FIN300Exam1sheet - Chapter 1 Goal Financial Management Max...

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Chapter 1 Goal Financial Management: Max CV company’s stock, Prof: Max SH value Max owner wealth? NO Cap budgeting: managing a firm’s LT investments *Ex. Expanding plant Cap structure: debt/equity of firm (Issue new equity/use proceeds to retire outstanding debt) Working cap management: (day-to-day financial activities) { CA-CL} (1) Rather have less inventory=less supplies tied up (2) AR < AP Ex. Modifying the firm’s credit policy with customers CFO: Treasurer/Controller report to CFO; Cost/Fin acct., tax, management systems and cash/credit, cap. Budgeting, fin planning Sole Proprietorship: (Adv.) easy to start, least regulated, taxed once as personal income (Dis) limited life of owner, , hard to sell 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 (do not hold all responsibility), hard to transfer ownership Corp: 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 owners/management, easy transfer, easy to raise cap. (Dis.) Separate owner/manage, Double Taxation (taxed corp. rate and div’s taxed at personal rate—lose half profits on tax) Agency costs have incentives to help Agency Relationship: Stockholders (principals) hire managers (agents) to run company Agency Problem: Conflict of interest between principal/agent, Conflicts impose agency costs = SH opportunity losses (indirect=failed project /direct = luxuries) EVA: economic value added Managerial Compensation: (1) Incentives used to align management and SH interests—Option to buy stock at bargain price (2) Incentives structured carefully to achieve their goal—better performers within firm will get promoted (3) Threat of a takeover—company taken over/being fired may result in better management Employee stock option (ESO): call option—gives right to buy at set price Proxy fight: unhappy stockholders replace existing management with this authority to vote someone else’s stock off; Board of Directors manages/fires, stockholders run company! Primary Market: Original Sale of securities (1) Public offering: sell securities to the public or initial investors, registration costs, SEC; (2) Private placement: sell to private investors to avoid costs Secondary Market: Securities already been issued and are traded again. *NYSE, Tokyo SE (1) Dealer/Over the Counter (NASDAQ): Electronic buying/selling at risk; Most common; (2) Auction Markets: physical location and matched by buyer/sellers Listed Securities: stocks that trade on an organized exchange are said to be listed on that exchange; *firms must meet criteria like asset size or # shareholders. Sarbannes Oxley (Sarbox):
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FIN300Exam1sheet - Chapter 1 Goal Financial Management Max...

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