quiz 1 finance

Corporate finance

Managing investments, financing, and day-to-day cash flows.

Investments

Financial assets (stocks, bonds), risk vs. return, asset allocation.

Financial institutions

Banks, credit unions, insurance companies, brokerage firms.

International finance

Exchange rates, political risk, global operations.

The Three Questions of Business Finance

Capital budgeting - What long-term investments or projects should the firm take on?

Capital structure - Where will we get the long-term financing to pay for investments? Should we use debt or equity?

Working capital management - How do we manage the everyday financial activities of the firm?

Capital budgeting

What long-term investments or projects should the firm take on?

Capital structure

Where will we get the long-term financing to pay for investments? Should we use debt or equity?

Working capital management

How do we manage the everyday financial activities of the firm?

CFO (Chief Financial Officer)

Top financial manager in a firm.

Treasurer

Oversees cash management, credit, capital expenditures, financial planning.

Controller

Oversees taxes, cost accounting, financial accounting, data processing.

Sole Proprietorship

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

Partnership

Two or more owners, more capital available, relatively easy to start, taxed once.

Corporation

Limited liability, unlimited life, separation of ownership & management, easier to raise capital, easy transfer of ownership.

Goal of Financial Management

Maximize the current value per share of existing stock (maximize market value of owners' equity).

Sarbanes-Oxley Act (2002)

Enacted after scandals (Enron, Tyco, WorldCom, Adelphia) to strengthen protections against fraud/malpractice.

Agency relationship

Stockholders (principals) hire managers (agents).

Agency problem

Managers may pursue personal goals vs. owners' interests.

Agency costs

Costs of resolving conflicts.

Financial Markets

Firms issue securities to raise capital; investors provide cash; firm invests in assets; cash flows back to investors as dividends or debt payments.