Chapter 16 – Understanding Financial Management and Securities Markets

What is financial management?

the art and science of managing a firm’s money so that it can meet its goals

What are cash flows?

the inflows and outflows of cash

What is commercial paper?

unsecured short-term debt (IOU) issued by a financially strong company

What are credit terms?

how long until a bill must be paid and how much of a discount to offer

What are capital expenditures?

the investment of funds in physical assets such as land, buildings, machinery, equipment, and information systems

How does capital budgeting work?

a process used to analyze long-term projects and select those that offer the best returns while maximizing the firm’s value

What are some types of unsecured short-term loans?

Commerical Paper, Trade Credit, and Unsecured Bank loans

When might an unsecured bank loan work be used?

Covering Cash shortfalls, managing seasonal needs, supporting Day-to-Day Operations and Centralizing International Cash

How does collateral work?

is accounts receivable or inventory in a lot of business circumstances

What is factoring?

the sale of a firm’s accounts receivable outright to a factor, a financial institution that buys accounts receivable at a discount

What are term loans?

a business loans with a maturity of more than one year

What are bonds?

long-term debt obligations (liabilities) of corporations and governments

What is common stock?

a security that represents an ownership interest in a corporation

What are dividends?

payments to stockholders from a corporation’s profits

What are retained earnings?

profits that have been reinvested into the firm

What is the role of an institutional investor?

investment professional who are paid to manage other people’s money

What is underwriting?

the main activity of an investment banker, the acquiring of the security for an agreed-upon price and hoping to be able to sell it at a higher price to make a profit

What is the role of a stockbroker?

a person who is licensed to buy and sell securities on behalf of clients / Work for brokerage firms

How does insider trading work?

the use of information that is not available to the general public to make profits on securities transactions