EO 1.
1.
2.
3.
EO 2.
1.
2.
3.
EO 3.
2004 exams
Copyright 2003
beating the competition, maximizing sales or market share, minimizing costs, maximizing profits, and/or
maintaining steady earnings growth.
Financial goals fall into two classes: Some increase profits, others decrease risks.
Profit maximization is an imprecise goal because it doesnt include
1.
a time limit--Increase profits over six months? One year? Five years? Twenty years?
2.
a form of measurement--Maximize accounting net income? Earnings per share? Cash flow?
THE GOAL OF FINANCIAL MANAGEMENT: Maximize the current value per share of the existing
stock. A business that doesnt issue stock maximizes the value of its owners equity.
EO 4.
THE AGENCY RELATIONSHIP is the relationship between stockholders and managers.
The agency problem is the possibility of conflicts of interest between stockholders and managers.
Agency cost is the cost of conflicts of interest between stockholders and managers, usually measured in
lost investment opportunities, corporate expenditures that benefit managers but not stockholders (buying an
unneeded corporate jet), and expenses incurred to monitor managers.
Managers act in the best interests of stockholders when
1.
managers goals are closely aligned to stockholders goals--Tie managers compensation to the
businesss financial performance or stock price.
Promote managers who meet stockholders goals.
2.
managers can be easily replaced--Stockholders can replace managers through a proxy fight or
through a takeover.
[A stakeholder is someone other than a stockholder or creditor who has a claim on a businesss cash flows.
Stakeholders include employees, customers, suppliers, and governments.]
EO 5.
HOW PRIMARY MARKETS OPERATE: In a primary market, a corporation sells securities
for the first time.
A public offering sells securities to the general public.
A private placement sells securities to a specific buyer (or to specific buyers).
Corporations must register their public offerings with the Securities and Exchange Commission (SEC).
HOW SECONDARY MARKETS OPERATE: In a secondary market, a securities owner sells his
securities to another buyer.
A dealer market (aka an over-the-counter market) has the securities owner sell his securities directly to the
buyer.
An auction market sells securities through brokers and agents, who match sellers with buyers.
The largest auction market in these US is the New York Stock Exchange (NYSE).
THE BALANCE SHEET lists the firms
assets (owned resources, amounts owned by the firm),
liabilities (owed resources, amounts owed by the firm), and
owners equity(ies) (owners claims, aka net assets and net worth), (residual amount owned by
the firms owners). [I favor owners equities rather than owners equity, since there are levels
of owners equities and since assets and liabilities are plural.]
at a certain point in time, like a freeze-frame snapshot.
Assets are either
1.
current (likely to be converted to cash or consumed within one year) or
2.
fixed (not likely to be converted to cash or consumed within with one year).
Fixed assets are either
EOs 6 + 8.
1.
2.
3.
2004 exams
Copyright 2003
1.
2.
2004 exams
Copyright 2003