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Management and Organizational Studies 1023A/B Study Guide - External Auditor, Investment Banking, Internal Audit

Management and Organizational Studies
Course Code
MOS 1023A/B
Maria Ferraro

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Finance: The study of how individuals, institutions, governments and businesses acquire,
spend, and manage financial resources.
Three areas of finance:
1. Financial institutions
oIntermediaries that help the financial system operate efficiently and
transfer funds from savers and investors to individuals, businesses, and
governments that seek to spend/invest the funds.
2. Financial markets
oForums that facilitate the flow of funds among investors, businesses,
and governments.
3. Investments
oSale or marketing of securities, analysis of the securities, and
management of investment risk through portfolio diversification.
Six principles of finance:
1. Money has a time value
2. Higher returns are expected for taking on more risk
3. Diversification of investments can reduce risk
4. Financial markets are efficient in pricing securities
5. Manager and stockholder objectives may differ
6. Reputation matters
Principle-agent problem: Conflict between managers and owners (i.e. investors).

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The three issues of financial management are:
oProfit Versus Return On Capital
Why study finance?
oTo make informed economic decisions
oTo make informed personal and business investment decisions
oTo make informed career decisions based on a basic understanding of
business and finance
An effective financial system must have policy makers, a monetary system, financial
institutions and financial markets.
Money: Anything that is generally accepted as payment.
Three basic functions:
1. Medium of exchange
2. Store of value
3. Standard of value
Canadian Money Supply
Currency in circulation = currency outside the banking system.
M1: currency in circulation plus current accounts and personal chequable accounts.
M2: M1 plus notice deposits of firms and personal savings deposits at chartered
M1+: M1 plus personal chequable savings deposits at banks and near banks and non-
personal chequable notice deposits at banks and near banks.
M2+: M2 plus notice and term deposits at near-banks, and money market mutual
M3: M2 plus non-personal fixed term deposits and the Canadian dollar value of
chartered bank deposits denominated in foreign currencies but owned by Canadian
Financial Intermediaries:
oBanks and other deposit-taking institutions
oInsurance companies
oPension Funds
oMutual Funds
Types of bonds:
oDebentures-unsecured debt. Backed only by the general assets of the issuing

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oSecured debt (mortgage debt) – secured by specific assets
oSubordinated debt – in default, holders get payments only after other
debtholders get their full payment
oSenior debt – in default holders get payment before other debtholders get.
oZero Coupon- pay face value at maturity only, sold at discount
oJunk bonds – bonds with below investment grade rating
Corporate governance: Many definitions, but shareholders define it as what a company
should and shouldn’t do.
Shareholder Aspect
Principle-agent theory = shareholder model of corporate governance, says:
oShareholders are the principles, management is the agent.
oPrimary objective of company is to max. shareholder wealth, and so goal of
corporate governance is to ensure this and to align interests of management
and shareholders.
oTwo factors cause principle-agent problem:
1. Separation of ownership and control
2. Incomplete contracts or costly enforceable contracts between agents and
principles, aka agency costs.
Two types of managerial failures that prevent acting in best interest of shareholders:
oFailures of managerial competence from unintentional mistakes or negligence
in discharging fiduciary duties (duties involving trust).
oFailures of managerial integrity caused by willful or opportunistic behaviors
(i.e. fraud) that have detrimental effects.
PRIMARY PURPOSE OF CORPORATE GOV.: To create and enhance sustainable and
enduring shareholder value while protecting the interests of other shareholders.
Structure – Principles, Functions, and Mechanisms
1. Fairness
2. Transparency
3. Accountability
4. Responsibility
And others (the ones from the powerpoint):
1. Honesty
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