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Finance Chpt 1

Goals and Governance

QuestionAnswer
What are the roles of the Financial manager? 1. Investment (capital budgeting) decision - investment in real assets. 2. Financing decision - raise money for firm's investments & operations 3. Capital structure - the mix of long term debt & equity financing.
Distinguish between real and financial assets. Real assets include all (tangible or intangible) assets used in the production or sale of the firms’ products or services. Financial assets are claims on the income generated by real assets.
Who are the major financial managers? Treasurer = raises capital & maintains relations w. banks + investors that hold the firm’s securities. Controller = preps financial stmnts & managing budgets. CEO - oversees treasurer & controller + invold in financial policymaking & corp planning.
Types of Corporations - Public Companies (shares traded in securities market) - Private Corporations (shares non-traded) - Limited Liability Corporations (LLC): its owners cannot be held personally responsible for the corporation’s debts.
Types of Business Organizations Sole Proprietorships Partnerships Corporations Limited Liability Partnerships
Corporate Structure Sole Proprietorships & Partnerships - Unlimited Liability & Personal tax on profits. Corporations - Limited liability, corporate tax on profits + personal tax on dividends.
Agency Problems Represent the conflict of interest between management and owners- i.e.,managers acting as agents for stockholders may act in their own interests rather than maximizing value.
Agency Problem Solutions Compensation plans (incentive schemes) Board of Directors Takeovers (poorly performing firms risk takeovers mgmt = replaced) Specialist Monitoring (lenders, stock market analysts, investors) Legal & regulatory requirements (in the interests of investo
Financial Markets Primary Markets - (the sale of new securities by corporations) Secondary Marketsn - (previously issued securities are traded among investors) OTC Markets - (trade bonds, stocks etc directly between two parties)
Financing Decision Source of Funds “Capital” Capital Structure (the choice between debt and equity financing) Money Markets (short-term securities, < 1 year) Capital markets (long-term debt and equity financing)
Functions of Financial Intermediaries Financial instits act as intermediaries that gather the savings of many individuals & reinvest them in loans or in the financial markets. E.g. banks, mutual funds + savings, loan & insurance comps. Adv: low-cost diversification and professional management
Financial Institutions Most of the firm's debt & equity is owned by financial insts. They finance corporate investments, & invest in real estate/other assets. They run the payments mechanism, help individuals diversify, manager their portfolios, & help companies manage risk.
Function of Financial environment Transport cash across time (save, borrow). Risk transfer & diversification (insurance comp, mutual fund). Liquidity (withdraw bank deposits, sell stock). Payment mech (alt cash payment). Provide info (Commodity prices, Interest rates, company values)
Value Maximization and the cost of capital Cost of capital: min acceptable rate of return on cap investmt. Invest projects offering rates of return higher than capital cost add value to the firm; & those that offer rates less than cost of cap subtract value & shouldn’t be undertaken.
Created by: wguate