financial services -- the area of finance concerned with the design and delivery of advice and financial products to individuals, business, and government
managerial finance -- concerns the duties of the financial manager in the business firm
financial manager -- actively manages the financial affairs of any type of business, whether financial or nonfinancial, private or public, large or small, profit seeking or not-for-profit
Sole proprietorship -- a business and by one person and operated for his or her own profit
unlimited liability -- the condition of a sole proprietorship (or general partnership) allowing the owner's total wealth to be taken to satisfy creditors
partnership -- a business and by two or more people and operated for profit
articles of partnership -- the written contract used to formally establish a business partnership
Corp. -- an artificial being created by law (often called a legal entity)
Strengths and weaknesses of the common legal forms of business organization
Sole proprietorship
Strengths
- The owner receives all profits (and sustains all losses)
low organizational costs - income included and taxed on proprietors personal tax return
- Independence
- secrecy
- ease of dissolution
- Owner has unlimited liability -- total wealth can be taken to satisfy debts
- limited fundraising power tends to inhibit growth
- proprietor must be Jack of all trades
- difficult to give employees long-run career opportunities
- lacks continuity when proprietor dies
Partnership
Strengths
- Can raise more funds than the sole proprietorship
borrowing power enhanced by more owners - more available brainpower and managerial skill
- income included and taxed on partners personal tax return
- Owners have limited liability, which guarantees that they cannot lose more than they invest
- Owners have unlimited liability and may have to cover debts of other partners
- partnership is dissolved when a partner dies
- difficult to liquidate or transfer partnership
Strengths
- can achieve large size via a sale of ownership (stocks)
ownership is readily transferable - Long life of firm
- can hire professional managers
- has better access to financing
- can offer a tract of retirement plans
- Taxes generally higher, because corporate income is taxed, and dividends paid to owners are also taxed at a maximum 15% rate
- more expensive to organize than other business forms
- subject to greater government regulation
- lacks secrecy, because stockholders must receive financial reports
common stock -- the purest and most basic form of corporate ownership
dividends -- periodic distributions of earnings to the stockholders of a firm
Board of Directors -- group elected by the firm's stockholders and typically responsible for developing strategic goals and plants, setting general policy, guiding corporate affairs, approving major expenditures, and hiring/firing, compensating, and monitoring key officers and executives
president or chief executive officer (CEO) -- corporate official responsible for managing the firm's day-to-day operations and tearing out policies established by the board of directors
Limited partnership (LP) -- a partnership in which one or more partners have limited liability as long as at least one partner (the General partner) has unlimited liability. The limited partners cannot take an active role in the firm's management; they are passive investors
S Corporation (S. Corp.) -- a tax reporting entity that (under subchapter S. of the Internal Revenue Code) allow certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. It's stockholders receive the organizational benefits of a corporation and the tax advantages of a partnership. But S corps lose certain tax advantages related to pension plans.
Limited liability corporation (LLC) -- permitted in most states, the LLC gives its owners, like those of S corps, limited liability and taxation as a partnership. But unlike an S. Corp., the LLC can end more than 80% of another corporation, and corporations, partnerships, or non-US residents can own LLC shares. LLC’s work well for corporate joint ventures or projects developed through a subsidiary.
Limited liability partnership (LLP) -- a partnership permitted in many states; governing statutes vary by state. All LLP partners have limited liability. They are liable for their own ask of malpractice, but not for those of other partners. The LLP is taxed as a partnership. LLP's are frequently used by legal and accounting professionals.
Career opportunities in managerial finance (examples)
financial analyst -- primarily prepares the firm's financial plans and budgets. Other duties include financial forecasting, performing financial comparisons, and working closely with accounting
capital expenditures manager -- a value weights and recommends proposed asset investments. Maybe involved in the financial aspects of implementing approved investments
Project finance manager -- in large firms, arranges financing for proved asset investments. Coordinates consultants, investment bankers, and legal counsel
cash managers -- maintains and controls the firm's daily cash balances. Frequently manages the firm's cash collection and disbursement activities and short-term investments; coordinates short-term borrowing and banking relationships
credit analyst/manager -- administers the firm's credit policy by a value waiting credit applications, extending credit, and monitoring and collecting accounts receivable
pension fund managers -- and large companies, oversees or manages the assets and liabilities of the employees pension funds
foreign exchange manager -- manages specific foreign operations and the firm's exposure to fluctuations in exchange rates
Treasurer -- the firm's chief financial manager, who is responsible for the firm's financial activities, such as financial planning and fundraising, making capital expenditure decisions, and managing cash, credit, the pension fund, and foreign exchange
controller -- the firm's chief accountant, who is responsible for the firm's accounting activities, such as corporate accounting, tax management, financial accounting, and cost accounting
*note* the treasurer's focus tends to be more external, the comptroller's focus more internal
foreign exchange manager -- the manager responsible for monitoring and managing the firm's exposure to loss from currency fluctuations
marginal cost benefit analysis -- economic principle that states that financial decisions should be made and actions taken only when the added benefits exceed the added costs
Accrual basis -- in preparation of financial statements, recognizes revenue at the time of sale and recognizes expenses when they are incurred
Cash basis -- recognizes revenues and expenses only with respect to actual inflows and outflows of cash
Earnings per share (EPS) -- the amount earned during the period on behalf of each outstanding share of common stock, calculated by dividing the period's total earnings available for the firm's common stockholders by the number of shares of common stock outstanding
risk -- the chance that actual outcomes may differ from those excepted
risk-averse -- seeking to avoid risk
stakeholders -- groups such as employees, customers, suppliers, creditors, owners, and others who have a direct economic link to the firm
corporate governance -- the system used to direct and control Corporation. Defines the rights and responsibilities of key corporate participants, decisions he procedures, and monitor its objectives
individual investors -- investors to buy relatively small quantities of shares so as to meet personal investment goals
institutional investors -- investment professionals, such as insurance companies, mutual funds, and pension funds, that are paid to manage other People's Money and that trade large quantities of securities
Sarbanes-Oxley act of 2002 (SOX) -- an act aimed at eliminating corporate disclosure and conflict of interest problems. Contains provisions about corporate financial disclosures in the relationships among corporations, analysts, auditors, attorneys, directors, officers, and shareholders
SOX focus:
- establish an oversight board to monitor the accounting industry
- tightened audit regulations and controls
- toughened penalties against executives who commit corporate fraud
- strengthend the accounting disclosure requirements and ethical guidelines for corporate officers
- established corporate board structure and membership guidelines
- established guidelines with regard to analyst conflicts of interest
- mandated instant disclosure of stock sales by corporate executives
- increased securities regulation Authority and budgets for auditors and investigators
considering ethics --
- is the action arbitrary or capricious? Does it unfairly single out one individual or group?
- Does the action violate the moral or legal rights of any individual or group?
- Does the action conform to accepted moral standards?
- are there alternative courses of action that are less likely to cause actual or potential harm?
- Are the rights of any stakeholder being violated?
- Does the firm have any overwriting duties to any stakeholder?
- Will the decision benefit any stakeholder to the detriment of another stakeholder?
- If there is detriment to any stakeholder, how should it be remedied, if at all?
- What is the relationship between stockholders and other stakeholders?
- reduce potential litigation and judgment costs
- maintain a positive corporate image
- build shareholder confidence
- gain the loyalty, commitment in respect of the firm's stakeholders
- provide employment integrity
agency costs -- the costs borne by stockholders to maintain a governance structure that minimizes agency problems and contributes to the maximization of owner wealth
incentive plans -- management compensation plans that tend to time management compensation to share price; the most popular incentive plan involves the grant of stock options
Stock options -- an incentive allowing managers to purchase stock at the market price at the time of the grant
performance plans -- plans the time management compensation to measures such as EPS, growth in EPS, and other ratios of return. Performance shares and/or cash bonuses are used as compensation under these plans
Cash bonuses -- Cash paid to management for achieving certain performance goals
Financial institution – an intermediary that channels the savings of individuals, businesses, and governments into loans or investments
Major financial institutions in the US economy -- commercial banks, savings and loans, credit unions, savings banks, insurance companies, mutual funds, and pension funds
financial markets -- forums in which suppliers of funds and demanders of funds can transact business directly
Private placement -- the sale of a new security issue, typically bonds or preferred stock, directly to an investor or group of investors
public offering -- the nonexclusive sale of either bonds or stocks to the general public
primary market -- financial market in which securities are initially issued; the only market in which the issuer is directly involved in the transaction
secondary market -- financial market in which pre-and securities (those that are not new issues) are traded
money market -- a financial relationship created between suppliers and demanders of short-term funds
marketable securities -- short-term debt instruments, such as U.S. Treasury bills, commercial paper, and negotiable certificates of deposit issued by government, business, and financial institutions, respectively
Federal funds -- led transactions between commercial banks in which the Federal Reserve banks become involved
Eurocurrency market -- international equivalent of the domestic money market
London Interbank Offered Rate (LIBOR) -- the best rate that is used to price all Eurocurrency loans
capital market -- a market that enable suppliers and demanders of long-term funds to make transactions
Bond -- long-term debt instrument used by businesses and government to raise large sums of money, generally from a diverse group of lenders
preferred stock -- a special form of ownership having a fixed periodic dividend that must be paid prior to payment of any dividends to common stockholders
securities exchanges -- organizations that provide the marketplace in which firms can raise funds through the sale of new securities and purchasers can resell securities (often miss labeled stock markets)
organized securities exchanges -- tangible organizations that act as secondary markets were outstanding securities are resold (New York Stock Exchange (NYSE), American Stock Exchange (AMEX) -- regional exchanges Chicago Stock exchange and Pacific exchange)
over-the-counter (OTC) exchange -- an intangible market for the purchase and sale of securities not listed by the organized exchanges
Eurobond market -- the market in which corporations and governments typically issue bonds denominated in dollars and sell them to investors located outside the United States
foreign bond -- bond that is issued by a foreign corporation or government and is denominated in the investors from currency and sold in the investors how market
international equity market -- a market that allows corporations to sell blocks of shares to investors in a number of different countries simultaneously
efficient market -- a market that allocates funds to their most productive uses as a result of competition among wealth maximizing investors that determines and publicize his prices that are believed to be close to their true value
Business taxes
ordinary income -- income earned through the sale of the firms goods or services
average tax rate -- a firm's taxes divided by its taxable income
marginal tax rate -- the rate at which additional income is taxed
double taxation -- occurs when the already once taxed earnings of a corporation are distributed as cash dividends to stockholders, who must pay taxes of up to a maximum rate of 15% on them
intercorporate dividends -- dividends received by one corporation on common and preferred stock held in other corporations
capital gain -- the amount by which the sale price of an asset exceeds the assets of initial purchase price
