer 23

How will we manage the everyday financial activities of the firm? How much inventory should the firm carry? What credit policy is best? Where will we get our short-term loans?

Question 24

Principles 1-3

Answer 24

Risk-Return Trade-Off, The time value of money, Cash-Not profits-Is king

Question 25

Principles 4-6

Answer 25

Incremental cash flows, the curse of competitive markets, efficient capital markets

Question 26

Principes 7-9

Answer 26

The agency problem, Taxes Blas business decisions, All risk is not equal

Question 27

Principal 10

Answer 27

Ethical behavior is doing the right thing, and ethical dilemmas are everywhere in finance

Question 28

Asset

Answer 28

A physical property or intangible right that has economic value

Question 29

Real asset

Answer 29

a physical property that provides owner with physical service

Question 30

The material wealth of a society is determined by

Answer 30

the productive capacity of its economy

Question 31

Capacity

Answer 31

a function of the real assets of the economy

Question 32

real assets generate

Answer 32

net income to the economy

Question 33

financial assets define the

Answer 33

allocation of income or wealth among investors

Question 34

Financial instrument

Answer 34

written legal obligation of a transfer of something of value from one to another, at a future time with certain conditions

Question 35

Legal obligation

Answer 35

Financial instruments are backed by government rules and regulations

Question 36

financial instruments will dicatate

Answer 36

the payments of money from one person/ firm to the other

Question 37

Financial assets of householders are

Answer 37

liabilities of the issuer of securities

Question 38

when we aggregate over all balance sheets these claims cancel out leaving

Answer 38

only real assets as the net wealth of the economy

Question 39

Reasons for the existence of financial assets

Answer 39

because the savings of various economic units during a time differ from their investment in real assets

Question 40

Saving-surplus (deficit) economic units

Answer 40

economic units whose current savings exceed (are lower than) their investment in real assets

Question 41

two channels

Answer 41

financial intermediaries and financial markets

Question 42

Financial intermediaries

Answer 42

institutions that borrow and pool funds from savers and sell them to borrowers

Question 43

Financial intermediaries ex

Answer 43

commercial banks, credit union, finance companies

Question 44

Primary markets

Answer 44

those in which newly issued claims are sold to initial buyers and sellers

Question 44

Secondary Markets

Answer 44

those in which claims that have already been issued are sold by one investor to another

Question 45

Capital Markets

Answer 45

consists of the institutions and procedures that provide for transactions in long term financial instruments

Question 46

Money Markets

Answer 46

consists of the institutions and procedures that provide for transactions in short-term debt insturments

Question 47

Risk sharing (diversification)

Answer 47

savers hold many assets, reducing uncertainty

Question 48

Liquidity services

Answer 48

a measure of how easily an asset can be converted into cash

Question 49

information services

Answer 49

the collection and communication of information or facts about borrowers and expectations about returns on financial assets

Question 50

the financial system is essential to assure

Answer 50

adequate capital formation and economic growth in a modern economy

Question 51

investment

Answer 51

the current commitment of money or any other resource in the expectation of reaping future benefits

Question 52

Financial assets provide

Answer 52

a ready vehicle to transfer consumption through time

Question 53

The problem at the heart of financial markets

Answer 53

asymmetric information and principal-agent problem

Question 54

Asymmetric information "information failure"

Answer 54

when one party to an economic transaction possesses greater material knowledge than the other party (information inequality)

Question 55

Principal-agent problem

Answer 55

the scale of enterprise has grown and owners are no longer managers; now owners (the principal) have to monitor managers (their agents) to ensure that they are not misbehaving