Section 1 Financial Statements

Section 1 Financial Statements - Fundamentals of Corporate...

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Fundamentals of Corporate Finance Section 1 Financial Statements Corporate Finance • Corporate finance answers three important questions: – What long-term investments should the firm take on? • Real Assets – Where will we get the long-term financing to pay for the investment? • Financial Assets – How will we manage the everyday financial activities of the firm?
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Structure of a Firm Sole Proprietorship: One-Person Business Partnership: business run by two or more people – General partnership – Limited partnership Corporation – Legally distinct from its owners and has limited liability. – Distinctive Feature: Separation of ownership and management. – Shareholders represented by the Board of Directors. – Major disadvantage: Double taxation We focus on corporation in this course. Goal Of Financial Management What should be the goal of a corporation? – Maximize profit? – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock?
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The Agency Problem Agency relationship – Principal hires an agent to represent his/her interests – Stockholders (principals) hire managers (agents) to run the company Agency problem – Conflict of interest between principal and agent Agency costs Managing Managers Managerial compensation – Can be used to align management and stockholder interests – 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 Proxy Fight
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Balance Sheet The balance sheet is a snapshot of the firm’s assets and liabilities at a given point in time Assets are listed in the order of decreasing liquidity – Liquidity: ease of conversion to cash without significant loss of value. Assets Liabilities and Equity Fixed Assets • Tangible • Intangible Current Liabilities US Corporation Balance Sheet – Table 2.1
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Market Vs. Book Value The balance sheet provides the ______________ of the assets, liabilities, and equity. – Market value is the price at which the assets, liabilities ,or equity can actually be bought or sold. – Market value and book value are often very different.
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Section 1 Financial Statements - Fundamentals of Corporate...

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