test 1 review.docx - To help your company succeed you must be able to evaluate proposals and ideas related to anything and understand the ways that

test 1 review.docx - To help your company succeed you must...

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- To help your company succeed, you must be able to evaluate proposals and ideas related to anything and understand the ways that value adding proposals can be funded - Providers supply cash now to users in exchange for a claim on future cash flows - Limitations for proprietorships: 1) difficult to obtain growth funding 2) unlimited personal liability 3) life limited to owner’s life - 2 disadvantages for corporations: 1) earnings may be subject to double taxation – taxed at corporate level and taxed income to stockholders 2) need charter, bylaws, filing state and federal reports - corporation’s value is the ability to generate cash flows now and in the future - company’s value is the size of future cash flows, timing of CFs, and the risk of CFs - FCF = sales revenues – operating costs – operating taxes – required investments in new operating capital - FCF = NOPAT – Gross Investiment in Long-term operating assets – investment in Net Working Capital - Intrinsic/fundamental value – value or price that incorporates all relevant information regarding expected future cash flows and risk - Primary goal of corporation is to maximize stockholder wealth unless the company’s charter states otherwise - Individuals are net savers / nonfinancial corporations are net borrowers / governments are also net borrowers / financial corporations are net borrowers - Investment banks are the underwriters - Unlike nonfinancial corporations, most commercial banks are highly leveraged in the sense that they owe much more to their depositors and creditors than they raised from stockholders - Debt matures more than a year = capital market security / less than a year = money market - Fundamental factors that contribute to Required rate of return – production opportunities, time preference for consumption, risk, inflation - Time preference for consumption – providers can user their current funds for consumption or saving / varies by individual, age, culture - Fed buy treasury securities interest rates go down which makes it less costly for companies to borrow money / banks sell their treasury securities to the feds money supply goes up which increases inflation which increases interest rates - Secondary markets provide liquidity for investors who need cash or who wish to reallocate their investments to potentially more productive ops / entrepreneurship / - US Treasury notes and bonds – backed by the US gov these financial instruments are fixed rate debt securities with a maturity of more than 1 yr. considered default free but subject to interest rate risk - Fed’s inject money into the market inflation is expected to increase which will higher returns in the future thus interest rates increae with the money supply - Countries with strong balance sheets and declining budget deficits tend to hanve lower interest rates - If the value of the foreign currency increases relative to home country the value of invested assets will decrease - The Fed is likely to decrease short term interest rates when the economy is weakening -
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  • Fall '14
  • Pandey

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