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BMGT340 Notes - missBMGT340 Business Finance Prof Elinda...

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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 [email protected] , cc: [email protected]
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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:
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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.
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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. Tuesday, February 01, 2011 – Chapter 2 – Financial Markets and Institutions The capital allocation process, financial markets, financial institutions, stock markets, stock market efficiency Markets: Venue where goods and services are exchanged o Financial market is a place where individuals and organizations want to borrow funds are brought together with those having a surplus of funds.
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