Exam 1 Flashcards
Financial management
How to run a firm to max value. How to raise funds.
Financial institutions
Where savers meet borrowers. Supply capital to firms
Forms of business organization
Propietorship, parternship, corporations
Proprietorship
Unincorporated, owned by individual
Partnership
Unincorporated, owned by two or more
Corporation
A legal entity, separate ownership and management
Proprietorship and partnership advantages
Ease of formation, subject to few regulations, no corporate income taxes
Proprietorship and partnership disadvantages
Difficult to raise capital, unlimited liablitiy, limited life
LLC/LLP
Hybrid: low income taxes and limited liability
Corporation advantages
Unlimited life, easy transfer of ownership, limited liability, ease of raising capital
Corporation disadvantages
Double taxation and cost of setup and report filling
S corporation
Private less than 100 owners. Avoid tax
C corporation
Public
The primary financial goal of management is
Shareholder wealth max and max stock price
Managers reocognize
That being socuially responsible is consistent with maxing shareholder value
Intrinsic value
True value
Market value
The extent that investor perceptions are incorrect
Important business trends
Increased business ethics, increased globalization, improving tech, stockholders have more control of corporate governance
Conficts between stockholders and bondholders
Stockholders prefer riskier projects, bondholders concerned about use of addional debt, bondholders limit use of addional debt
Stockholders
Have owners stake and get more when company has higher profit
Bondholders
Recieve fixed payment of interst regardless of how well the company does
Suppliers of capital
Excess funds and looking for a rate of return on their investments
Demanders of capital
Need to raise funds and are willing to pay a rate of return on captial
Direct transfers
From savers to business: private placement. Underwriters