FIN 300 Final Exam Study Guide
Lecture 1: Course Introduction
Finance – The science of managing money matter (Webster)
Three areas of Finance
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◊ Managerial Finance: concerned with the financial management of a firm
Buying/selling assets
Financing choices
Control cost
◊ Investing: concerned with purchasing & holding assets and securities
Stocks
Bonds
◊ Financial Markets
Monet market – places where short-term securities are traded
Capital market – long-term money
Financial intermediaries – banks and our credit unions
Major Principles of Finance
◊ Risk – return tradeoff
The higher the risk, the higher the return you require
◊ Time Value of Money
Present value
◊ Cash is King (not profits)
The company has to have cash, or at least, access to cash
Not always concerned with profits, concerned with having cash or good cash flow
◊ Incremental cash flow
The change or improvement in cash flows
◊ Competitive Markets
The way we do business is efficient because of competition
◊ Efficient Capital Markets
Information spreads quickly and its reflected in the stock price
◊ Agency issue
Who do managers really work for?
◊ Tax impact
Investment decisions should be viewed after tax
◊ Diversification
Safety with diversification
◊ Ethics
Be ethical in our decisions and our actions
Business Organization Set-up
◊ Sole Proprietorship – one person
Taxation: personal taxes – paid once
Liability: on the sole proprietor
Raising capital: more difficult time
Selling: accept an offer from someone else
Continuity: to change it to some type of a limited liability or corporation, or even a sub chapter
◊ General Partnership – two or more general partners
Taxation: don't pay taxes themselves, tax consequences are given to their partners
Liability: responsible for the actions of others
Raising capital: easier to raise money than just having one person
Selling: more of a challenge
◊ Limited Partnership
Taxation: don't pay taxes themselves, tax consequences are given to their partners
Liability: you can only lose what you put in
Selling: more of a challenge
◊ LLP – Limited Liability Partnership (hybrid) – taking the benefit of that limited liability of a corporation with
some of the benefits up the partnerships
Taxation: don't pay taxes themselves, tax consequences are given to their partners
◊ Corporation – a legal entity
Taxation: receive the dividends and declare them as income and pay taxes
Continuity: it lives forever
◊ Subchapter S Corporation – Family Companies
getting that liability but also then some of the benefits of some of the tax consequences
Lecture 2: Interest Rates and Taxes
Financial Markets
◊ Purpose: bring the sources of capital and the user of capital together
◊ Corporate financing trends:
Bonds – 75.5% (debt)
Preferred stock – 4.1%
Common stock – 20.4% (equity)
◊ Money Market – Short-term securities
T-bills
CDs
◊ Capital Market – Long-term securities
Stocks
Bonds
◊ Primary Market
New issues
Investment banker
Purchase new share “underwriting”
Distribution (selling) new shares
Advisement capacity
◊ Secondary Market
Reselling of existing securities
◊ A firm has two types of selling expenses (flotation costs) to pay:
Underwriter’s spread
at a price higher than what they paid
gross price minus net proceeds
Issuance costs
Common stock (most expensive)
tends to trade more often
Preferred stock
Bonds (least expensive)
not changing hands that often
◊ Regulation:
Securities Act of 1933: firms have to provide full disclosure on new issues
Securities Exchange of Act of 1934: put the SEC in charge of securities regulation
Securities Acts Amendments of 1975: creation of a national market system, no fixed commissions
Shelf registration: register stock issues in bulk – while selling the stock over time
◊ T-Bills or T-Bonds are considered to be risk free
They are guaranteed by the US Treasury, there are no safer investments in world
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Rrf : risk free rate = T-Bill or T-Bond rate
Rrf = r + IRP [Show Less]