60 Cards in this Set
| Front | Back |
|---|---|
|
Finance
|
the management of money (raising, overseeing, investing)
|
|
three primary areas of finance
|
1) corporate finance
2)investments
3) institutions and markets
|
|
Basic Corporate Financial decisions
|
1) investment
2) financing
3) dividend
|
|
financial toolbox
|
-acctg stmt and ratios
-present value
-risk and return models
-spreadsheet modeling
|
|
importance of financial markets
|
Agricultural, Energy, Gold, Currencies Capital
|
|
Debt capital markets
|
raising money by issuing bonds
|
|
equity capital markets
|
raise capital by issuing stock. allicator of risk capital in economy
|
|
Role of capital markets
|
1)Markets allocate capital
2)Role of government (regulator, investor)
3)Stock price reflect stock values
4)Creating shareholder value
5)Current market issues (financial crisis etc
|
|
Four common elements of financial crises
|
1) excessive investment
2)easy financing
3) govt bailout
4) it will happen again
|
|
Warren Buffet Case Study
|
Brk.A stock = over 100,000 a share..company owns other companies like geico
Buffett likes companies w/ barriers to entry, evaluates companies by profit margin and return on equity
|
|
Principle 1 of finance
|
Higher Returns Require Taking More Risk
Key Number to know – annual stock market return = 10%
|
|
principle 2 of finance
|
efficient capital markets are tough to beat--current stock prices reflect all publicly known info
|
|
principle 3 of finance
|
rational investors are risk averse. higher std dev means more risk
|
|
Principle 4 of finance
|
supply and demand drive stock prices in the short run
fundamentals drive stock price in long run
|
|
principle 5 of finance
|
corporate finance and governance: corp managers should make decisions that maximize shareholder value
|
|
princple 6
|
transaction costs, taxes and inflation are enemies --can reduce real return on investments
|
|
principle 7
|
time and the value of money are closely related
|
|
principle 8
|
asset allocation is a very important decision. money put in stocks bonds or cash
|
|
principle 9
|
asset diversification reduces risk
|
|
principle 10
|
an asset pricing model should be used to value investments
CAPM- indicator to investments on how much they should expect in return on investments
|
|
traditional/rational finance
|
becker, cochran
models of rational individual behavior
free markets- L-T growth
Missed seeing financial crisis coming
rational expectations,
|
|
Behavioral finance
|
thaler, shiller
based on emotions and bias
people can be irratoinal
proof= financial crisis
|
|
who believes in traditional finance
|
investment bankers
|
|
Controller duties vs treasurer duties
|
controller- planning and control, financial stmts, acctg
treasurer- cash and investingm working cpital mgmt- finance
|
|
the new corporate finance, elements of new environment
|
advances in technology
growth in investment
deregulation and growth of global markets
greater econimic volatility and risk
insitutionalization of markets
|
|
academic advances in finance
|
more models applied
|
|
key strategic financial decisions for a company
|
1) working capital mgmt (short term financial.. customers suppliers etc)
2) capital budgeting (investing assets)
3) capital structure (managing debt and equity)
|
|
market cap
|
value on stock market
#sharesxshare price
|
|
managements tenets
|
efficiency
accountability
stake in company
greed is good
|
|
dual challenges of management
|
product/service markets--> creating high value products at competitve rices
capital markets--> privide good return on investments
|
|
challenges to shareholder value
|
-too much focus on market expectations
-short term horizon
-financial crises
-financial scandals
|
|
how do you create shareholder value
|
percent return on investments > cost of capital
|
|
corporate governance
|
system of rules practices and processes by which company directed and controlled
|
|
The agency problem
|
seperation of ownership(stockholders) and control(mgmt)
assets are owned by stockholders but controlled by managers
|
|
agency costs
|
1) small scale--mgmt perks
2)large scale--big things
|
|
control mechanisms
|
internal- board of directors
audited financial systems
stock value based compensation
external- hostile takeovers
proxy contest--gain control of another companies board
shareholder activism large investor buys stock
|
|
corporate governance in 80s
|
solved by hostile takeovers
|
|
managerial defense mechanisms
|
poison pill- making stock very expensive to make unappealing
golden parachutes- provide compensation to top level execs if control changes
white knight- target company finds friendly merger candidate
pac-man- comp a going for b.. b goes for a
green mail- target company purchases acqu…
|
|
corp gov in 90s
|
a lot of ceos fired, mgmt stock ownership
solution was shared governance,,,lining interest of investors and mgmt
|
|
global models of capitalism
|
United states- fluid capital~minority shareholders elect board
japan germany- large equity holders, very few takeovers
rest of world- majority equity owners
|
|
2000s
|
problems with scandals becauese tring to keep up with wallstreet expectations
surbanes oxley act--made mgmt accountable for acuracy of financial stmts
after crash housing bubble then big crisis
|
|
who is to blame for financial crisis
|
alll
|
|
biggest acctg firm
|
deloitte
|
|
gaap
|
so that things can be comparable
|
|
balance sheet
|
reports resources of company(assets), liabilities and equity
|
|
administrative control
|
assess financial health of business
|
|
resource allocation
|
money efficiently being used
|
|
management stewardship
|
mgmt doing well?
|
|
book vs market value on balance sheet
two sets of books one for taxes one for investors
|
taxes--excellerated depr
investors- straight line depr
|
|
gross profit
|
sales-cogs
|
|
eps
|
net income/#shares
diluted eps~number of shares including those given to execs
|
|
Stmt of cash flows
|
1) three source of cash (oper, inv, financing)
2) most companies source of cash=opp activities
3) primary use of cash for companies = investing
4) companies balance cash inflows and outflows with financing activities--buy stock
5) net change in cash= CFO+I+F
|
|
ISSUES IN ACCOUNTING
|
1) depreciation as source of cash
2) what is goodwill= value you pay for a company is more than book value of assets for company
3) deferred taxes-
|
|
Common size income statement accounts computed as % of
|
sales
detect trends, make comparisons
|
|
common size balance sheet
|
expressed as % of total assets...
|
|
measure efficiency of managment
|
activity
|
|
ratios most interest of supplier
|
liquidity
|
|
financial leverage ratios
|
measure risk on financing.. extent to which firm uses debt to finance stuff
|
|
profibility ratios
|
asses managers performance
|
|
valuation ratios
|
determine value investors place on cmpany
PE ratio= stock price/ EPS ____>driven by expected growth
|
FIN 301: MP INTEGRATION