350-01a_note[1]

350-01a_note[1] - 350-01a_note, 11S Page 1 of 10 TOPIC 1:...

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Unformatted text preview: 350-01a_note, 11S Page 1 of 10 TOPIC 1: INTRODUCTION AND MARKET (CHAPTER 1 & 2) I.Outline A.Introduction 1.Forms of Business 2.Financial Goals of the Corporation 3.Stock Prices and Intrinsic Value 4.Conflicts between Managers, Shareholders, and Bondholders B.Financial Markets and Institutions 1.What is a Market 2.Financial Markets 3.Financial Institutions 4.Stock Markets and Returns 5.Stock Market Efficiency II.Homework Assignment Chapter12 Question1, 3, 5-91-4, 7-8, 12 ProblemNANA ================================================================ Class Notes I.Introduction A.Alternative Forms of Business Organization 1.Advantages vs. Disadvantages Proprietorships & Partnerships Corporation Advantages Subject to few regulations Easy and less expensive formation No corporate income taxes Unlimited life Ease of raising capital Easy transfer of ownership Limited liability Disadvantages Limited life Difficult to raise capital Harder to transfer ownership Unlimited liability Subject to more regulations Cost of set-up and report filing Double taxation 2.Special forms: a)S Corporation: b)Limited Liability Company (LLC) c)Limited Liability Partnership (LLP) 3.B.Fina1.C.Stock1.Finance withancial Goals oThe primary price. a)Do firmb)Is stock c)Should fk Market PrDeterminanhin an Organof the Corpofinancial goas have any reprice maximfirms behave rices and Intrts of Intrinsinization ration al is shareholdesponsibilitiesization good ethically?rinsic Value ic Value and der wealth mas to society ator bad for socStock Pricesaximization, wt large? ciety? s (Figure 1-1which transla) 350Pates to maximi0-01a_note, 11Sage 2 of 10 izing stock S 350-01a_note, 11S Page 3 of 10 2.What is market equilibrium? Relationship between stock price and Intrinsic value a)In equilibrium, stock prices are stable and there is no general tendency for people to buy versus to sell. b)In equilibrium, two conditions hold: (1)The current market stock price equals its intrinsic value (expected value)PP(2)Estimated returns must equal required returns.ssrrP: Intrinsic value (expected value) is determined by pricing model such dividend growth model. P: Market price is obtained from the market. sr: Required return is determined by estimating risk and applying the CAPM. sr: Estimated return (expected return in textbook) is determined by estimating dividends and expected capital gains. 3.How is market equilibrium established? (F1-1) a)Example 1: If price is below intrinsic value PP, what will happen in the market? (1)The current price (P) is too low and offers a bargain. (2)Buy orders will be greater than sell orders. (3)Pwill be bid up until market price equals intrinsic value b)Example 2: What if price is above intrinsic value PP????...
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350-01a_note[1] - 350-01a_note, 11S Page 1 of 10 TOPIC 1:...

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