Finance Test 1 Notes

Finance Test 1 Notes - Finance 3 Areas 1 Financial...

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Finance 3 Areas: 1. Financial Management – concerned with the creation and maintenance of economic value or welfare. (Corporate Finance) 2. Capital Markets – The markets where interest rates, stock and bond prices are determined 3. Investments – relating to decisions regarding stocks and bonds a. Security analysis – finding the proper value of individual securities b. c. Market analysis – determining if markets are priced too high, too low, or correctly Security – a document which gives a claim on future cash flows Common Stock – residual ownership in a corporation represented by shares Behavioral Finance – the psychology of investing “herding” (relatively new field) Forms of Business Organization *See Handout 1* Goal of the Firm – maximize shareholder wealth Market Value of the Firm = (Price per share of Common Stock)*(# of Shares outstanding) Aka. Market Cap Disney example *Handout 2* 22.64 * 1.85 B = 41.884 B Market Cap Why investors buy stock – in anticipation of future dividends and increase in market price They pay what they believe it is worth today (present value) based on: - Future cash flows - Risk of the cash flows - Time value of money Why not say maximize earnings? (net income is an Accounting # subject to the rules and laws of accounting) Accounting methods can differ - LIFO or FIFO inventory - Depreciation methods (non-cash expense) - Cash vs accrual (A/P & A/R) - Intrinsic Value of the stock- true value based on all accurate risk and return information (HealthSouth – falsified $2mil in revenues) Agency Theory – the study of the conflict of interests between management and shareholders How to resolve? 1. Bonuses based on performance (financial ratios) 2. Make managers shareholders can cause short term thinking a. Restricted stock (can’t be sold immediately) b. Stock options 3. Threat of firing after poor performance
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4. Threat of takeovers (technically also a threat of loss of a job) “The market for Corporate
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Finance Test 1 Notes - Finance 3 Areas 1 Financial...

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