Finance 3110 chapter 1

General partnership

each partner has unlimited liability for all of the obligations of the business. Approximately 17 percent of all partnerships in the United States are this type

What are stakeholder concerns of shareholder wealth maximization?

has to think about how increasing the stock price will affect the stockholders, customers, employees, suppliers and communities in which the firm operates

Market value

is defined as the price at which the stock trades in the marketplace

Corporate governance

is the system of rules, practices and processes by which a company is directed and controlled. Involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community

Stockholders (principles) hire _______ to run the company

managers (agents)

Management should seek to _____ the ______ _____ of the expected returns to the shareholders of the firm

maximize, present value

Shareholder wealth =

number of shares outstanding x market price per share

Agency relationships

occur when one or more individuals (the principles) hire another individual (the agent) to perform a service on behalf of the principles

Shares outstanding

refers to all the shares currently owned by stockholders, DOES NOT INCLUDE shares repurchased by a company

Book value

reflects the historic cost of assets, not the earning capacity of those assets

Cash flows

relates to the actual cash generated or paid by the firm

Corporate securities

represent claims against the assets and future earnings of the firm

SEC

securities and exchange commission

Exercise price

the price per share at which the owner of a traded option is entitled to buy or sell the underlying security

Present value

the value today or some future payment or stream of payments, evaluated at an appropriate discount rate

Limited partnership

usually involves one or more general partners and one or more limited partners. common in real estate ventures

Corporation

"legal person" composed of one or more actual individuals or legal entities

Subchapter S corporation

-retains limited liability of corporation -no corporate taxation-all income is passed to owners who pay individual taxes -requires that the firm have 100 or fewer shareholders

Limited Liability Corporation (LLC)

-similar to subchapter S but with fewer restrictions-generally replacing Subchapter S

What is shareholder wealth maximization?

-when business managers try to maximize the wealth of their firm, they are actually trying to increase their stock price...as the stock price goes up, the value of the firm increases and the net worth of the individual who owns the stock increases.

Partnerships account for ____ percent of all U.S. business firms and ____ percent of business revenues

10; 13

Corporations account for less than _____ percent of all U.S. business firms but about ____ percent of U.S. business profits.

18; 61

Threat of takeovers

If managers act in their self-interest, then share values will be depressed, providing an incentive for someone to take over the company at a depressed level

Maximization of shareholder wealth: managerial strategies

Managerial actions to influence value -products and services offered for sale -production technology -marketing and distribution network -investment strategies

Is maximizing profits the same as maximizing shareholder wealth?

Maximizing profits is typically not the same as maximizing shareholder wealth. ---profit maximization lacks a time dimension (long-term versus short-term) ---GAAP results in hundreds of definitions of profits (or earnings or income) ---Profit maximization ignores risk

Principles hire ____ to represent his/her interest

agents

Divergent Objectives of Shareholder wealth maximization

There could be a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. **Sometimes managers pursue goals that are directed more towards their self-interests, while still satisfying shareholders sufficiently to maintain control of the corporation. ***can lead to long-run job security and limit the risk incurred by the firm, but can cause bankruptcy within the firm.

Organization of the Financial Management Function-microeconomics

-financial managers use the concepts of setting marginal cost equal to marginal revenue when making long-term investment decisions and when managing working capital

Advantages of a corporation

-limited liability -permanency -flexibility -ability to raise capital

Organization of the Financial Management Function- Chief financial officer

-oversees: accounting, treasury, tax, and audit

Organization of the Financial Management Function- Controller

-oversees: financial accounting, cost accounting, taxes and data processing

Sole Proprietorship

-owned by one person -represent 72 precent of all businesses -account for less than 4 percent of total business revenues

Disadvantages of corporation

-ownership is often separated from management

Stock prices

(the measure of shareholder wealth) reflect the magnitude, timing and risk associated with future benefits expected to be received by stockholders

Hybrid forms of ownerships

-Subchapter S corporation -Limited Liability Corporation (LLC) -Limited Liability Partnership (LLP)

Organization of financial management function- marketing, production, quantitative methods, and human resources management

-all are indirectly related to the key day-to-day decisions made by financial managers

Limited Liability Partnership (LLP)

-all partners have limited liability -special form- professional limited liability partnership

Organization of the Financial Management Function- accounting

-financial managers are primarily concern with a firm's cash flow

Organization of financial management function- macroeconomics

-financial managers should recognize and understand how monetary and fiscal policies affect the economy and the cost of funds and the availability of credit

Organization of the Financial Management Function- Treasurer

Oversees: -cash and marketable securities management -capital budgeting analysis -financial planning -investor relations -pension fund management

What is the primary goal of the firm?

Shareholder wealth maximization

Maximization of shareholder wealth is

a market concept, not an accounting concept

Discount rate

takes into account the returns that are available from alternative investment opportunities during the specific (future) time period