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C214- Chpt 1 Finance
Chpt 1 Finance
| Question | Answer |
|---|---|
| finance is the study of management or the allocation of | capital |
| Three important areas in finance: | 1. Corporate Finance 2. Investments 3. Financial Institutions |
| Corporate finance: focuses on | financial decision-making by a firm’s management |
| Investments: The second area is investments. This area is devoted to understanding the various types of financial instruments—such as | stocks and bonds—and how to value these instruments |
| Financial institutions (banking). These institutions make money by | paying depositors a lower interest rate than the interest rate they charge to borrowers |
| capital budgeting, | is the planning of a firm’s long-term investments. |
| Economics is a subfield of finance | False |
| Which of the following is not an example of firm capital? | Labor |
| Corporate finance is devoted to understanding various types of financial instruments. | |
| Which of the following is an example of firm capital | Bank Deposits |
| Corporate finance focuses on the decision-making by the management of the firm. | True |
| What are the three important areas of finance discussed in this section? | Corporate finance, investments, and financial institutions |
| Capital is defined as a financial asset. | true |
| Corporate finance is devoted to understanding various types of financial instruments. | False |
| Banks make money when interest rates they charge to borrowers are less than interest rates they pay depositors. | False |
| Stocks and bonds are two types of | financial instruments |
| Treasury securities are generally bonds that are issued by | The U.S. government |
| When tax revenues fall short of covering these and other governmental costs the U.S. Treasury will issue | Bonds |
| Corporate bonds is a | Debt instrument that is issued by a corporation in order to raise capital. |
| Primary Financial Markets- that is, the markets in which | securities are first issued |
| primary financial markets are where the | The issuers (the firms) and the buyers (the investors) engage in deals |
| A syndicate is a group that | is temporarily formed to handle a bond or stock issue. |
| syndicate might also be the | underwriters of the security issue |
| An underwriter has the responsibility of determining the value of the | security |
| An underwriter in the large majority of cases | purchases all of the securities from the issuer and then sells them to other investors |
| a firm issuing a bond can place the bonds with a syndicate in two ways | The first way is through a competitive sale. The second way is through a negotiated sale |
| Primary financial markets are indeed where | new securities are issued and sold to investors for the first time, which helps companies raise new capital. |
| What are the two ways a syndicate can place a bond? | Competitive sale or negotiated sale |
| An IPO, or initial public offering, is the | first sale of stock by a company to the public |
| A seasoned equity offering refers to | the sale of new shares by a company that has already gone public |
| An IPO does occur on | the primary market, where new issues of securities are sold to initial buyers |
| Syndicates involved in IPOs are typically composed of | investment banks and other institutional investors that underwrite and distribute new securities. |
| Competitive sales do involve | underwriters submitting bids to purchase bonds |
| negotiated sales involve | direct negotiation with the issuer and do not include competitive bidding |
| Secondary Financial Markets are where securities are | traded after the initial offering |
| The secondary market for stocks is commonly referred to as | the “stock market.” |
| There are two types of secondary markets | 1. Auction Market 2. Dealer Market |
| the world's largest secondary financial market, is | the world's largest secondary financial market, is |
| a dealer market does not require a | physical location |
| in a dealer market, securities are bought and sold through a | network of dealers that trade for themselves |
| When dealers have to compete with one another, transaction costs will generally | decrease |
| Markets are indeed where prices are | determined through the interaction of buyers and sellers establishing the value of traded securities |
| When dealers compete with one another, transaction costs tend to decrease due to the | competitive pressure to offer better prices and lower fees to attract business. |
| tocks that are listed on dealer markets generally have | multiple dealers for each stock |
| NASDAQ is an example of a | dealer market |
| The difference between the bid price and the ask price is called | bid-ask spread |
| example of bid-ask spread | The ask price of Stock A is $215.54, while the bid price for Stock A is $215.14. answer: .40 |
| The bid-ask spread represents the difference between the highest price a buyer is willing to pay and | the lowest price a seller is willing to accept. |
| he NYSE specialist will charge a lower price to sellers of the stock and a higher price to the | buyer of the stock |
| The NYSE specialist (now known as a designated market maker) indeed has an objective to | provide liquidity to the market, ensuring there is a buyer for every seller and vice versa |
| specialist also known as a | designated market maker |
| two most common types of orders used by investors | 1. Market Order 2. Limit Orders |
| Market orders are | time-sensitive |
| limit orders are | price-sensitive |
| A market order means: | |
| Market Order (FAST) | Example: Stock is “$100” Current ask price (what sellers want) = $100.03 If you place a market order: You buy immediately at $100.03 You don’t wait—you accept the current price |
| A market order means: | You may pay slightly more (or receive slightly less) because you prioritize speed. |
| Limit Order (PRICE CONTROL) | Only buy/sell at this specific price or better |
| Limit Order Example | Example: You want to buy at $100.00 Current ask is $100.03 If you place a limit order: Your order does NOT execute yet You wait until: Sellers lower their price to $100.00, OR Someone else agrees to sell at $100.00 |
| What Does “Orders Crossing” Mean | Crossing = matching buyers and sellers directly Example: You place a limit buy at $100 Someone else places a limit sell at $100 These orders match (cross) and execute instantly at $100 No need for a middleman to adjust prices. |
| Simple Analogy Market order = | “I’ll pay whatever the seller is asking right now” |
| Simple Analogy Limit order = | “I’ll only buy if someone agrees to my price” |
| What are the two types of orders that are used by investors? | Market orders and limit orders |
| A market order to buy will execute immediately at the current ask price, which is the | lowest price a seller is willing to accept |
| A limit order to buy a stock at $101.55 will execute only if the stock’s ask price falls to | $101.55 or lower |
| the goal of the firm has been to | maximize shareholder value |
| What is a way firms can maximize shareholder value? | Invest in new machinery that will be profitable |
| For publicly traded companies, the most reasonable and reliable signal of whether management is indeed maximizing shareholder value is simply the firm’s | share price |
| traditionally, the goal of the firm is to ___________ shareholder value. | maximize |
| maximize shareholder value, which often leads to an | increase in the stock price, reflecting the company’s growth and profitability |
| Privately held companies and publicly traded companies will make different decisions about | how to maximize shareholder value |
| What is one ways firms can maximize shareholder value? | Hire new employees to improve production and profitability |
| What is another firms can maximize shareholder value? | Invest in new research and development that will be profitable |
| What a third way firms can maximize shareholder value? | Invest capital into projects that will improve the profitability of the firm |
| maximization of shareholder value is the concept of | agency costs |
| Agency costs are defined as | costs that are incurred when management does not act in the best interests of shareholders |
| For example, a particular manager might really want to remodel his office on the company’s dime. Does remodeling an office maximize shareholders’ value | What happens when management has incentives different from those of the shareholder |
| The second issue regarding profit maximization or the maximization of shareholder value is the potential effect | of focusing solely on profits |
| True or False: Agency costs are costs that are incurred when management does not act in the best interest of shareholders. | true |
| True or False: Firms try to mitigate agency costs by aligning managers’ interests with shareholders’ interests. | true |
| True or False: Agency costs are commonly mitigated by increasing management compensation. | False |
| True or False : Agency costs are commonly mitigated by compensating management with company stock. | true |
| What issue(s) are associated with the firm goal to maximize shareholder value? | Agency costs and potential unethical behavior |
| Maximizing shareholder value ethically can improve society generally by ________. | 1. employing additional workers 2. creating growth and leading to increased production by other firms 3. increasing the profitability of other firms because of increased consumption |
| True or False : An example of agency costs is a firm’s decision to invest in a project because management enjoys working on the project. | True |
| True or False :An example of agency costs is management spending company money on unprofitable goods and services. | True |
| True or False : An example of agency costs is increased costs incurred because of higher levels of production. You SelectedTrue | True |
| Agency costs occur when management does not act | in the best interest of shareholders |
| When management spends company resources on goods or services that do not contribute to | profitability or shareholder value, this represents agency costs |
| f management chooses to invest in a project for personal interest rather than the profitability or benefit of the shareholders, it is | an example of agency costs. |
| Ethically maximizing shareholder value can lead to societal benefits by | creating jobs, fostering economic growth, and increasing overall production and profitability in the economy. |
| A focus on maximizing shareholder value can sometimes lead to | agency costs or create incentives for management to engage in unethical behavior to boost short-term profits or the stock price. |
| ranting stock options or shares to management is a common way to | align their interests with those of shareholders, potentially reducing agency costs as it incentivizes managers to focus on increasing the company’s stock value. |
| Agency costs are not commonly mitigated by | imply increasing management compensation. |
| To reduce agency costs, firms often try to align the interests of managers with those of shareholders, such as | through stock-based compensation, bonuses tied to performance, or other incentive mechanisms. |
| Agency costs arise from conflicts of interest between the goals of shareholders and the actions of management, which may not always | align with maximizing shareholder value |
| A bond that a company issues to raise capital is a form of | debt |
| A bond is a form of | ebt financing, as it requires the company to repay the borrowed funds to bondholders. |
| f the price of a particular stock begins to heavily fluctuate, then the specialist will __________ the spread. | increase |
| The specialist widens the spread in response to | high volatility to mitigate the increased risk. |
| A stock is a share of ______________ in a particular company. | ownership |
| A stock represents a share of | ownership in a company |
| Negotiated sales often involve more in-depth interviews to select an underwriter due to the | complexity and tailored nature of the bond issuance. |
| 0 / 1 If providing liquidity becomes more risky, then dealers will __________ the spread. | increase |
| Dealers increase the spread to compensate for | the higher risk of providing liquidity. |
| Traditionally, what is the goal of the firm? | To maximize shareholder value |
| In 2019, the Business Roundtable released a statement suggesting that the goal of the firm should focus more on ___________. | considering how firm decisions affect all stakeholders of the firm |
| Which of the following is listed as an issue related to maximizing shareholder value? | Focusing primarily on profit might lead to unethical behavior. |
| An exclusive focus on profit maximization can sometimes | incentivize unethical behavior within a firm. |
Created by:
mnapole