Exam I Study Guide

Exam I Study Guide - (1) Real assets: assets used to...

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(1) Real assets:  assets used to produce goods and services; can be seen/touched o Real assets create wealth o Real assets of the economy: the land, buildings, knowledge, machines, patents,  Financial assets:  claims on real assets or the income generated by them o Financial assets represent claims to parts or all of that wealth o They determine how the ownership of real assets is distributed among investors  o Stocks/bonds; lease obligations; $5 bill; securities on paper or in computer entry  form Financial assets (3 types):  o Derivative securities:  provide payoffs that depend on the values of  other  assets, such as bonds or stocks Their values “derive” from the prices of other assets Ex. options/futures contracts; the value of a call option depends on stock  price  Primarily used to hedge investment risks or transfer them to other parties o Fixed-income securities: pay a specified cash flow over a specific period; may be  fixed Money market: short term F-IS’s, highly marketable, low risk—US T-Bills,  CDs Capital market: long-term securities; Ex. T-bonds, bonds issued by states/ corps  Bonds range from very safe (T-bonds) to relatively risky (High  yield/junk) o Equity: common stock; represents an ownership share in a corporation Equity holders are not promised any particular payment; they receive any  dividends a firm may pay and have prorated ownership in the firm’s real  assets If the firm is successful, the equity value increases; if not, it will decrease Agency Dilemma:  potential conflicts of interest between managers and stockholders— managers, who are hired as agents of the shareholders, may pursue their own interests  instead  o Ex. managers might engage in empire building or avoid risky projects to protect  their own jobs or over-consume luxuries such as corporate jets, reasoning that  the cost of such perquisites is largely borne by the shareholders Potential conflicts:  mechanisms that are used to mitigate potential agency problems,  including: 
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o (1) Compensation plans that tie the income of the managers to the success of  the firm—typically in the form of stock options o (2) A board of directors can force out underperforming management teams o (3) Outsiders, such as security analysts and large institutional investors such as  pension funds, monitor the firm closely and make the lives of poor performers  uncomfortable o (4) Bad performs re subject to threat of takeover—if board of directors is lax in  monitoring management, unhappy shareholders can launch a 
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This note was uploaded on 04/08/2008 for the course FIN 312 taught by Professor Staff during the Spring '08 term at Bryant.

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Exam I Study Guide - (1) Real assets: assets used to...

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