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    Finance

    Although many business students see finance as it is portrayed in the movie Wall Street, the study of finance is much more than learning to be a young high-power stock trader or greedy corporate raider. For one, finance impacts everyone on a day-to-day basis. Whether you are getting your first mortgage or credit card, buying life insurance, or planning for retirement, most people are faced with financial decisions that play a very important role in their lives. Furthermore, the majority of careers in finance are not in financial markets; rather, business students who study finance are in high demand in financial services and corporate finance. While the study of finance helps prepare business students for a career in one of these three fields, financial information is often relevant in personal and business decision-making, and understanding how to prepare and use financial information is important for both individuals and all business students a like. 

    1. Financial Markets: The goal of efficient financial markets is to ensure that capital goes where it is needed. Imagine a company needed to borrow one million dollars for a new project. Before, owners of the company would use personal networks to either secure government loans or grants or to procure new investors. Today, while many companies still raise money this way, they now have another option: financial markets. Financial markets are simply a platform which savers and investors are connected with borrowers - individuals and companies who need capital. Borrowers can raise money by appealing to a larger selection of investors, and savers have a wide range of investments to choose from. Financial markets are supported by financial institutions, intermediaries such as banks, who take individual, government and corporate savings and then trade or lend these funds out in exchange for financial securities such as stocks or bonds (which represent ownership or a promise to repay). 


    2. Financial Services: Financial services institutions include banks, trust companies, investment dealers and brokers, financial planners, mutual fund companies, life and property insurance companies, mortgage brokers and real estate companies. These institutions are overseen by regulators such as the Securities and Exchange Commission and involve the participation of professional bodies such as Chartered Accountants, Chartered Financial Analysts and Lawyers. This branch of finance looks at how financial products are designed and delivered to individuals, businesses and governments. For example, a bank may take personal savings in the form of deposits from its over-the-counter bankers and use these savings to provide you a mortgage for your house. 

    3. Corporate Finance: Finance plays an important role in both the day to day and long-term decision-making in a business. Daily financial activities include ensuring enough cash is on hand to maintain operations. This includes decisions such as extending credit, collecting receivables, buying inventory and paying suppliers. Long-term financial activities include capital budgeting as well as planning and forecasting the business's need for cash and financing. Preparing and using this financial information is the job of a financial manager. Financial managers look to make decisions that maximize the value of the firm to its shareholders. This distinction is important. While there exist many financial goals in organizations (such as maximizing sales or profits) maximizing the firm's value to shareholders should be the overarching goal of any successful financial manager. Today, because of the paramount role that financial managers play in decision-making, we see many CEOs and top executives in corporation coming from careers in financial management. 
     

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    BrainMass Categories within Finance

    The Time Value of Money

    Solutions: 1,024

    The general concept of time value of money relies on the fact that the value of a dollar today is worth more than the value of a dollar in the future. We use time value of money concepts to compare the value of cash flows received at different times.

    Annuity

    Solutions: 725

    Annuities are periodic, fixed payments over a period of time. Present and future values are used in annuity calculations.

    The Discounted Cash Flows Model

    Solutions: 474

    Investors will buy shares in a company when they believe they will receive a return on their investment, either in the form of dividends (that is, regular cash distributions of a corporation's profits) or an appreciation in the value of the stock (that is, they can sell the stock for more tomorrow than they would today). We use the dividend discount model and comparative models to value securities. See also: Financial Statement Analysis.

    Arbitrage Pricing Theory (APT)

    Solutions: 77

    The arbitrage pricing theory looks at how a security’s return is related to its risk. However, the arbitrage pricing theory looks at different factors that contribute to a securities risk. These factors may be systematic, such as interest rates, or unsystematic, such as the success or failure of a company’s research and development.

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    Capital Structure and Firm Value

    Solutions: 374

    We look at theories such as Modigliani and Miller (M&M) Proposition I and II to explain how a firm's capital structure and tax shield from debt affect firm value; and how leverage affects the risk and return of a firm's stock.

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    Dividends, Stock Repurchase and Policy

    Solutions: 424

    A corporation's earnings may be paid out as dividends to shareholders instead of kept as retained earnings. Corporations may also use extra cash on hand to repurchase its own stock. Paying dividends, unlike repurchasing stock, reduces the value of a share by the amount of the dividend on the ex-dividend date.

    Issuing Equity

    Solutions: 464

    As a company grows, its growth prospects will likely require additional financing. For many companies, raising new capital can be done by issuing more common stock. A company's first issue of common stock to the public is called an Initial Public Offering. Afterword, a corporation may issue new equity at any time in order to finance its growth. When new common shares are offered to existing shareholders first, this is called a rights offering.

    Bond Valuation

    Solutions: 1,643

    Bonds are a type of security; in essence, bonds are a corporation's promise to pay a specified amount at a future date. Investors buy bonds at an amount equal to the present value of this future payment (or the sum of the discounted future payments expected from the bond). They do this in order to earn interest from the purchase of the bond. By knowing the interest rate investors expect to return on the purchase of a corporate bond, we can calculate the price they would be willing to pay.

    Leasing

    Solutions: 648

    Many assets such as buildings, machinery and other equipment, may be leased or purchased outright. Lease vs. buy decisions are important financing decisions for businesses looking to acquire a new asset.

    Derivatives

    Solutions: 1,382

    Derivatives are contracts that involve underlying assets and can be used for hedging the risk associated with the prices of these assets. Hedging risk plays an important role in driving the popularity of financial derivatives. As well, derivatives play a key role in supporting standardized and transparent trading of commodities in financial markets.

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    Credit Management: Credit Policy, Analysis and Risk

    Solutions: 174

    Accounts receivables make up somewhere over 15 percent of all assets held by firms. As a result, decisions that affect how a company extends credit to consumers (consumer credit) and other firms (trade credit) have a significant impact on the financing activities of the firm.

    Mergers and Acquisitions

    Solutions: 468

    There are three different legal variations of a merger and acquisition: merger/consolidation, acquisition of stock and acquisition of assets. Mergers often occur because of the synergy that can be created when two companies integrate their operations. Company takeovers can also occur as a result of proxy battles and leveraged buyouts.

    Financial Distress and Bankruptcy

    Solutions: 185

    Although debt provides a tax shield that increases the value of a firm, the use of debt is limited by what we call financial distress costs. Financial distress occurs when a firm has difficulty meeting its financial obligations. A firm may default on its interest payments, become insolvent, stop investing, restructure, and/or file for bankruptcy.

    Valuing Securities using Accounting Information

    Solutions: 198

    The fundamental value of a firm is based on its earnings. As analysts and financial managers, we use accounting concepts to better understand a firm’s earnings to evaluate where a company is doing well, where it can focus on improving, and how much growth and future earnings we can expect. Growth rates determined through a comprehensive analysis of a firm’s financial statements can be used to value the firm’s securities.

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    Buy a Note or Money in Bank?

    Suppose someone offered to sell you a note that calls for a $1,000 payment three years from today. The person offers to sell the note for $850. You have $850 in a bank time deposit (savings instrument) that pays a 6.77%APR with daily compounding; and you plan to leave this money in the bank unless you buy the note. The note is n

    Finding the future values

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    Annuities: Future and Present Values

    (a) What is the future value of a 3-year ordinary annuity (recall that ordinary annuities have end of year cash flows) of $200 if the appropriate interest rate is 12%? (b) What is the present value of the annuity? (c) What would the future and present values be if the annuity were an annuity due (beginning of year cash flows

    All About Annuities

    (a) What is the difference between an ordinary annuity and an annuity due? (b) What type of annuity is shown in the following cash flow timeline? (c) How would you change it to the other type of annuity?

    How long for a sum of money to grow, how to double an investment

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    Future and Present Values

    (a) If you deposit $200 in the bank today, what is its future value at the end of three years if it is invested in an account paying 12% annual interest, assuming annual compounding? (b) What is the present value of $200 to be received in three years if the appropriate interest rate is 12% (annual compounding)?

    Savings Rates

    When it comes to saving disposable income, Americans have a remarkably low savings rate. Find sources that compare the savings rates of Asian and European countries to that of the U.S.A. Discuss your observations and put the savings habits of someone you know on the scale.

    Risk & Portfolio Choice

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    Amortization

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    Applying Financial Analysis Tools

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