Lecture1 (2) - Lecture 1: Introduction to Corporate Finance...

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Lecture 1: Introduction to Corporate Finance and Financial Statements
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Key Concepts for Lecture 1 Advantages/Disadvantages of different business types. The goal of the firm. Problems financial managers face. The agency problem. Balance Sheet and Income Statement. Book values vs. Market values. Marginal and average tax rates
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Legal Business Structures in the US Sole Proprietorship Advantages: 1. Income is not taxed twice. 2. Cheap and easy to start. 3. No agency problem. Disadvantages: 1. Unlimited liability. 2. Limited access to capital limits growth. 3. Firm may end when owner dies.
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Legal Business Structures in the US Partnership Advantages: 1. No double taxation. 2. Can share workload with partner. 3. Partners can buy/sell their portion of the business. 4. No agency problem (unless a silent partnership). Disadvatages: 1. Limited access to capital = limited growth potential. 2. Unlimited liability.
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Legal Business Structures in the US Corporation Advantages: 1. Limited liability. 2. Easier access to financing. 3. Potentially infinite lifespan. Disadvantages: 1. Double taxation of income. 2. Agency problem.
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Three Decisions Financial Managers Make Working Capital Decision How much money is needed for transactions and day-to-day operations? Capital Budgeting Decision Which investments are good and which are bad? Capital Structure Decision Once we find a good investment how do we finance it?
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The goal of the firm Utility theory: 1. People care about their happiness 2. They get happiness via consumption. Do people only care about consumption? Individual’s Goal: Maximize Consumption. Problem for firm: Every individual wants different things, what should the firm do? Solution: Maximize Shareholder Wealth (Long-term). Formula for Shareholder Wealth: SW=Shares Outstanding x Price per Share
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The agency problem Corporations can have millions of owners.
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Lecture1 (2) - Lecture 1: Introduction to Corporate Finance...

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