lOMoAR cPSD| 6861666
D076 study guide Unit 2 to Unit 6 With complete
solutions | new update
D076 Study Guide
Thursday, November 21, 2024 2:05 PM
UNIT 2: Overview of Finance
Module 1: What is Finance?
1. Define finance and subspecialties in finance.
○ Finance is the study of managing and allocating funds at the personal or business level
Business Finance: deals with the sources of funding, the capital structure (mix of debt
and equity used to finance a firm) of corporations, the action that managers take to
increase the value for a firm for its owners, and the tools in analysis used to allocate
financial resources. AKA managerial finance, financial management, and
organizational finance
The goal of business finance is to maximize owner wealth for a privately
held company (firms that have not issues shares to the public where the
ownership rights are privately held) and to maximize shareholder wealth
for a publicly held company (firms that have issues shares to the public).
□ Financial Manager: Acts on behalf of the owners by managing the investing and
financing functions of the firm to achieve the goal of the firm. The goal is “to
maximize shareholder wealth” for publicly traded firms, or “to maximize owner
wealth” for privately held companies. There are 3 main tasks that a FM does in
order to achieve the goal of the firm:
Making Investment Decisions: Most important task
Making Financing Decisions: After investment decisions are made, the FM
needs to make these decisions. If the investments are large, the firm may
need to issue new stocks (Equity) or new bonds (Debt) to raise capital to
finance them
Managing Working Capital:
FM needs to manage cash to pay the firm’s suppliers and other day-to-day
operations by setting its credit standard for the customers, discussing
inventories with the supply chain manager (inventory control), etc.
Investments: involves deciding which assets to invest in to create wealth in the future.
Responsibility = asset manager. Challenges are you cannot know exactly how much an
asset is worth until it is purchased.
□ Asset Manager: Most common responsibility in the investments field. The
invest funds in an attempt to create more wealth and earn positive returns
□ Asset Pricing: Process of valuing assets. Asset Pricers attempt to use
quantitative methods to estimate the value of an asset prior to selling or buying
it
Current Market Value: what someone would pay right now for an asset
Financial Institutions: Includes firms or organizations that exist to accept a
organizations wide variety of deposits, to offer investment products to individuals and
businesses, to provide loans, or to broker financial transactions.
Utility: The total satisfaction received from consuming goods and services.
D076 Finance for Managers Page 1
, lOMoAR cPSD| 6861666
2. Distinguish between the goals and applications of personal and organizational finance.
○ Personal = maximize individual utility.
○ Business= maximize shareholder wealth.
In both personal finance and business finance, the main principle that underlies
decision-making is whether the benefits outweigh the costs.
3. Identify the role of finance in business environments.
○ The goal of a financial manager of a firm is to maximize owner wealth
○ The main question a firm asks when considering an investment is do the benefits outweigh
the costs
○ The task a finance manager performs when assessing the cost/benefit of a project is to make
investment decisions
4. Identify the role finance plays in personal decision making
○ You can use budgeting to understand cash flows
○ You can invest in a savings account as an alternative to keeping emergency cash
○ A financial process you may have engaged in would be financing a house like mortgage
Module 2: Financial Markets
1. Identify the types of financial markets.
○ Liquidity: investments can turn financial securities into cash without losing value
○ Treasuries: bonds by us government
○ Corp bonds: borrows money from public to cover investment in projects
○ Stock: share of company ownership
○ Money market: borrow/lend in short term (1 year)
○ Capital market: long term - 1 year+ = stock/bond markets
○ US SEC: protects investors
2. Define the types of financial institutions.
○ Primary market: securities (stocks/shares or bonds) are first sold
○ Syndicate: ex: banks or investors - middlemen who oversee the issuance of stocks and bonds
○ IPO: initial public offering: private comp first offers shares to outside investors to raise capital
and become public
○ Secondary Market
Stock Market: auction- physical location: money determined by investors
Dealer Market: securities bought/sold through network dealers for themselves
(NASDAQ)
3. Identify primary activities of financial institutions
○ NYSE (New York Stock Exchange): bidder specialist for fair and orderly holds stock to buy and
sell. Risks in holding inventory of a stock. Fluctuation of money (ask-bid spread)
○ Efficient Market: money reflects available information on a security
4. Explain the influence of financial markets and institutions on major economic indicators.
○ SEC: Independent federal government agency with the responsibility to:
Protect Investors\
Maintain Fair, Orderly and Efficient Markets
Facilitate Capital
○ Financial Institutions: Provide financial services including accepting deposits, offering loans,
and managing investments. Any type of firm that links lenders (Savers) to borrowers
(Consumers) is considered a financial institution.
D076 Finance for Managers Page 2
, lOMoAR cPSD| 6861666
Ways money circulates through financial institutions:
□ Individuals and Organizations lend and borrow money.
□ Individuals and Organizations purchase financial securities to provide capital to
companies and receive dividends.
3 major types of financial institutions
□ Depository institution: Accepts monetary deposits and provides loans, like
banks and Credit Unions. They generate profit by charging more interest on
personal loans than the interest they pay to their depositors.
Savings and Loans Associations: Known as a “thrift” institution that places a
large focus on providing loans for residential mortgages and real estate
□ Non-depository institutions: Instead of accepting deposits, these organizations
act as an intermediary between savers and lenders. (Ex. Mortgage Brokerage
Firm, Investment Firms, Mutual Funds, Hedge Funds)
Securities firms: Financial institution that facilitates the investment and
purchase of securities in financial markets. Common services include
underwriting, trading of securities on
secondary markets, and the general sale of securities
Investment firms: Company that invests the capital of investors in financial
securities. Examples include mutual funds and investment trusts.
The company may also be involved in issuing securities.
Contractual savings institutions: financial intermediary that raises capital for
long-term contractual agreements. Examples include an insurance
company or a private pension fund
○ Economic Indicators: Used to assess, measure, and evaluate the overall state of the
macroeconomy.
3 types of economic indicators
□ Leading Indicators: Indicators that usually change before the economy, as a
whole, changes. They have the potential to forecast where an economy is
headed. Gov’t and policymakers may use them to implement or alter policies
and programs to avoid economic downturn.
D076 Finance for Managers Page 3
D076 study guide Unit 2 to Unit 6 With complete
solutions | new update
D076 Study Guide
Thursday, November 21, 2024 2:05 PM
UNIT 2: Overview of Finance
Module 1: What is Finance?
1. Define finance and subspecialties in finance.
○ Finance is the study of managing and allocating funds at the personal or business level
Business Finance: deals with the sources of funding, the capital structure (mix of debt
and equity used to finance a firm) of corporations, the action that managers take to
increase the value for a firm for its owners, and the tools in analysis used to allocate
financial resources. AKA managerial finance, financial management, and
organizational finance
The goal of business finance is to maximize owner wealth for a privately
held company (firms that have not issues shares to the public where the
ownership rights are privately held) and to maximize shareholder wealth
for a publicly held company (firms that have issues shares to the public).
□ Financial Manager: Acts on behalf of the owners by managing the investing and
financing functions of the firm to achieve the goal of the firm. The goal is “to
maximize shareholder wealth” for publicly traded firms, or “to maximize owner
wealth” for privately held companies. There are 3 main tasks that a FM does in
order to achieve the goal of the firm:
Making Investment Decisions: Most important task
Making Financing Decisions: After investment decisions are made, the FM
needs to make these decisions. If the investments are large, the firm may
need to issue new stocks (Equity) or new bonds (Debt) to raise capital to
finance them
Managing Working Capital:
FM needs to manage cash to pay the firm’s suppliers and other day-to-day
operations by setting its credit standard for the customers, discussing
inventories with the supply chain manager (inventory control), etc.
Investments: involves deciding which assets to invest in to create wealth in the future.
Responsibility = asset manager. Challenges are you cannot know exactly how much an
asset is worth until it is purchased.
□ Asset Manager: Most common responsibility in the investments field. The
invest funds in an attempt to create more wealth and earn positive returns
□ Asset Pricing: Process of valuing assets. Asset Pricers attempt to use
quantitative methods to estimate the value of an asset prior to selling or buying
it
Current Market Value: what someone would pay right now for an asset
Financial Institutions: Includes firms or organizations that exist to accept a
organizations wide variety of deposits, to offer investment products to individuals and
businesses, to provide loans, or to broker financial transactions.
Utility: The total satisfaction received from consuming goods and services.
D076 Finance for Managers Page 1
, lOMoAR cPSD| 6861666
2. Distinguish between the goals and applications of personal and organizational finance.
○ Personal = maximize individual utility.
○ Business= maximize shareholder wealth.
In both personal finance and business finance, the main principle that underlies
decision-making is whether the benefits outweigh the costs.
3. Identify the role of finance in business environments.
○ The goal of a financial manager of a firm is to maximize owner wealth
○ The main question a firm asks when considering an investment is do the benefits outweigh
the costs
○ The task a finance manager performs when assessing the cost/benefit of a project is to make
investment decisions
4. Identify the role finance plays in personal decision making
○ You can use budgeting to understand cash flows
○ You can invest in a savings account as an alternative to keeping emergency cash
○ A financial process you may have engaged in would be financing a house like mortgage
Module 2: Financial Markets
1. Identify the types of financial markets.
○ Liquidity: investments can turn financial securities into cash without losing value
○ Treasuries: bonds by us government
○ Corp bonds: borrows money from public to cover investment in projects
○ Stock: share of company ownership
○ Money market: borrow/lend in short term (1 year)
○ Capital market: long term - 1 year+ = stock/bond markets
○ US SEC: protects investors
2. Define the types of financial institutions.
○ Primary market: securities (stocks/shares or bonds) are first sold
○ Syndicate: ex: banks or investors - middlemen who oversee the issuance of stocks and bonds
○ IPO: initial public offering: private comp first offers shares to outside investors to raise capital
and become public
○ Secondary Market
Stock Market: auction- physical location: money determined by investors
Dealer Market: securities bought/sold through network dealers for themselves
(NASDAQ)
3. Identify primary activities of financial institutions
○ NYSE (New York Stock Exchange): bidder specialist for fair and orderly holds stock to buy and
sell. Risks in holding inventory of a stock. Fluctuation of money (ask-bid spread)
○ Efficient Market: money reflects available information on a security
4. Explain the influence of financial markets and institutions on major economic indicators.
○ SEC: Independent federal government agency with the responsibility to:
Protect Investors\
Maintain Fair, Orderly and Efficient Markets
Facilitate Capital
○ Financial Institutions: Provide financial services including accepting deposits, offering loans,
and managing investments. Any type of firm that links lenders (Savers) to borrowers
(Consumers) is considered a financial institution.
D076 Finance for Managers Page 2
, lOMoAR cPSD| 6861666
Ways money circulates through financial institutions:
□ Individuals and Organizations lend and borrow money.
□ Individuals and Organizations purchase financial securities to provide capital to
companies and receive dividends.
3 major types of financial institutions
□ Depository institution: Accepts monetary deposits and provides loans, like
banks and Credit Unions. They generate profit by charging more interest on
personal loans than the interest they pay to their depositors.
Savings and Loans Associations: Known as a “thrift” institution that places a
large focus on providing loans for residential mortgages and real estate
□ Non-depository institutions: Instead of accepting deposits, these organizations
act as an intermediary between savers and lenders. (Ex. Mortgage Brokerage
Firm, Investment Firms, Mutual Funds, Hedge Funds)
Securities firms: Financial institution that facilitates the investment and
purchase of securities in financial markets. Common services include
underwriting, trading of securities on
secondary markets, and the general sale of securities
Investment firms: Company that invests the capital of investors in financial
securities. Examples include mutual funds and investment trusts.
The company may also be involved in issuing securities.
Contractual savings institutions: financial intermediary that raises capital for
long-term contractual agreements. Examples include an insurance
company or a private pension fund
○ Economic Indicators: Used to assess, measure, and evaluate the overall state of the
macroeconomy.
3 types of economic indicators
□ Leading Indicators: Indicators that usually change before the economy, as a
whole, changes. They have the potential to forecast where an economy is
headed. Gov’t and policymakers may use them to implement or alter policies
and programs to avoid economic downturn.
D076 Finance for Managers Page 3
