Final Notes - Chapter 1 • Stock price maximization is not...

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Unformatted text preview: Chapter 1 • Stock price maximization is not the same as profit maximization • Basic areas of finance o Corporate finance managing company’s money o Investments stocks, bonds, mutual funds, hedge funds, venture capital Risk verses return and asset allocation o Financial Institutions banks, insurance companies, brokerage firms o International Finance area within the 3 areas above o Non-profits o Public Sector • Financial Mgmt decisions o Capital Budgeting: where are you going to spend your money? o Capital Structure: how will you pay for your assets? o Working Capital Mgmt: how will you manage day to day finances of the firm? • Forms of Business Organization o Sole Proprietorship 80% of all businesses, 13% of revenue Pros: Take in all profits, easy to start, least regulated, taxed once as personal income Cons: Unlimited liability, difficult to sell ownership, limited to life of owner o Partnership 10% of all businesses, 7% of revenues Pros: 2+ owners, easy to start, income taxed once as personal income Cons: Difficult to transfer ownership, dissolves when one partner dies 2 types • General: legally binding, personal money on the line • Limited: contribute only money, not involved in decisions, can only lose as much money as you put in o Corporation 10% of all businesses, 80% of revenues Pros: limited liability, unlimited life, separation of owners and mgmt, easily transfer ownership, easy to raise capital Cons: Separation of ownership and mgmt (agency problem), Double taxation (taxed at corporate rate, and dividends taxed at personal rate) 2 types • S-Corp: less than 35 investors, avoid double taxation • Limited Liability company • Ultimate goal maximize the current value of the company’s stock • Agency problem: conflict of interest between principal and agent o Use incentives to align mgmt and stockholder interests o Professor Elson- Corporate Governance • Primary market: The place where the original sale of securities takes place • Secondary market: Where securities are bought and sold after initial sale Chapter 2 • Balance sheet: snapshot of the firm’s assets and liabilities at a given time o Balance sheet identity: Assets= Liabilities+ Shareholders equity • Market Value: the price at which the asset, liability or equity can actually be bought or sold at o More important than book value in decision making • Income Statement: view of the firms operations over a specified period of time o Report revenues and deduct expenses Matching principle: match expenses required to generate revenue to the period of recognition • Where people usually manipulate earnings • Cash flow from Assets= Cash flow to creditors+ cash flow to stockholders o Cash flow to creditors=interest paid- new net borrowing o Cash flow to stockholders= dividends paid- net new equity raised • Articles o Scandals in corporate America o Is the solution to scandals simpler rules? Is the solution to scandals simpler rules?...
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Final Notes - Chapter 1 • Stock price maximization is not...

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