[Recommended]The Financial System: Financial Market & Management

The Financial System: Financial Market & Management Ch. 1 1 Definition of the Money The Transaction Approach–Any definition of the money supply relating money to…

The Financial System: Financial Market & Management
Ch. 1
1
Definition of the Money
The Transaction Approach–Any definition of the money supply relating money to current spending.
M1 – It is the medium of exchange in the economy. Money is obtained for the purpose of spending
M1 includes – currency, demand deposits, other checkable deposits, travelers’ checks
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Definition of the Money (continued)
The Store of Value Approach–Any definition of the money supply associating money to its ability to store or hold purchasing power through time. Spending may occur now or later.
Money serves as a store of purchasing power.
M2 & M3 serve as means to “store” purchasing power(monetarists’ view).
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Definition of the Money (continued)
M2 includes: M1 + small time deposits + money market deposits accounts + money market mutual funds + overnight Eurodollars
M3 includes: M2 + large time deposits + large-denomination repurchase agreements
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Types of Financial Intermediaries (FI)
Deposit-Type Institutions
Commercial Banks
Savings and Loan Associations
Mutual Savings Banks
Credit Unions
Contractual Savings Institutions
Life Insurance Companies
Casualty Insurance Companies
Pension Funds
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Types of Financial Intermediaries (continued)
Other Types of FI
Finance Companies
Mutual Funds
Money Market Mutual Funds
Federal Agencies
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We will focus on ..
Know the basic types of financial management decisions and the role of the financial manager
Know the goal of financial management
Know the financial implications of the different forms of business organization
Understand the conflicts of interest that can arise between owners and managers
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Basic Areas of Finance
Corporate finance
Investments
Financial institutions
International finance
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Corporate Finance
Subject of this course
Financial decisions made by corporations
Find the money to run the business
Grow the business
Make acquisitions
Plan for its financial future
Manage cash
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Investments
Work with financial assets such as stocks and bonds
Value of financial assets, risk versus return and asset allocation
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Financial Institutions
Companies that specialize in financial matters
Banks – commercial and investment, credit unions, savings and loans
Insurance companies
Brokerage firms
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11
International Finance
It may allow you to work in other countries or at least travel on a regular basis
Need to be familiar with exchange rates and political risk
Need to understand the customs of other countries and speaking a foreign language fluently is also helpful
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Financial Manager
Financial managers try to answer some or all of these questions
The top financial manager within a firm is usually the Chief Financial Officer (CFO)
Treasurer – oversees cash management, credit management, capital expenditures and financial planning
Controller – oversees taxes, cost accounting, financial accounting and data processing
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Financial Management Decisions
Capital budgeting
What long-term investments or projects should the business take on?
Capital structure
How should we pay for our assets?
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm?
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So,
The management of the firm’s short-term assets and liabilities is called:
A) Working capital management.
B) Financial depreciation.
C) Agency cost analysis.
D) Capital budgeting.
E) Capital structure.
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Forms of Organization
Three major forms in the united states
Sole proprietorship
Partnership
General
Limited
Corporation
C-Corp
S-Corp
Limited liability company
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Sole Proprietorship
Advantages
Easiest to start
Least regulated
Single owner keeps all the profits
Taxed once as personal income
Disadvantages
Limited to life of owner
Equity capital limited to owner’s personal wealth
Unlimited liability
Difficult to sell ownership interest
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Partnership
Advantages
Two or more owners
More capital available
Relatively easy to start
Income taxed once as personal income
Disadvantages
Unlimited liability
General partnership
Limited partnership
Partnership dissolves when one partner dies or wishes to sell
Difficult to transfer ownership
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Corporation
Advantages
Limited liability
Unlimited life
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital
Disadvantages
Separation of ownership and management
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate)
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Goal of Financial Management
What should be the goal of a corporation? Choose one.
Maximize profit?
Minimize costs?
Maximize market share?
Maximize the current value of the company’s stock?
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The Agency Problem
Agency relationship
Principal hires an agent to represent their interest
Stockholders (principals) hire managers (agents) to run the company
Agency problem
Conflict of interest between principal and agent
Agency costs
Cost that arises from an agent (managers) acting on behalf of a principal
Due to agency problem
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Managing Managers
Managerial compensation
Incentives can be used to align management and stockholder interests
The incentives need to be structured carefully to make sure that they achieve their goal
Corporate control
The threat of a takeover may result in better management
Other stakeholders, e.g., employees, buyers, sellers…
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Financial Markets
Primary vs. secondary markets
Primary market: the original sale of securities by governments and corporations
Secondary market: those securities are bought and sold after the original sale.
Dealer vs. auction markets
NYSE : auction market, organized market (www.nyse.com)
NASDAQ : dealers’ market, over-the-counter market (www.Nasdaq.com)
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Daily Assignment
What are the four basic areas of finance?
What are the three types of financial management decisions and what questions are they designed to answer?
Answer slide #15?
What are the three major forms of business organization?
What is the goal of financial management? Why? (slide #20)
What are agency problems and why do they exist within a corporation?
Find 5 companies listed under NYSE.
Find 5 companies listed under Nasdaq
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