finance ch 1

Business

A legal entity formed to produce goods or services in order to make money for its owners (shareholders).

Capitalistic Society

An economic system where private businesses own resources and operate for profit.

Corporate Finance

The area of finance focused on how businesses raise, invest, and manage money.

Investment

The allocation of money with the expectation of earning a future return.

Financial Institutions

Organizations such as banks, insurance companies, and brokerage firms that facilitate financial transactions.

Fintech

The intersection of technology and finance that improves or replaces traditional financial services.

International Finance

The study of financial transactions that occur across national borders.

Key Difference Between a Person and a Company (Finance Perspective)

A company can issue stock, raise capital from investors, and is managed to maximize shareholder value.

Public Company

A company whose stock is traded publicly and whose value is closely tied to its stock price.

Private Company

A company that is owned by a small group of investors and does not trade shares publicly.

Stock Price

The market value of a company’s shares; a key indicator of firm value and cost of capital.

Cost of Capital

The return a company must earn on its investments to satisfy investors.

Stock as Currency

The use of company stock to acquire other companies.

Hostile Takeover

An acquisition attempt that occurs against the wishes of a company’s management, often triggered by low stock prices.

Chief Financial Officer (CFO)

The top financial manager responsible for a firm’s overall financial strategy.

Treasurer

Manages cash, credit, capital expenditures, and financial planning.

Controller

Oversees accounting, taxes, financial reporting, and data processing.

Capital Budgeting

Decisions about which long-term projects or investments a company should undertake.

Capital Structure

Decisions about how a firm finances its assets using debt and/or equity.

Working Capital Management

Managing short-term assets and liabilities to ensure smooth daily operations.

Sole Proprietorship

A business owned by one person with unlimited personal liability.

Advantages of Sole Proprietorship

Easy to start, least regulated, single taxation, owner keeps all profits.

Disadvantages of Sole Proprietorship

Unlimited liability, limited life, limited access to capital.

Partnership

A business owned by two or more individuals.

Advantages of Partnership

More capital available, relatively easy to form, single taxation.

Disadvantages of Partnership

Unlimited liability, ownership disputes, difficult transfer of ownership.

Corporation

A legal entity separate from its owners that has limited liability and unlimited life.

Advantages of Corporation

Limited liability, easy transfer of ownership, easier to raise capital.

Disadvantages of Corporation

Double taxation and agency problems.

C Corporation

A traditional corporation subject to corporate income tax.

S Corporation

A corporation that allows income to pass through to owners for tax purposes.

LLC (Limited Liability Company)

A hybrid structure combining limited liability with pass-through taxation.

B Corporation

A corporation that pursues public benefits in addition to shareholder value.

Professional Corporation

A corporation where owners remain liable for their professional actions.

Goal of Financial Management

To maximize the market value of the firm’s equity (shareholder value).

Shareholder Value

The value of ownership interest in a company, reflected in stock price.

Sarbanes-Oxley Act (SOX)

A 2002 law designed to reduce accounting fraud and increase corporate accountability.

Agency Relationship

A relationship where shareholders (principals) hire managers (agents) to run the firm.

Agency Problem

Conflict of interest between managers and shareholders.

Agency Costs

Costs arising from conflicts between principals and agents.

Primary Market

The market where new securities are issued.

Secondary Market

The market where existing securities are traded.

NYSE

A major stock exchange with auction-style trading.

NASDAQ

A major electronic stock exchange.

Four Areas of Finance

Investment, Corporate Finance, Financial Institutions, International Finance.

Three Financial Management Decisions

Capital budgeting, capital structure, working capital management.

Three Forms of Business Organization

Sole proprietorship, partnership, corporation.