MOS 1023 Midterm: FINANCE EXAM [FULL EXAM NOTES]

43 Pages
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Department
Management and Organizational Studies
Course Code
Management and Organizational Studies 1023A/B
Professor
Maria Ferraro

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Description
Week1FinanceisthesciencestudyofthemanagementoffundshowmoneyisallocatedbetweenlendersandborrowersFinancialsecuritiesfinancialcontractthatiscreatedwheneverfundsaretransferredBalancesheetsnapshotofwhatisownedandowedRoleofManagementToactasamiddlemantoensureallobjectivesofallthedifferentshareholdersaremetaswellasserveasanarbitratorandmoderatorbetweenconflictinginterestgroupsCreditorsmanagersandemployeeshavecontractualclaimsworkandthenmustbepaidShareholdershaveresidualclaimsaftereveryonegetstheirmoneyandcontractualclaimsaremetthentheygetpaidFinancialmanagermanagesthefundsinvestsintherightplacesLongterminvestmentdecisionsandshorttermdaytodayoperationsCapitalexpendituredecisionsassetacquisitionsCorporatefinancingdecisionsliabilityhowwefinanceitTheobjectiveoffinancialmanagementistomaximizeshareholderwealthSixPrinciplesofFinance1TimeValueofMoneyAdollartodayisworthmorethangettingthesameamountinthefutureyoucouldputitinthebanktodayandearninterestthatwouldallowittogrowAninventorycanbelookedatasfutureorpresentvalueputsomemoneytodayandlookatitinthefuturethentakethembackintoourvaluetoseehowmuchitisworthnowCompoundingtakingvaluestodayandseeingwhattheywillbeworthinthefutureExMultiplytheamountofmoneybytheinterestrateDiscountingtakingfuturevaluesandbringingthemtotheirvaluetodayExIfabondwillpay100intwoyearswhatisthepresentvalueof100ifaninvestorcanearnareturnof12PFn1rnDiscountrateinterestrateusedtofindthepresentvalueNetpresentvaluemethodfindtheapproximatecashvaluestheprojectwillgenerateandbringitbacktodaytoseeifitisworthit1Calculatethepresentvalueofcashinflows2Calculatethepresentvalueofcashoutflows3PresentvalueofinflowspresentvalueofoutflowsPositivenumberprojectisacceptablewillprovideagreaterreturnthanrequiredrateZeroacceptablereturnequaltorequiredrateofreturnNegativenumbernopedoesnotgiveusrequiredrateofreturnCostofcapitalaveragerateofreturnthecompanymustpayitslongtermcreditorsandstockholdersfortheiruseoffundsminimumrateofreturn2RiskReturnTradeoffRiskaverserationalinvestorswouldtakeonriskonlyifthereturncompensatesthatadditionalrisk3DiversificationofInvestmentsArationalinvestorwilldiversifytheirportfoliowillinvestindifferentcountriesandindustriesSomeriskcanberemovedordiversifiedbyinvestinginseveraldifferentassetsorsecuritiesUnsystematicriskfirmspecificcandiversifythisriskawaySystematicriskrelatestotheentiremarketcannotdiversifythisriskaway4EfficientFinancialMarketsInvestorswillautomaticallyfindoutanactonnewinformationexnewproductreleasedMainfinancetheorythestockpricereflectsallcurrentinformationandprovidesliquidandfairpriceifthisholdstruethemarketisinformationefficient5ManagementvsOwnerObjectivesPrincipleagentproblemmanagersmaynotbeactinginthebestinterestoftheabsenteeownersAgencycostsanythingthattriestomitigatetheriskofthisagencyproblem6ReputationRecentfraudhascausesdistrustinfinanceandmakesethicalbehaviourevenmoreimportantRealassetstangiblethingsthatcomposepersonalandbusinessassetsFinancialassetswhatoneindividualhaslenttoothercreditloansmortgagesOnepersonspositivefinancialassetisanothersnegativefinancialassetGovernmentandbusinessentitiesobtainmostoftheirfinancingfromthedomestichouseholdsectorwiththeremainingsmallproportionoftheirfinancingcomingfromforeigninvestorsGenerallyyoungerlesswealthyindividualshaveanegativefinancialassetpositionOlderhigherincomeindividualssohaveanetpositivefinancialassetpositionTheFunctionsofMoneyMediumofexchangesomethingthatisgenerallyacceptableinexchangeforgoodsandservicesremovesthedoublecoincidenceofwantsbeseparatingthesellerfromthebuyerNoneedforbarterhowtransactionsareconductedStandardofvaluesomethingthatcirculatesthatprovidesastandardizedmeansofevaluatingtherelativepriceofgoodsandservicesHowthevalueofgoodsandservicesaredenominatedStoreofvaluetheabilityofmoneytocommandpurchasingpowerinthefuture
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