Khursheed Ahmad Bhat, HOD. When buying a share of stock and becoming an owner in a corporation, an individual can lose his entire initial investment if the company goes bankrupt, but nothing beyond that. While we will deal with some issues that are of concern to these financial institutions (time value of money, risk/return analysis, types of financial instruments, etc. This requires planning. Chapter 1 2. Some companies expand rapidly and are extremely successful leading to high returns. What if the coin flip cost you $0.90 instead of $1? The firm needs to generate positive cash flows in order to maintain its operations. This implies that the overwhelming evidence suggests that corporations behaving in a manner consistent with social responsibility and ethical behavior are likely to either benefit financially or not experience any noticeable financial downside to doing so. This is a relatively new form of Corporate Governance that is gaining prominence. CHAPTER 5. Does this seem to be a valid assumption? Risk aversion refers to the idea that investors don’t like risk. Remember that this is not the case for sole proprietorships or general partnerships. Chapter 2 4. Due to this priority of claims, the fixed cash flow stream (coupon payments and maturity payment), and the fixed time horizon, bonds are considered lower risk than stocks. The concept of maximizing firm value is not specific to finance. 1.1 Introduction. Others struggle (or even go bankrupt) and lead to negative returns. Cash flows are considered more important than earnings for three basic reasons: The word Expected is a critical component of the three factors. Both come home with several Bs on their report card. Chapter 1 Corporate Finance and the Financial Manager • Grasp the importance of financial information in both your personal and business lives • Understand the… Slideshare uses cookies to improve functionality and performance, and to provide you with relevant advertising. Examples may include exceeding minimum safety requirements for employees, abiding by (or exceeding) regulations regarding environmental issues, honoring not just the letter, but the spirit of contracts or verbal agreements with customers and suppliers. The timeliness is likely to be slightly slower, but not nearly as significant. For example, if the stock price before the takeover is $50, the takeover offer may be $70 per share. However, takeovers are not cheap. While the concept applies to both personal and business oriented decisions, the focus of this course will be first on corporations and secondarily on personal issues. Corporations allow individuals to own multiple businesses without having expertise in all (or even any) of these businesses. Choose from 500 different sets of personal financial management chapter 2 vocabulary flashcards on Quizlet. can I afford a new house or new car? Chapter 3 6. Explain the concepts of limited liability and double-taxation and how they relate to the corporate form of ownership. Agency problems can cause difficulties in maximizing firm value. An analogy would be to compare two students in junior high. Since these are among the largest firms in terms of market values, clearly foreign revenues are a key component of maximizing firm value. Personal financial planning is the process of gathering and analyzing financial data to develop a set of strategies that form an integrated plan to help people achieve their financial goals. When analyzing stock price changes to information, it is always essential to consider what the new information is RELATIVE TO what expectations were. It can also apply to banking where financial institutions evaluate who to lend money to and how much to charge in interest rates. Explain how career management and education can determine your income level. Chapter 1 Introduction to Financial Management 1. Explain why personal financial planning is so important. Sometimes firms will engage in buying back shares of their own stock as a substitute (or in addition to) dividends as a way to return profits to shareholders. P lanning is the p rocess of making a proper lay dow n procedure of doing Social Responsibility and Ethics are NOT inconsistent with the maximization of firm value. The general partnership is what is described above. Snap, Inc. (Snapchat) is an example of a limited liability corporation that recently became a publicly traded corporation via an Initial Public Offering, IPO. Choose from 500 different sets of financial management chapter 1 personal flashcards on Quizlet. One important characteristic of a sole proprietorship is that, from a legal and tax perspective, there is no real distinction between the owner and the business. endstream endobj 181 0 obj <>stream Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS) allow corporations some flexibility in how they account for revenues and expenses. income statement, income and expense statement, budget) and the net worth statement (a.k.a. Our focus this semester will be on the corporation, but at this point we should introduce all three forms (in a simplified manner) to give the basic framework of each. Note that this refers to the stock itself, not the investor’s holding period which may be as short as a few seconds or as long as several decades. while exposure is the possibility of loss, although they are often used interchangeably.Risk arises as a result of exposure. In the article, Where Do Firms Go When They Die the author discusses this relatively short lifespan. While personal finance is not the primary topic of this course, it is an important issue for everyone AND overlaps with many of the main themes (time value of money, diversification, valuation analysis, etc.) Again, a lower EXPECTED return does not mean a lower return for any particular bond or for bonds in general in a particular year. Two studies that address this are Gompers, et al, 2003 and Cuñat, et al, 2010). As such, the returns associated with stock ownership are highly volatile and risky. However, it may not be bad enough to justify a takeover. There are many different definitions of finance, but for the purposes of this course, we are going to define it as follows:Finance refers to the Marketing solely to the US excludes over 95% of potential customers. Chap 1 an overview of financial management 1. If a shareholder with a large stake in the firm creates enough pressure on management and the board of directors, changes to the firm’s strategies and/or operations may occur. Ultimately, it doesn’t matter if the firm is profitable on an EARNINGS basis if it isn’t generating enough cash to pay its employees, suppliers, creditors, etc. Many Chief Executive Officers (CEOs) get rich compensation packages (Golden Parachutes) even if they are forced out of their position. 3. Some people are highly risk averse (needing significantly higher expected return to take on a little more risk) while others are only mildly risk averse (needing only slightly higher expected return to take on significantly more risk). Over the following few months the stock price gradually fell, trading significantly below its original offering price of $17 per share (all the way down to about $5 per share in Dec. 2018). Banks and other similar financial institutions are among the primary employers in the field of finance. Some of the key considerations in the field of investments include valuation analysis, risk/return analysis, diversification, and fit (by fit we mean that what may be a good investment for one individual may be a poor investment for someone else due to each person’s unique set of investment objectives.). What 3 elements are essential to meeting this goal? The purpose of marketing, internal accounting, personnel decisions, production, etc. building a new warehouse), and managing the firm’s cash flows. However, things are rarely equal. The corporation is a form of business organization that separates out management from ownership and accounts for the bulk of business activity within the U.S. Get calculators, trackers, schedules, and comparison sheets to manage income and expenses. 2. Therefore, if we ignore the global aspects of business, we are not maximizing firm value. In practice, there are different types of partnerships (general vs. limited vs. limited liability). ), this class will not be primarily focused on banking-related issues. Finance deals with the allocation of capital in order to optimize the risk-adjusted return earned on that capital. Also, there are some instances where the Board of Directors (the people responsible for hiring and paying the CEO) may be “friendly” to the CEO. The reason for this is because people have different levels of risk aversion depending on their personality, their age, their income, and several other factors. These include: This textbook will touch on several of these topics (interested students may find more information about potential finance-related careers at the Careers-in-Finance site), but our primary focus is going to be on Corporate Finance. Note that this does not mean that any individual stock (or stocks in general) WILL generate a higher return, only that its EXPECTED return will be higher. |:��W��� ZQ������m�����{������� t������%�/c-��o��+� 4��Oф��c����k There are several primary areas of finance. All else equal, if two investments have the same expected return investors will choose the one with the least risk. There are many career paths related to investments including stock analyst, fixed-income analyst, portfolio manager, trader, etc. Cuñat, Vicente, Gine, Mireia and Guadalupe, Maria, The Vote is Cast: The Effect of Corporate Governance on Shareholder Value (February 17, 2010). There are many different definitions of finance, but for the purposes of this course, we are going to define it as follows: Finance refers to the process of allocating capital in order to optimize the risk-adjusted expected return on that capital. Finally, stock options may be the most popular way of trying to align the interests of shareholders and managers but they also have some serious flaws. Therefore, something like depreciation may understate the financial cost of owning assets. Because of the difference in the way stockholders and bondholders are compensated, their attitudes towards a “worthwhile” investment may be different. FINANCIAL MANAGEMENT THEMES 140 Themes 1 1 Process 142 Stability 145 Capacity to change 146 Safety 150 Control 151 Comfort 153 Values 154 Feelings 159 Reported ... personal financial management textbooks (e.g.. Carman & Forgue, 1994: Winger & Frasca. Cash is the life-blood of a business. 107-155, February 2003. Stocks are a form of ownership (equity) in a corporation. Note that specifics of partnership law vary by country and by state. 4. Base your arguments on the concept of shareholders and wealth maximization. Learn vocabulary, terms, and more with flashcards, games, and other study tools. This is often accomplished through payment with stock options (the right to purchase shares at a fixed price even if the stock goes higher). A fundamental component of the corporate form of ownership is the separation of ownership from the process of managing the firm. If a firm is purchased by another firm, the acquiring firm may replace upper management. 180 0 obj <>stream Learn personal financial management chapter 2 vocabulary with free interactive flashcards. A limited partnership involves at least one general partner to manage the company and take on the risk. Chapter 1 Personal Finance Basics ... Chapter 1 Learning Objectives 2 1. When an individual is hired in any field, the rationale for that decision is that the company plans for that person to directly or indirectly increase its value. Chapter 1 -Introduction to Financial Management, Chapter 6 -The Financial System and Interest Rates, Chapter 8 -Introduction to Capital Budgeting, Chapter 9 -Mutual Funds, IRAs and 401(k) Plans, Financial Statement Analysis Guided Tutorial (CH 2), Financial Statements from Walmart and Target (CH 2), Financial Statements for Joe's Gadgets (CH2), Table: Future Value of a $250 per month investment (CH3), Setting up Your Financial Calculator (CH3), TVM 5-Key Approach Guided Tutorials with TI-BAII+ (CH3), TVM 5-Key Approach Guided Tutorial with HP10BII+ (CH3), TVM 5-Key Approach Guided Tutorial with TI-83 or TI-84 (CH3), Stock Valuation Guided Tutorial with Calculations (CH 5), Observed Correlations, Returns, Standard Deviations and Betas Table (CH 7), Table: Correlations, Returns and St. Deviations Across National Equity Markets (CH11), Table: Foreign currency relative to US dollar in 2017 (CH11), After completing this chapter, students should be able to. Specifically, the overall mean correlation is 0.13 (indicating a small, positive relationship). When you buy a stock, you own it until you decide to sell or the company goes bankrupt. 1993). Why should we concentrate on Cash Flows instead of Earnings Per Share? One of the large costs facing corporations is the cost of preparing and verifying financial statements. Cash flow statement (Also known as income statement). Interested students can compare historical returns for the S&P 500, 3-month Treasury bills and 10-year Treasury bonds on a data page by Aswath Damodaran. Activist investors may pressure management to run a more efficient operation. A sole proprietorship is a business organization where the owner is a single person and is solely responsible for control of the business. These expenses lower the profitability of the company, but may be necessary to protect shareholders. 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