ECON 371 Midterm 1

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.