Finance 303 part 1

  1. Financing Decision:
    How to raise money, includes capital structure policy & dividend policy
  2. Capital Structure Policy:
    • Determines the optimal mix of financial
    • resources
  3. Dividend Policy:
    Determines the optimal dividend payout ratio
  4. Investment Decision:
    • How to use money, includes capital budgeting
    • & working capital management
  5. Capital Budgeting:
    • Decision making on the acquisition of fixed
    • (long-term) assets
  6. Working Capital Management:
    • Management of current assets and current
    • liabilities
  7. Goal of Financial Management:
    Maximize stockholders wealth
  8. Agency Problem:
    Conflict of interest between principal and agent
  9. Agency Costs to Solve Agency Problem:
    Structuring Cost, Monitoring Cost, Bonding Cost
  10. Financial Market:
    • Direct market for two parties to exchange
    • securities for money
  11. Capital Market:
    • For the transaction of long-term securities
    • (Bonds, Stocks)
  12. Money Market:
    • For the transaction of short-term securities
    • (Commercial Paper, T-bill, negotiable CD)
  13. Federal Fund:
    Transfer of money by banks through the Federal Reserve
  14. T-bill:
    Short-term unsecured note issued by the treasury department
  15. Commercial Paper:
    • Short-term unsecured note issued by a major
    • company
  16. Stock Dividend:
    • Company pays dividend with stock rather than
    • cash, saves cash for the company
  17. Stock Split:
    • Increases the number of shares by offering a two for one split, done when prices are believed to be too high, lowers the market
    • price to enhance trading activity
  18. Stock Repurchase:
    • When a company buys back its own stock (Treasury Stock), done to take back majority of control of the company or because stock
    • price is too low
  19. Primary Market:
    For new issues of securities
  20. Private Placement:
    • Sell to certain private groups, such as
    • management, employees, and existing stockholders
  21. Public Offering:
    sell to public investors
  22. Secondary Market:
    • For the transfer of existing issues
    • Organized Stock Exchange: NYSE(physical)
    • Over The Counter: NASDAQ (online)
  23. Risk Premium:
    The difference between risky securities and 3 month T-bill interest rates
  24. Maturity Risk Premium: interest – T.bill interest
  25. Default Risk Premium:
    Corporate Bond interest – Interest
  26. Total Risk Premium:
    Maturity Risk Premium + Default Risk Premium
  27. Nominal Interest Rate:
    Real Interest Rate + Inflation Expectation
  28. Market Segmentation Theory:
    • No relation between short-term and long-term
    • interest rates
  29. Liquidity Preference Theory:
    • Long-term interest rate must be higher than
    • short-term interest rate to cover the liquidity preference. Yield curve is upward sloping
  30. When ppl expect interest rate will go up (expectation theory):
    Long-term interest rate is higher than short-term interest rate. Upward-sloping yield curve
  31. When ppl expect interest rate will go down (expectation theory):
    • Short-term interest rate is higher than
    • long-term interest rate. Downward-sloping yield curve
  32. When ppl expect interest rate will stay the same (expectation theory):
    Long-term interest rate is the same as short-term interest rate. Flat yield curve.
  33. Operating Cycle:
    Avg. Age. Inv. + Avg. Collection Period
  34. Cash Collection Cycle:
    Operating Cycle - Avg. Pay Period
  35. Price Purchased Today
    Face Value - Interest Earned
  36. Interest Earned
    Image Upload 1
  37. Annual Effective Rate
    Image Upload 2
Card Set
Finance 303 part 1