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Business Chapter 16

financial managment
all of the activities concerned with obtaining money and using it effectively
chief financial officer (CFO)
a high level corporate executive who manages a firm’s finances and reports directly to the company’s chief executive officer or president, must be honest
short term financing
money that will be used for one year or less; need include cash flow, speculative production, inventory needs, monthly expenses, short term promotional needs, unexpected emergencies
cash flow
the movement of money into and out of an organization, short term financing needs
speculative production
the time lag between the actual production of goods when the goods are sold, short term financing need
long term financing
money that will be used for longer than 1 year, needs include start up costs, mergers/acquisitions, new product development, long term marketing, replacement of equipment, expansion of facilities
risk return ratio
a ratio based on the principle that a high risk decision should generate higher financial returns for a business and more conservative decisions often generate lower returns
financial plan
a plan for obtaining and using the money needed to implement an organization’s goals and objectives
a financial statement that projects income, expenditures, or both over a specified future period
cash budget
a financial statement that estimates cash reciepts and expenditures over a specified period
zero based budgeting
budgeting approach that every expense in every budget must be justified, eliminates the problem of managers padding budget items
capital budget
a financial statement that estimates a firm’s expenditures for major assets and its long term financing needs
equity capital
money received from the owners or from the sale of shares of ownership in a business
debt capital
borrowed money obtained through loans of various types
CD (certificate of Deposit)
a document stating that the bank will pay the depositor a guaranteed interest rate on money left on deposit for a specified period of time
a written order for a bank or other financial institution to pay a stated amount to the business or person indicated on the face
line of credit
loan that is approved before the money is actually needed; loan is pre approved and paperwork is completed, so business can obtain the money without delay
revolving credit agreement
a guaranteed line of credit; in return for the guarantee, the bank charges a commitment fee
real estate or property pledged as security for a loan, required for most long term loans
debit card
a card that electronically subtracts the amount of a customer’s purchase from his bank account at the moment the purchase is made
electronic funds transfer (EFT)
a means of performing financial transactions through a computer terminal; includes ATMs, automatic clearinghouses (ATH), point of sale (POS) terminals, electronic check conversion (ECC)
letter of credit
a legal document issued by a bank or other financial institution guaranteeing to pay a seller a stated amount for a specified period of time (30-60days)
banker’s acceptance
a written order for a bank to pay a 3rd party a stated amount of money on a specified date, an order to pay with no strings attached
unsecured financing
financing that is not backed by collateral
trade credit
type of short term financing, extended by a seller who does not require immediate payment after delivery of purchase, delayed payment, most popular
promissory note
type of short term financing, written pledge by a borrower to pay a certain sum of money to a creditor at a specified future date, ususally require borrower to pay interest, legally binding, a negotiable instrument
prime interest rate
the lowest rate charged by a bank for a short term loan, rate received by borrowers with “best” credit rating
commercial paper
type of short term financing, a short term promissory note issued by a large corporation, secured only by the reputation of the issuing firm, interest rate is determined by credit rating and ability to repay
type of short term financing, a firm that specializes in buying other firms’ accounts receivable; buys at less than face value but collects full dollar amount when due
initial public offering (IPO)
when a corporation sells common stock to the general public for the first time, used to increase cash balance
primary market
a market in which an investor purchases financial securities (via investment bank) directly form the issuer of those securities
investment banking firm
an organization that assists corporations in raising funds, usually by helping to sell new issues of stocks, bonds or other financial securities
secondary market
market for existing financial securities that are traded between investors; without this there would be no way to sell shares to other investors, completed through securties exchange
securities exchange
a market place where member brokers meet to buy and sell securities, secondary markets competed through this
over the counter market (OTC)
a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange
common stock
stock whose owners may vote on corporate matters but whose claims on profits and assets are subordinate to the claims of others; type of long term financing
preferred stock
stock whose members usually do not have voting rights, but whose claims on dividends and assets are paid before those of common stock; type of long term financing
retained earnings
the portion of a corporation’s profits not distributed to stock holders
private placement
occurs when stock and other corporate securities are sold directly to insurance companies, pension funds, or large institutional investors
financial leverage
the use of borrowed funds to increase the return on owners’ equity , works as long as a firm’s earnings are larger than the interest charged on borrowed money
term loan agreement
a promissory note that requires a borrower to repay a loan in monthly, quarterly, semiannual, or annual installments
corporate bond
a corporation’s written pledge that it will repay a specified amount of money with interest, type of long term financing
maturity date
date on which corporation is to repay borrowed money
registered bond
a bond registered in the owner’s name by the issuing company (borrowing company)
debenture bond
a bond backed only by the reputation of the issuing corporation
mortgage bond
a corporate bond secured by various assets of the issuing firm
convertible bond
a bond that can be exchanged at the owner’s option for a specified number of shares in the corporation’s common stock
bond indenture
a legal document that details all the conditions relating to a bond issue
serial bonds
bonds of a single issue that mature on different dates, used to ensure that it has sufficient funds available to redeem a bond issue
sinking fund
a sum of money to which deposits are made each year for the purpose of redeeming a bond issue, used to ensure that it has sufficient funds available to redeem a bond issue
an individual or independent firm that acts as a bond owner’s representative

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