Lecture01_winter09

Lecture01_winter09 - How should the Money to Finance the...

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Econ134a-Financial Management Finance is the Interaction of TIME , MONEY and UNCERTAINTY
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Business Organizations 1. Sole Proprietorship 2. Partnerships and Limited Partnerships 3. Corporations
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Sole Proprietorship No Corporate Income Tax Unlimited Liability Limited by Initial Owner
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Partnerships Mostly Limited Liability of Owners Still Difficult to Raise Funds Income taxed as Personal Tax
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Corporations Legal Entity Unlimited Life Limited Liability Separation of Ownership and Management Double taxation
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Financial Manager Function Intermediary Between the Firm’s Operations and Capital Markets Objective Maximize the Value of the Shareholder Sometimes incompatible with his own private interests: AGENCY PROBLEMS Institutional Arrangements Incentives in Contracts
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Financial Manager Decisions 1. Capital Budgeting Decisions Which Projects to Invest? How much Money allocate to Specific Assets? 2. Financing Decisions
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Unformatted text preview: How should the Money to Finance the Investments be raised? The Capital Budgeting Decision will be discussed in the first part of the course The Financing Decision and how it affects the Value of the Corporation will be discussed in the second part of the course Financing Decisions Two sources of Capital to the Corporation Issue Debt ( Bonds ) Issue Ownership of the Corporation ( Stock ) Important Distinction! Bondholders need to be paid first and only the residual goes to the Stockholders Critical Assumptions Perfect Markets : Investors can freely trade any securities. They do not pay any transaction costs and do not affect the price of the security Efficient Markets : The Price of a Security will reflect All the Available Information Complete Markets : Any pattern of payoffs can be obtained by an Individual Asset or a Combination of Assets....
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Lecture01_winter09 - How should the Money to Finance the...

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