Study File .docx

not clear important info relevant Finance 1 (AQUI PASARE MIS APUNTES AL MOMENTO DE ESTUDIAR) INFO ESTA EN EL LIBRO/ SLIDES tomare apuntes normal leere y subrayare del libro al estudiar, aca pongo info y me hago un test KEY TERMS **Assets**= property owned (debt equity) **debt=** what i ow...

not clear important info relevant Finance 1 (AQUI PASARE MIS APUNTES AL MOMENTO DE ESTUDIAR) INFO ESTA EN EL LIBRO/ SLIDES tomare apuntes normal leere y subrayare del libro al estudiar, aca pongo info y me hago un test KEY TERMS **Assets**= property owned (debt equity) **debt=** what i owe **equity=**the amount of money the owner of an asset would be paid after selling it and any debts associated with the asset were paid of **preferred stock=** a type of equity that represents ownership of a company and the righ to claim from the company\'s operations. **liability=** any money owed to another party **dividends=** distribution of a company\'s earnings to its shareholders. IMPORTANT ChaP 1.1 The Role of Managerial Finance *Finance* can be defined as the science and art of managing money. **CAREER OPPORTUNITIES IN FINANCE** - - **LEGAL FORMS OF BuSINESS ORGANIZATION** This decision has very important financial implications because how a business is organized legally influences the risks that the firm's owners must bear, how the firm can raise money, and how the firm's prof- its will be taxed.  - - - - - - - - - - - ChaP 1.2 Goal Clearly, the goal managers select will affect many of the decisions they make, so choosing an objective is a critical determinant of how businesses operate. **MAXIMIZE SHAREHOLDER WEALTH** To enrich shareholders, managers must first satisfy the demands of these other interest groups (employees, customers, suppliers...). Dividends that stockholders receive ultimately come from the firm's profits.we argue that the goal of the firm, and also of managers, should be to *maximize the wealth of the owners for whom it is being operated*, which in most instances is equivalent to *maximize the stock price.''Only take actions that are expected to increase the wealth of shareholders.'.* To determine whether a particular course of action will increase or decrease shareholders' wealth, managers have to assess what ***return*** (that is, cash inflows net of cash outflows) the action will bring and how risky that return might be. K **MAXIMIZE PROFIT?** Corporations commonly measure profits in terms of **earnings per share (EPS)**, which represent the amount earned during the period on behalf of each outstanding share of common stock. Does profit maximization lead to the highest possible share price? For at least three reasons, the answer is often **no**. **Timing:** Because the firm can earn a return on funds it receives, the receipt of funds sooner rather than later is preferred. **Cash Flows:** Profits do not necessarily result in cash flows available to the stockholders. There is no guarantee that the board of directors will increase dividends when profits increase.In addition, the accounting assumptions and techniques that a firm adopts can sometimes allow a firm to show a positive profit even when its cash outflows exceed its cash inflows. Furthermore, higher earnings do not necessarily translate into a higher stock price. Only when earnings increases are accompanied by increased future cash flows is a higher stock price expected. **Risk:** A basic premise in *managerial finance* is that a trade-off exists between return (cash flow) and risk. Return and risk are, in fact, *the key determinants of share price, which represents the wealth of the owners in the firm.* stockholders are ***risk averse***, which means that they are only willing to bear risk if they expect compensation for doing so. (Holding risk fixed-, higher cash flow is generally associated with a higher share price\^. In contrast, holding cash flow fixed-, higher risk tends to result in a lower share price\_.) **WHAT ABOUT STAKEHOLDERS?** Many firms broaden their focus to include the interests of *stakeholders* as well as shareholders. ***Stakeholders*** are groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm. The goal is not to *maximize stakeholder well-being but to preserve it.* **ROLE OF BUSINESS ETHICS** ***Business ethics*** are the standards of conduct or moral judgment that apply to persons engaged in commerce. The goal of these ethical standards is to motivate business and market participants to adhere to both the letter and the spirit of laws and regulations concerned with business and professional practice ***Considering ethics***... **ETHICS AND SHARE PRICE**... Such actions, by maintaining and enhancing cash flow and reducing perceived risk, can positively affect the firm's share price. Ethical behavior is therefore viewed as *necessary for achieving the firm's goal of owner wealth maximization*. ChaP 1.3 Managerial Finance Function The managerial finance function can be broadly described by considering its role within the organization, its relationship to economics and accounting, and the primary activities of the financial manager. **ORGANIZATION OF THE FINANCE FUNCTION** Depends on size of firm, finance function performed by accounting dep. Reporting to the CFO are the *treasurer* and the *controller*. The **treasurer** (the chief financial manager) typically manages the firm's cash, investing surplus funds and securing outside financing, oversees a firm's pension plans and manages critical risks related to movements in foreign currency values, interest rates, and commodity prices. focus more external The **controller** (the chief accountant) typically handles the accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting. focus is more internal. A trained *financial manage*r can "hedge," or protect against such a loss, at a reasonable cost by using a variety of financial instruments. These **foreign exchange managers** (The manager responsible for managing and monitoring the firm's exposure to loss from currency fluctuations. ) typically report to the firm's treasurer. **RELATIONSHIP TO ECONOMICS** Financial managers must understand the economic framework and be alert to the consequences of varying levels of economic activity and changes in economic policy...The primary economic principle used in managerial finance is ***marginal cost--benefit*** ***analysis***, the principle that financial decisions should be made and actions taken only when the added benefits exceed the added costs. **RELATIONSHIP TO ACCOUNTING** In small firms, accountants carry some financial responsibilities... There are, however, two differences between finance and accounting; one is related to the emphasis on cash flows, and the other is related to decision making. **Emphasis on Cash Flows** The accountant's primary function is to develop and report data for measuring the performance of the firm, assess its financial position, comply with and file reports required by securities regulators, and file and pay taxes. **Accrual basis** in preparation of financial statements, recognizes revenue at the time of sale and recognizes expenses when they are incurred The [financial manager], on the other hand, places primary emphasis on *cash flows*, the intake and outgo of cash. The financial manager uses this ***cash basis*** to recognize the revenues and expenses only with respect to actual inflows and outflows of cash. Whether a firm earns a profit or experiences a loss, it must have a sufficient flow of cash to meet its obligations as they come due. **Decision Making** Accountants devote most of their attention to the *collection and presentation of financial data*. Financial managers evaluate the accounting statements, develop additional data, and make *decisions on the basis of their assessment of the associated returns and risks*. **PRIMARY ACTIVITIES OF THE FINANCIAL MANAGER** *Investment decisions* determine what types of assets the firm holds. *Financing decisions* determine how the firm raises money to pay for the assets in which it invests. ChaP 1.4 Governance and Agency.... To help ensure that managers act in ways that are consistent with the interests of shareholders and mindful of obligations to other stakeholders, firms aim to establish sound corporate governance practices. **CORPORATE GOVERNANCE** ***Corporate governance*** refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. helps shape a firm's corporate governance structure....Corporate governance refers to the rules, processes, and laws by which companies are operated, controlled, and regulated. **Individual vs Institutional Investor**.**.*Individual investors*** own relatively few shares and as a result do not typically have sufficient means to influence a firm's corporate governance. act as a group by voting collectively on corporate matters (election of the firm's board of directors). The corporate board's first responsibility is to the shareholders. ***Institutional investors*** are investment professionals that are paid to manage and hold large quantities of securities on behalf of individuals, businesses, and governments. Include banks, insurance companies, mutual funds, and pension funds. often monitor and directly influence a firm\'s corporate governance. Because individual and institutional investors share the same goal, individual investors benefit from the shareholder activism of institutional investors. **Government regulation** **....** **THE AGENCY ISSUE not clear** Technically, any manager who owns less than 100 percent of the firm is an agent acting on behalf of other owners. ***principal--agent relationship***, where the shareholders are the principals. **The agency problem** Arise when managers deviate from the goal of maximization of shareholder wealth by placing their personal goals ahead of the goals of shareholders. These problems in turn give rise to ***Agency costs*** , are costs borne by shareholders due to the presence or avoidance of agency problems and in either case represent a loss of shareholder wealth **Management Compensation Plans** **...**. A common approach is to *structure management compensation* to correspond with firm performance. The two key types of managerial compensation plans are incentive plans and performance plans. **Incentive plans** tie management compensation to share price. One incentive plan grants ***stock options***(Options extended by the firm that allow management to benefit from increases in stock prices over time. ***)*** to management. Many firms also offer ***performance plans*** that tie management compensation to performance measures such as earnings per share (EPS) or growth in EPS. Compensation under these plans is often in the form of performance shares or cash bonuses. ***Performance shares*** are shares of stock given to management as a result of meeting the stated performance goals, whereas ***cash bonuses*** are cash payments tied to the achievement of certain performance goals... **The Threat of Takeover** When a firm's internal corporate governance structure is unable to keep agency problems in check, it is likely that rival managers will try to gain control of the firm....... Chap 2.1 The financial market environment **FINANCIAL INSTITUTIONS** ***Financial institutions*** serve as intermediaries by channeling the savings of individuals, businesses, and governments into loans or investments. **Key customers of finance institutions** For financial institutions, the key suppliers of funds and the key demanders of funds are individuals (net suppliers) , businesses (net demanders), and governments (net demanders). -Individuals not only supply funds to financial institutions but also demand funds from them in the form of loans -Business firms also deposit some of their funds in financial institutions, pri-marily in checking accounts with various commercial banks. -Governments maintain deposits of temporarily idle funds, certain tax payments, and Social Security payments in commercial banks **Major financial institutions** The major financial institutions in the U.S. economy are commercial banks, savings and loans, credit unions, savings banks, insurance companies, mutual funds, and pension funds. **COMMERCIAL BANKS, INVESTMENT BANKS, AND THE SHADOW BANKING SYSTEM** ***Commercial banks*** are Institutions that provide savers with a secure place to invest their funds and that offer loans to individual and business borrowers ***Investment banks*** are institutions that (1) assist companies in raising capital, (2) advise firms on major transactions such as mergers or financial restructurings, and (3) engage in trading and market making activities.