Finance management cengage 2013 chapter 01

An Overview of Financial Management Forms of Business Organization Balancing Shareholder Value and Society Interests Intrinsic Values, Stock Prices, and Managerial Incentives Important B

An Overview of Financial

Management

Forms of Business Organization Balancing Shareholder Value and Society Interests

Intrinsic Values, Stock Prices, and Managerial Incentives

Important Business Trends Conflicts Between Managers, Stockholders, and

Chapter 1

Finance Within the Organization

Forms of Business Organization

Proprietorships and Partnerships

– Ease of formation

– Subject to few regulations

– No corporate income taxes

– Difficult to raise capital

– Unlimited liability

– Limited life

– Unlimited life

– Easy transfer of ownership

– Limited liability

– Ease of raising capital

– Double taxation

– Cost of setup and report filing

Balancing Shareholder Value and Society Interests

shareholder wealth maximization, which translates

to maximizing stock price.

– Value of any asset is present value of cash flow stream to owners.

– Most significant decisions are evaluated in terms of their financial consequences.

– Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects.

is not inconsistent with maximizing shareholder value.

Stock Prices and Intrinsic Value

“true” or intrinsic value.

incorrect, a stock’s price in the short run may deviate from its intrinsic value.

intrinsic value, even if those decisions increase the stock price in the short run

Determinants of Intrinsic Values and Stock

Prices

“True”

Risk “Perceived” Investor Cash Flows “Perceived” Risk

Managerial Actions, the Economic Environment,

Taxes, and the Political Climate

Stock’s

Market Equilibrium:

Some Important Business Trends

of business ethics, and have spurred additional regulations and corporate oversight.

technology have had a profound effect on all aspects of business finance.

governance.

Conflicts Between Managers and Stockholders

best interests (which are not always the same as the interest of stockholders).

behavior:

– Managerial compensation packages

– Direct intervention by shareholders

– The threat of firing

– The threat of takeover

Conflicts Between Stockholders and Bondholders

projects, because they receive more of the upside if the project succeeds By contrast, bondholders

receive fixed payments and are more interested in limiting risk.

use of additional debt.

including covenants in bond agreements that limit the use of additional debt and constrain managers’