Ch 1

• a firm's principle goal should be to maximize stockholder wealth
• free enterprise is a system where companies develop products/services that people want and that benefit society
• finance is a system that includes the circulation of money, the granting of credit, the making of investments, and the provision of banking facilities
• finance is divided into three areas: financial management, capital markets, and investments
• Fed stands for federal reserve system
• SEC stands for securities exchange commission
• the fed regulates banks, controls money supply, and sets interest rates
• the fed meets every 6-8 weeks
• the SEC regulates the trading of stocks and bonds in public market
• a portfolio is a basket of stocks and bonds held by an investor
• financial management is also called corporate finance
• financial management focuses on decisions relating to acquiring assets, raising capital, and maximizing firm value through management
• capital markets are markets where interest rates and stock and bond prices are determined
• capital markets includes the study of investment banks, stockbrokers, mutual funds, insurance companies, etc
• capital markets study the fed and SEC
• investments relate to decisions about stocks and bonds
• investments study security analysis, portfolio theory, and market analysis
• security analysis is the proper pricing of stocks and bonds
• portfolio theory studies the best way to structure portfolios
• market analysis is understanding when stocks and bonds are under or overvalued
• behavioral finance is a part of market analysis
• behavioral finance is examining investor psychology in effort to determine whether stock prices have been bid up or driven down
• intrinsic value is an estimate of the true value of stock in the long run
• market price is determined by perceived investor cash flows and perceived risk
• market price is figured out by a marginal investor
• successful investors are able to estimate intrinsic value well through security analysis
• main financial goal is maximizing shareholder wealth
• being socially responsible doesn't equal maximizing shareholder value (does or doesn't)
• maximizing shareholder wealth = maximizing stock price
• stockholders prefer riskier projects because they gain more profit if the project succeeds
• bondholders want to limit risk because they receive fixed payments regardless of company wealth
• bondholders are concerned with the use of additional debt
• covenants limit the use of additional debt in bond agreements to restrain stockholders