Fin 331 Study Guide

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Finance Final Study Guide
FIN 331 – Moser – Study Guide for Exam 1 – Spring 2011

Important Concepts
* Forms of Business Organization
* Proprietorship- an unincorporated business owned by one individual * Partnership- legal arrangement between two or more people who decide to do business together * Advantages
* Ease of formation
* Subject to few regulations
* No corporate income taxes
* Disadvantages
* Limited life
* Unlimited liability
* Difficult to raise capital
* Corporation- legal entity created by a state, and it is separate and distinct from its owner and managers. * Advantages
* Unlimited life
* Easy transfer of ownership
* Limited liability
* Ease of raising capital
* Disadvantages
* Double taxation
* Cost of set-up and report filing
* Conflicts between Managers and Stockholders
* Managers are naturally inclined to act in their own best interests (which are not always the same as the interest of stockholders). * But the following factors affect managerial behavior: * Managerial compensation packages

* Direct intervention by shareholders
* The threat of firing
* The threat of takeover
* Shareholder Value
* The price at which the stock would sell if all investors had all knowable information about a stock. * The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. * Value of any asset is present value of cash flow stream to owners. * Most significant decisions are evaluated in terms of their financial consequences. * Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects. * Intrinsic value

* In equilibrium, a stock’s price should equal its “true” or intrinsic value. * Intrinsic value is a long-run concept.
* To the extent that investor perceptions are incorrect, a stock’s price in the short run may deviate from its intrinsic value. * Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run.

* Capital allocation process
* In a well-functioning economy, capital flows efficiently from those who supply capital to those who demand it. * Suppliers of capital – individuals and institutions with “excess funds.” These groups are saving money and looking for a rate of return on their investment. * Demanders or users of capital – individuals and institutions who need to raise funds to finance their investment opportunities. These groups are willing to pay a rate of return on the capital they borrow. * Direct transfers

* Investment banking house
* Financial intermediaries
* Types of financial markets
* Physical asset markets versus financial asset markets * Physical asset markets are for products such as wheat, autos, real estate, computers, and machinery. * Financial asset markets, on the other hand, deal with stocks, bonds, notes, and mortgages. * Spot markets versus future markets

* Spot markets are markets in which assets are bought or sold for “on-the-spot” delivery. * Future markets are markets in which participants agree today to buy or sell an asset at some future date * Money markets versus capital markets

* Money markets are the markets for short-term, highly liquid debt securities. The New York, London, and Tokyo money markets are among the world’s largest. * Capital Markets are the markets for intermediate- or long-term debt and corporate stocks. The NYSE * Primary markets versus secondary markets

* Primary markets are the markets in which corporations raise new...
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