BMGT340
Managerial Agency Problem
Conflicts of interest between the principal (shareholders), and the agent (managers). Excessive perquisites (Perks) Too Conservative The manager will act in his/her own interest that might not be what the shareholder wants.
What are some legal powers held by corporations?
Corporations have many of the legal powers that people have. It can enter into contracts, acquire assets, and incur obligations, and it enjoys protection under the U.S. Constitution against the seizure of its property.
C Corporations
Corporations subject to corporate taxes. Because most corporations have no restrictions on who owns their shares or the number of shareholders, they cannot qualify for subchapter S tax treatment. Thus, most corporations are C corporations.
Corporate charity
Decisions benefit other stakeholders at shareholders' expense.
CEO's Performance in Relation to Stock Price
Directors and top executives are rarely replaced through a grassroots shareholder uprising. Instead, dissatisfied investors often choose to sell their shares, driving the price down if there are not enough buyers. Similarly, investors who see a well-managed corporation will want to purchase shares, which drives the stock price up. Thus, the stock price of the corporation is a barometer for corporate leaders that continuously give them feedback on the shareholders' opinion of their performance. When the stock performs poorly, the board of directors might react by replacing the CEO. In a hostile takeover, an individual or organization—sometimes known as a corporate raider—purchases a large fraction of a company's stock and in doing so gets enough votes to replace the board of directors and the CEO. The mere threat of being removed as a result of a hostile takeover is often enough to discipline bad managers and motivate boards of directors to make difficult decisions.
Financial Institutions
entities that provide financial services, such as taking deposits, managing investments, brokering financial transactions, or making loans
Corporations can be...
private or public
The fact that a corporation's shares can be publicly traded creates a...
"Market for corporate control" that encourages managers and boards of directors to act in the interests of their shareholders.
The Financial Cycle (Figure 1.5)
(1) people invest and save their money, (2) that money, through loans and stock, flows to companies who use it to fund growth through new products, generating profits and wages. (3) the money then flows back to the savers and investors.
Key Features of a Partnership (General Partners)
1. All partners are liable for the firm's debt. That is, a lender can require any partner to repay all the firm's outstanding debts. 2. The partnership ends in the event of the death or withdrawal of any single partner. 3. Partners can avoid liquidation if the partnership agreement provides for alternatives such as a buyout of a deceased or withdrawn partner.
Top 10 Reasons to Study Finance
1. Finance is more interesting than accounting 2. Dazzle your friends. 3. Use a financial calculator 4. Give your parents advice 5. Business Terminology 6. Make a major donation to the university 7. Knowledge is power 8. Wall Street Journal 9. Youll be a better person 10. Get a challenging, well plaid hob
The three main tasks of financial managers:
1. Make investment decisions. 2. Make financing decisions. 3. Manage short-term cash needs (Working Capital Management).
Key Features of a Sole Propreitorship
1. Sole proprietorships have the advantage of being straightforward to set up. Consequently, many new businesses use this organizational form. 2. The principal limitation of a sole proprietorship is that there is no separation between the firm and the owner—the firm can have only one owner who runs the business. If there are other investors, they cannot hold an ownership stake in the firm. 3. The owner has unlimited personal liability for the firm's debts. That is, if the firm defaults on any debt payment, the lender can (and will) require the owner to repay the loan from personal assets. An owner who cannot afford to repay a loan for which he or she is personably liable must declare personal bankruptcy. 4. The life of a sole proprietorship is limited to the life of the owner. It is also difficult to transfer ownership of a sole proprietorship.
Responsibilities of Financial Manager
1. What long-term investments should the firm make? (Capital Budgeting Decisions) 2. Where will we get the financing? (Financing Decision) 3. How will the firm manage everyday activities? (Working Capital Decision)
High Frequency Traders
A class of traders who, with the aid of computers, place, update, cancel, and execute trades many times per second in response to new information as well as other orders, profiting by both providing liquidity and taking advantage of stale limit orders.
Corporation
A corporation is a legally defined, artificial being (a legal entity), separate from its owners. Considered to be and judicial person or legal entity Has many of the legal powers that people have. Protection under the U.S. Constitution. Can own stock in another corporation. Solely responsible for its own obligations. Often includes manufacturing communities. "Corporations cannot commit treason or be outlawed nor be excommunicated for they have no souls."
Formation of a Corporation
A corporation must be legally formed, which means that the state in which it is incorporated must formally give its consent to the incorporation by chartering it. Setting up a corporation is therefore considerably more costly than setting up a sole proprietorship. For jurisdictional purposes, a corporation is a citizen of the state in which it is incorporated.
Board of directors
A group of people who have the ultimate decision-making authority in the corporation. Elected by shareholders exercising control. The board of directors makes rules on how the corporation should be run (including how the top managers in the corporation are compensated), sets policy, and monitors the performance of the company. The board of directors delegates most decisions that involve the day-to-day running of the corporation to its management.
Limited Liability Company (LLC)
A limited liability company (LLC) is like a limited partnership but without a general partner. That is, all the owners (referred to as members) have limited liability, but unlike limited partners, they can also run the business (as managing members). Allow owners have limited liability. No restriction on operating the firm. If an LLC wants to borrow money, it is highly likely that the bank will require an owner to sign a guarantee for the loan.
Limited Partnership
A limited partnership is a partnership with two kinds of owners: general partners and limited partners. Advantage: Limited liability for limited partners. Disadvantage: Limited partners cannot actively run the firm.
Partnership
A partnership is a business owned and run by more than one owner.
Sole Proprietorship
A sole proprietorship is a business owned and run by one person. Sole proprietorships are usually very small with few, if any, employees. Although they do not account for much sales revenue in the economy, they are the most common type of firm in the world.
Advantages and Disadvantages of Sole Propreitorships
Advantages (1) Easy to form (2) No paperwork to fill out (3) No corporate income taxes Disadvantages (1) Limited life (no formal way to transfer the business) (2) Unlimited liability (personal assets are liable on top of business assets. (3) Difficult to raise capital. (4) Difficult to sell ownership interest.
Advantages and Disadvantages of Partnerships
Advantages (1) Relatively easy to form (2) No paperwork to fill out (3) No corporate income taxes (4) Access more capital from multiple owners. Disadvantages (1) Limited life (no formal way to transfer the business) (2) Unlimited liability (personal assets are liable on top of business assets. (3) Difficult to raise capital from outside sources. (4) Difficult to sell ownership interest. (5) Needs written assignment.
Advantages and Disadvantages of LLC
Advantages More Capital Unlimited Liability Disadvantages Difficult to transfer ownership
Advantages and Disadvantages of S Corporations
Advantages Single-Taxation Disadvantages No earnings may be retained Ownership restricted to less than 100 U.S. individuals.
Advantages and Disadvantages of a corporation
Advantages Unlimited life Ease of transfer of ownership Limited liability Easier to raise capital Disadvantages Double taxation Legal complexity
Secondary Market
After the initial transaction between the corporation and investors, the shares continue to trade in a secondary market between investors without the involvement of the corporation. Account for the vast majority of trading in the stock market.
General Partnership
All partners share in gains and losses All partners actively run business All have unlimited liability Gains and losses based on contributions and agreement.
Dark Pools
Alternative trading systems that do not make their order books visible. Instead, these dark pools offer investors the ability to trade at a better price (for example, the average of the bid and ask, thus saving the bid-ask spread) with the tradeoff that their order might not be filled if an excess of either buy or sell orders is received. Trading on a dark pool is therefore attractive to traders who do not want to reveal their demand and who are willing to sacrifice the guarantee of immediacy for potential price improvement.
Liquid (liquidity)
An investment is liquid if it can be easily turned into cash by selling it immediately at a competitive market price.
Limit order
An order to buy or sell a set amount at a fixed price. The bid ask spread of a stock is determined by the outstanding limit orders. The limit sell order with the lowest price is the ask price. The limit buy order with the highest price is the bid price. Traders make the market in the stock by posting limit buy and sell orders. Traders who post limit order provide liquidity to the market.
What does having no limitation on who can own its stock allow corporations to do?
An owner of a corporation need not have any special expertise or qualification. This feature allows free and anonymous trade in the shares of the corporation and provides one of the most important advantages of organizing a firm as a corporation: Corporations can raise substantial amounts of capital because they can sell ownership shares to anonymous outside investors. The availability of outside funding has enabled corporations to dominate the economy.
Shareholder, Stockholder, or Equity holder
An owner of a share of stock in the corporation. These individuals are entitled to dividend payments.
Tac Implications For Corporate Entities
Because a corporation is a separate legal entity, a corporation's profits are subject to taxation separate from its owners' tax obligations. In effect, shareholders of a corporation pay taxes twice. First, the corporation pays tax on its profits, and then when the remaining profits are distributed to the shareholders, the shareholders pay their own personal income tax on this income. This system is sometimes referred to as double taxation.
How is are agency problems commonly addressed?
By minimizing the number of decisions managers make that require putting their self-interest against the interests of the shareholders. For example, managers' compensation contracts are designed to ensure that most decisions in the shareholders' interest are also in the managers' interests; shareholders often tie the compensation of top managers to the corporation's profits or perhaps to its stock price.
Limitation to the strategy of tying compensation of top managers to the corporation's profits or stock price:
By tying compensation too closely to performance, shareholders might be asking managers to take on more risk than they are comfortable taking. As a result, the managers may not make decisions that shareholders want them to, or it might be hard to find talented managers willing to accept the job. For example, biotech firms take big risks on drugs that fight cancer, AIDS, and other widespread diseases. The market for a successful drug is huge, but the risk of failure is high. Investors who put only some of their money in biotech may be comfortable with this risk, but managers who have all of their compensation tied to the success of such a drug might opt to develop a less risky drug that has a smaller market.
Differences in tax implications between C Corporations and S Corporations:
C Corporations are subject to double taxation, while only shareholders are taxed within S Corporations. In a C corporation, you are only taxed when you receive the income as a dividend, whereas in an S corporation, you pay taxes on the income immediately regardless of whether the corporation distributes it as a dividend or reinvests it in the company.
Types of Roles
Chief Financial Officer (CFO) - Top Financial Manager Treasurer - cash and credit management, accounting for capital expenditures, deciding on capital expenditures, financial planning. Controller - taxes, accounting, and data processing.
financial conglomerates (financial services firms)
Combine more than one type of institution. Examples include Bank of America, JPMorgan Chase, and Deutsche Bank, all of which engage in commercial banking (like Wells Fargo) as well as investment banking.
New York Mercantile Exchange
Commodities like oil, wheat, and soybeans are traded on physical exchanges like the New York Mercantile Exchange.
Mitigation of Managerial Agency Conflicts
Compensate managers with stock or stock-linked securities (options), causing the manager to be a shareholder. Market for corporate control (hostile takeovers)
Derivative Securities
Complicated financial products used to hedge risks. Traded in locations like the Chicago Board Options Exchange
NYSE-Listed Market Shares and Nasdaq-Listed Market Shares over time (Figure 1.4)
Distribution of trading volume for NYSE-listed (left panel) and Nasdaq-listed (right panel) stocks. NYSE Arca is the electronic trading platform of the NYSE. BATS and Direct Edge merged in 2014; these new electronic exchanges now handle about 20% of all trades. Other venues, including internal dealer platforms and so called "dark pools," accounted for almost 40% of all trades in 2015
Managing Working Capital
Ensuring that the firm has enough cash on hand to meet its obligations from day to day.
Valuation Principle
How finance decisions in your personal life and inside a business are tied together. The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
Citizens United v. Federal Election Commission
In Citizens United v. Federal Election Commission, the Court held, in a controversial 5-4 decision, that the First Amendment allows corporations and unions to make political expenditures in support of a particular candidate. This ruling overturned existing restrictions on political campaigning by corporations.
Hostile Takeover
In a hostile takeover, an individual or organization—sometimes known as a corporate raider—purchases a large fraction of a company's stock and in doing so gets enough votes to replace the board of directors and the CEO. With a new superior management team, the stock is a much more attractive investment, which would likely result in a price rise and a profit for the corporate raider and the other shareholders.
Stock Shares and Voting on the Board of Directors
In most corporations, each share of stock gives a shareholder one vote in the election of the board of directors, so investors with more shares have more influence. When one or two shareholders own a very large proportion of the outstanding stock, these shareholders might either be on the board of directors themselves, or they may have the right to appoint a number of directors.
Dodd-Frank Act
In response to the 2008 financial crisis, the U.S. federal government reevaluated its role in the control and management of financial institutions and private corporations. Signed into law on July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act brought a sweeping change to financial regulation in response to widespread calls for financial regulatory system reform after the near collapse of the world's financial system in the fall of 2008 and the ensuing global credit crisis. The Dodd-Frank Act aims to: (1) Promote U.S. financial stability by "improving accountability and transparency in the financial system." (2) Put an end to the notion of "too big to fail." (3) "Protect the American taxpayer by ending bailouts." (4) "Protect consumers from abusive financial services practices." Implementing the wide-ranging financial reforms in the Dodd-Frank Act requires the work of many federal agencies, either through rulemaking or other regulatory actions. By mid-2018, just over two-thirds of the rules had been finalized. But as the financial crisis has faded from memory and political priorities have changed, there is increasing pressure to roll back many of the Dodd-Frank reforms.
Separation of Powers Between CEO and Board of Directors:
In some corporations, the separation of powers between the board of directors and CEO is not always distinct. In fact, the CEO can also be the chair of the board of directors (although in that case, there would also be a lead independent director to balance the CEO's power).
3-6-3 Rule
Issue Deposits at 3% Lend that money at 6% Golf at 3 PM
How is a Limited Liability Company (LLC) similar/different to Limited Partnerships?
It is similar in that it consists of limited partners. It is different in that it does not consist of any general partners (all owners have limited liability), and the limited partners can make managerial decisions (run the business).
Limited Liability
Liability is limited to one's investment.
Private Corporation
Limited number of owners and there is no organized market for its shares, making it hard to determine the market price of its shares at any point in time.
Sources of Conflict within a Corporation
Managers may decide to take the interests of other stakeholders into account in their decisions, such as keeping a loss-generating factory open because it is the main provider of jobs in a small town, paying above local market wages to factory workers in a developing country, or operating a plant at a higher environmental standard than local law mandates. In some cases, these actions that benefit other stakeholders may also benefit the firm's shareholders by creating a more dedicated workforce, generating positive publicity with customers, or other indirect effects. In other instances, when these decisions benefit other stakeholders at shareholders' expense, they represent a form of corporate charity. Also, because it is highly unlikely that all shareholders of a corporation would unanimously support a particular candidate in an election, allowing activities such as endorsement effectively guarantees a potential conflict of interest.
Dow Jones Industrial Average (DJIA) and the Standard and Poor's 500 (S&P 500).
The DJIA and S&P 500 are simply measures of the aggregate price level of collections of preselected stocks—30 in the case of the DJIA and 500 in the case of the S&P 500. These stocks were selected by Dow Jones (the publisher of the Wall Street Journal) or Standard & Poor's as representative of the overall market. The S&P 500 consists of 500 of the highest-valued U.S. companies. While fewer in number, the 30 stocks in the DJIA include companies such as Microsoft, Walmart, Boeing, and 3M, and are selected to cover the important sectors in the U.S. economy.
(The Dodd-Frank Act on Corporate Compensation and Governance) To limit senior corporate executives' influence over their own compensation and prevent excessive compensation, the Act directs the SEC to adopt new rules that:
Mandate the independence of a firm's compensation committee and its advisers. Provide shareholders the opportunity to approve—in a non-binding, advisory vote—the compensation of executive officers at least once every three years (referred to as a "Say-on-Pay" vote). Require firm disclosure and shareholder approval of large bonus payments (so-called "golden parachutes") to ousted senior executives as the result of a takeover. Require disclosure of the relationship of executive pay to the company's performance, as well as the ratio between the CEO's total compensation and that of the median employee. Create "clawback" provisions that allow firms to recoup compensation paid based on erroneous financial results.
Public Corporation
Many owners and its shares trade on an organized market, called a stock market (or stock exchange or bourse).
Stock Market
Market in which people buy and sell shares of public companies. Provide liquidity for a company's shares and determine the market price for those shares.
Market makers (specialists)
Matches buyers and sellers. Posted two prices for every stock they made a market in: The price they stood willing to buy the stock at (the bid price) and the price they stood willing to sell the stock for (the ask price). When a customer arrived wanting to make a trade at these prices, they would honor the price (up to a limited number of shares) and would make the trade even if they did not have another customer willing to take the other side of the trade. In this way, they provided liquidity by ensuring market participants they always had somebody to trade with.
What is a financial managers goal?
Maximizing the value of the business, which is determined in the financial markets. (Maximizing Share Price) Maximizing shareholder wealth.
Roles of Financial Institutions
Moving funds from those who have extra funds (savers) to those who need funds (borrowers and firms) Move funds through time: For example, suppose you need a $20,000 car loan. You need $20,000 now, but do not have it. However, you will have it in the future as you earn a salary. The financial institution, in this case a bank or credit union, helps transfer your future salary into funds today by issuing you a loan. Help spread out risk-bearing: Insurance companies essentially pool premiums together from policyholders and pay the claims of those who have an accident, fire, medical need, or who die. This process spreads the financial risk of these events out across a large pool of policyholders and investors in the insurance company. Similarly, mutual funds and pension funds take your savings and spread them out among the stocks and bonds of many different companies, limiting your risk exposure to any one company.
Bond Market and Foreign Exchange Market
Networks of dealers connected by phone and computer.
Making Financing Decisions
Once the financial manager has decided which investments to make, he or she also decides how to pay for them. Large investments may require the corporation to raise additional money. The financial manager must decide whether to raise more money from new and existing owners by selling more shares of stock (equity) or to borrow the money instead (bonds and other debt). A bond is a security sold by governments and corporations to raise money from investors today in exchange for a promised future payment. It can be viewed as a loan from those investors to the issuer. In this book, we will discuss the characteristics of each source of money and how to decide which one to use in the context of the corporation's overall mix of debt and equity.
Market Orders
Orders that trade immediately at the best outstanding limit order. Traders who place market orders are said to be "takers" of liquidity.
Listing Standards
Outlines of the requirements a company must meet to be traded on the exchange. Each exchange has its own listing standards. These standards usually require that the company has enough shares outstanding for shareholders to have a liquid market and to be of interest to a broad set of investors.
Dividend Payments
Payments made at the discretion of the corporation to its equity holders. Shareholders are entitled to dividend payments. Shareholders usually receive a share of the dividend payments that is proportional to the amount of stock they own. For example, a shareholder who owns 25% of the firm's shares would be entitled to 25% of the total dividend payment.
Stock Market Terms
Primary market: Issuer of stock is a party to the transaction Initial Public Offering (IPO): When a stock is issued for first time Seasoned Equity Offering (SEO): Existing company has a new equity issue after it has formed and had its initial public offering. Secondary Markets: Where investors trade; much larger. Dealer Market: Intermediary (Dealer) in the transaction actually owns the stock for the period of time after the seller sells before the buyer buys. Auction Market: Intermediary (Broker) intermediary in the transaction finds the other party of the transaction as a match maker. Market Maker: Dealers who specialize in a particular stock and buy and sell that stock. NYSE: Primarily an auction market NASDAQ: Purely a dealer market Bid-ask Spread: Difference between the selling price and the buying price; how dealers make money.
How are the legal precedents of the property of corporations similar to those of people?
Properties are private and entitled to protection under the U.S. Constitution.
Primary Market
Refers to a corporation issuing new shares of stock and selling them to investors.
Income Statement
Revenues - Costs of goods sold (COGS) (Variable/Operating Costs) Fixed Operating Costs (Selling General Administrative) = EBITDA (Earnings Before Interest Taxes Depreciation Amortization) - Depreciation and Amortization = EBIT (Earnings Before Interest Taxes) - Interest = Earnings Before Taxes (EBT) - Tax (EBT * Corp. Tax Rate) = Net Income
S Corporations (Tax Implictions)
S Corporations are corporations that are exempt from double taxation because they elect subchapter S tax treatment. Under subchapter S tax regulations, the firm's profits (and losses) are not subject to corporate taxes, but instead are allocated directly to shareholders based on their ownership share. The shareholders must include these profits as income on their individual tax returns (even if no money is distributed to them). However, after the shareholders have paid income taxes on these profits, no further tax is due.
Double Taxation
Shareholders of a corporation pay taxes twice. First, the corporation pays tax on its profits, and then when the remaining profits are distributed to the shareholders, the shareholders pay their own personal income tax on this income. The corporate organizational structure is the only organizational structure subject to double taxation.
Limitations on the qualifications for Subchapter S tax treatment.
Shareholders of such corporations must be individuals who are U.S. citizens or residents, and there can be no more than 100 of them.
Stock
Shares that make up the entire ownership stake of a corporation.
Business Finance Decisions
Should your firm launch a new product? Which supplier should your firm choose? Should your firm produce a part of the product or outsource production? Should your firm issue new stock or borrow money instead? How can you raise money for your start-up firm?
Four Major Types of Firms
Sole proprietorships, Partnerships, Limited liability Companies, and Corporations.
Corporate Raider
Someone who induces a hostile takeover by purchasing a large fraction of a company's stock and in doing so gets enough votes to replace the board of directors and the CEO.
Fintech
Technology aimed at disrupting many of the intermediation functions these institutions perform. Subareas include: (1) Lending tech (Prosper, LendingTree, RocketMortgage, SoFi, Lu.com, etc.) (2) Payments/billing tech (PayPal, Alipay, Clover, Square) (3) Personal finance/wealth management (Wealthfront, Betterment, Robinhood) (4) Money transfer/remittance (PayPal, Alipay, WePay, Payoneer, Venmo, Square Cash) (5) Blockchain (Bitcoin, Ethereum, R3, Corda) (6) Institutional/capital markets tech (Symphony, Plaid, InvestCloud) (7) Equity crowdfunding (KickStarter, Initial Coin Offerings) (8) Insurance tech (Oscar, Bright Health, Metromile, HNA Easylife, )
Worldwide Stock Markets Ranked By Volume of Trade (Figure 1.3)
The bar graph shows the 10 biggest stock markets in the world ranked by total value of shares traded on exchange in 2018. All of these markets are considered secondary markets.
New York Stock Exchange (NYSE)
The best known U.S. stock market and one of the largest stock markets in the world.
Bid-Ask Spread
The bid-ask spread is a transaction cost investors pay in order to trade. Customers always buy at the ask (the higher price) and sell at the bid (the lower price). Market makers make money because ask prices exceed bid prices. This difference is called the bid-ask spread.
Who possesses direct control of the corporation (Corporate Management Team)?
The board of directors and the management team headed by the chief executive officer.
The Financial Functions within a Corporation (Figure 1.2)
The board of directors, representing the stockholders, controls the corporation and hires the top management team. A financial manager might hold any of the green-shaded positions, including the Chief Financial Officer (CFO) role. The controller oversees accounting and tax functions. The treasurer oversees more traditional finance functions, such as capital budgeting (making investment decisions), risk management (managing the firm's exposure to movements in the financial markets), and credit management (managing the terms and policies of any credit the firm extends to its customers).
Investment Banking
The business of advising companies in major financial transactions. Examples include buying and selling companies or divisions, and raising new capital by issuing stock or bonds. Goldman Sachs and Morgan Stanley are financial institutions that are focused on investment banking activities.
Chief Executive Officer (CEO)
The chief executive officer (CEO) is charged with running the corporation by instituting the rules and policies set by the board of directors.
limit order book
The collection of all limit orders. Exchanges make their limit order books public so that investors (or their brokers) can see the best bid and ask prices when deciding where to trade.
Equity
The collection of all the outstanding shares of a corporation.
Corporate Charter
The corporate charter specifies the initial rules that govern how the corporation is run. Most firms hire lawyers to create a corporate charter that includes formal articles of incorporation and a set of bylaws.
Managing Short-Term Cash Needs
The financial manager must ensure that the firm has enough cash on hand to meet its obligations from day to day. This job, also commonly known as managing working capital, may seem straightforward, but in a young or growing company, it can mean the difference between success and failure. Even companies with great products require a lot of money to develop and bring those products to market. Consider the costs to Starbucks of launching their VIA instant coffee, which included developing the instant coffee crystals and creating a big marketing campaign for them, or the costs to Boeing of producing the 787—billions of dollars were spent before the first 787 finally left the ground in December 2009. A company typically burns through a significant amount of cash before the sales of the product generate income. The financial manager's job is to make sure that limited access to cash does not hinder the firm's success.
Making Investment Decisions
The financial manager's most important job is to make the firm's investment decisions. The financial manager must weigh the costs and benefits of each investment or project and decide which ones qualify as good uses of the money stockholders have invested in the firm. These investment decisions fundamentally shape what the firm does and whether it will add value for its owners.
How do limited partnerships differ from general partnerships?
The general partners have the same rights and privileges as partners in any general partnership—they are personally liable for the firm's debt obligations. Limited partners, however, have limited liability—that is, their liability is limited to their investment. Their private property cannot be seized to pay off the firm's outstanding debts. Furthermore, the death or withdrawal of a limited partner does not dissolve the partnership, and a limited partner's interest is transferable. However, a limited partner has no management authority and cannot legally be involved in the managerial decision-making for the business.
Whose interests and priorities determine the goals of the firm, and what do all shareholders agree on?
The interests of shareholders are aligned for many, if not most, important decisions. All the shareholders will agree that they are better off if the value of their investment in the corporation is maximized.
Chief Financial Officer (CFO)
The most senior financial manager, often reporting to the CEO.
Finance Theory
The only acceptable ultimate goal of the company is to maximize shareholder wealth by maximizing share price by accepting all possible positive net present value projects.
Why may old or established businesses remain as partnerships or sole proprietorships?
The owners' personal reputations are the basis for the businesses. For example, law firms, medical practices, and accounting firms are frequently organized as partnerships. For such enterprises, the partners' personal liability increases the confidence of the firm's clients that the partners will strive to maintain the firm's reputation. Agriculture forestry and fishing are the most common proprietorships and partnerships.
the value of the owner's investment in the corporation is determined by...
The price of a share of the corporations stock
US Firm Statistics (% of businesses vs. % of revenue)
There are four major types of firms in the United States. As (a) and (b) show, although the majority of U.S. firms are sole proprietorships, they generate only a small fraction of total revenue, in contrast to corporations.
Why is it not feasible for the owners of a corporation to have direct control of the firm?
There are many owners of a corporation, each of whom can freely trade their stock, It falls to the financial manager to make the financial decisions of the business for the stockholders. Within the corporation.
Ownership of a Corporation
There is no limit to the number of owners a corporation can have. Because most corporations have many owners, each owner owns only a fraction of the corporation. The entire ownership stake of a corporation is divided into shares known as stock. The collection of all the outstanding shares of a corporation is known as the equity of the corporation. An owner of a share of stock in the corporation is known as a shareholder, stockholder, or equity holder.
Goals of the Corporation
To maximize shareholder wealth, that the corporation is supposed to look out for its shareholders. Shareholders are residual claimants, meaning they only get paid when all other obligations to stakeholders are taken care of. Stakeholders: Those who have a "stake" in the actions of the corporation. (CEO, Top Executives, Employees, Local Communities, Federal, State, Local Governments, Suppliers and Customers, Bondholders, Debt Holders, Creditors). The firm maximizes shareholder value by maximizing share price.
The Goal of the Financial Manager
To maximize the wealth of the owners, the stockholders.
NASDAQ (National Association of Securities Dealers Automated Quotations)
Well known U.S. stock market
Agency Problem
When managers, despite being hired as the agents of shareholders, put their self-interest ahead of the interests of those shareholders.
Personal Finance Decisions:
When to start saving and how much to save for retirement. Whether a car loan or lease is more advantageous. Whether a particular stock is a good investment. How to evaluate the terms of a home mortgage.
Shareholder Value vs. Stakeholder Value
While the goal of a financial manager is to increase the value of the firm to its shareholders, this responsibility does not imply that the impact of the firm's decisions on other stakeholders, such as employees or customers, can be ignored. By creating additional value for customers, the firm can raise prices and increase profits. Similarly, if the firm makes decisions that benefit employees (for example, increasing their job security), it will be able to attract the best employees or benefit from increased productivity. On the other hand, if customers or employees anticipate that the firm is likely to exploit them, they will demand lower prices or higher wages. Thus, to maximize shareholder value, the financial manager must consider the impact of her decision on all stakeholders of the firm.
Do corporations have a limitation on who can own its stock?
Within a corporation, there is no limitation on who can own its stock.
