Corporate Finance
focuses on financial decision making by a firms management
Investments
various types of financial instruments (stocks, bonds, etc)
00:05
01:11
Banking or Financial Institutions
make money by paying depositors a smaller interest rate than the interest rate ch...
WGU C214
Corporate Finance - Answer focuses on financial decision making by a firms
management
Investments - Answer various types of financial instruments (stocks, bonds, etc)
Banking or Financial Institutions - Answer make money by paying depositors a smaller
interest rate than the interest rate charged to borrowers
Treasury Securities - Answer generally bonds that are issued by the US government
Corporate Bonds - Answer firms borrowing from the public
Stocks - Answer a share of ownership in a company
Primary financial markets - Answer markets where securities are first issued
Syndicate - Answer a group that is temporarily formed to handle a bond or stock issue:
generally large investment bank or institutional investors
Underwriter - Answer responsible for determining the value of the security; may
purchase all the securities & then resale to investors
Competitive sale - Answer underwriters submit bids offering highest price/lowest interest
rate; underwriter resales a slightly higher price
Negotiated sale - Answer underwriters submit bids, go thru interview to be selected
Secondary financial markets - Answer where securities are traded after the initial
offering (stock market)
Auction market - Answer has a physical location & prices are determined by the highest
price an investor is willing to pay (New York Stock Exchange)
Dealer market - Answer no physical location- securities are bought & sold thru a
network of dealers that trade for themselves; multi dealers per stock (NASDAQ)
Role of financial markets - Answer they reduce the cost of borrowing from the public or
selling ownership to the public
Role of Specialist (NYSE) or Dealers - Answer provide liquidity for a fair & orderly
market; may increase the spread to do so (charge a lower price to seller and a higher
price to buyer)
,Financial market liquidity - Answer the ease of trading in the market (high frquency
traders)
Market orders - Answer time sensitive; sales at current bid price/buys at current asking
price when order is placed-immediately
Limited orders - Answer price sensitive; sell occurs when price of stock matches order
price
Role of price - Answer convet information to consumers; affect incentives &affect the
distribution of income
Dollar Returns - Answer Pt - Pt-1 + CFt (Pt= sold price, Pt-1=bought price, CFt=cash
flow-coupons for bonds/dividians for stocks)
Percentage Returns - Answer Pt - Pt-1/Pt-1 + CFt/Pt-1 x 100 (1.2)
(figure for dollar return and divide into bought price)
Goal of company/firm - Answer to maximize shareholder value or maximize profit
Agency costs - Answer costs that are incurred when management doesn't act in the
best interests of shareholders
Profit maximizarion - Answer the potential effect of focusing soley on profits
Accounting - Answer is backward-looking and risk free
Finance - Answer is forward-looking and involes massive uncertainty
Income Statement - Answer show results of operation over time; revenues - expenses =
net income
Balance Sheet - Answer a "snap shot" of a firm's assests & financing at a paticular point
in time; Assets= Liabilities + Owner's Equity
Statement of Cash Flows - Answer tracks all cash in and out of the firm
Cash Accounting - Answer cash in =revenue; cash out=expense
Accrual Accounting - Answer revenues are recognized when the earnings process is
complete; expenses are "matched" to recongized revenues
Cash-based income - Answer an informal metric based on cash in & cash out of the firm
Income for tax purposes - Answer based on the government's definition of income, this
is the amount of income the government will tax
, Accounting income - Answer the income calculated using accrual accounting (aka,
GAAP); best & most complicated metric for understanding the operations of the firm
On the Income statement - Answer Revenues- Cost of goods sold= Gross profit
- Operating expenses= earning before interest & taxes
- interest expenses, - taxes= Net income
Revenue - Answer recognized when "earned"
Cost of Goods Sold - Answer direct costs of materials & labor
Gross profit - Answer revenue - cost of goods sold
Operating Expenses - Answer expenses not directly associated with production (office
expenses, administrative expenses, depreciation, research & development)
EBIT - Answer Earnings before interest & tax; Gross profit - operating expenses (also
known as operating income)
Net Income on balance sheet - Answer EBIT - interest - taxes
Current Assets - Answer cash marketable securities, A/R, inventory
Statement of Cash Flows - Answer cash flow reveals the true health of a company;
explains cash in & cash out from operations, investing & financing
CFO + CFI + CFF = change in cash - beginning cash = end cash
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