Chapters 18-20 Ground Floor

finance

the function in a business that acquires funds for the firm and manages those funds within the firm

financial management

the job of managing a firm’s resources so it can meet its goals and objectives

financial managers

managers who examine financial data prepared by accountant and recommend strategies for improving the financial performance of the firm

cash flow forecast

forecast that predicts the cash inflows and outflows in future periods, usually months or quarters

budget

a financial plan that sets forth management’s expectations, and, on the basis of those expectations, allocates the use of specific resources throughout the firm

capital budget

a budget that highlights a firm’s spending plans for major asset purchases that often require large sums of money

cash budget

a budget that estimates cash inflows and outflows during a particular period like a month or a quarter

operating (master) budget

the budget that ties together a firm’s other budget and summarizes its proposed financial activities

financial control

a process in which a firm periodically compares its actual revenues, costs, and expenses with its budget

capital expenditures

major investments in either tangible long-term assets such as land, buildings, and equipment or intangible assets such as patents, trademarks, and copyrights

debt financing

funds raised through various forms of borrowing that must be repaid

equity financing

money raised from within the firm, form operations or through the sale of ownership in the firm (stock or venture capital)

trade credit

the practice of buying goods and services now and paying for them later

promissory note

a written agreement with a promise to pay a supplier a specific sum of money at a definite time

secured loan

a loan backed by collateral (something valuable)

unsecured loan

a loan that doesn’t require any collateral

line of credit

a given amount of unsecured short- term funds a bank will lend to a business, provided the funds are readily available

factoring

the process of selling accounts receivable for cash

term-loan agreement

a promissory note that requires the borrower to repay the loan in specified installments

risk/ return trade-off

the principle that the greater the risk a lender takes in making a loan, the higher the interest rate required

venture capital

money that is invested in new or emerging companies that are percieved as having great profit potential

leverage

raising funds through borrowing to increase a firm’s rate of return

cost of capital

the rate of return a company must earn in order to meet the demands of its lenders and expectations of its equity holders

initial public offering (IPO)

the first public offering of a corporation’s stock

investment bankers

specialists who assist in the issue and sale of new securities

institutional investors

large organizations such as pension funds, mutual funds, and insurance companies that invest their own funds or the funds of others

stock exchange

an organization whose members can buy and sell securities for companies and investors

over the counter (OTC) market

exchange that provides a means to trade stocks not listed on the national exchanges

NASDAQ

a nationwide electronic system that communicates over the counter trades to brokers

securities and exchange commission (SEC)

federal agency that has responsibility for regulating the various exchanges

prospectus

a condensed version of economic and financial information that a company must file with the SEC before issuing stock; the prospectus must be sent to prospective investors

stocks

shares of ownership in a company

stock certificate

evidence of stock ownership that specifies the name of the company, the number of shares it represents, and the type of stock being issued

dividends

part of a firm’s profits that the firm may distribute to stockholders as either cash payments or additional shares of stock

common stock

the most basic form of ownership in a firm; it confers voting rights and the right to share in the firm’s profits through dividends, if offered by the firm’s board of directors

preferred stock

stock that gives its owners preference in the payment of dividends and an earlier claim on assets than common stockholders if the company is forced out of business and its assets sold

bond

a corporate certificate indicating that a person has lent money to a firm

maturity date

the exact date the issuer of a bond must pay the principal to the bondholder

interest

the payment the issuer of the bond makes to the bondholders for use of the borrowed money

debenture bonds

bonds that are unsecured (not backed by an collateral)

sinking fund

a reserve account in which the issuer of a bond periodically retires some part od the bond principal prior to maturity so that enough capital will be accumulated by the maturity date to pay off the bond

stockbroker

a registered representative who works as a market intermediary to buy and sell securities for clients

diversification

buying several different investment alternatives to spread the risk of investing

capital gains

the positive difference between the purchase price of a stock and its sale price

stock splits

an action by a company that gives stockholders two or more shares of stock for each one they own

buying stock on margin

purchasing stocks by borrowing some of the purchase cost form the brokerage firm

junk bonds

high risk, high interest bonds

mutual fund

an organization that buys stocks and bonds and then sells shares in those securities to the public

exchange-traded funds (EFTs)

collections of stocks, bonds, and other investment that are traded on exchanges but are traded more like individual stocks than like mutual funds

Dow jones industrial average (the Dow)

the average cost of 30 selected industrial stocks, used to give an indication of the direction (up down) of the stock market over time

program trading

giving instructions to computers to automatically sell if the price of a stock dips to a certain point to avoid potential losses

banker’s acceptance

a promise that the bank will pay some specified amount at a particular time

barter

the direct trading of goods or services for other goods or services

certificate of deposit (CD)

a time- deposit (savings) account that earns interest to be delivered at the end of the certificate’s maturity date

commercial bank

a profit- seeking organization that receives deposits from individuals and corporations in the form of checking and savings accounts and then uses some of these funds to make loans

credit unions

nonprofit, member- owned financial cooperatives that offer the full variety of banking services to their members

debit card

an electronic funds transfer tool that serves the same function as checks: it withdraws funds from a checking account

demand deposit

the technical name for a checking account; the money in a demand deposit can be withdrawn anytime on demand from the depositor

discount rate

the interest rate that the Fed charges for loans to member banks

electronic funds transfer (EFT) system

a computerized system that electronically performs financial transactions such as making purchases, paying bills, and receiving paychecks

federal deposit insurance corporation (FDIC)

an independent agency of the US government that issues bank deposits

international monetary fund (IMF)

organization that assists the smooth flow of money among nations

letter of credit

a promise by the bank to pay the seller a given amount if certain conditions are met

m-1

money that can be accessed quickly and easily (coins and paper money, checks, traveler’s checks, etc.)

m-2

money included in the m-1 plus money that may take a little more time to obtain (savings accounts, money market accounts, mutual funds, certificates of deposit, etc.)

m-3

m-2 plus big deposits like institutional money market funds

money

anything that people generally accept as payment for goods and services

money supply

the amount of money the federal reserve bank makes available for people to buy goods and services

nonbanks

financial organizations that accept no deposits but offer many of the services provided by regular banks (pension funds, insurance companies, commercial and consumer finance companies, brokerage houses)

open- market operations

the buying and selling of US government bonds by the fed with the goal of regulating the money supply

pension funds

amounts of money put aside by corporations, nonprofits, or unions to cover part of the financial needs of members when they retire

reserve requirement

a percentage of commercia banks checking and savings accounts that must be physically kept in the bank

savings and loan association (S&L)

a financial institution that accepts both savings and checking deposits and provides home mortgage loans

savings association insurance fund (SAIF)

the part of the FDIC that insures holders of accounts in savings and loan associations

smart card

an electronic funds transfer tool that is a combination credit card, debit card, phone card, driver’s license card, and more

time deposit

the technical name for a savings account; the bank can require prior notice before the owner withdraws money from a time deposit

world bank

the bank primarily responsible for financing economic development; also known as the international bank for reconstruction and development