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Chapter 1 - (owners and managers are completely separate...

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Chapter 1 Questions: 1. What long-term investments should the firm take on? 2. Where ill we get the money to pay for these investments? -take out a loan -issue equity (more risky) -cash on hand 3. How will we manage the everyday operations of the firm? Working capital=CA-CL Capital structure-mix of debt & equity in 0 firm Corporation -separate entity -owned by shareholders -legal separation of the firm & owners Goal of financial management: Maximize the value of the firm All other goals should lead to firm value maximization To measure: look at market capitalization Market cap: stock price * number of shrs outstanding Assume: markets are efficient (ch 12) Firm -run by CEO & managers -CEO hired by board of directors -board of directors elected by shareholders
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Unformatted text preview: (owners and managers are completely separate gropus) Managers run the firm, make daily decisions Owners expect to earn 0 return on their investment Conflict of interest due to the separation of ownership & management Agency relationship Shareholders- principal Managers- agent Managing managers 1. Compensation-bonuses-stock options- managers are shareholders 2. Threat of a takeover 3. Job security The market values a firm’s social responsibility Firm value: v0= E (top=infinity, bottom=t=1)of PV of all future cash flows Firm issue securities to financial market and firm get cash to invest from financial market Financial market earn return to investors and investors buy securities to financial market...
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