Census for January 2021 shows there were 330 million people in the US and 7.7 billion people on the planet. income statement, income and expense statement, budget) and the net worth statement (a.k.a. However, in practice, we find that publicly traded companies have a much more finite lifespan of approximately 15 years. While we will deal with some issues that are of concern to these financial institutions (time value of money, risk/return analysis, types of financial instruments, etc. Cash budget. Corporations have access to the capital markets by issuing shares of stock or issuing bonds. Financial planning is an expanding field and is consistently rated very high in job ranking evaluations due to its combination of potential income and job satisfaction. What can be done to help minimize this problem? While personal finance is not the primary topic of this course, it is an important issue for everyone AND overlaps with many of the main themes (time value of money, diversification, valuation analysis, etc.) Stockholders hire managers under the goal of maximizing firm value as doing so will maximize the wealth of shareholders. For example, there may be a clause in the debt agreements that all debt becomes due in the event of a takeover. CHAPTER 1 What Is Financial Risk Management? In practice, there are different types of partnerships (general vs. limited vs. limited liability). What 3 elements are essential to meeting this goal? Chapter 3 Financial Statements, Cash Flow, and Taxes Answers to End-of-Chapter Questions 3-1 The four financial statements contained in most annual reports are the balance sheet, income statement, statement of stockholders’ equity, and statement of cash flows. ��K$Ϗ(� ��\����_3��T������+���Q*�3�&w��������&����&ơ�> �@��*��d�ꙔW|KK�D��*ƵG��n���En��?�I߭���i*���Е�o�,��G�X�M���K���yз�~�n}+�a�$n=��$��Ȩ�����q�W��"��z�?q�9�QP���W�AP"�KS��K ���]�}/��a�Մ��t=_-�F�,��4��_�����;�K����c+α4�ye��T�\�������9����*J�%��%�K�[�Fa�nϴ��@`PG*�wO(�@D��U�Κ����b�E�༘��ty�乎�)0��l�Nm�@p���%8b�� �X[��"�\����%6\������Bsk#b���i?�Ͱ�תA���q�FP���-JM��do�"���F% Yb��c3a����pJb��^êi��Q. Chapter 2 4. Again, a lower EXPECTED return does not mean a lower return for any particular bond or for bonds in general in a particular year. Variable cash flow (return) stream — dividends and capital gains, Higher risk and (on average) higher returns, Fixed cash flow stream — coupon and maturity payments, Lower risk and (on average) lower returns. If a shareholder with a large stake in the firm creates enough pressure on management and the board of directors, changes to the firm’s strategies and/or operations may occur. Sometimes firms will engage in buying back shares of their own stock as a substitute (or in addition to) dividends as a way to return profits to shareholders. Large corporations have several million (or in some cases billion) shares outstanding, so when an individual owns 100 shares they own a very small fraction of the firm. ... Another study of Navy service members’ personal financial management difficulties showed an annual direct cost of $36 million to the Command from productive time lost in �"�9 ru4�EG�Kގ��@W �Es'��h�e�>S���(�R>��ϰ�d�j���n���,�0��!��������F0sg�������� �ED��J!,%Ź�h�G�-��3�������,:�b(�9�KM�,A��##WW��5����@�D&�_�נ�$���. Theoretically, the timeline for this type of security is potentially infinite. Examples may include establishing scholarship funds, contributing to the arts, or “matching” employee’s contributions to charities. CHAPTER 5. Risk aversion refers to the idea that investors don’t like risk. With stocks, new information causes investors to revise their expectations for future cash flows to the firm. A fundamental component of the corporate form of ownership is the separation of ownership from the process of managing the firm. Ultimately, it doesn’t matter if the firm is profitable on an EARNINGS basis if it isn’t generating enough cash to pay its employees, suppliers, creditors, etc. Khursheed Ahmad Bhat, HOD. Note that specifics of partnership law vary by country and by state. Also, there are some instances where the Board of Directors (the people responsible for hiring and paying the CEO) may be “friendly” to the CEO. The other statements are false. It is important, therefore, that we understand the principles governing these statements by looking at four questions: A sole proprietorship is a business organization where the owner is a single person and is solely responsible for control of the business. The firm needs to generate positive cash flows in order to maintain its operations. When a corporation writes a large check to a charitable organization, essentially the managers of the corporation are deciding where and how to spend the stockholders’ money. Firm organization Answer: c Diff: E. Statement c is correct. Because the owners and the business are treated as two separate entities under the corporate form of ownership, both are taxed. One of the more controversial issues facing corporations today is the issue of executive compensation. Profit maximisation V/S wealth maximisation objectives. Banks and other similar financial institutions are among the primary employers in the field of finance. All else equal, if two investments have the same expected return investors will choose the one with the least risk. ANSWERS AND SOLUTIONS. As such, the returns associated with stock ownership are highly volatile and risky. Others struggle (or even go bankrupt) and lead to negative returns. Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS) allow corporations some flexibility in how they account for revenues and expenses. In addition, 28% of the studies reveal a statistically significant, positive relationship, 59% reveal no relationship, and only 2% suggest a statistically, negative relationship (with about 10% not reporting a sample size to make statistical significance impossible to measure). It should, because it is intentionally vague. Another agency conflict arises between the two principals, the stockholders and bondholders. Therefore, there is the potential for the decision-makers to run the firm more in their own self-interest rather than in the best interest of the owners (shareholders). If a firm is purchased by another firm, the acquiring firm may replace upper management. Learn vocabulary, terms, and more with flashcards, games, and other study tools. Chapter 1 -Introduction to Financial Management, Chapter 6 -The Financial System and Interest Rates, Chapter 8 -Introduction to Capital Budgeting, Chapter 9 -Mutual Funds, IRAs and 401(k) Plans, Financial Statement Analysis Guided Tutorial (CH 2), Financial Statements from Walmart and Target (CH 2), Financial Statements for Joe's Gadgets (CH2), Table: Future Value of a $250 per month investment (CH3), Setting up Your Financial Calculator (CH3), TVM 5-Key Approach Guided Tutorials with TI-BAII+ (CH3), TVM 5-Key Approach Guided Tutorial with HP10BII+ (CH3), TVM 5-Key Approach Guided Tutorial with TI-83 or TI-84 (CH3), Stock Valuation Guided Tutorial with Calculations (CH 5), Observed Correlations, Returns, Standard Deviations and Betas Table (CH 7), Table: Correlations, Returns and St. Deviations Across National Equity Markets (CH11), Table: Foreign currency relative to US dollar in 2017 (CH11), After completing this chapter, students should be able to. 2. If a firm’s assets are worth $60 per share under optimal conditions, but under current management are only valued at $50, management is not maximizing firm value. Chapter 1 – financial management 1. balance sheet). Specifically, while approximately 17% of business tax returns were filed by corporations, they accounted for about 82% of total revenues by businesses and 62% of taxable income according to IRS SOI Tax Stats in 2015. Choose from 500 different sets of chapter 3 personal financial management flashcards on Quizlet. This is often accomplished through payment with stock options (the right to purchase shares at a fixed price even if the stock goes higher). We should always focus our attention on cash flows instead of earnings. 2. Cash flow statement (Also known as income statement). Note that this refers to the stock itself, not the investor’s holding period which may be as short as a few seconds or as long as several decades. In any given year, bonds can earn higher returns than stocks, but typically, over longer periods of times, stocks usually earn higher returns than bonds. We begin with a brief discussion of the different forms of business organization. The owner is liable (legally and financially) for the actions and liabilities of the business. 1Chapte 2. What is personal financial statement? This implies that the overwhelming evidence suggests that corporations behaving in a manner consistent with social responsibility and ethical behavior are likely to either benefit financially or not experience any noticeable financial downside to doing so. Activist investors may pressure management to run a more efficient operation. Less risk usually means lower expected cash flows. can I afford a new house or new car? If the new information is worse than previously expected, investors revise cash flow forecasts downward (and the stock price goes down). Note that this does not mean that any individual stock (or stocks in general) WILL generate a higher return, only that its EXPECTED return will be higher. When you buy a bond, you are lending the issuer money (in addition to corporations, governments – federal, state local and international – also are large issuers of bonds). 1 1 CHAPTER 3 UNDERSTANDING FINANCIAL STATEMENTS Financial statements provide the fundamental information that we use to analyze and answer valuation questions. An analogy would be to compare two students in junior high. Chapter outlines What is Finance? Learn chapter 3 personal financial management with free interactive flashcards. Compensation packages must be carefully designed to align the interest of management with the objective of creating shareholder wealth in order to minimize agency conflicts. Some companies expand rapidly and are extremely successful leading to high returns. Personal finance deals with a variety of financial decisions made on the personal level. When investors make money through dividends (a distribution of corporate profits to owners) or through capital gains (an increase in the value of a share of stock) these are taxable. Set your financial goals. See the current price of Snap. qH��3$���F�9��W9�[4���e�"Wyw�(y�b���=@��;�-�)y��z^�X��}om��tt(�f'��`sB�K;�V���T����`���̩�HjI��C�a�4v�Fl��e�m�gM Also, like in a sole proprietorship, the income is only taxed once. The major agency conflict we will focus on is between managers and stockholders (owners). It can also apply to banking where financial institutions evaluate who to lend money to and how much to charge in interest rates. Discuss. The reason for this is because people have different levels of risk aversion depending on their personality, their age, their income, and several other factors. A final issue associated with stocks is that there is no maturity date to stock ownership. Tìm kiếm fundamentals of personal financial management , fundamentals of personal financial management tại 123doc - Thư viện trực tuyến hàng đầu Việt Nam The concept of maximizing firm value is not specific to finance. Also, compensation based on meeting sales targets may get met by selling items for a loss (which reduces firm value). We need to be careful because there are other reasons why firms may engage in buybacks, but while the COVID pandemic of 2020 saw companies cut dividends and buybacks, they were still quite strong. Our focus this semester will be on the corporation, but at this point we should introduce all three forms (in a simplified manner) to give the basic framework of each. For example, Exxon Mobil had 4.23 billion shares outstanding in January 2021, while Amazon had 501 million and Winnebago had 33.6 million at that time. What are the two primary instruments corporations issue to raise money? 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