FIN 341 - GUYTON EXAM 1 (CH 1-6) STUDY GUIDE
intrinsic value - Answers -an estimate of a stock's "true" value based on accurate risk
and return data; can't be measured precisely; managers estimates are better than
outside investors. it is a long run concept. management should make goals to maximize
this not current market price.
market price - Answers -stocks' current price based on possibly incorrect info
equilibrium is when... - Answers -intrinsic value=market price; there is no pressure for a
change in the stock's price.
finance - Answers -anything that deals with analyzing numbers and getting feedback;
cash flow based; management of assets-decision making.
financial management - Answers -corporate finances, focuses on decisions relating to
how much and what types of assets to acquire, how to raise capital for assets, and how
to maximize value of firm.
capital markets - Answers -relates to markets where interest rates are determined;
financial institutions that supply capital to businesses (banks mutual funds, insurance
comps.); market for intermediate (1-10 yrs) and long-term (>10 yrs) debt and corporate
stocks (ex: NYSE)
investments - Answers -managing mutual funds or portfolios; personal financial
planning; includes security analysis (finding proper values of stocks and bonds),portfolio
theory (structures portfolios; want to be diversified),market analysis (too high/low?),
behavioral finance (unreasonable highs and lows)
main certifications needed - Answers -CFA and CFP
sole proprietorship - Answers -easily formed, few gov regulations, lower income tax
than corps, unlimited personal liability, life is limited to owner's life; BY NUMBER most
businesses are these.
partnership - Answers -easily formed between 2 or more people, lower income tax than
corps, unlimited personal liability, life is limited to owner's life
corporation - Answers -unlimited life, loss limited to individual investment, easy to
transfer ownership and to raise capital, double taxation, heavy regulation; BY DOLLAR
VALUE more than 80% of all business are these; separate and distinct from owners and
managers.
,s-corporation - Answers -what gov allows company to become if they want limited tax,
taxed as if they were sole proprietorship/partnership, no more than 100 stockholders
(they become C corporations when they want to sell stock to the public)
primary goals of finance - Answers -maximize value of firm, maximize stock price (Pø),
and maximize shareholder wealth, NOT PROFIT
stock price is affected by... - Answers -external factors, mix of debt an equity, % of
earnings paid in dividend, products/services being produced, and the firms' social
responsibility
2 goals of Fed... - Answers -keep unemployment at 5% and inflation at 2%
fed moves in - Answers -short term rates
as rates go up, banks... - Answers -increase profit margin value
historical trends of interest rate levels: - Answers -1. short-term interest rates are prone
to rise during booms
2.during recessions, short term interest rates normally fall and there is LESS demand
for credit, rate of inflation decreases, fed offers lower rates during recessions *AIG
ensures mortgages be paid*
3. short-term interest rates have higher correlation with inflation than long-term interest
rates-average of short-term (2008 BOA almost closes its doors)
4. inflation has been about 2% (healthy rate) in recent years; it was negative (not good)
in 2009 *never want to be in bond if rates are going up*
5. higher (adjust) rates of return are expected on riskier investments
-rates going up:loading gun
-bringing it down: firing the gun
you can be sure of 2 things: - Answers -1. interest rates will vary
2. increase if inflation is expected to be higher, decrease if inflation is expected lower
1980 savings and loans crisis - Answers -known to provide mortgages but most of them
went out of business
following a bell curve: - Answers -bottom left: low rates
mid curve rising: rise
peak:recession
mid curve falling: recover
bottom right: low rates
stockholders vs managers (agency relationship) - Answers -stockholders=principal,
managers=agents; motivate managers to act in shareholders' best interests by
managerial compensation, direct intervention, threat of firing, or threat of takeovers
, (happens when stock price is low and corporate raider buys enough stock to hold
majority); ex: Carl Icahn is active stockholder who forced Apple to give dividends
stockholders/managers vs creditors (agency relationship) - Answers -
stockholders/managers=agents, creditors=principal; managers have to protect existing
creditors from detrimental changes in the riskiness of a firms' existing assets,
expectations concerning the riskiness of future asset additions, the amt of debt used,
and expectations concerning future capital structure decisions
money markets - Answers -short-term highly liquid debt securities (NY, London, Tokyo,
highest markets) ex: 3-mo CD, commercial paper
primary market - Answers -originally buying the stock, "going public"; IPO; raising new
capital. investment banks sell on this market.
secondary market - Answers -selling already existed, outstanding primary stock and it
is bought by someone else (NYSE)
direct capital transfers - Answers -securities transferred from business to savers and
money transferred from savers to business; goes through NO financial institution;
mainly small firms use this, little capital is raised here
indirect transfers through investment bankers - Answers -trying to go public; business
transfers securities to investment banking houses (GS, ML), investment firm transfers
securities to savers through NETWORK, savers transfer money to investment firms,
investment firms transfer money back to business; known as primary market transaction
indirect transfers through a financial intermediary - Answers -business transfers
business's securities to financial intermediary (Fidelity, ETFs, mutual funds), financial
intermediary transfers intermediary's securities to savers, savers transfer money to
financial intermediary, and financial intermediary transfers money back to business;
intermediary creates their own products
financial intermediaries - Answers -create new products, help investors diversify while
gaining benefits of economy of scale, innovative combo of products; ex: investment
banks, commercial banks, pension funds, etc.
Glass Steagall Act of 1933 - Answers -commercial banks had to be different than
investment banks; repealed in 1999 by Clinton bc they couldn't compete with
international banks ('08-'09 crisis)
mutual funds - Answers -sell you units of mixtures of stocks; have to be traded at end
of day to get in/out (3pm in TX)
stock funds (mutual funds) - Answers -savers who are willing to accept significant
risking hopes of higher returns
intrinsic value - Answers -an estimate of a stock's "true" value based on accurate risk
and return data; can't be measured precisely; managers estimates are better than
outside investors. it is a long run concept. management should make goals to maximize
this not current market price.
market price - Answers -stocks' current price based on possibly incorrect info
equilibrium is when... - Answers -intrinsic value=market price; there is no pressure for a
change in the stock's price.
finance - Answers -anything that deals with analyzing numbers and getting feedback;
cash flow based; management of assets-decision making.
financial management - Answers -corporate finances, focuses on decisions relating to
how much and what types of assets to acquire, how to raise capital for assets, and how
to maximize value of firm.
capital markets - Answers -relates to markets where interest rates are determined;
financial institutions that supply capital to businesses (banks mutual funds, insurance
comps.); market for intermediate (1-10 yrs) and long-term (>10 yrs) debt and corporate
stocks (ex: NYSE)
investments - Answers -managing mutual funds or portfolios; personal financial
planning; includes security analysis (finding proper values of stocks and bonds),portfolio
theory (structures portfolios; want to be diversified),market analysis (too high/low?),
behavioral finance (unreasonable highs and lows)
main certifications needed - Answers -CFA and CFP
sole proprietorship - Answers -easily formed, few gov regulations, lower income tax
than corps, unlimited personal liability, life is limited to owner's life; BY NUMBER most
businesses are these.
partnership - Answers -easily formed between 2 or more people, lower income tax than
corps, unlimited personal liability, life is limited to owner's life
corporation - Answers -unlimited life, loss limited to individual investment, easy to
transfer ownership and to raise capital, double taxation, heavy regulation; BY DOLLAR
VALUE more than 80% of all business are these; separate and distinct from owners and
managers.
,s-corporation - Answers -what gov allows company to become if they want limited tax,
taxed as if they were sole proprietorship/partnership, no more than 100 stockholders
(they become C corporations when they want to sell stock to the public)
primary goals of finance - Answers -maximize value of firm, maximize stock price (Pø),
and maximize shareholder wealth, NOT PROFIT
stock price is affected by... - Answers -external factors, mix of debt an equity, % of
earnings paid in dividend, products/services being produced, and the firms' social
responsibility
2 goals of Fed... - Answers -keep unemployment at 5% and inflation at 2%
fed moves in - Answers -short term rates
as rates go up, banks... - Answers -increase profit margin value
historical trends of interest rate levels: - Answers -1. short-term interest rates are prone
to rise during booms
2.during recessions, short term interest rates normally fall and there is LESS demand
for credit, rate of inflation decreases, fed offers lower rates during recessions *AIG
ensures mortgages be paid*
3. short-term interest rates have higher correlation with inflation than long-term interest
rates-average of short-term (2008 BOA almost closes its doors)
4. inflation has been about 2% (healthy rate) in recent years; it was negative (not good)
in 2009 *never want to be in bond if rates are going up*
5. higher (adjust) rates of return are expected on riskier investments
-rates going up:loading gun
-bringing it down: firing the gun
you can be sure of 2 things: - Answers -1. interest rates will vary
2. increase if inflation is expected to be higher, decrease if inflation is expected lower
1980 savings and loans crisis - Answers -known to provide mortgages but most of them
went out of business
following a bell curve: - Answers -bottom left: low rates
mid curve rising: rise
peak:recession
mid curve falling: recover
bottom right: low rates
stockholders vs managers (agency relationship) - Answers -stockholders=principal,
managers=agents; motivate managers to act in shareholders' best interests by
managerial compensation, direct intervention, threat of firing, or threat of takeovers
, (happens when stock price is low and corporate raider buys enough stock to hold
majority); ex: Carl Icahn is active stockholder who forced Apple to give dividends
stockholders/managers vs creditors (agency relationship) - Answers -
stockholders/managers=agents, creditors=principal; managers have to protect existing
creditors from detrimental changes in the riskiness of a firms' existing assets,
expectations concerning the riskiness of future asset additions, the amt of debt used,
and expectations concerning future capital structure decisions
money markets - Answers -short-term highly liquid debt securities (NY, London, Tokyo,
highest markets) ex: 3-mo CD, commercial paper
primary market - Answers -originally buying the stock, "going public"; IPO; raising new
capital. investment banks sell on this market.
secondary market - Answers -selling already existed, outstanding primary stock and it
is bought by someone else (NYSE)
direct capital transfers - Answers -securities transferred from business to savers and
money transferred from savers to business; goes through NO financial institution;
mainly small firms use this, little capital is raised here
indirect transfers through investment bankers - Answers -trying to go public; business
transfers securities to investment banking houses (GS, ML), investment firm transfers
securities to savers through NETWORK, savers transfer money to investment firms,
investment firms transfer money back to business; known as primary market transaction
indirect transfers through a financial intermediary - Answers -business transfers
business's securities to financial intermediary (Fidelity, ETFs, mutual funds), financial
intermediary transfers intermediary's securities to savers, savers transfer money to
financial intermediary, and financial intermediary transfers money back to business;
intermediary creates their own products
financial intermediaries - Answers -create new products, help investors diversify while
gaining benefits of economy of scale, innovative combo of products; ex: investment
banks, commercial banks, pension funds, etc.
Glass Steagall Act of 1933 - Answers -commercial banks had to be different than
investment banks; repealed in 1999 by Clinton bc they couldn't compete with
international banks ('08-'09 crisis)
mutual funds - Answers -sell you units of mixtures of stocks; have to be traded at end
of day to get in/out (3pm in TX)
stock funds (mutual funds) - Answers -savers who are willing to accept significant
risking hopes of higher returns
