Ch 1

Cards (33)

  • 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