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midterm1review - Primary market transaction= between corp...

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Primary market transaction= between corp. and investor for 1 st time ex: IPO Secondary=any time after ex: buy/sell stock Financial managers goal= increase market value of OE, max shareholders wealth Agency cost= managers don’t act upon shareholders best interest Sole Proprietorship: Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest Partnership: Two or more owners More capital available Relatively easy to start Income taxed once as personal income Corporation: -limited liability Unlimited liability General partnership, Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership -separation of ownership & management -unlimited life -double taxation (income taxed at corporate rate and then dividends -transfer of ownership= easy taxed at personal rate) -easier to raise capital Limited liability=lose only what you invest -limited liability corporation= taxed on personal level Agency relationship: Principal hires an agent to represent their interest Stockholders (principals) hire managers (agents) to run the company Agency problem= Conflict of interest between principal and agent Management goals and agency costs (direct and indirect) Managerial compensation Incentives can be used to align management and stockholder interests The incentives need to be structured carefully to make sure that they achieve their goal Corporate control The threat of a takeover may result in better management Working capital management= firm’s STA & Liab. ex: inv, $ to suppliers
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CH2 : Current assets: plan to use in one year or less Ex: cash, AR, inv, marketable securities, short-term investments, ppd. Expenses (insurance, rent) Fixed= PPE (land, building), long-term investments (stock in other companies or owe another company) intangible (goodwill, patent, copyright) *not very liquid, but earns high returns Current Liabilities: AP, un-paid expenses (accrued), taxes payable, NP, bond Long term Liab.= “long-term” debt, notes B/S= short period of time I/S= long period of time Financial leverage= degree of debt in firm; more debt as % of assets= more leverage NWC= CA-CL if positive, cash available> cash that must be paid Market value= value today, not shown in B/S (more important) Book values= historical Market > Book= well-managed company
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