Reviewer 1
Fundamentals of Financial Management|Brigham|Houston
Chapter 1 – An Overview of Financial
Management
 Sarbanes-Oxley Act. A law passed by congress that
requires the CEO and CFO to certify that their firms
FSs are accurate.
 Finance – Three Areas:
1. Financial Management (also called corporate
finance)
2. Capital markets
3. Investments relate to decisions concerning
stocks and bonds and include a number of
activities: (1) Security Analysis deals with
finding the proper values of individual
securities (i.e., stocks and bonds). (2) Portfolio
Theory deals with the best way to structure
portfolios, or “baskets”, of stocks and bonds.
(3) Market Analysis deals with the issue of
whether stock and bond markets at any given
time are “too high,” “too low,” or “about
right.”
 Proprietorship. An unincorporated business
owned by one individual.
 Partnership. An unincorporated business owned
by two or more persons.
 Corporation. A legal entity created by a state,
separate and distinct from its owners and
managers, having unlimited life, easy
transferability of ownership, and limited liability.
 S Corporation. A special designation that allows
small businesses that meet qualifications to be
taxed as if they were a proprietorship or a
partnership rather than a corporation.
 Limited Liability Company (LLC). A relatively new
type of organization that is a hybrid between a
partnership and a corporation.
 Limited Liability Partnership (LLP). Similar to an
LLC but used for professional firms in the fields of
accounting, law, and architecture. It has limited
liability like corporations but is taxed like
partnerships.
 Shareholder Wealth Maximization. The primary
goal for managers of publicly owned companies
implies that decisions should be made to maximize
the long-run value of the firm’s common stock.
 In response to the financial crisis, I July 2010,
Congress passed the Dodd-Frank Act, which
established the Financial Stability Oversight
Council to monitor for risks in the financial system
and the Consumer Financial Protection Bureau to
enforce consumer protection rules for financial
products.
 “true” – the cash flows and risk that investors
would expect if they had all of the information that
existed about a company.
 “perceived” – what investors expect, given the
limited information they actually have.
 Intrinsic Value. An estimate of the stocks “true”
value based on accurate risk and return data. The
intrinsic value can be estimated but not measured
precisely.
 Market Price. The stock value based on perceived
but possibly incorrect information as seen by the
marginal investor.
 Marginal Investor. An investor whose views
determine the actual stock price.
 Equilibrium. The situation in which the actual
market price equals the intrinsic value, so investors
are indifferent between buying or selling a stock.
 Important Business Trends:
1. Increased globalization of business
2. Ever-improving information technology
3. Corporate Governance – the way the top
managers operate and interface with
stockholders
 Corporate Raider. An individual who targets a
corporation for takeover because it is undervalued.
 Hostile Takeover. The acquisition of a company
over the opposition of its management.

Fundamentals of Financial Management|Brigham|Houston
Chapter 2 – Financial Markets and Institutions
 Capital Formation Process for Business (Three
Ways)
1. Direct Transfers
2. Indirect Transfers through Investment Bankers
3. Indirect Transfers through a Financial
Intermediary
Types of Markets
 Physical Asset Markets. (“tangible” or “real asset”
markets) are for products such as wheat, autos,
real estate, computers, and machinery.
 Financial Asset Markets. Deal with stocks, bonds,
notes, and mortgages. Also deal with derivative
securities.
 Spot Markets. The markets in which assets are
bought or sold for “on-the-spot” delivery.
 Futures Markets. The markets in which
participants agree today to buy or sell an asset at
some future date
 Money markets. The financial markets in which
funds are borrowed or loaned for short periods
(less than one year).
 Capital Markets. The financial markets for stocks
and for intermediate- and long-term debt (one
year or longer).
 Primary Markets. Markets in which corporations
raise capital by issuing new securities.
 Secondary Markets. Markets in which securities
and other financial assets are traded among
investors after they have been issued by
corporations.
 Private Markets. Markets in which transactions
are worked out directly between two parties.
 Public Markets. Markets in which standardized
contracts are traded on organized exchanges.
 portfolio of stocks of a certain type and then
 Derivatives. Any financial asset whose value is
derived from the value of some other “underlying”
asset.
Reviewer 2
 Financial Institutions:
1. Investment Bank. An organization that
underwrites and distributes new investment
securities and helps businesses obtain
financing.
2. Commercial Bank. The traditional department
store of finance serving a variety of savers and
borrowers.
3. Financial Services Corporation. A firm that
offers a wide range of financial services,
including investment banking, brokerage
operations, insurance, and commercial
banking.
4. Credit Unions. Cooperative associations whose
members are supposed to have a common
bond, such as being employees of the same
firm.
5. Pension Funds. Retirement plans funded by
corporations or government agencies for their
workers and administered primarily by the
trust departments of commercial banks or by
life insurance companies.
6. Life Insurance Companies take savings in the
form of annual premiums; invest these funds
in stocks, bonds, real estate, and mortgages;
and make payments to the beneficiaries of the
insured parties.
7. Mutual Funds. Organizations that pull investor
funds to purchase financial instruments and
thus reduce risks through diversification.
Money Market Funds. Mutual funds that
invest in short-term, low risk securities and
allow investors to write checks against their
accounts.
8. Exchange Traded Funds (ETFs) are similar to
regular mutual funds and are often operated
by mutual fund companies. ETFs buy a
sell their own shares to the public.
9. Hedge Funds are also similar to mutual funds
because they accept money from savers and
use the funds to but various securities, but
there are some important differences. (a)
Hedge funds are largely unregulated. (b)
 Reviewer 3
Fundamentals of Financial Management|Brigham|Houston

typically, have large minimum investments  Efficient Market. A market in which prices are
(often exceeding S1 million) (c) marketed close to intrinsic values and stocks seem to be in
primarily to institutions and individuals with equilibrium.
high net worths.  Types of Stock Market Transactions
10. Private Equity Companies are organizations 1. Outstanding shares of established publicly
that operate much like to hedge funds; but owned companies that are traded: the
rather than purchasing some of the stocks of a secondary market.
firm, private equity players buy and then 2. Additional shares sold by established publicly
manage entire firms. owned companies: the primary market
 Physical Location Exchanges. formal 3. Initial public offerings made by privately held
organizations having tangible physical locations firms: the IPO market.
that conduct auction markets in designated
(“listed”) securities.
 Over the Counter (OTC) Market. A large
collection of brokers and dealer, connected
electronically by telephones and computers, that
provides for trading in unlisted securities.
 Dealer Market. Includes all facilities that are
needed to conduct security transactions not
conducted on the physical location exchanges.
 Closely Held Corporation. A corporation that is
owned by few individuals who are typically
associated with the firm’s management.
 Publicly Owned Corporation. A corporation that
is owned by a relatively large number of
individuals who are not actively involved in the
firm’s management.
 Going Public. The act of selling stock to the public
at large by a closely held corporation or its
principal stockholders.
 Initial Public Offering (IPO) Market. The market
for stocks of companies that are in the process of
going public.
 Market Price. The current price of a stock.
 Intrinsic Value. The price at which the stock
would sell if all investors had all knowable
information about the stock.
 Equilibrium Price. The price that balances buy
and sell orders at any given time. The price
remains relatively stable until new information
becomes available and causes the price to
change.