Reviewer Fundamentals of Financial Management|Brigham|Houston Management|Brigham|Houston
implies that decisions should be made to maximize
Chapter 1 – An An Overview of Financial
the long-run long-run value of the firm’s common stock.
Management
Congress passed the Dodd-Frank Act, which
requires the CEO and CFO to certify that their firms
established the Financial Stability Oversight
FSs are accurate.
Council to monitor for risks in the financial system
Finance – Three Areas:
and the Consumer Financial Protection Bureau to
1.
Financial Management (also called corporate
enforce consumer protection rules for financial
finance)
products.
existed about a company.
stocks and bonds and include a number of activities: (1) Security Analysis deals with
value based on accurate risk and re turn data. The
portfolios, or “baskets” baskets”, of stocks and bonds.
intrinsic value can be estimated but not measured
(3) Market Analysis deals with the issue of
precisely.
but possibly incorrect information as seen by the
right.” right.”
marginal investor.
Proprietorship. An unincorporated business Partnership. An unincorporated business owned
Equilibrium. The situation in which the actual
Corporation. A legal entity created by a state,
are indifferent between buying or selling a stock.
Important Business Trends:
managers, having unlimited life, easy
1. Increased globalization of business
transferability of ownership, and limited liability.
2. Ever-improving information technology
S Corporation. A special designation that allows
3. Corporate Governance – the the way the top
small businesses that meet qualifications to be
managers operate and interface with
taxed as if they were a proprietorship or a
stockholders
partnership and a corporation.
Limited Liability Partnership (LLP). Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It has limited liability like corporations but is taxed like partnerships.
Shareholder Wealth Maximization. The primary goal for managers of publicly owned companies
Corporate Raider. An individual who targets a corporation for takeover because it is undervalued.
Limited Liability Company (LLC). A relatively new type of organization that is a hybrid between a
determine the actual stock price. market price equals the intrinsic value, so investors
partnership rather than a corporation.
Marginal Investor. An investor whose views
by two or more persons. separate and distinct from its owners and
per ceived Market Price. The stock value based on perceived
time are “too high,” high,” “too low,” low,” or “about
owned by one individual.
Intrinsic Value. An estimate of the stocks “true”
str ucture Theory deals with the best way to structure
whether stock and bond markets at any given
– what investors expect, given the perceived” – what
“
limited information they actually have.
finding the proper values of individual securities (i.e., stocks and bonds). (2) Portfolio
– the cash flows and risk that investors true” – the
“
would expect if they had all of the information that
3. Investments relate to decisions concerning
In response to the financial crisis, I July 2010,
Sarbanes-Oxley Act. A law passed by congress that
2. Capital markets
1
Hostile Takeover. The acquisition of a company over the opposition of its management.
Reviewer Fundamentals of Financial Management|Brigham|Houston Management|Brigham|Houston
Chapter 2 – Financial Financial Markets and Institutions
2
Financial Institutions: Institutions: 1. Investment Bank. An organization that
Capital Formation Process for Business (Three
underwrites and distributes new investment
Ways)
securities and helps businesses obtain
1. Direct Transfers
financing.
2.
Indirect Transfers through Investment Bankers
3.
Indirect Transfers through a Financial
store of finance serving a variety of savers and
Intermediary
borrowers.
Types of Markets
markets) are for products such as w heat, autos,
operations, insurance, and commercial
real estate, computers, and machinery.
banking.
Financial Asset Markets. Deal with stocks, bonds,
members are supposed to have a common
securities.
bond, such as being employees of the same
Spot Markets. The markets in which assets are
firm. 5. Pension Funds. Retirement plans funded by
Futures Markets. The markets in which
corporations or government agencies for their
participants agree today to buy or sell an asset at
workers and administered primarily by the
some future date
trust departments of commercial banks or by
Money markets. The financial markets in which
life insurance companies. 6.
Life Insurance Companies take savings in the
(less than one year).
form of annual premiums; invest these funds
Capital Markets. The financial markets for stocks
in stocks, bonds, real estate, and mortgages;
and for intermediate- and long-term debt (one
and make payments to the beneficiaries of the
year or longer).
insured parties.
Primary Markets. Markets in which corporations
7. Mutual Funds. Organizations that pull investor
raise capital by issuing new securities.
funds to purchase financial instruments and
Secondary Markets. Markets in which securities
thus reduce risks thr ough diversification.
and other financial assets are traded among
Money Market Funds. Mutual funds that
investors after they have been issued by
invest in short-term, low risk securities and
corporations.
allow investors to write checks against their
Private Markets. Markets in which transactions
accounts. 8.
Exchange Traded Funds (ETFs) are similar to
Public Markets. Markets in which standardized
regular mutual funds and are often operated
contracts are traded on organized exchanges.
by mutual fund companies. ETFs buy a portfolio of stocks of a certain type and then
4. Credit Unions. Cooperative associations whose
notes, and mortgages. Also deal with derivative
are worked out directly between two parties.
offers a wide range of financial services, including investment banking, brokerage
funds are borrowed or loaned for short periods
3. Financial Services Corporation. Corporation. A firm that
Physical Asset Markets. (“tangible” or “real asset”
bought or sold for “on-the“on -the-spot” spot” delivery.
2. Commercial Bank. The traditional department
Derivatives. Any financial asset whose value is derived from the value of some other “underlying” asset.
sell their own shares to the public. 9. Hedge Funds are also similar to mutual funds because they accept money from savers and use the funds to but various securities, but there are some important differences. (a) Hedge funds are largely unregulated. (b)
Reviewer Fundamentals of Financial Management|Brigham|Houston Management|Brigham|Houston typically, have large minimum investments
close to intrinsic values and stocks seem to be in
primarily to institutions and individuals with
equilibrium.
10. Private Equity Companies are organizations
secondary market.
Physical Location Exchanges. formal that conduct auction markets in designated (“listed”) securities.
Over the Counter (OTC) Market. A large collection of brokers and dealer, connected electronically by telephones and computers, that provides for trading in unlisted securities.
Dealer Market. Includes all facilities that are needed to conduct security transactions not conducted on the physical location exchanges.
Closely Held Corporation. Corporation. A corporation that is owned by few individuals who are typically associated associated with the firm’s management.
Publicly Owned Corporation. A corporation that is owned by a relatively large number of individuals who are not actively involved in the firm’s management.
Going Public. The act of selling stock to the public at large by a closely held corporation or its principal stockholders.
Initial Public Offering (IPO) Market. The market for stocks of companies that are in the process of going public.
Market Price. The current price of a stock.
Intrinsic Value. The price at which the stock would sell if all investors had all knowable information about the stock.
1. Outstanding shares of established publicly
rather than purchasing some of the stocks of a
organizations having tangible physical locations
Types of Stock Market Transactions owned companies that are traded: the
manage entire firms.
that operate much like to hedge funds; but firm, private equity players buy and then
Efficient Market. A market in which prices are
(often exceeding S1 million) (c) marketed high net worths.
3
Equilibrium Price. The price that balances buy and sell orders at any given time. The price remains relatively stable until new information becomes available and causes the price to change.
2. Additional shares sold by established established publicly owned companies: the primary market 3. Initial public offerings made by privately held firms: the IPO market.
