Seneca College: Exam prep chapter 15 summary

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Definitions:

Finance The business function involving decisions about a firm’s long term investments and obtaining funds to pay for those investments.

Cash-flow management: Managing the pattern in which cash flows into firms out as the flow of revenues, and out the firm in the form of debt payments.

Financial Control: The Process of checking actual performance against plans to ensure that the desired financial status is achieved.

Financial plan: A description of how a business will reach some financial position it seeks for the future; includes projections, sources and uses of funds.

Inventory: Materials and goods currently held by the company that will be sold within a year.

Trade Credit: The granting of credit by selling a firm to buying a firm.

Secured loans: A short-term loan in which the borrower is required to put up collateral.

Line of Credit: A standing agreement between the bank and firm in which the bank specifies the maximum amount it will make available to the borrower for a short term, unsecured loan; the borrower can then draw on those funds when available.

Revolving credit agreement: A guaranteed line of credit for which the firm pays the bank interest on funds borrowed, as well as the fee for extending the line of credit.

Commercial paper: A method of short-run fundraising in which a firm sells unsecured notes for less than the face value and then repurchases them at the face value within 270 days; buyers’ profits are the difference between the original price paid and the face value.

Debt Financing: Raising money to meet long-term expenditures by borrowing from outside your company; usually takes the form of long-term loans or sale of corporate bonds.

Corporate bond: A promise by issuing the company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim; a form of long term debt-financing.

Secured Bonds: Bonds issued by borrowers who pledge assets as collateral in the event of non-payment.

Par value: The arbitrary value of a stock set by the issuing company’s board of directors and started on stock certificates; used by accountants but of little significance to investors.

Book value: The value of a common stock expressed as total stockholders’ equity divided by the number of shares of stock.

Market Value: The current price of one share of a stock in the secondary securities market; the real value of the stock.

Market capitalization: The dollar value (market value) of stocks listed on a stock exchange.

Capital structure: Relative mix of a firm’s debt and equity financing.

Risk-return relationship: Shows the amount of risk and the likely rate of return on various financial instruments.

Securities: Stocks, bonds, and mutual funds representing secured, or asset-based, claims by investors against the issuers.

Investment bankers: Financial specialists in issuing new securities.

Stock Exchange: A voluntary organization of individuals formed to provide an institutional setting the members can buy and sell stock for themselves and their clients within the exchange rules. .

Stock Brokers: An individual licensed to buy and sell securities for customers in the secondary market; may also provide other financial services.

Over-the-counter (OTC) Market:Organization of securities dealers formed to trade stock outside the format of institutional setting of the organized stock exchanges.

Market Index: A measure of the market value of stocks; provides a summary of price trends in a specific industry or of the stock market as a whole.

Bull Market: A period of rising stock prices; a period in which investors act on a belief that stock prices will rise again.

Bear Market: A period of falling stock prices; a period in which investors act on a belief that stock prices will fall.

Stock Option: The purchased right to buy or sell stock.

Margin: The percentage of the total sales price that a buyer must put up to place an order for stock or futures contract.

Exchange traded fund: A bundle of stocks (or bonds) that is in an index that tracks the overall movement of the market.

Hedge funds: Private pools of money that try to give investors a positive return regardless of the stock market performance.

Futures contracts: Agreement to purchase specified amounts of a commodity (or stock) at a given price on a set future date.

Questions:

  1. What are three main responsibilities of financial managers? How do these responsibilities influence the amount of cash that companies hold? Financial managers ensure the financial health of the companies they associate with, this is done through investment and financing strategies. The financial managers directly influence the amount companies hold by strategically arranging the optimal use of the capital with the company.
  2. If companies paid out more money in dividends, do you think that consumers would spend more money thereby boost the economy?  No I don’t think if companies paid more dividends that consumers would spend more money and therefore boost the economy. I think money gained from company shares is used for personal long term personal investments. Unless that money was going to be directly used to purchase within that market, it isn’t likely this would affect the economy positively regardless. However maybe there is an ethical responsibility for company’s to reward their shareholders through the long term association. Companies who put responsibility into their mission statements really should practice what they preach in the creation of jobs and rewarding their shareholders.
  3. Which two claims – that companies are unreasonably hoarding cash or companies are not unreasonably hoarding cash do you think is most persuasive? I think the fact that it is reported that 10 companies have 10 billion in cash at any given time but payment to dividends and job creation is low is a bit depressing. In 2008 Canada’s GDP dropped to $40764 however since then moving forward it does seem there is recovery in Canada’s economy.
  4. Do you think green bonds might encounter the same problems that the cap and trade system did? I think the green bonds are an excellent investment and here is why, the market started in 2007 and in 2013 it has grown exponentially. The bonds are used for project in solar energy and clean energy. By 2020 there is going to be a growing demand for these clean energy sources and people who had bonds should be rewarded as promised with the initial investment.
  5. Green bonds are a gimmick to attract investors who think they are doing the right thing. Absolutely with most of the financial backing to the green energy initiative most of the funding is due to social responsibility. From investors, to involved politicians and even people involved. Some people are making very good returns on their investment. Mostly though people buy green bonds because they feel responsible for the planet.
  1. Short selling should likely be banned because it creates an instability in the company’s stock, dishonesty from the buyer to seller and only benefits the seller. In stock terms this sounds like a product bait and switch only with stock values.
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