| All successful companies identify, create, and deliver products or services that are highly valued by customers - so highly valued that customers choose to purchase from them rather than from their customers. | Main goal of successful companies |
| All successful companies sell their products/services that are high enough to cover costs and to compensate owners and creditors for the use of their money and their exposure to risk. | Main goal of successful companies |
| Key attributes of successful companies | Skilled people, strong external relationships, sufficient capital |
| an unincorporated business owned by a single person who is responsible for its liabilities and entitled to its profits | Proprietorship |
| It is easily and inexpensively formed. | Proprietorship |
| It is subject to few government regulations. | Proprietorship |
| Its income is not subject to corporate taxation. | Proprietorship |
| Difficult to obtain the capital needed for growth | Proprietorship |
| Unlimited personal liability | Proprietorship |
| Limited to the life of its founder | Proprietorship |
| Exists whenever two or more persons or entities associate to conduct a noncorporate business for profit | Partnership |
| All partners enjoy limited liability with regard to the business' liabilities and their potential losses are limited to their investment | Limited liability partnership |
| Legal entity created under state laws, and it is separate and distinct from its owners and managers | Corporation |
| Unlimited life | Corporation |
| Easy transferability of ownership interest | Corporation |
| Limited liability | Corporation |
| It may be subject to double taxation - the earnings of the corporation are taxed at a corporate level and then earnings paid out as dividends are taxed again as income to the stockholders. | Corporate earnings |
| It includes the following information like name of the proposed corporation, type of activities it will pursue, amount of capital stock, number of directors, and names and addresses of directors. | Charter |
| Set of rules drawn up by the founders of the corporation | Bylaws |
| Type of corporations that is formed by doctors, lawyers, and accountants | Professional corporation |
| Firms that differ not in organizational form but only in how their owners are taxed | S corporations |
| Selling stock to the public at large | Initial public offering |
| Managers are hired as agents to act on behalf of the owners | Agency problem |
| Set of rules that control the company's behavior towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community | Corporate governance |
| Stock price that we observe in the financial markets | Market price |
| If the market price reflects all relevant information, then the observed price | Intrinsic price |
| Cash flows that matter not because they are free, but because they are available (or free) for distribution to all of the company's investors, including creditors and stakeholders | Free cash flows |
| Three factors where FCF depend | Sales revenues, operating costs and taxes, required investments in operating capital |
| Increase sales and prices by truly understanding their customers and then designing goods and services that customers want | Brand managers and marketing managers |
| Improve productivity through training and employee retention | Human resource managers |
| Improve profit margins, reduce inventory, and improve throughout at facories by implementing supply chain management, JIT management, and lean manufacturing | Production and logistics managers |
| Rate of return required by investors | Weighted average cost of capital |
| Serves as a middleman and facilitates the issuance of securities | Underwriter |
| Bank, mutual fund | Financial intermediary |
| Variety of financial securities | Human creativity, ingenuity, governmental regulations |
| Pieces of paper with contractual provisions that entitle their owners to specific rights and claims on specific cash flows or values | Financial securities |
| Have specified payments and specified maturity | Debt instruments |
| Debt matures in more than one year | Capital market security |
| Debt matures in less than a year | Money market security |
| Claim upon a residual value | Equity instruments |
| Securities whose values depend on, or are derived from, the values of some other traded assets | Derivatives |
| Process of some securities are created from packages of other securities | Securitization |
| Fundamental factor affecting the cost of money (1) | Production opportunities |
| Fundamental factor affecting the cost of money (2) | Time preferences for consumption |
| Fundamental factor affecting the cost of money (3) | Risk |
| Fundamental factor affecting the cost of money (4) | Inflation |
| Vast majority of their deposits from individuals who lived in nearby neighborhoods | Savings and loan associations |
| Process whereby banks, the remaining S&Ls, and socialized mortgage originating firms would originate mortgages and then sell them to investment banks | Mortgage securitization |
| Most often uses open market operations to purchases treasury securities held by banks | Federal Reserve Policy |
| Risk that arises from investing or doing business in a particular country, and it depends on the country's economic, political and social environment | Country risk |
| The value of an investment depends on what happens to exchange rates | Exchange rate risk |
| A division or subsidiary of a larger company; help companies raise capital | Investment banks |
| M&A analysis and Investment management are provided by | Investment banks |
| Same with S&Ls but they operate primarily in the northeastern states | Mutual savings banks |
| Cooperative associations whose members have a common bond, such as being employees of the same firm or living in the same geographic area | Credit unions |
| Raise funds from depositors and by issuing stock and bonds to investors | Commercial banks |
| Corporations that accept money from savers and then use these funds to buy financial instruments; pooling of funds | Mutual funds |
| Invest in short-term, low-risk securities, such as treasury bills and commercial paper | Money market funds |
| Allows investors to sell their share at any time during normal trading hours | Exchange traded fund |
| Raise money from investors and engage in a variety of investment activities; limited to high-net-worth individuals | Hedge funds |
| Company's stock is not traded in the public markets | Private equity funds |
| Take premiums, invest these funds in stocks, bonds, real estate, and mortgages and then make payments to beneficiaries | Life insurance companies |
| Retirement plans funded by corporations or government agencies, invest primarily in bonds, stocks,mortgages, hedge funds, private equity, and real estate | Pension funds |
| Bring together people and organizations needing money with those having surplus funds | Financial markets |
| Those for such products as wheat, autos, real estate, computers, and machinery | Physical asset markets |
| Deal with stocks, bonds, notes, mortgages, derivatives, and other financial instruments | Financial asset markets |
| Markets where assets are being brought or sold for "on-the-spot" delivery or for delivery at some future date | Spot markets |
| Markets for short term highly liquid debt securities | Money markets |
| Markets for corporate stocks and debt maturing more than a year in the future | Capital markets |
| Deals with loans on residential, agricultural, commercial and industrial real estate | Mortgage markets |
| Loans for autos,appliances, education, vacations | Consumer credit markets |
| Depending on an organization's size, and scope of operations | World, national, regional, local markets |
| Markets in which corporations raise new capital | Primary markets |
| Markets in which existing, already outstanding securities are traded among investors | Secondary markets |
| Transactions are worked out directly between two parties | Private markets |
| Standardized contracts are traded on organized exchanges | Public markets |
| There are market makers who keep an inventory of the stock in much the same way that any merchant keeps an inventory. | Dealer market |
| third method of matching orders | electronic communications network |
| whenever stock is offered to the public for the first time, the company is said to be in | Initial Public Offering |
| if a company later decides to sell additional shares to raise new equity capital | seasoned equity offering |
| It was a privately held firm owned by its members. One of the two leading U.S stock markets today. | New York Stock Exchange |
| It is a self-regulatory body that licenses brokers and oversees trading practices. One of the two leading U.S stock markets today. | National Association of Securities Dealers Automated Quotation System |
| Some of which where themselves combined and subdivided into other securities, commonly called CDOs-squared. | collateralized debt obligations |
| It is the average return required by all of the firm's investors. | weighted average cost of capital |
| To maximize the fundamental, or intrinsic, value of the firm's stock | manager's primary goal |
| usually begins with the chairman's description of the firm's operating results during the past year and a discussion of new developments that will affect future operations | company's annual report |
| four basic financial statements | balance sheet, income statement, statement of stockholders' equity, statement of cash flows |
| represent snapshots of its financial position on the last day of each year | balance sheet |
| hybrid, cross between common stock and debt | preferred stock |
| earnings before interest, taxes, depreciation and amortization | EBITDA |
| generally differs from its accounting profit because some of the revenues and expenses listed on the income statement were not received or paid in cash during the year | net cash flow |
| other things held constant, a positive net income will lead to more cash in the bank | net income before preferred dividends |
| to calculate cash flow, it is necessary to adjust net income to reflect noncash revenues and expenses | noncash adjustments to net income |
| increases in current assets other than cash decrease cash, whereas decreases in these accounts increase cash | changes in working capital |
| if a company invests in fixed assets or short-term financial investments, this will reduce its cash position | investments |
| if a company issues stock or bonds during the year, the funds raised will increase its cash position | security transactions and dividend payments |
| includes net income, depreciation, changes in current assets and liabilities other than cash, short-term investments, and short-term debt | operating activities |
| includes investments in or sales of fixed assets and short-term financial investments | investing activities |
| includes raising cash by issuing short-term debt, long-term debt, or stock. also because dividend payments, stock repurchases, and principal payments on debt reduce a company's cash, such transactions are included here | financing activities |
| after-tax operating profit minus the amount of new investment in working capital and fixed assets necessary to sustain the businesss | free cash flows |
