MANAGERIAL FINANCE REVIEWER

(PRELIMS)
Finance art and science of managing
money
Financial Services - the area of finance
concerned with the design and delivery of
advice and financial products to individuals,
business, and government
Managerial Finance - concerned with the
duties of the financial manager in the
business firm
Financial Managers - manage the financial
affairs of any type of businesses; perform
such varied financial tasks as planning,
extending credit to customers, evaluating
proposed large expenditures, and raising
money to fund the firms operations
Sole Proprietorship - business owned by one
person and operated for his or her own
profit; has unlimited liability

Common Stock - purest and most

basic form of corporate ownership; units of
ownership, or equity, in a corporation
Dividends - periodic distributions of
earnings to the stockholders of a firm.
Board of Directors - group elected by
the firms stockholders and having ultimate
authority to guide corporate affairs, make
general policy, and approving major
expenditures
* Some corporations have members who
are entitled to vote and receive dividends.
Examples include mutual savings banks,
credit unions, mutual insurance companies,
and a whole host of charitable organizations
President or CEO - responsible for managing
the firms day-to-day operations and carrying
out the policies established by the board of
directors
Other Limited Liability Organizations:

Unlimited Liability - condition of a sole

proprietorship (or general partnership)
allowing the owners total wealth to be taken
to satisfy creditors.

Limited partnership (LP) - one or more

partners have limited liability as long as at
least one partner (the general partner) has
unlimited liability

Partnership - business owned by two or more

people to operate profit

S corporation (S corp) - tax-reporting entity

that allows certain corporations with 75 or
fewer stockholders to choose to be taxed as
partnerships

Articles of Partnership - written

contract used to formally establish a
business partnership.
Corporation artificial being created by law
(often called a legal entity); it has legal
power of an individual in it
* For many small corporations, as well as
small proprietorships and partnerships, there
is no access to financial markets. In addition,
whenever the owners take out a loan, they
usually must personally cosign the loan.
Stockholders - owners of a
corporation, whose ownership, or equity, is
evidenced by either common stock or
preferred stock and they enjoy limited
liability; residual claimants
Limited Liability limits SHs liability
for corporations debt to the amount they
initially invested

Limited liability Corporation (LLC) - gives its

owners limited liability and taxation as a
partnership
Limited Liability Partnership (LLP) - partners
have limited liability and liable for their own
acts of malpractice, not for those of other
partners.
Career Opportunities in MF
Financial Analyst - prepares the firms
financial plans and budgets. Other duties
include financial forecasting, performing
financial comparisons, and working closely
with accounting.
Capital Expenditures Manager - evaluates
and recommends proposed asset
investments. May be involved in the financial

aspects of implementing approved

investments.
Project Finance Manager - in large firms,
arranges financing for approved asset
investments. Coordinates consultants,
investment bankers, and legal counsel.
Cash Manager - maintains and controls the
firms daily cash balances. Frequently
manages the firms cash col- lection and
disbursement activities and short-term
investments; coordinates short-term
borrowing and banking relationships.
Credit Analyst/Manager - administers the
firms credit policy by evaluating credit
applications, extending credit, and
monitoring and collecting accounts
receivable.
Pension Fund Manager - in large companies,
oversees or manages the assets and
liabilities of the employees pension fund.
Foreign Exchange Manager - manages
specific foreign operations and the firms
exposure to fluctuations in exchange rates
Earnings Per Share (EPS) - amount earned
during the period on behalf of each
outstanding share of common stock,
calculated by dividing the periods total
earnings available for the firms common
stockholders by the number of shares of
common stock outstanding
Profit Maximization Wealth Maximization

Stakeholders - employees, customers,

suppliers, creditors, owners, and others who
have a direct economic link to the firm
Stakeholder Focus avoids actions
that would prove detrimental to stakeholders
Business Ethics standards of conduct or
moral judgment that apply to persons
engaged in commerce
Treasurer -firms chief financial manager,
who is responsible for the firms financial
activities, oversees its the pension plan, and
manages key risks; external control
Controller - firms chief accountant, who is
responsible for the firms accounting
activities, such as corporate accounting, tax
management, financial accounting, and cost
accounting; internal control
Foreign Exchange Manager - responsible for
monitoring and managing the firms
exposure to loss from currency fluctuations
reports to treasurer
Marginal Cost-Benefit Analysis financial
decisions should be made and actions taken
when added benefits exceed added costs
Accrual Basis acctg; recognizes revenue at
time of sale and recognizes expenses when
incurred
Cash Basis finance; recognizes revenues
and expenses with respect to actual cash
inflow or outflow

1) Timing the receipt of funds sooner rather

than later is preferred

Corporate Governance rules, processes,

and laws by which companies are operated,
regulated, and controlled

2) Cash Flows profit is just an estimate

influenced by many acctg choices and cash
flows are straightforward measure of inflow
or outflow of cash

Individual Investors own relatively small

quantities of shares and cant directly
influence corporate governance

3) Risk - earning low but reliable profit might

be more valuable than earing profits that
fluctuate great deal

Institutional Investors investment

professionals that are paid to manage and
hold large quantities of shares on behalf of
others

Risk - chance that actual outcomes may

differ from those expected
Risk Averse SH must be compensated for
bearing risk

Principal-agent Relationship agent acts on

behalf of the principal

Agency Problem - likelihood that managers

may place personal goals ahead of corporate
goals
Agency Costs - costs borne by stockholders
to minimize agency problems
Incentive Plans - management compensation
plans that tend to tie management
compensation to share price; most popular
incentive plan involves the grant of stock
options.
Stock Options - incentive allowing managers
to purchase stock at the market price set at
the time of the grant.
Performance Plans - plans that tie
management compensation to measures
such as EPS, growth in EPS, and other ratios
of return. Performance shares and/or cash
bonuses are used as compensation under
these plans.
Performance Shares - shares of stock given
to management for meeting stated
performance goals.
Cash Bonuses - cash paid to management for
achieving certain performance goals.
Financial Institution - an intermediary that
channels the savings of individuals,
businesses, and governments into loans or
investments; directly or indirectly pay savers
interest on deposited funds; others provide
services for a fee
*Individuals not only supply funds to financial
institutions but also demand funds from
them in the form of loans they are net
suppliers - save more money than they
borrow
*Business Firms also deposit some of their
funds in financial institutions, primarily in
checking accounts with various commercial
banks they are net demanders - borrow more
money than they save
* Governments maintain deposits of
temporarily idle funds, certain tax payments;
do not borrow funds directly from financial
institutions, although by selling their debt
securities to various institutions,

governments indirectly borrow from them;

net demanders
Commercial Banks provide savers with a
secure place to invest their funds and that
offer loans to borrowers
Investment Banks assist companies in
raising capital, and advice firms on major
transactions and engaged in trading and
market making activities
Shadow Banking System group of
institutions engaged in lending activities but
do not accept deposits
Financial Markets - forums in which suppliers
of funds and demanders of funds can
transact business directly
Money Market - transactions in shortterm debt instruments, or marketable
securities; financial relationship created
between suppliers and demanders of shortterm funds
Capital Market - long-term securities
bonds and stocks
Private Placement - sale of a new security
issue, typically bonds or preferred stock,
directly to an investor or group of investors
Public Offering - nonexclusive sale of either
bonds or stocks to the general public
Primary Market - financial market in which
securities are initially issued; the only market
in which the issuer is directly involved in the
transaction; receives the proceeds from the
sale of securities
Secondary Market - financial market in which
pre-owned securities (those that are not new
issues) are traded
Marketable Securities - short-term debt
instruments, such as treasury bills,
commercial paper, and negotiable
certificates of deposit issued by government,
business, and financial institutions,
respectively.
* In the money market, businesses and
governments demand short-term funds
(borrow) by issuing a money market
instrument. Parties who supply short-term

funds (invest) purchase the money market

instruments.
Capital Market - enables suppliers and
demanders of long-term funds to make
transactions; backbone is formed by the
various securities exchanges that provide a
forum for bond and stock transactions
Bonds - long-term debt instrument used by
business and government to raise large sums
of money, generally from a diverse group of
lenders; key capital market securities
Corporate Bonds - pay interest semiannually
at a stated coupon interest rate
Preferred Stock - special form of ownership
having a fixed periodic dividend that must be
paid prior to payment of any common stock
dividends
Broker Market SE on which two sides of a
transaction are brought together to trade
securities
Securities Exchange where firms can raise
funds through sale of new securities and
purchasers can resell them
Dealer Market buyer and seller are not
brought up together but have their orders
executed by securities dealers
Market Makers make markets by offering to
buy or sell certain securities at stated prices
Nasdaq Markets all-electronic trading
platform used to execute securities trades
Over-the-counter Market where smaller,
unlisted securities are traded
Bid Price highest price offered to purchase
a security
Ask Price the lowest price at which a
security is offered for sale

Foreign Bond issued by a foreign

corporation of govt and it is denominated in
the investors home currency and sold in his
home market
International Equity Market - market that
allows corporations to sell blocks of shares to
investors in a number of different countries
simultaneously
Efficient Market - allocates funds to their
most productive uses as a result of
competition among wealth-maximizing
investors that determines and publicizes
prices that are believed to be close to their
true value
Securitization pooling mortgages of other
types of loans and then selling claims or
securities against that pool
Mortgage-backed securities represent
claims on the cash flows generated by pool
of mortgages
Securities Exchange Commission
responsible for enforcing securities laws
Ordinary Income earned through the sale of
a firms goods or services
Marginal Tax Rate additional income taxed
Average Tax Rate firms taxes divided by
taxable income
Double Taxation after tax corporate
earnings are taxed and cash dividends
received is also taxed
Capital Gain - amount by which the sale price
of an asset exceeds the assets initial
purchase price