Equity share 1 Shareholders ownership rights by buying shares in the

Equity share 1 shareholders ownership rights by

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Equity (share): (1) Shareholder’s ownership rights- by buying shares in the corporation, shareholders become the owners of the firm. Shareholders are the residual claimants of the firm. (2) Shareholder’s payoffs- receive monetary returns in the following ways: Dividend per share- paid to investors from the corporations after tax dollars AND Capital gain- from the sale of shares (ownership rights) at a price higher than they were purchased for. Goal of financial management: (1) the primary goal is shareholder wealth maximisation. (2) Maximising the value of the firm, wealth of its owners, the price of its stock and its contribution to the economy. Ultimately, the value of the firm is determined by the investors in the financial market. 3 aspects of cash flows that affect asset value and thus stock prices: (1) Amount of cash flows expected by shareholders (2) Timing of the cash flow stream (3) Riskiness of the cash flow stream. All three determine the stock’s intrinsic value Intrinsic value VS market value: (1) Intrinsic value is an estimate of a stock’s ‘true’ value based on accurate risk and return data. (2) Market value is based on perceived information as seen by the marginal investor. Financial management decisions: (1) Capital budgeting- what long-term investments or projects should the business take on? (2) Capital structure- how should we pay for our assets? Should we use debt or equity? (3) Woking capital management- how do we manage the day-to-day finances of the firm? Agency problem: (1) Principal hires an agent to represent their interest (2) Stockholders hire managers, via the board of directors, to run the company (3) Conflict of interest between principal and agent Agency costs: (1) Direct agency costs: expenditures that benefit management: car and accommodation, big office, high pay & monitoring cost: auditors, audit committee, corporate governance (2) Indirect agency costs: lost opportunities which would increase firm value in the long run, if accepted How to handle the agency problem: (1) Compensation plans that tie the fortunes of the managers to the fortunes of the firm (2) Monitoring by lenders, stock market analysts and investors (3) The threat that poorly performing managers will be fired (4) The growing awareness of the importance of good corporate governance In large corporations, the separation of management and ownership provides the ease of share ownership transfer. Money market vs capital market Money market: (1) Debt securities of one year maturity or less are traded: treasury securities, commercial paper, bills, inter- bank loans (2) Loosely connected dealer markets (3) Banks are major players Capital markets: (1) Where equity and long-term debt claims are traded (2) Usually auction markets like the Singapore exchange Primary market VS secondary market Primary market: (1) For government and corporations initially issued securities (2) Public offering- where securities are offered to public at large; needs underwriting, more regulatory requirements, costly (3) sales of a newly issued
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