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Chapter 1 - Chapter 1 Finance 302 Test#1 Outline What is...

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Chapter 1 – Finance 302 Test #1 Outline What is the goal of the firm and why? Why are other goals not adequate? The goal of the firm is to maximize shareholder wealth (in the long run) . Shareholder Wealth Maximization – the primary goal of publicly traded companies implies that decisions should be made to maximize the long-run value of the firm’s common stock. By maximizing firm’s stock price: Cash flow affects stock price Cash flow considers risk, timing, and level of cash flow Most firms that maximize stock prices are maximizing profits but just because firms are maximizing profits, it doesn’t mean they are maximizing stock prices. Management’s goal should be to make decisions designed to maximize the stock’s price. List the Different Business Organization Types and Advantages/Disadvantages: The way a firm is organized affects financial decisions of the firm. 1. Sole Proprietorship – an unincorporated business owned by one individual. Advantages: i. Easy, cheap to start (inexpensively formed) ii. Easy to manage iii. Few regulations iv. Business pays no taxes Disadvantages: i. Hard to raise capital (outside funds) ii. Limited life (limited to the life of the individual who created it) iii. Unlimited liability 2. Partnership – an unincorporated business owned by two or more persons.
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