BMGT340 Notes

BMGT340 Notes - missBMGT340 Business Finance Prof. Elinda...

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Unformatted text preview: missBMGT340 Business Finance Prof. Elinda Kiss Office: 4459 VMH Office Hours: T/Th 11-11:30, Tu: 5-6pm, W: 2-5pm Phone: (215) 962-9071 ekiss@rhsmith.umd.edu , cc: efkiss@aol.com Tuesday, February 01, 2011 Chapter 1 An Overview of Financial Management Major areas in Finance, Recent Trends, Forms of Businesses, Goals of the Corporation, Agency Relationships Areas in Finance o Money and Capital Markets o Investments o Financial Management Financial Management Issues of the new millennium o Use of computers and electronic business o Globalization of Business Forms of Business Organization o Sole Proprietorship: Pros: Ease of formation Subject to few regulations No corporate income tax Cons: Limited life Unlimited liability Difficult to raise capital o Partnership Most revenues come from partnerships Roughly the same advantages and disadvantages than a sole proprietorship Only advantage of a partnership over a sole proprietorship is that it can have a longer life as long as one partner is alive and more partners can be added. o Corporation Bondholders, Stakeholders, Board of directors, Managers/Employees, Local Community, Suppliers/Customers, Federal/State/Local Government Pros: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Cons: Double taxation (income taxed at corporate rate and then dividends taxed at personal rate) Cost of set-up and report filing Agency Relationships o An agency relationship exists wherever a principal hires an agent to act on their behalf o Within a corporation, agency relationships exist between: Shareholders and managers Shareholders and creditors Goals of the Corporation o Primary: wealth maximization, which translates to maximizing stock price o Social Value Creation at Smith Shareholders vs. Managers o Managers are naturally inclined to act in their own best interest o But the following factors affect managerial behavior: Managerial compensation plans Direct intervention by shareholders The threat of firing The threat of takeover o Stock Options: Given to employees and managers, Call Option Right to buy stock at strike (exercise price) Shareholders vs. Creditors o Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors. o In the long run, such actions will raise the cost of debt and ultimately lower stock price. o Stockholders might prefer riskier projects, because they receive more of the upside if the project succeeds. By contrast, bondholders received fixed payments are more interest in limiting risk....
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This note was uploaded on 09/07/2011 for the course BMGT 340 taught by Professor White during the Spring '08 term at Maryland.

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BMGT340 Notes - missBMGT340 Business Finance Prof. Elinda...

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