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SCM 305: Chapter 1
Capital Budgeting
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What long-term investments should the firm take on?
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Capital Structure
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How will the firm finance these long-term investment?
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Working Capital Management
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How is the firm managing their short-term, day-to-day, financial activities?
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Debt |
-exchanging money for a contract
-contractual obligation to repay corporate borrowing
-can force one to go into bankruptcy
-all types of bonds and loans |
Debt; Equity; Interest
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______ is cheaper than ______ because the _______ is tax deductible
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Equity |
-exchanging money for ownership
-are shares of common and preferred stock
-a non-contractual claim (not required to pay back)
-long-term always
-can't force the company into bankruptcy |
Public financial investment
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open to everyone to purchase (i.e. : NYSE)
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Private financial investment
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only available to select investors for purchase
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Short-term financial investment
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lasts less than one year. ONLY DEBT
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Long-term financial investment
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lasts more than one year. Can be debt and equity
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Public Debt
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Bonds |
Public Equity
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Issue stock
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Private equity
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venture and non-venture investments
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Derivatives
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a financial asset whose value is based on or derived from the value of other assets (used to hedge or insure against a variety of risks)
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Options (Derivatives)
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a contract entitling the owner the right to buy or sell an asset at some predetermined price within a present time frame
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Call Option
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a contract entitling the owner the right to buy or "call in" and asset (stock) at some predetermined price within a preset time frame
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Put Option
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a contract entitling the owner the right to sell or "put out" and asset (stock) at some predetermined price within a preset time frame.
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Strike/Exercise Price
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the transaction price outlined in the option contract. the price the stock can be bought for in a call option or a put option.
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In-the-money
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-call option = option's strike < current market price
-put option= option's strike price > current market price |
Out-of-the-money
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-call option = option's strike price > current market price
-put option= option's strike price < current market price |
American Options
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the option can be exercised between a given range of dates
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European Options
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a specific date which the option can be exercised
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Convertible Security (Derivative)
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bonds that have a feature allowing them to be exchanged for or converted to common stock
-when conversion takes place debt is converted to equity
-can only be converted once and it adds value to the bond |
Future Contract
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an agreement for the buying or selling of an asset (physical or financial) at some preset date and price
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Future Contract
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often used to minimize the risk (hedge) of fluctuating currency prices and commodity prices
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Exchanged traded - Type of Future
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standardized and exchanged many times prior to their settlement date. the price is determined based on he equilibrium of the buy-sell demand price in the market at the time of sale
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Mark to Market - Future
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"trued-up" daily
the difference between the contract price and the market or spot price
if there is a loss, the money is paid to the appropriate party (buyer or seller) |
Currency - Future
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agree to buy or sell foreign currency at a present exchange rate
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Commodity - Future
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agree to buy or sell a commodity sometime in the future at a preset price
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Forward |
not standardized and not exchanged traded. not "trued-up" daily. the net gain or loss over the life of the contract is settled on a delivery date or settlement date
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The Agency Relationship
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the relationship between stockholders and management
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Managerial Compensation
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incentives can be used to align management and stockholder interest; the incentives need to be structured carefully to make sure that they achieve their goal
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Corporate Control
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Unhappy stockholders can elect a new board of directors, who in turn may hire new managers; a poorly managed and undervalued firm is a target for takeover
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Agency Costs
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the costs of resolving the conflicts of interest between managers and shareholders
include: the cost of an audit of the firm's financial statements, profit-sharing & the loss of profit due to a foregone investment opportunity |
Agency Costs
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Can be defined as the sum of
1) the monitoring costs of the shareholders
2) the costs of implementing incentives
3) opportunity costs |