Financial place where issuers and investors buy and sell debt and equity securities.
How corporate managers should allocate funds of the company to buy or build projects and investments that will be worth more than they cost.
How corporate managers raise money from institutional and individual investors through the sale of debt and equity claims for the company to finance the investment projects of the firm.
The percentage of company's profits and cash from operations that the company should reinvest in the business and how much should be returned to the stockholders.
Net Present Value
The value (positive or negative) associated with investing in a project or venture.
A financial intermediary borrows funds from savers/investors and uses funds to make purchases higher yielding securities.
-Financial Statements and Ratio Analysis
-Present and Future Value Concepts
-Models or risk and return
-Spreadsheet modeling methods
Current prices reflect all publicly available information and prices react completely, correctly, and instantaneously to new information.
Reversion to the Mean
Tendency for a particular measure of performance, such as percentage rate of return, to revert to its historical average return.
Random Walk Hypothesis
This states that the changes in stock prices are completely random.
Capital Asset Pricing Model
The pricing of assets and the trade-off between the risk of the asset and the expected returns associated with the asset.
(Current Stock Price) x (# of Shares Outstanding)
Process of planning and managing a firm's long-term investments in projects and ventures.
Goal of Capital Budgeting
Maximize the net present value of the investments that are financed by the firm's capital budget.
Working Capital Management
Process of managing the firm's short-term assets, such as accounts receivable and inventory, and short-term liabilities. Insure the firm has sufficient resources to continue its operations and avoid costly financial interruptions.
Goal of Working Capital Management
Minimize the cost of maintaining the net working capital position of the company.
Process of managing the firm's specific mixture of long-term debt and equity that it uses to finance its operations and investments.
Goal of Capital Structure
Minimize the weighted average cost of capital.
PV x (1+ r)^n
Spreading wealth among a number of different investment classes, doing this will result in the highest amount of return given a certain risk.
Reduce risk by diversifying your portfolio.
Modern Portfolio Theory
A theory on how risk-averse investors can construct portfolios in order to optimize market risk for expected returns, emphasizing that risk is an inherent part of higher reward.
Head accountant of the firm and is responsible for maintaining the company's books and financial statements.
In charge of managing the company's cash, which includes managing the firm's day-to-day cash inflows and outflows.
A business owned by one person.
A business formed by two or more individuals.
A distinct legal entity that is owned by one or more entities.
Board of Directors
Represent the stockholders and should run the business with the stockholder's best interest in mind. Select the managers of the firm and are responsible for monitoring the activities management.
Return that investors receive from their investment in the form of dividends and stock price increases.
Owners of the common stock of a corporation.
Any entities with legitimate claims on a firm.
Interaction between the firm's suppliers of capital and the management of the company.
The misalignment of objectives of shareholders and management that stems from the separation of ownership and control of corporate assets.
Board of Director Functions
-Hiring, firing, and rewarding management
-Reviewing management's performance
-Setting overall policy and the strategic direction of the corporation
Internal Control Mechanisms
-Board of Directors
-Audited Financial Statements
-Stock Ownership Interest
External Control Mechanisms
-Managerial Labor Market
-Market for Corporate Control
Managerial Labor Market
Manager's ability to create shareholder value is reflected in pay for executives.
Market for Corporate Control
Poorly managed companies are acquired by other companies and existing management is fired.
Large investors become aggressive in corporate governance issues due to poor corporate performance.
One company acquires another company against the wishes and efforts of the management and the board of directors of the target company.
When an acquiring company makes an offer to purchase shares in a target company for the purpose of gaining control.
Going-private transaction in which a tender offer for all of a firm's commons stock, financed mostly by debt, is made by an investment group.
Prospective acquirer solicits voting proxy statements from shareholders in an attempt to gain control of the board of directors.
Target company employs a counter-takeover bid for the aggressor, announces they are acquiring the aggressor and makes necessary advances to do so.
These provide target shareholders with the rights to purchase additional shares or sell shares to the target on very attractive terms making it harder for the acquirer to take over.
Corporate Governance in the 1990's
Board became more Proactive
-CEOs fired for poor performance
Debate over Executive Compensation
-Management pay vs Performance
-Management had increasing stake in company
With compensation packages dominated by stock options, there is an incentive for short-term price manipulation by management.
Board of Directors
Boards have not been independent of the management in many cases and haven't provided effective management oversight.
Accounting and Auditing
Public accounting firms that audit the books have gotten too close to their clients.
Wall Street Analysis
Analysts have been pressured to give positive outlooks for stocks of companies that employ the analyst's firm.
Justice Department and SEC
Government agencies have to be more proactive in policing corporate financial activities.
Ethical behavior of management is in the spotlight because of many investigations involving fraudulent activities.
This model of corporate governance involves primarily minority shareholders who elect board members to represent their interests.
Fluid Capital Model
Capital easily flows from individual and institutional investors to those entities that offer the best investment opportunities.
Dedicated Capital Model
Common shares are owned by investors who wil not trade or sell the shares.
Japan's predominant business model where a group of companies operate under a common institutional name and share operational and managerial expertise.
In Germany, a financial institution is the primary supplier of debt and equity capital and has a large influence on management through the board.
Rest of the World Model
The Corporate Governance model where a large investor owns the majority of the outstanding common stock and therefore effectively controls corporate resources, goals, and oversees management.
A right, not an obligation, to buy a stock from the company at a fixed price during a specified time period.
Report that is required to be filed annually, and includes all of the financial information about the firm.
Report that is filed quarterly, which contains much of the same type of information disclosed in the annual report.
Requires the recognition of revenues in accordance with the accrual basis accounting principles.
Earnings Per Share
Computation of net income after taxes divided by the amount of shares of outstanding common stock.
A provision in a loan agreement that requires the firm to maintain a minimum financial ratio.
Ratios used to indicate the ability of a company to pay its bills on time.
Ratios used to assess the effectiveness in which a firm is managing assets and liabilities to generate sales.
Ratios indicating the extent to which a firm has financed its assets with debt financing.
Ratios that serve as an overall measurement of firm performance and the effectiveness of the firm's management.
Ratios used to compare accounting numbers to the current market price.
Strategic Profit Model
(Net Income/Sales) x (Sales/Assets) = Net Income/Assets x Assets/Equity = Net Income/Equity
-Meant to monitor changes in ROE
Supply and Demand
This is the driver of stock prices in the short-run.
This is the driver of stock prices in the long-run.
Expected utility maximization, rational expectations, efficient markets.
Flaws in utility functions, not always rational, decisions reflect emotions and biases, market may or may not be efficient.
Roles of Controller
-Financial Statements and Reports
Roles of Treasurer
-S-T and L-T Capital Requirements
-Cash Management and Working Capital
Markets affected by Disasters
New role of CFO of assisting in Strategy Formulation.
Financing and Capitalization
New role of CFO of insuring that capital is available to fund strategic plan.
New role of CFO of hedging risk (currency, commodity, financial) in markets when appropriate.
Growth and Acquisition
New role of CFO of providing for growth opportunities.
Fraud where invested money is pocketed by a schemer and investors are paid out of proceeds from new investors.
Diffusion of Stock Ownership
Separation of stock to many small stock owners.
Previous sales of common stock and Reinvested Earnings.
Company buys another one and pays higher than it's actually worth.
Statement of Cash Flows
1. Three sources and uses
2. Primary source is Operations
3. Primary use is Investing
4. Excess is balanced with Financing activities
5. Net Change (CFO + CFI + CFF)
Price Earnings Ratio
Stock Price/Earnings Per Share
Drivers of Price Earnings Ratio
Elements of New Corporate Finance
-Growth in Investment
-Growth of Global Markets
-Volatility and Risk
-Complex Financial Instruments
The target company will sell off some of it's major assets to discourage the takeover company from acquisition.
Free Market Approach
Concept that the Government shouldn't be creating rules, but the Investors should be determining shareholder value.
Challenges of Management
Finding the balance of providing high quality products/services at competitive prices while also maximizing shareholder value.
Corporate Governance in the 1980's
-Diffusion of Stock Ownership
-Unfair Voting Procedures for Board Members and Management
-Low Degree of Managerial Stock Ownership
Defense mechanism against unwanted takeovers when the target company finds a friendly merger candidate.
Defense mechanism against unwanted takeovers when the target company purchases the acquirer's shares at a premium over the market price.
Defense mechanism against unwanted takeovers when the target company provides compensation at top-level executives in the event of a change of corporate control.
Defense mechanism against unwanted takeovers when the target company agrees to purchase some of the current outstanding shares at a price above what acquiring firm is offering.