MGNT3125_chapter1and2_notes

MGNT3125_chapter1and2_notes - Introduction to Financial...

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Unformatted text preview: Introduction to Financial Management Chapter 1 Forms of Business Organization Stock Prices and Shareholder Value Intrinsic Values, Stock Prices, and Executive Compensation Important Business Trends Conflicts Between Managers, Stockholders, and Bondholders 1-1 Forms of Business Organization Proprietorship Partnership Corporation 1-2 3 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 owners personal wealth Unlimited liability Difficult to sell ownership interest 4 Partnership Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Limited/general partner Disadvantages Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership 5 Corporation Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management (agency problem) Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate) Stock Prices and Shareholder Value The primary financial goal of management is shareholder wealth maximization, which translates to maximizing stock price. Value of any asset is present value of cash flow stream to owners. Most significant decisions are evaluated in terms of their financial consequences. Stock prices change over time as conditions change and as investors obtain new information about a companys prospects. 1-6 Stock Prices and Intrinsic Value In equilibrium, a stocks price should equal its true or intrinsic value. Intrinsic value is a long-run concept. To the extent that investor perceptions are incorrect, a stocks price in the short run may deviate from its intrinsic value. Ideally, managers should avoid actions that reduce intrinsic value, even if those decisions increase the stock price in the short run. 1-7 Determinants of Intrinsic Values and Stock Prices 1-8 True Risk Perceived Investor Returns Perceived Risk Managerial Actions, the Economic Environment, Taxes, and the Political Climate Stocks Intrinsic Value Stocks Market Price Market Equilibrium: Intrinsic Value = Stock Price What is the Efficient Market Hypothesis...
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MGNT3125_chapter1and2_notes - Introduction to Financial...

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