Midterm 1 Notes

Midterm 1 Notes - Investment decision/Capital budgeting...

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Investment decision/Capital budgeting decision- decision to invest in tangible (plants) or intangible assets (research, advertising, marketing, acquisition of new products) Financial Decision- form and amount of financing of a firms investment. Capital Structure- mix of long-term debt and equity financing. (1) equity investors- investors put up cash in exchange for a share of future profits (2) debt investors- promise to pay back the investors cash plus interest. Real Assets- assets used to produce goods and services, machinery, factories, offices, technical knowledge, trademarks, patents, undeveloped land. Financial Assets- financial claims to the income generated by the firms real assets, shares of stock, bank loan, IOU. Sole Proprietorship- manager owns manages business, unlimited financial liability personal tax on profits. Corporation - business organization as a separate legal entity owned by stockholders. Board of directors manage and hire top managers and monitor their performance. Taxed separately- corporations pay tax on their profits and shareholders are taxed on dividends. Continuity- outlasts individual owners, ownership easily transferred. Public traded in a securities market and are available for purchase by an investor. Private corporations shares are closely held by small groups of managers and investors, cant purchases shares except by negotiating with existing share owners. Limited Liability- owners of a corporation (stockholders) are no personally liable for the corporations obligations, this benefits the stockholders. Financial Manager - anyone responsible for a significant corporate investment or financing decision. Treasurer - responsible for financing, cash management, and relationships with banks and other financial institutions. Controller - responsible for budgeting, accounting, and taxes. Chief financial officer - oversees the treasurer and controller and sets overall financial strategy- financial policy and corporate planning. Shareholders want manager to maximize market value . NOT Maximize profits- by cutting back but do not add value NOT cutting dividends- increase future profits investing the low ROI . NOT accounting- profit can calculated in different ways. Agency Problems- managers acting as agents for stockholders may act in their own interests rather than maximizing value, corporate perks growth that doesn’t add value risk avoidance entrenchment. Stakeholder- anyone with a financial interest in the firm. Solutions -compensation plans: incentive schemes, Board of directors: replace managers and the board itself. Takeovers: poorly performing companies by another firm. Specialist monitoring- keep an eagle eye on progress. Legal requirements-
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Midterm 1 Notes - Investment decision/Capital budgeting...

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