Details Title: Business Finance Description: Exam 1 Total Flash Cards: 58 Created: 05/25/2009 16:00:32		New Users: To study from this flashcard set, or to create your own your own study flash cards, REGISTER HERE. Existing Users: CLICK HERE. Additional Finance Flashcards
Cards in this set: Term       Goal of the Firm Definition Shareholder (Stockholder) Wealth Maximization   This is the same as A) Maximizing the Firm Value B) Maximizing Stock Price   Note: Goal of the firm is NOT profit Maximization because it ignores A) timing of returns (time value of money) B) Uncertainty of returns (risk) Term       Sole Proprietor Definition     A business owned by a single individual Term       General Partnership Definition     A partnership in which all partners are fully liable for the indebtness incurred by the partnership Term       Limited Partnership Definition     A partnership, in which one or more of the partners has limited liability, restricted to the amount of capital he or she invests in the partnership Term       Corporation Definition   An entity that legally functions separate and apart from its owners Term       Gross Profit Definition   Sale or revenue minus the Costs of Goods Sold Term       Operating Income Definition   Sales less the Cost of Goods Sold less Operating Expense   Also known as: Earnings Before Interest and Taxes (EBIT) Term       Taxable Income Definition   Gross income from all sources, except from allowable exclusions, less any tax deductable expense Term       Dividend Exclusion Definition   70% of all dividend income (dividends received) is exempt from federal taxation (30% is taxable) Term         Depreciation Definition     The means by which an asset's value is expensed over its useful life for federal income tax purposes Term       Capital Gain Definition     As defined by the revenue code, gain resulting from the sale or exchange of a capital asset Term       Capital Loss Definition   As defined by the revenue code, loss resulting from the sale or exchange of a capital asset Term       Net Capital Loss Carry Back/Carry Forward Definition   May be carried back 3 years or forward up to 5 years and is applied to net capital gains Term       Operating Loss Carry Back/Carry Foward Definition     May be carried back 2 years or carried forward up to 20 years Term       Financial Markets Definition   Ways for corporations to raise funds by selling securities (stocks and debt) and in return, once the corporation/assets thrive, money is given back to the investor in the form of dividends or interest payments   Allows people to easily buy and sell (trade) financial securities (stocks and bonds), commodities (metals and agricultural goods) and other items of value at low transaction costs Term       Real Asset Definition     Asset that is tangible or physical in nature such as land, machinery and livestock Term       Financial Asset Definition     An asset that derives value because of a contractual claim. Stocks, bonds, and bank deposits are all examples of financial assets Term       Underwriting Definition     The purchase and subsequent resale of a new security issue. The risk of selling the new issue at a satisfactory (profitable) price is assumed (underwritten) by the investment banker   Term       Secondary Market Definition     A market where current outstanding securities are traded   Ex: Used Car market, sales from investor to investor Term       Indirect Securities (Over-the-Counter markets) Definition   Include all security markets except the organized exchanges.   Ex: The Money Market is an over-the-counter market because it doesn't occupy a physical location   Most corporate bonds are traded in this market   Term       Direct Securities (Organized Securities Exchange) Definition   Tangible entities, that is, they physically occupy space (such as a building or part of a building), and financial instructments are traed on their premises   Formal organizations that facilitate the trading of securities   Example: New York Stock Exchange, American Stock Exchange Term     3 Ways to Transfer Savings to a Business Definition 1) Direct transfer of funds 2) Indirect transfer using investment banker 3) Indirect transfer using a financial intermediary Term       Public Offering Definition   An offering of securities where all investors have the opportunity to acquire a portion of the financial claims being sold Term       Private Placement Definition     A security offering limited to a small number of potential investors Term       Primary Market Definition     A market where securities are being offered for the first time for sale to potential investors   Example: New Car Market   It's the only time the issuing firm ever gets any money for the securities, and it is the type of transaction that introduces new financial assets (stocks, bonds) into the economy Term       Money Market Definition     All institutions and procedures that facilitate transactions for short-term (maturity periods of 1 year or less) instruments issued by borrowers with very high credit ratings   Example: US treasury bills, various federal agency securities, bankers' acceptances, negotiable certificates of deposit, and commercial paper Term       Capital Market Definition   All institutions and procedures that facilitate transactions for long-term (maturity periods that extend beyond 1 year) finaincial instructments   Example: Term loans, financial leases, and corporate stocks and bonds Term       Exchange Definition     To provide goods or services and receive goods or services of approximately equal value in return Term       Investment Banker Definition   Financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds Term         Investment Banker Functions Definition Underwriting: assuming the risk of selling a security issued at a satisfactory price (one that generates profit for the investment-banking house).   Distributing: Once they own the new securities they must get them into the hands of the ultimate investors. The syndicate is almost viewed as the security wholesalers and the dealer organization can be viewed as the security retailer   Advising: Investment banker as an expert in the issuance and marketing of securites finds the ideal time for the exchange between client and public Term       Negotiated Purchase Definition 1. Firm that needs funds gets in contact with an investment banker 2. Method is negotiated for determining the price the investment banker and the syndicate will pay for the securities   -Most prevalent method of securities distribution in the private sector -Generally thought to be most profitable technique for investment bankers Term       Competitive Bid Purchase Definition An offering procedure in which underwriters submit sealed bids for the new issue from the corporation and the underwriter with the best terms is chosen by an auction process (not by the Corporation itself)   Confined to 3 situations: railraod issues, public utility issues and state and municipal bond issues     Term     A Commission or Best Efforts Biases Definition   An underwriting in which an investment bank, acting as an agent, agrees to do its best to sell the offering to the public (in return for a fixed commission on each), but does not buy the securities outright and does not guarantee that the issuing company will receive any set amount of money, less common than a firm commitment offering   Used for more speculative issues   Benefits the issuer because it's less costly for them Term         A Privileged Subscription Definition   The process of marketing a new security issue to a select group of investors   3 target markets are typically involved: current stockholders, employees, and customers of the firm   Investment banker may only act as a selling agent Term         Direct Sales Definition     The issuing firm sells the securities directly to the investing public without involving an investment banker   This procedure is relatively rare Term       Floatation Cost Definition The transaction cost incurred when a firm raises funds by issuing a particular type of security   Underwrite's Cost: the difference between the gross and net proceeds from a given securuity issue expressed as a percent of the gross proceeds   Issue Costs: The printing and engraving of the security certificates, legal fees, accounting fees, trustee feeds, etc   -Mirror the risk of the relationship (Common Stocks have more than Corporate Bonds) -Larger the security, less fees because they're fixed   Term       Securities Act of 1933 Definition     First Congressional Law regulating the securities industry. Required registration and disclosure and included measures to discourage fraud and deception   Regulated the primary market (original issues) Term         Securities Act Amendments of 1975 Definition     Congressional law amending the Securities Act of 1933 to enable the establishment of a National Market System, and to encourage fair and efficient handling of security transactions Term       Shelf Registration Definition     A registration of a new issue which can be prepared up to 2 years in advance, so that the issue can be offered quickly as soon as funds are needed or market conditions are favorable Term         Opportunity Cost of Funds Definition     The next-best rate of return available to the investor for a given level of risk   The higher the risk, the higher the expected returns   All securities are risky, except for treasury bills and bonds Term       Maturity Premium Definition   The additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes Term       Liquidity Premium Definition   The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price Term       Nominal Rate of Interest Definition     The interest rate paid on debt securities without an adjustment for any loss in purchasing power (inflation) Term       Real Rate of Interest Definition     The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment (inflation) Term         Term Structure of Interest Rates Definition   The relationship between interest rates and the term to maturity, where the risk of default is held constant Term         Unbiased Expectations Theory Definition     The theory that the shape of the term structure of interest rates is determined by an investor's expectations about future interest rates Term       Liquidity Preference Theory Definition     The theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation of additional risks Term       Market Segmentation Theory Definition   The theory that the shape of the term structure of interest rates implies that the rate of interest for a particular maturity is determined solely by demand and supply for a given maturity. This rate is independent of the demand and supply for securities having different maturities   There are separate markets for short and long-term investments Term         Yield to Maturity Definition     The rate of return a bondholder will receive if the bond is held to maturity Term       Securities Exchange Act of 1934 Definition   The act which created the SEC, outlawed manipulative and abusive practices in the issuance of securities, required registration of stock exchanges, brokers, dealers, and listed securities and required disclosure of certain financial information and insider trading   Regulates secondary trading Term       Income Statement Definition Profit and loss statement   Sales - Expense = Profit   A basic accounting statement that measures the results of a firm's operations over a specific period, commonly 1 year. The bottom line of the income statement shows the firm profit or loss for the period. Term         Balance Sheet Definition     A statement that shows a firm's assets, liabilities, and shareholder equity at a given point in time. It is a snap shot of the firm's financial position on a particular date Term         Current Assets Definition     Consist primarily of cash, marketable securities, accounts receivable, inventories, and prepaid expenses Term       Fixed Assets Definition   Assets such as equipment, buildings, and land. Long term in nature. Term       Debt Definition     Liabilities consisting of such sources as credit extended by suppliers or a loan from a bank Term         Equity Definition     Stockholders' investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet. Term       Retained Earnings Definition         Cumulative profits retained in a business up to the date of the balance sheet Term       Liquidity Definition     A firm's ability to pay its bills on time.   Liquidity is related to the ease and quickness with which a firm can convert its noncash assets into cash, as well as the size of the firm's investment in noncash assets relative to its short-term liabilities