Ch.1
Goal of a firm: create value for the firms legal owners (shareholders): Maximize
shareholders wealth.
Profit= Sales-Expenses:
5 foundational principles of Finances:
1. Cash flow is what matters:
2. Money has a time value: A dollar today is worth more than in the future: you can invest
it today
3. Risk requires a reward
4. Market prices are generally right
5. Conflicts of interest cause agency problems: managers may not make decision in the
best interest of the shareholders
Sole Proprietorship: business owned by individual: unlimited liability: termination at
owners death or choice
Partnership: Two or more person’s; co-owners:
General Partnership: all partners fully responsible
Limited Partnership: One or more partners can have limited liability: one partner has
unlimited liability
Corporation: Acts like and individual: separate from owners (shareholders): Liability is
restricted: life of corporation does not depend on owners: taxed separately.
Companies abroad: Benefits: increase revenue: reduce expenses: lower govt. regulation:
increase exposure Risk: Country risk (changes in govt, economy): Currency risk: Cultural
risk
Capital budgeting: where to invest Capital structure: whether to borrow long-term bank
loans or debt
Working capital management: how to pay employees
Ch.2
Direct Transfer of Funds: savers invest in business, business issue securities: Firms seeking
funds directly approaches a wealthy investor.
Venture capital firm: an investment firm that provides money t business startups
Indirect Transfer using investment banks (firms) : link between firm and investor: no
transformation of assets
Indirect transfer using financial intermediary: collects funds in exchange for its
securities: intermediary sells its securities to savers: Saver to intermediary to Firm: Firm to
intermediary to saver
Public offering: sold to both individuals and institutional investors
Private Placement: Sold to limited number of investors
Primary Market: Stock sold directly by offering firm: only time issuing firm gets money
for stock
Secondary Market: previously issued securities are traded: issuing firm gets no money
Initial Public offering (IPO): the first time a company issues its stock to the public
Seasoned Equity offering: Sale of additional share by a company already public.
Money Market: Market for short term debt instruments (<1yr) treasury bills, CDs
Capital market: Market for long-term financial securities (>1yr) Treasury Bonds,
common stock
Commercial paper: unsecured promissory note with a fixed maturity of 1 to 364 days
Promissory Note: a negotiable instrument where the issuer promises to pay a set sum
Negotiable CDs: certificate deposits with a min face value of $100,000: guarantee ability
to sell after maturity Bankers acceptances: guaranteed by commercial bank: short term
