Finance 120 Ch. 1

Wealth
the economic value of the assets someone possesses
Stakeholder
anyone other than an owner-stockholder with a claim on the cash flows of a firm, including employees, suppliers, creditors, and the government
Productive assets
the long-term tangible and intangible assets a firm uses to generate cash flows
Residual cash flows
the cash remaining after a firm has paid operating expenses and what it owes creditors and in taxes; can be paid to the owners as a cash dividend or reinvested in the business
Bankruptcy
legally declared inability of an individual or a company to pay its creditors
3 fundamental decisions in Financial Management
Capital budgeting decision
Financing decisions
Working capital management decisions
Capital budgeting decision
Identifying the productive assets the firm should buy
Financing decisions
Determining how the firm should finance or pay for assets
Working capital management decisions
Determining how day-to-day financial matters should be managed so that the firm can pay its bills, and how surplus cash should be invested
How the Financial Manager’s decision affect the Balance Sheet in regards to Working capital management decisions
Assets-current assets including cash, inventory, and accounts receivable and Liabilities and Equity-current liabilities including short term debt and accounts payable
How the Financial Manager’s decision affect the Balance Sheet in regards to Capital budgeting decisions
It affects Long-term assets; productive assets, which may be tangible or intangible
How the Financial Manager’s decision affect the Balance Sheet in regards to Financing decisions
It affects Long-term debt with a maturity of over one year.
It also affects Stockholders Equity
Capital structure
the mix of debt and equity that is used to finance a firm
Capital markets
financial markets where equity and debt instruments with maturities greater than one year are traded
Net working capital
the dollar difference between total current assets and total current liabilities
What are the three basic types of financial decisions managers must make?
Finance decisions
Capital budgeting decisions
Working capital management decisions
Why are capital budgeting decisions among the most important decisions in the life of a firm?
Over the long run, they have a large impact on the firms success or failure
Sole proprietorship
a business owned by a single person
Benefits of Sole Proprietorship
Disadvantages of Sole Proprietorship
Partnership
two or more owners who have joined together legally to manage a business and share its profits
Benefits of Partnership
Two types of Partnerships
General and Limited Liability
Disadvantages of Partnership
Corporation
a legal entity formed and authorized under a state charter; in a legal sense, a corporation is a “person” distinct from its owners
Benefits of Partnership
Disadvantages of Corporation
Double taxation
Public markets
markets regulated by the Securities and Exchange Commission in which securities such as stocks and bonds are publicly traded
Privately held, or closely held, corporations
corporations who stock is not traded in the public markets
LLP and LLC
hybrid business organizations that combine some of the advantages of corporations and partnerships; in general, income to the partners is taxed only as personal income, but the partners have limited liability
Limited Liability
Can only lose as much as partner contributed into company
Why are many businesses operated a sole proprietorships or partnerships?
What are some advantages and disadvantages of operating as a public corporation?
CEO’s most important responsibilities
are to set the strategic direction of the firm and see that the management team executes the strategic plan
Treasurer
takes care of:
Cash payments/collections
Foreign exchange
Pension funds
Derivatives hedging
Marketable securities prtfolio
Risk Manager
takes care of:
-Monitor firm’s risk exposure in financial and commodities markets
-Design strategies or limiting risk
-Manage insurance portfolio
Controller
takes care of:
Financial accounting
Cost accounting
Taxes
Accounting Information system
Prepare financial statements
Internal Auditor
takes care of:
Audit high risk areas
Prepare working papers for external auditor
Internal consulting for cost savings
Internal fraud monitoring and investigation
Audit Committee
is a subcommittee of board of directors who oversees accounting functions and preparations of the firms financial statements
What are the major responsibilities of CFO?
Identify 3 financial officers who typically report to CFO
Treasurer
Controller
Risk Manager
Why does the internal auditor report to CFO and Board of Directors?
Why is profit maximization an unsatisfactory goal for managing a firm?
Agency conflicts
conflicts of interest between a principal and an agent
Agency cost
the costs arising from conflicts of interest between a principal and an agent;example between a firm’s owner and its manager
Sarbanes-Oxley Act
focuses on:
-reducing agency costs in corporations
-restoring ethical conduct within the business sector
-improving the integrity of the accounting reporting system within firms
What are Corporate raiders?
Information asymmetry
the situation in which one party in a business transaction has information that is unavailable to the other parties in the transaction