Summary
BSC2 Managerial Finance summary chapter 1, 2,3, 6, 7, 13, 15, 16, 19, 24
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the summary contains the chapters 1, 2,3, 6, 7, 13, 15, 16, 19, 24
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Summary financeChapter 1
Finance the science and art of how individuals and firms raise, allocate, and invest money
Managerial finance concerns the duties of the financial manager in a business
Maximize wealth of the owners for whom it is being operated (shareholders) is in most instances
equivalent to the stock price
Earnings per share (EPS) the amount earned during the period on behalf of each outstanding share
of stock, calculated by dividing the period’s total earnings available for the firm’s stockholders by the
number of shares of stock outstanding.
Risk the chance that actual outcomes may differ from those expected
Risk averse requiring compensation to bear risk
Stakeholders groups such as employees, customers, suppliers, creditors, and others who have a
direct economic link to the firm but are not owners.
Business ethics standards of conduct or moral judgement that apply to persons engaged in
commerce
Investment decisions. Decisions that focus on how a company will spend its financial resources on
long-term projects that ultimately determine whether the firm successfully creates value for its
owners.
Capital budgeting A technique that helps managers decide which projects create the most value for
shareholders
Financial decisions. Decisions that determine how companies raise the money they need to pursue
investment opportunities
Capital the money that firms raise to finance their activities
Working capital decisions decisions that refer to the management of the firm’s short-term resources
Principle-agent problem A problem that arises because the owners of a firm and its managers are
not the same people and the agent does not act in the interest of the principle
Treasurer a key financial manager, who manages the firm’s cash, oversees its pension plans, and
manages key risks
Director of risk management works with the treasurer to manage risks that the firm faces related to
movements in exchange rates, commodity prices and interest rates.
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.
Director of investor relations the conduit of information between the firm and the investment
community
Director of internal audit leads a team charged with making sure that all business units follow
internal policies and comply with the government regulations
,Foreign exchange manager the manager responsible for managing and monitoring 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 marginal benefits exceed the marginal 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 with respect to actual inflows and outflows of cash
Sole proprietorship a business owned by one person and operated for his or her own profit
Unlimited liability the conditions of a sole proprietorship (or general partnership), giving creditors
the right to make claims against the owner’s personal assets to recover debts owned by a business
Partnership a business owned by two or more people and operated for profit
Articles of partnership the written contract used to formally establish a business partnership
Corporation a legal business entity with rights and duties similar to those of individuals but with a
legal identity distinct from its owners
Stockholders the owners of a corporation, whose ownership, or equity, takes the form of common
stock or, less frequently, preferred stocks
Limited liability a legal provision that limits stockholders’ ability for a corporation’s debt to the
amount they initially invested in the firm by purchasing stock
Stock a security that represents an ownership interest in a corporation
Dividends periodic distribution of cash to the stockholders of a firm
Board of directors group elected by the firm’s stockholders and typically responsible for approving
strategic goals and plans, setting general policy, guiding corporate affairs, and approving major
expenditures
President or chief executive officer (CEO) corporate official responsible for managing the firm’s day-
to-day operations and carrying out the policies established by the board of directors
Marginal tax rate the tax rate that applies to the next dollar of income earned
Average tax rate calculated by dividing taxes paid by taxable income
Double taxation a situation facing corporations in which income from the business is taxed twice –
once at the business level and once at the individual level when the cash is distributed to
shareholders
Ordinary income income earned by a business through the sale of goods or services
Capital gain income earned by selling an asset for more than it costs
Agency cost the costs that shareholders bear due to the managers’ pursuit of their own interests
Corporate governance the rules, processes, and laws by which companies are operated, controlled
and regulated
Stock options securities that allow managers to buy shares of stock at a fixed price
, Restricted stock shares of stock paid out as part of a compensations package that do not fully
transfer from the company to the employee until certain conditions are met
Individual investors investors who own relatively small quantities of shares to meet personal
investment goals
Institutional investors investment professionals such as banks, insurance companies, mutual funds,
and pension funds that are paid to manage and hold large quantities of securities on behalf of others.
Activist investor investors who specialize in influencing management
Sarbanes-Oxly Act of 2002 (SOX) an act aimed at eliminating corporate disclosure and conflict of
interest problems. Contains provisions concerning corporate financial disclosures and the
relationships among corporations, analysts, auditors, attorneys, directors, officers, and shareholders
Chapter 2
Financial institution an intermediary that channels the savings of individuals, businesses and
governments into loans or investments
Commercial banks institutions that provide savers with a secure place to invest their funds and that
offer loans to individuals and business borrowers
Glass-Steagall act an act of Congress in 1933 that created the Federal Deposit Insurance Corporation
(FDIC) and separated the activities of commercial and investment banks
Investment banks institutions that assist companies in raising capital, advice firms on major
transactions such as mergers or financial restructurings, and engage in trading and market-making
activities
Shadow banking system a group of institutions that engage in lending activities, much like traditional
banks, but that do not accept deposits and therefore are not subject to the same regulations as
traditional banks
Financial markets forums in which suppliers of funds and demanders of fund can transact business
directly
Private placement the sale of a new security directly to an investor or group of investors
Public offering the 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-owned securities (those who are not new issues) are
traded
Money market a market where investors trade highly liquid securities with maturities of 1 year old or
less
Marketable securities short-term debt instruments, such as the U.S. treasury bills, commercial
paper, and negotiable certificates of deposit issued by government, business, and financial
institutions, respectively
Eurocurrency market international equivalent of the domestic money market
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