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Managerial Finance - Ch. 1-4
Terms in this set (64)
The art and science of managing money
Two categories of Finance
1. financial services
2. managerial finance
Financial Services Definition
The area of finance concerned with design and delivery of advice and financial products to individuals, businesses and governments.
Financial Services Examples
banking, personal financial planning, real estate, insurance, and consulting
Involves tasks such as budgeting, financial forecasting, cash management, and funds procurement
What is the controller responsible for?
Firm's accounting activities such as...
tax management, corporate accounting, financial accounting, and cost accounting
What is the treasurer responsible for?
Firm's financial activities such as...
financial planning and fund raising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange
Sole Proprietorship Advantage
Simplicity of decision making
Sole Proprietorship Disadvantage
Earnings are taxed as personal earnings
Stockholders (owners) have limited liability
Double taxation of earnings
Who are the true owners of a corporation?
What is the primary goal of the financial manager?
to maximize the wealth of the shareholders
What must financial managers consider when evaluating decisions or actions?
risk, return, and impact on share price
the ability to pay short-term obligations as they come due
What are the benefits of an effective ethics program?
1. Reduce potential litigation and judgment costs
2. Maintain a positive corporate image and build shareholder confidence
3. Gain the loyalty, commitment, and respect of the firm's stakeholders
How does the accountant recognize revenues and expenses?
On an accrual basis
How does the financial manager recognize revenues and expenses?
On a cash basis - utilize the actual inflows and outflows of cash.
Solvency (the ability of a company to meet its long-term obligations) is very important.
What is the primary economic principle used in managerial finance?
Marginal cost-benefit analysis
What does marginal cost-benefit analysis state?
Financial decisions should be made and actions taken only when added benefits exceed added costs
What are some economic considerations for a financial manager?
1. Inflation sensitivity
2. Extensive use of debt financing
3. Corporate restructuring of the balance sheet (repurchase stock or merger/acquisition)
4. High deficits
Reasons a company would repurchase shares of common stock
1. lack of better alternative investments
2. stock thought to be underpriced
3. avoidance of an unfriendly takeover
What is the key role of the financial manager?
Daily decisions of financial manager:
credit management, inventory control, and the receipt and disbursement of funds
Occasional decisions of financial manager:
stock issue, bond issue, capital budgeting, and dividend decision
What is the agency problem?
conflict between the goals of a firm's owners and the goals of its non-owner managers
a way to insure that management decisions are in the best interest of the stockholders:
tie management compensation to the performance of the company's common stock price
Who are the key participants in financial transactions?
individuals, businesses, and governments
What is the private placement market?
the sale of a new security directly to an investor or a group of investors
Key financial markets
1. Primary market
2. Secondary market
3. Money market
4. Capital market
What is primary market?
market for the initial sale of financial instruments (stocks/bonds)
the only market in which the issuer receives the proceeds of the sale of securities
How do most businesses raise money?
By selling their securities in a public offering
What is secondary market?
market in which previously issued financial instruments are traded, or resold
What is money market?
a financial relationship that is created between suppliers and demanders of short-term funds
what is capital market?
a financial relationship that is created by institutions and arrangements that facilitate long-term funds transactions
Long-term security transactions
debt (bonds) and equity (common and preferred stock)
What kind of market is the New York Stock Exchange?
a secondary and capital market.
Trading is carried out on the floor of the exchange by the auction process
How is trading carried out in the Over-the-Counter Exchange?
by competitive bid process and the negotiation process
What exchanges provide
1. Liquid, continuous market
2. Market efficiency to ensure productive use of funds
3. A forum for the forces of supply and demand
4. Assistance for firms requiring new financing
What is securitization?
the process of pooling mortgages or other types of loans and selling the claims or securities against that pool in the secondary market
What two types of income can be earned by business firms?
1. Ordinary income
2. Capital gains
How is ordinary income earned?
through operating activities of the firm (i.e. the sale of its goods and services)
How is capital gains earned?
when a firm sells an asset for more than the asset's original purchase price
what is marginal tax rate?
the rate at which the next additional dollar of income will be taxed
What is stockholders' report or annual report?
an annual summary and documentation of a firm's financial activities for the most recent fiscal year.
What is an income statement?
provides a summary of financial transactions for a period of time
What is a balance sheet?
portrays the cumulative results of transactions at a point in time
What is the statement of retained earnings?
reconciles the net income earned during a given year and any cash dividends paid
What is the statement of cash flows?
provides a summary of the firm's operating, investment, and financing cash flows
What are operating profits defined as?
Earnings Before Interest and Taxes (EBIT)
What is benchmarking?
where the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement
what is price/earnings ratio commonly used for?
to assess the owner's appraisal of the share value
what is the primary concern of creditors when assessing the strength of a firm?
the firm's short-term liquidity
What is depreciation?
allocation of the historic costs of fixed assets against the annual revenue they generate
Is a shorter or longer depreciable life preferred?
a shorter depreciable life because financial manager's prefer faster receipt of cash flows
What is cash flows from investing?
The sum of the changes of investment in securities and plant and equipment
What is cash flows from financing activities?
The sum of the sale or retirement of corporate securities and dividends
What is cash flows from operations?
The net increase or decrease shown in the statement of cash flows will be equal to the change in the cash balance on the balance sheet
What are the key aspects of the financial planning process?
cash planning and profit planning
The key input to any cash budget is...
the sales forecast
Internal sales forecast
based on a buildup, or consensus, of sales forecasts through the firm's own sales channels, adjusted for additional factors such as production capabilities
based on the relationships between the firm's sales and certain economic indicators