An Overview of Financial Management Flashcards

Vocabulary flashcards covering key terms, organizational structures, business forms, stock valuation concepts, and stakeholder conflicts from Chapter 1 of Fundamentals of Financial Management.

Proprietorships and Partnerships

Unincorporated business organizations characterized by ease of formation, few regulations, and no corporate income taxes, but limited by difficulty raising capital, unlimited liability, and limited life.

Corporation

A business organization offering unlimited life, easy transfer of ownership, limited liability, and ease of raising capital, but subject to double taxation and costs of setup and report filing.

Intrinsic Value

A long-run concept representing the true value of a stock, determined by true investor cash flows and true risk.

Stock's Market Price

What investors currently think the stock is worth.

Market Equilibrium

The market state achieved when a stock's intrinsic value equals its stock price.

Stockholder-Manager Conflicts

Problems that happen when managers make decisions that benefit themselves instead of the stockholders.

Stockholder-Debtholder Conflicts

Conflicts resulting from stockholders preferring riskier projects with high upside potential, while bondholders receive fixed payments, aim to limit risk, and worry about additional debt.

Bond Covenants

Rules in a bond agreement that protect bondholders by limiting what the company and its managers can do.

Shareholder Wealth Maximization

The primary financial goal of management, which translates to maximizing the stock price.

Corporate Structure Hierarchy

The organizational hierarchy in which the Board of Directors oversees the Chief Executive Officer (CEO), who in turn oversees the Chief Operating Officer (COO) and Chief Financial Officer (CFO).

Chief Financial Officer (CFO)

A corporate executive reporting directly to the CEO who oversees accounting, treasury, credit, legal, capital budgeting, and investor relations.

Chief Operating Officer (COO)

A corporate executive reporting directly to the CEO who oversees marketing, production, human resources, and other operating departments.