Chapter 1 2 and 3 notes

Chapter 1 2 and 3 notes - Session 1 covers most of the...

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Session 1 covers most of the familiar to you concepts. Many of these you learned in MGMT 640, so this should be a review. From Chapter 1 , the following concepts should seem familiar: The goal of financial management in a for-profit business is to make decisions that increase the wealth of common shareholders. The corporate form of organization is superior to other forms (such as sole proprietorships or partnerships) when it comes to raising money and transferring risk, but it has the significant disadvantage of double taxation. The advantages of the corporate form of organization are enhanced by the existence of financial markets. Financial Managers should make decisions that increase firm value, which effectively involves three primary categories of financial decisions. 1. Capital budgeting – process of planning and managing a firm’s investments in fixed assets. The key concerns are the size, timing, and risk of future cash flows. 2. Capital structure – mix of debt (borrowing) and equity (ownership interest) used by a firm. What are the least expensive sources of funds? Is there an optimal mix of debt and equity? When and where should the firm raise funds? 3. Working capital management – managing short-term assets and liabilities. How much inventory should the firm carry? What credit policy is best? Where will we get our short-term loans? These broad categories, however, can be summarized with two concrete responsibilities: selecting value creating projects; making smart financing decisions. Financial markets function as both primary and secondary markets for corporate securities and can be organized as either dealer or auction markets. Money markets are markets for securities that mature in less than one year. Capital markets are markets for long-term debt (with a maturity of over one year) and equity. In the capital markets, brokers act as agents for the customer in buying and selling securities and never actually acquire or own the securities. Dealers carry inventory of securities and “clear” the market. Financial markets can be classified as primary or secondary: 1. The primary market is for new issues of government and corporate securities, with investment banking firms under-writing new securities and reselling them. 2. The secondary market is where owners of securities resell to each other. a. The dealer’s market is the secondary market for dealers to buy and sell stocks and long-term debt to each other. Today this primarily done electronically. The auction market, has a physical location (like Wall Street), and is a place where buyers and sellers try to meet to make a sale/buy. Examples of an auction markets is the NYSE. Managers seldom act in the best interested of stakeholders. The conflict between managers and shareholders,
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This note was uploaded on 02/14/2011 for the course FINANCE 610 taught by Professor Siad during the Spring '09 term at UMBC.

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Chapter 1 2 and 3 notes - Session 1 covers most of the...

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