notes_chatper_16 - 10 Principles Agency Problem 1. Risk -...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 10 Principles 1. Risk - return trade-off 2. Time value of money 3. Cash is king 4. Incremental cash flows 5. The Curse of Competition 6. Efficient capital markets 7. The agency problem 8. Taxes bias business decisions 9. All risk is not equal 10.Ethics – Doing the “Right” thing Chapter 13 – Inference Comparing 2 Difference between 2 means - draw random sample comparing two population means which is an unbiased and consistent estimator of µ 1 - µ 2 1. is normally distributed if original pop are normal –or– approximately normal if the Income Tax Objective Raise revenue for gov’t expenditures Achieve socially desirable goals Achieve economic stabilization Corporate Tax Rates $0 ~ $15,000 .............................................. 15% $50,001 ~ $75,000 .............................................. 25% $75,001 ~ $10,000,000 .............................................. Legal Form of Business Computing Taxable Income Gross Income: Sales Costs of Goods Sold (production) Taxable Income: Gross Income tax deductible Expenses Tax Deductible: Operating expense (Admin, Mrktg, depreciation, Interest expense) *dividend expense (paid) is not deductible 4 important considerations: Dividend Income - 70% is exempt Net operating losses - carried back 2 yrs /forward 20 yrs. Net capital gains - taxed as ordinary income. Net capital losses - carried back 3 years /forward 5 yrs, applied against Risk-Return Tradeoff More risk, higher the return Maturity Premium, Liquidity Premium Agency Problem Mgrs won’t work for the owners unless it is in their best interest The separation of mgmnt/ ownership creates agency problem. Mgrs may make decisions not in line w/ the goal of max shareholder wealth. Ethical Considerations Unethical behavior lose trust lose business Corp. has responsibility to society. Chapter 2 - The Financial Markets and Financial Market Exist to allocate $ supply to those in need. Wealth - be less w/o Fin Mrkts (less rate of capital formation) Interest Rate Determinants (1 basis pt = 1/100%) k = k* + IRP + DRP + LP + MP Nominal rate (k) = + Real Risk Free Rate (k*) 3 mo. T-Bills – Inflation + Inflation Rate (IRP) + Default Premium (DRP) AAA Corp Bonds – 30 yr. T-Bonds + Maturity Premium (MP) 30 yr. T-Bonds – 3 mo. T-Bills + Liquidity Prem. (LP ) How easy to convert to cash Real Assets – tangible assets (house, euip., inventory) Financial Assets – claims for future pymt (stocks, bills, bonds) Securities - Fin Assets with potential high Components of US Financial Market Public Offering Private (direct) Placement – sold to ltd investors Primary Market – securities offered for first time Secondary Market – trans.of outstanding securities Money Market – short-term debt inst (t-bills, CD, fed agency security, banker’s acceptances) Capital Market – Long-term (over 1 year - corp. equity, bonds, term loans, financial Benefits of Stock Exchange Provide continuous market Establish & publish fair security prices Help businesses raise new capital s) Investment Banker Financial specialists – intermediary in raising funds Not a depository of funds like commercial bank.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 2

notes_chatper_16 - 10 Principles Agency Problem 1. Risk -...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online