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Finance
Exam 1
Ch 1
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Olivia Adams
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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