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Investment Essentails ch 1-7 outline

Investment Essentails ch 1-7 outline - Chapter 1 Forms of...

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Chapter 1 Forms of business organization o Proprietorship Easily and inexpensively formed Subject to few government regulations Lower income taxes Unlimited personal liability Difficult to raise funds Limited life o Partnership Partners equal liability, if one bankrupts liability transferred to other(s) o Corporation Created by the state, separate and distinct from owners and managers Limited liability Unlimited life Easy transfer of ownership Easy to raise funds Double taxation o S Corporation A special designation that allows a small business that meets qualifications to be taxed as if they were a proprietorship or partnership than as a corporation No more than 75 stockholders Stock Prices and Shareholder Value o Stockholder wealth maximization- the primary goal for managerial decisions; considers the risk and timing associated with expected EPS in order to maximize the price of the firm’s c stock o Shareholder wealth= MP*shares outstanding o Value= PV of future CF o Finance department’s principal task is to evaluate proposed decisions and judge how they will affect the stock price and therefore shareholder wealth. Must estimate probable effects of projects on profitability and thus stock price. Intrinsic Values, Stock Prices, and Compensation Plans o Intrinsic Value An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not precisely measured. Management is best able to estimate because they have all information Estimating these values is what security analysis is all about and something successful investors are good at.
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Long-run concept that reflects proper and improper actions Management should aim to take action designed to maximize the firm’s intrinsic values, which will maximize the average price over the long run. They should provide as much info as possible to investors without providing helpful info to competitors o Market Price The stock value based on perceived but possibly incorrect information as seen by the marginal investor Marginal investor is that who would buy more if the stock price fell slightly or buy more if it rose slightly MP>IV overvalued IV>MP undervalued o Equilibrium The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying or selling stock. Deviation from equilibrium results from investor optimism and pessimism, and imperfect knowledge of intrinsic value Important Trends o Management liability as to the accuracy of annual reports o Increased globalization of business o Ever-improving information technology Business Ethics o The company’s attitude and conduct toward its employees, customers, community, and stockholders o Can be measured by a firm’s employee’s tendency to adhere to laws, regulations and moral standards o Firms have codes of ethics and training programs
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Investment Essentails ch 1-7 outline - Chapter 1 Forms of...

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