Podcast
Questions and Answers
What must be paid whenever specified in debt financing?
What must be paid whenever specified in debt financing?
- Interest (correct)
- Dividends
- Principal
- Maturity date
Which type of financing involves an investment that never has to be repaid?
Which type of financing involves an investment that never has to be repaid?
- Debenture
- Secured
- Common
- Preferred (correct)
What is a legal obligation for companies who issue secured bonds?
What is a legal obligation for companies who issue secured bonds?
- Pay interest (correct)
- Interest is tax deductible
- Increase debt
- Must pay dividends
Which special bond feature allows the issuer to repay the bond before maturity?
Which special bond feature allows the issuer to repay the bond before maturity?
What type of securities does an investment banker assist in selling or issuing?
What type of securities does an investment banker assist in selling or issuing?
What are the characteristics of a good money system?
What are the characteristics of a good money system?
Which components make up the total M1 money supply?
Which components make up the total M1 money supply?
What does the Federal Reserve focus on to monitor potential inflation?
What does the Federal Reserve focus on to monitor potential inflation?
Who was the immediate past Chairman of the Federal Reserve before Jerome Powell?
Who was the immediate past Chairman of the Federal Reserve before Jerome Powell?
Which institution is responsible for determining how to control the economy?
Which institution is responsible for determining how to control the economy?
Where is the largest regional bank of the Federal Reserve located?
Where is the largest regional bank of the Federal Reserve located?
Why does the Federal Reserve increase the federal funds rate and shrink its portfolio of bonds and other assets?
Why does the Federal Reserve increase the federal funds rate and shrink its portfolio of bonds and other assets?
What is the purpose of selling government bonds in relation to monetary policy?
What is the purpose of selling government bonds in relation to monetary policy?
Which sector includes commercial banks and savings and loans associations in the American banking system?
Which sector includes commercial banks and savings and loans associations in the American banking system?
What was the main focus of the Dodd-Frank Wall Street Reform and Consumer Protection Act?
What was the main focus of the Dodd-Frank Wall Street Reform and Consumer Protection Act?
Why did the Federal Reserve decide to increase the discount rate and set credit controls?
Why did the Federal Reserve decide to increase the discount rate and set credit controls?
Where is the internationally money fund located?
Where is the internationally money fund located?
What activity ratios are impacted positively by implementing a just-in-time strategy?
What activity ratios are impacted positively by implementing a just-in-time strategy?
In financial benchmarking analysis, what type of comparison involves benchmarking against a specific firm's data at a particular point in time?
In financial benchmarking analysis, what type of comparison involves benchmarking against a specific firm's data at a particular point in time?
Which skill is NOT listed as one of the most important skills needed by CFOs?
Which skill is NOT listed as one of the most important skills needed by CFOs?
What is one of the typical activities that financial managers engage in as part of their role?
What is one of the typical activities that financial managers engage in as part of their role?
Which type of budget is focused on managing daily operations and acquiring inventory?
Which type of budget is focused on managing daily operations and acquiring inventory?
What is one of the reasons firms might need long-term funds?
What is one of the reasons firms might need long-term funds?
What is the main role of venture capitalists?
What is the main role of venture capitalists?
What does leverage refer to in the context of finance?
What does leverage refer to in the context of finance?
How do venture capitalists add value to the companies they invest in?
How do venture capitalists add value to the companies they invest in?
What does the debt to owner's equity ratio measure?
What does the debt to owner's equity ratio measure?
Which source of equity financing involves selling ownership stakes to external investors?
Which source of equity financing involves selling ownership stakes to external investors?
What is the primary purpose of leveraging in finance?
What is the primary purpose of leveraging in finance?
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Study Notes
Economy and Money
- Economy depends on money as a medium of exchange, unit of value, and store of value
- Money supply consists of currency and demand deposits (M1) and time deposits and money market accounts (M2)
Debt vs Equity Financing
- Debt financing:
- Secured or debenture bonds
- Must be repaid on maturity date
- Interest must be paid whenever specified
- Equity financing:
- Preferred or common stocks
- Investment never has to be repaid
- No legal obligation to pay dividends
Investment Banker
- Assists in the sale/issue of new securities
- Underwrites issues
- Sells to institutional investors
Bond Market
- Characteristics:
- Coupon/interest rate
- Denomination (e.g., $1,000)
- Principal
- Maturity date
- Types:
- Unsecured/debenture bonds
- Secured bonds
- Advantages:
- Increase debt
- Interest is tax deductible
- Legal obligation to pay interest
- Disadvantages:
- Temporary source of funds
- Repaid on maturity date
- Can be repaid before maturity with call provision
Stock
- Definition: a type of security that represents ownership in a company
Federal Reserve
- Responsibilities:
- Regulates and controls the money supply
- Supervises and regulates banks
- Collects data on economic activities
- Processes checks
- Tools:
- Reserve requirement
- Discount rate
- Open market operations
- Current chairman: Jerome Powell
Monetary Policy
- Objectives:
- Fight against inflation
- Regulate money supply
- Tools:
- Increase/decrease reserve requirement
- Increase/decrease discount rate
- Sell/buy government bonds
- Set credit controls
American Banking System
- Components:
- Depository institutions (commercial banks, savings and loans, credit unions)
- Non-depository institutions (life insurance companies, pension funds, brokerage firms)
International Banking
- International monetary fund (IMF) located in Washington, D.C.
- Stock market performance: 20% fluctuation during COVID-19 pandemic
Financial Management
- Importance of finance:
- Financial management is crucial for business decisions
- Financial managers must possess skills such as people development, building relationships, communication, creativity, objectivity, leadership, and analytical thinking
- Functions:
- Planning, budgeting, obtaining funds, controlling funds, collecting funds, auditing, and advising top management
- Financial planning:
- Budget process
- Financial statements
- Types of budgets (capital, cash, operating)
- Financial controls and feedback
Financial Ratios and Analysis
- Leverage ratio:
- Measures the degree to which a firm relies on borrowed funds
- Debt to owners' equity ratio
- Activity ratios:
- Inventory turnover
- Just-in-time strategy
- Financial benchmarking analysis:
- Horizontal analysis (cross-section comparison)
- Vertical analysis (time-series comparison)
Sources of Funds
- Short-term funds:
- Meet monthly expenses
- Unanticipated emergencies
- Cash-flow problems
- Long-term funds:
- New product development
- Replacing capital expenditures
- M&A (mergers and acquisitions)
- Expanding current inventory
- Temporary promotional programs
- Expansion into new markets
- Building new facilities
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