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Lec 1
What are the main types of decisions that a financial manager makes?
What products to launch, how to pay to develop those products (investment back into firm) and dividend decisions (how much profit to return to shareholders).
Sole Proprietorship and advantage/disadvantages
A business owned and run by one person.
Ad: Simple to set up
DisAd: No separation between firm and the owner, unlimited liability, difficult to transfer ownership, life of firm is limited to life of owner
Partnerships
Lec 3
Private corporation
limited number of owners and no organized market for its shares
Public corporation
has many owners and its shares trade on an organized market called the stock market
What happens in a primary market?
New shares of stocks are issued by a corporation and sold to investors
What happens in a secondary market and examples
Shares of corporations are traded between investors without the involvement of the corporation. Ex: TSX,l NYSE or Nasdaq
What is TSX in the stock market
Toronto stock exchange. It is an electronic exchange or trading system. Investors (individuals and institutions) post orders onto the TSX from anywhere.
What is the NYSE?
New York Stock Exchange; largest stock exchange in the world that has an active trading floor which orders are routed for trading shares
What are NYSE specialists?
market makers are traders who get special access to orders. They are required to step in and buy or sell shares at their listed prices to ensure trading runs smoothly.
Who can be market makers
They can be can be broker-dealers or financial firms authorized by stock exchanges. They must have the capital, expertise, and approval from the exchange to trade securities and ensure market liquidity.
What is a security in the stock market?
a tradable financial asset, like stocks, bonds, or ETFs.
Bid price
the highest price in a market for which someone is willing to purchase a security
Ask (or Offer) Price:
The lowest price someone is willing to accept to sell a security.
Bid-Ask Spread:
The difference between the bid and ask prices, acting as a hidden transaction cost for trading quickly.
limit order
an order to either buy a security at a specified or lower price or to sell a security at or above a specified price. If not met, no trade will take place
Market order
Order to buy or sell immediately at the current best price available.
Why is the bid-ask spread an implicit transaction cost?
It is an transaction cost (the difference between the buy and sell prices) as a result of quick trades
What are listing standards, and how do the NYSE's standards compare to the TSX's?
It outlines the requirements a company must meet to be traded on the exchange. NYSE are more stringent than the TSX's standards
List four examples of Financial markets
Bond Market, Foreign Exchange market, Commodities market, derivative securities.
Financial institutions
Entities that provide financial services such as taking deposits, managing investments, brokering financial transaction, or making loans
What are financial institutions three main roles
1. move funds from savers to borrowers
2. move funds through time
3. help spread out risk bearing
Name examples of financial institutions
banks and credit unions, insurance companies, mutual funds, pension funds, hedge funds, venture capital funds, private equity funds.
Financial cycle (3)
1. Ppl invest and save their money
2. From loans and stocks, money flows to companies who use it to fund growth through new products, generating profits and wages
3. Money flows back to the savers and investors
How do shareholders control a corporation?
by voting on major decisions like electing the board of directors and approving significant changes, ensuring the management acts in their best interests.
What is the importance of a stock market to a financial manager?
by providing a platform to raise capital, evaluate the company's value, and monitor investor confidence in their decisions.
What are the advantages and disadvantages of organizing a business as a corporation
Ad: limited liability, easy capital raising through stocks, and perpetual existence.
DisAd: double taxation, higher setup costs, more paperwork, and less owner control due to shareholder influence.
Lec 4
Financial statements
Financial reports issued periodically that summarize the financial condition and operations of a business; how assets are financed
Why is the disclosure of financial info through financial statements critical to investors
Investors, financial analysts, managers, and creditors rely on financial statements to obtain info about the corporation
What is GAAP
Generally Accepted Accounting Principle.
A standardized framework of rules for public companies to prepare accurate and understandable financial reports. Enables easier comparison of financial results across firms
Corporations are required to hire an auditor to ____
1. Check annual financial statements
2. ensure compliance with GAAP
3. Provide evidence that info is reliable
What is IFRS?
International Financial Reporting Standards
What is IASB, how many countries involved
International Accounting Standards Board, representatives from 10 countries
Who are required to follow IFRS
All publicly traded European Union companies, including Canada must follow IFRS in financial statements for fiscal years Jan 1, 2011 or later.
Who else use IFRS? And where is it not accepted?
Australia, latin America and Africa use IFRS and accepted by all major stock exchanges except U.S and Japan.
Difference between GAAP and IFRS?
GAAP based on historical cost accounting. US.
IFRS More principles-based, allowing flexibility in interpretation, and emphasizes fair value accounting. Globally used outside of US.
What does the balance sheet/Statement of Financial Position list?
Assets: cash, inventory, property, equipment, AR
liabilities: Obligations to creditors, AP
Shareholder's equity: firms net worth (difference between assets and liabilities)
Balance Sheet Equation
Assets = Liabilities + Stockholders' Equity
Current assets vs long-term assets
Current Assets will be converted to cash, sold, or used up during the next 12 months or within the business operating cycle if the cycle is longer than a year. Examples of current assets listed in order of liquidity: cash, accounts receivable, inventory, supplies, prepaid expenses
Long-term assets produce tangible benefits for more than one year. Reduced through yearly depreciation.
Current liabilities vs long term liabilities
Current: Liabilities due for payment w/n 12 months
Long term: due for payment more than 12 months
Notes payable/short term debt
Loans that must be repaid in the near year
Accural Items
Items such as salary or taxes that are owed but have not yet been paid, and deferred or unearned revenue
Net working capital
=current assets - current liabilities
capital available in short term to run the business
Market capitalization
Market price per share x number of shares
Market vs. Book Value
Market value = true value; the price at which the assets, liabilities, or equity can actually be bought or sold.
Book value = the balance sheet value of the assets, liabilities, and equity.
What are examples of sources of value for a company that do not appear on the statement of financial position?
1. Potential opportunities for growth.
2. The quality of the management team.
3. Relationships with suppliers and customers.
Why is the book value of a firm's equity not a good estimate of its true value?
because it reflects historical costs rather than the current market value of assets and liabilities. It also fails to capture intangible assets, growth potential, and other factors that contribute to the firm's ongoing operations and future profitability.
Liquidation value
value of a firm after its assets are sold and liabilities are paid
Market-to-book ratio ([P/B] ratio)
market value of equity / book value of equity
value stocks
fist with low market-to-book ratios
growth stocks
firms with high market-to-book ratios
What is the formula for Enterprise Value?
Market Value of Equity + Debt - Cash
What does Enterprise Value measure?
The value of a business's underlying assets, excluding debt, cash, and marketable securities.