Cheat sheet Test 1 - Chapter 1 Goal Financial Management...

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Chapter 1 Goal Financial Management: Maximize current value of company’s stock, Professor says Maximize the shareholder value (stock change price and dividends) Should we do everything to maximize the owner wealth? NO Capital budgeting: process of planning/managing a firm’s long-term investments *Ex. Expanding a manuf. plant Capital structure: mixture of debt and equity maintained by a firm.(how will we pay for investment?) Ex. Deciding whether to issue new equity and use proceeds to retire outstanding debt Working capital management: firm’s short term assets; inventory, short-term liabilities (day-to-day financial activities) { CA-CL} (1) Rather have less inventory=less supplies tied up (2) Want less AR (3) Want more AP Ex. Modifying the firm’s credit policy with customers Chief Financial Officer: Treasurer’s office and Controller’s Office report to CFO; Cost/Financial acct., tax, management systems and cash/credit, cap. Budgeting, financial planning Sole Proprietorship: 1 person business (Adv.) easy to start, least regulated, taxed once as personal income (Dis) limited life of owner, , difficult to sell ownership Partnership (General/Limited): One partner must be general (Adv.) >2 owners, more capital, easy to start, income taxed once (Dis.) unlimited liability, Gen: each partner has unlimited liability, Limited: some partners have limited liability (invest in business but do not hold all responsibility Ex. Acct. firms, Partnership dissolves when one partner dies/wishes to sell, Difficult to transfer ownership Corporation: Sub-Corp (small, hybrid of partnership/corp. *Taxed double), LLC (option to be taxed as corp or partner)--Legal entity separate from owners (stockholders) (Adv.) Limited Liability ( stockholders don’t lose more than they invest), Unlimited life, Separation of ownership/management, easy transfer of ownership, easy to raise cap. (Dis.) Separate owner/manage, Double Taxation (taxed corp. rate and dividends taxed at personal rate—lose half profits on tax) Agency costs have incentives to help Agency Relationship: Principal hires agent to represent his/her interest, Stockholders (principals) hire managers (agents) to run company Agency Problem: Conflict of interest between principal/agent, Conflicts impose agency costs = stockholders opportunity losses (indirect/direct=company luxuries) Managerial Compensation: (1) Incentives can be used to align management and stockholder interests—Option to buy stock at bargain price (2) Incentives need to be structured carefully to achieve their goal—better performers within firm will get promoted (3) Threat of a takeover/being fired may result in better management Proxy fight: unhappy stockholders replace existing management with this authority to vote someone else’s stock off; Threat of takeover: company taken over; Board of Directions manages/fires, Stockholders control firm! Primary Market:
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  • Fall '08
  • mucklow
  • Market Value, Generally Accepted Accounting Principles, net fixed assets, Sales/ total assets, cash flow** CASH

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