ADM 1300 Chapter 15: Financial Decisions and Risk Management

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101 Terms

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role of financial manager

plan and control the acquisition and distribution of the company's financial assets

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finance

business function involving decisions about a firm's long term investments and obtaining the funds to pay for those investments

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four responsibilities of finance

determine long-term investments, obtain funds to pay for investments, conduct everyday financial activities, manage risks that are taken

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objective of financial officer

increase firm's value and shareholder wwealth

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cash-flow management

managing the pattern in which cash flows into the firm in the form of revenues and out in the form of debt payments

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financial control

process of checking actual performance against plans to ensure that the desired financial status is achieved

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financial planning

description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds

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short-term expenditures

incurred during everyday business activities

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accounts payable

unpaid bills owed to suppliers plus wages and taxes due within a year

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accounts receivable

funds due from customers who have bought on credit

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credit policies

rules governing a firm's extension of credit to customers

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inventory

material and goods currently held by the company that will be sold within the year

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raw-materials inventory

basic supplies used in production process

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work-in-process inventory

goods partway through the production process

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finished-goods inventory

items that are ready for sale

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capital expenditures

long-term expenditures that are not normally sold for cash

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trade credit

granting of credit by a selling firm to a buying firm

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open-book credit

informal agreement of trade credit

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promissory notes

legally binding agreement stating when and how much money will be paid to the seller

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trade draft

attached to shipments and must be signed by buyer to receive merchandise

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secured short-term loans

loans in which the borrower is required to put up collateral

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inventory as collateral

lender lends the borrower some portion of the stated value of inventory

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pledging accounts receivable

lender can seize accounts receivable if loan isn't paid on time

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factoring accounts receivable

purchaser tries to collect on the receivables and profits to the extent that the money it eventually collects exceeds the amount it paid for the receivable

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unsecured short-term loan

borrower does not have to put up collateral

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lines of credit

standing agreement between a bank and a firm that there is a maximum amount the bank will make available to the borrower for a short-term unsecured loan

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revolving credit agreements

guaranteed line of credit for which the firm pays the bank interest on fund borrowed and a premium

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commercial paper

firm sells unsecured notes for less than face value and repurchases them at face value within 270 days

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debt financing

raising money to meet long-term expenditures by borrowing from outside the company

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long-term loans

typically comes from a chartered bank

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bonds

promise by the issuing company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim

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bond indenture

details terms of the bond

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default

if a firm fails to make a bond payment

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registered bonds

registers the names of holders with the company and mailing out the cheques to bondholders

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bearer bonds

bondholders clip coupons from certificates and sends them to the issuer to receive payment

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secured bonds

bonds issued by borrowers who pledge assets as collateral in the event of nonpayment

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debentures

unsecured bonds

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callable bonds

issuers can call it in and pay it off before the maturity date at a price stipulated in the indenture

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serial bonds

firm retires portions of the bond issue in a series of different preset dates

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convertible bonds

can be converted into the common stock of the issuing company

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equity financing

raising money to meet long-term expenditures by issuing common stock or by retaining earnings

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issuing common stock

selling shares of common stock to obtain funds needed to buy land, building and equipment

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par value

arbitrary value of a stock set by the issuing company's board of directors and stated on stock certificates

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book value

value of a common stock expressed as total shareholders' equity divided by the number of shares

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market value

current price of one share of a stock int he secondary securities market; true value of a stock

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investor relations

publicizing the positive aspects of a company's financial condition to financial institutions

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market capitalization

dollar value of stocks listed on a stock exchange; number of company's outstanding shares times the market value of each share

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retaining the firm's earnings

using profits not paid out in dividends

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hybrid financing

payments on preferred stock are fixed amounts but it will never mature

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capital structure

relative mix of a firm's debt and equity financing

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risk-return relationship

shows the amount of risk and the likely rate of return on various financial instruments

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diversification

buying several kinds of investments rather than just one kind

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asset allocation

proportion of funds invested in each of the investment alternatives

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current dividend yield

rate of return from dividends paid to shareholders; calculated by dividing yearly dollar amount of dividend income by the investments current market value

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price appreciation

increase in the dollar value of an investment

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capital gain

profit gained from increased market value of a stock

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total return

a calculation that includes the annual dividend as well as any increase or decrease in the original purchase price of the investment

<p>a calculation that includes the annual dividend as well as any increase or decrease in the original purchase price of the investment</p>
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compound growth

with each additional time period, interest returns accumulate and earn more interest

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rule of 72

divide annual interest rate into 72; shows how long it will take money to double

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primary securities market

handles buying and selling of new shares (IPO)

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private placements

new securities being sold to one buyer of a small group of buyers

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secondary securities market

market for existing stocks and bonds

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investment banking

new stocks have to be approved by a provincial securities commission before being issued

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investment bankers

financial specialists in issuing new securities

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stock exchanges

voluntary organizations of individuals formed to provide an institutional setting where members can buy and sell stock for themselves and their clients in accordance with the exchange's rules

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stockbroker

individual licensed to buy and sell securities for customers in the secondary market

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discount brokers

offers well informed individual investors a fast and low cost way to participate in the market

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over the counter market

organization of securities dealers formed to trade stock outside of the formal institutional setting of the organized stock exchanges

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stock quotations

daily market transactions of individual stocks

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bond quotations

daily market transactions of bonds

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market indexes

provides a summary of price trends in a specific industry

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bull markets

period of rising stock prices

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bear markets

period of falling stock prices

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market order

broker should buy or sell a certain security at the prevailing market price at the time

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limit order

authorizes the purchase of a stock only if its price is less than or equal to a given limit

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stop order

broker will sell a stock if its price falls to a certain level

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round lot

requests 100 shares of some multiple therof

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odd lot

fractions of a round lot

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call option

the right to buy a particular stock at a certain price; right lasts up to a certain date

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put option

the right to sell a particular stock at a specified price; right lasts until a particular date

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margin

percentage of the total sales price that a buyer must put up to place an order for stock or a futures contract

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day traders

those who buy and sell stock in the same day; seeking quick profits on large volumes of stock

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short sales

selling borrowed shares of stock in the expectation that prices will fall; replacement shares are then bought for less

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mutual funds

any company that pools the resources of many investors and uses those funds to purchase various types of financial securities

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no-load funds

investors are not charged a sales commission when they buy into or sell out of the mutual fund

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load funds

carry a charge between 2% and 8% of invested funds

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exchange-traded funds

bundle of stocks that is in an index that tracks the overall movement of the market

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hedge funds

private pools of money that try to give investors a positive return regardless of stock market performance

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principal protected notes

guarantee that investor will have original investment back at a certain time; not necessarily additional returns

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futures contracts

agreement to purchase specified amounts of a commodity at a given price on a set future date

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blue sky laws

laws regulating how corporations must back up securities to help prevent fraud

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venture capital

outside equity funding provided in return for part ownership of the firm

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planning for cash-flow requirements

success hinges on anticipating times when cash will be short and when excess cash is expected

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risk management

conserving a firm's financial power by minimizing the financial effect of accidental losses

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speculative risks

event that offers the chance for either a gain or loss

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pure risk

event offers only the chance of loss or no loss

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risk avoidance

stopping participation or refusing to participate in ventures that carry any risk

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risk control

techniques to prevent, minimize or reduce losses in the consequences of losses

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risk retention

covering of a firm's unavoidable losses with its own funds