Questions and Answers
What is the primary difference between the money market and the capital market?
An essential goal of a firm is solely profit maximization.
False
What are agency problems?
Issues arising when management acts in its own interests rather than in the interests of shareholders.
The two primary categories of financial markets are the _____ and _____ markets.
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Match the following terms with their definitions:
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Which of the following is an example of a capital market security?
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Institutional investors are individual investors who pool resources to create a larger investment portfolio.
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Name one common legal form of business organization.
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The goal of _____ maximization focuses on increasing the market value of shareholders' equity.
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What role do financial institutions play in the economy?
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Study Notes
Financial Managers and Their Roles
- Financial managers oversee financial affairs for various business types, including private, public, large, small, for-profit, and non-profit organizations.
- Key tasks include developing financial plans, extending credit to customers, evaluating large expenditures, and raising funds for operations.
Legal Forms of Business Organization
- Sole Proprietorship: Owned and operated by one individual for personal profit.
- Partnership: Owned by two or more individuals, focused on generating profits.
- Corporation: A legally recognized entity capable of suing, signing contracts, and owning property independently of its owners.
Corporate Organization
- Corporations offer limited liability protection to owners, separating personal assets from business liabilities.
Financial Markets Overview
- Financial markets enable transactions between fund suppliers and demanders.
- Primary Market: The initial issuance of securities with the issuer involved in transactions.
- Secondary Market: Trading of pre-owned securities, independent of the issuer.
- Money Market: Deals with short-term marketable securities.
- Capital Market: Concerned with long-term securities.
- Private Placement: Selling securities to individuals or small groups rather than the public.
Nature of Finance
- Finance involves evaluating investments and raising capital, influencing personal and business financial decisions.
- Businesses must decide how to raise, invest, and allocate profits among investors.
Career Opportunities in Finance
- Financial Services includes banking, personal financial planning, investments, real estate, and insurance sectors.
- Managerial finance focuses on the financial manager's responsibilities within a business.
Agency Issues and Corporate Governance
- Agency problems arise when the governance structure fails, possibly leading to takeover threats from rival managers aiming to enhance a firm's value.
Key Terms in Finance
- Financial Services: Advice and financial products delivery.
- Financial Institutions: Entities that facilitate financial transactions.
- Financial Market: Platforms for buying and selling securities.
- Money Market: Short-term financing.
- Capital Market: Long-term investment focus.
- Business Organizations: Different forms of business structures.
- Agency Theory: Addresses the relationship and conflicts between owners and management.
Upcoming Class Preparations
- Expect discussions on financial institutions, differences between money and capital markets, career paths in finance, common legal forms of business organizations, firm goals, and distinctions between individual and institutional investors.
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Description
Explore the key roles of financial managers and the different legal forms of business organization, including sole proprietorships, partnerships, and corporations. Understand how financial markets operate and the significance of limited liability protection in corporate structures.
