ADM 1300 Chapter 15: Financial Decisions and Risk Management

plan and control the acquisition and distribution of the company's financial assets

business function involving decisions about a firm's long term investments and obtaining the funds to pay for those investments

determine long-term investments, obtain funds to pay for investments, conduct everyday financial activities, manage risks that are taken

increase firm's value and shareholder wwealth

managing the pattern in which cash flows into the firm in the form of revenues and out in the form of debt payments

process of checking actual performance against plans to ensure that the desired financial status is achieved

description of how a business will reach some financial position it seeks for the future; includes projections for sources and uses of funds

incurred during everyday business activities

unpaid bills owed to suppliers plus wages and taxes due within a year

funds due from customers who have bought on credit

rules governing a firm's extension of credit to customers

material and goods currently held by the company that will be sold within the year

basic supplies used in production process

goods partway through the production process

items that are ready for sale

long-term expenditures that are not normally sold for cash

granting of credit by a selling firm to a buying firm

informal agreement of trade credit

legally binding agreement stating when and how much money will be paid to the seller

attached to shipments and must be signed by buyer to receive merchandise

loans in which the borrower is required to put up collateral

lender lends the borrower some portion of the stated value of inventory

lender can seize accounts receivable if loan isn't paid on time

purchaser tries to collect on the receivables and profits to the extent that the money it eventually collects exceeds the amount it paid for the receivable

borrower does not have to put up collateral

standing agreement between a bank and a firm that there is a maximum amount the bank will make available to the borrower for a short-term unsecured loan

guaranteed line of credit for which the firm pays the bank interest on fund borrowed and a premium

firm sells unsecured notes for less than face value and repurchases them at face value within 270 days

raising money to meet long-term expenditures by borrowing from outside the company

typically comes from a chartered bank

promise by the issuing company to pay the holder a certain amount of money on a specified date, with stated interest payments in the interim

details terms of the bond

if a firm fails to make a bond payment

registers the names of holders with the company and mailing out the cheques to bondholders

bondholders clip coupons from certificates and sends them to the issuer to receive payment

bonds issued by borrowers who pledge assets as collateral in the event of nonpayment

unsecured bonds

issuers can call it in and pay it off before the maturity date at a price stipulated in the indenture

firm retires portions of the bond issue in a series of different preset dates

can be converted into the common stock of the issuing company

raising money to meet long-term expenditures by issuing common stock or by retaining earnings

selling shares of common stock to obtain funds needed to buy land, building and equipment

arbitrary value of a stock set by the issuing company's board of directors and stated on stock certificates

value of a common stock expressed as total shareholders' equity divided by the number of shares

current price of one share of a stock int he secondary securities market; true value of a stock

publicizing the positive aspects of a company's financial condition to financial institutions

dollar value of stocks listed on a stock exchange; number of company's outstanding shares times the market value of each share

using profits not paid out in dividends

payments on preferred stock are fixed amounts but it will never mature

relative mix of a firm's debt and equity financing

shows the amount of risk and the likely rate of return on various financial instruments

buying several kinds of investments rather than just one kind

proportion of funds invested in each of the investment alternatives

rate of return from dividends paid to shareholders; calculated by dividing yearly dollar amount of dividend income by the investments current market value

increase in the dollar value of an investment

profit gained from increased market value of a stock

a calculation that includes the annual dividend as well as any increase or decrease in the original purchase price of the investment

with each additional time period, interest returns accumulate and earn more interest

divide annual interest rate into 72; shows how long it will take money to double

handles buying and selling of new shares (IPO)

new securities being sold to one buyer of a small group of buyers

market for existing stocks and bonds

new stocks have to be approved by a provincial securities commission before being issued

financial specialists in issuing new securities

voluntary organizations of individuals formed to provide an institutional setting where members can buy and sell stock for themselves and their clients in accordance with the exchange's rules

individual licensed to buy and sell securities for customers in the secondary market

offers well informed individual investors a fast and low cost way to participate in the market

organization of securities dealers formed to trade stock outside of the formal institutional setting of the organized stock exchanges

daily market transactions of individual stocks

daily market transactions of bonds

provides a summary of price trends in a specific industry

period of rising stock prices

period of falling stock prices

broker should buy or sell a certain security at the prevailing market price at the time

authorizes the purchase of a stock only if its price is less than or equal to a given limit

broker will sell a stock if its price falls to a certain level

requests 100 shares of some multiple therof

fractions of a round lot

the right to buy a particular stock at a certain price; right lasts up to a certain date

the right to sell a particular stock at a specified price; right lasts until a particular date

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

those who buy and sell stock in the same day; seeking quick profits on large volumes of stock

selling borrowed shares of stock in the expectation that prices will fall; replacement shares are then bought for less

any company that pools the resources of many investors and uses those funds to purchase various types of financial securities

investors are not charged a sales commission when they buy into or sell out of the mutual fund

carry a charge between 2% and 8% of invested funds

bundle of stocks that is in an index that tracks the overall movement of the market

private pools of money that try to give investors a positive return regardless of stock market performance

guarantee that investor will have original investment back at a certain time; not necessarily additional returns

agreement to purchase specified amounts of a commodity at a given price on a set future date

laws regulating how corporations must back up securities to help prevent fraud

outside equity funding provided in return for part ownership of the firm

success hinges on anticipating times when cash will be short and when excess cash is expected

conserving a firm's financial power by minimizing the financial effect of accidental losses

event that offers the chance for either a gain or loss

event offers only the chance of loss or no loss

stopping participation or refusing to participate in ventures that carry any risk

techniques to prevent, minimize or reduce losses in the consequences of losses

covering of a firm's unavoidable losses with its own funds