Term
| What are the major responsibilities of financial managers? |
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Definition
| Prepare financial reports, direct investment activities, and implement cash management strategies |
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Term
| What is capital budgeting? |
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Definition
| Determines if long term investments are worth pursuing |
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Term
| What is capital structure? |
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Definition
| how assets are financed through some combination of equity, debts, or hybrid securities |
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Term
| What is net working capital? |
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Definition
| represents the operating liquidity available to the business |
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Term
| What should be the objective of a firm? |
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Definition
| Increase shareholders wealth |
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Term
| Why does maximizing profit not necessarily maximize shareholders wealth? |
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Definition
| If unethical then it won't maximize wealth over the long run |
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Term
| What is the best measure of shareholder wealth? |
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Definition
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Term
| What determines the intrinsic value of any asset? |
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Definition
| Based on future projections and current market value |
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Term
| What is the difference between intrinsic value and stock price? |
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Definition
| intrinsic value is based off of estimated future cashflows where as stock price is where is currently stands today |
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Term
| When is a stock overvalued, fairly valued, or undervalued? |
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Definition
| If the intrinsic value exceeds the stock price that stock is undervalued if the intrinsic value is below the stock price it is overvalued |
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Term
| Reason, consequences, and solutions of the conflict of interest between shareholders and management. |
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Definition
Reasons - Management may not always be focused on maximizing shareholder wealth
Consequences - firm may not be operating as efficently as possible
Solutions - 1. Compensation plans 2. Direct intervention by shareholders 3. threaten takeover |
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Term
| What is the nature of conflict between shareholders and bondholders? |
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Definition
| Stockholders prefer riskier projects to increase their compensation where as bondholders prefer more stagnat operations |
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Term
| What are the different ways to transfer funds from savers to borrowers? |
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Definition
| Depository institutions, Contractural institutions, and Investment institutions |
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Term
| How do Depository institutions, contractual insitiutions, and investment institutions differ? |
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Definition
Depository institutions get their funds from deposit accounts(Commercial banks, savings and loans, and credit unions)
Contractual institutions get their funds by offering legal contracts to protect the saver against risk (Insurance companies, pension funds)
Investment institutions- sell shares to the public and invest the proceeds in stocks, bonds, and other assets. (Investment companies, money market funds, REIT) |
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Term
| What are financial intermediaries? |
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Definition
| A financial institution that connects surplus and deficit agents |
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Term
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Definition
| FI's are efficient at obtaining information, evaluation credit risks, and are specialists in produciton of information |
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Term
| What are the characteristics of the different types of financial intermediaries? |
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Definition
Commercial banks - hold diversified load portfolios
Credit Unions - serve only members sharing a common bond and are nonprofit therefore tax exempt
Investment Companies - mutual funds, exchange traded funds |
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Term
| What is the difference between Capital Market and Money Market |
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Definition
Money Market - long term
Capital Market - Short term |
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Term
| What is the difference between primary and secondary markets? |
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Definition
Primary markets - newly issued securities IPO
Secondary markets - buying and selling previously issued securities |
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Term
| What is the difference between organized exchange and OTC? |
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Definition
OE - buyers and sellers are in one central location
OTC - buyers and sellers are in different locations |
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Term
| What is the difference between Aucition and Dealer markets? |
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Definition
Auction Markets - NYSE individuals buy and sell to one another
Dealer Markets - individuals buy and sell to one another through a dealer |
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Term
| What are the problems of the traditional IPO process? |
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Definition
| IPO underpricing money left on the table |
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Term
| What is the concept of bid-ask spread? |
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Definition
Bid - dealer buys from you so you pay bid price
Ask - dealer sells to you so you recieve the ask price |
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Term
| What are the difference between traditional IPO and auction IPO? |
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Definition
Traditional tell people how much to pay
Auction allows investors to bid on shares |
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Term
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Definition
| Where the stock price is set to low |
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Term
| What is money left on the table? |
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Definition
| Money that could have been made had the price been properly set |
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Term
| What are the major types of financial derivatives? |
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Definition
| Forwards Futures Options Swap |
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Term
| What are forward derivatives? |
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Definition
| tailor made product traded on the open market |
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Term
| What are future derivatives? |
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Definition
| Standardized proded traded on a organized exchange |
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Term
| What are option derivatives? |
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Definition
| A right to buy or sell an underlying asset sometime in the future at a price determined today |
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Term
| What are swap derivatives? |
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Definition
| a financial contract that allows two parties to exchange payment regularly |
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Term
| What are the functions of derivatives? |
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Definition
| a derivative can be though of as how much quantity is changing in response to another quantity |
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