Finance
study how individuals and companies acquire capital and how they invest it
financial resource decisions:
1) how to allocate financial resources
2)how to acquire financial resources
3) how to value financial assets
inside the firm (corporate finance)
decisions are made about investing, financing, cash management, and dividends
outside the firm (financial markets)
financial assets: stocks, bonds, and derivatives
investments
how to price assets and create optimal combinations
proprietorship, partnership, LLC, corporation
What are the 4 types of business organizations?
sole proprietorship- advantages
ease and inexpensive to form, subject to few regulations, low income tax, no corp income taxes
Sole Proprietorship- disadvantages
the firm is the owner, unlimited liability, limited life, difficult to raise capital
limited partnerships
1. general partners are personally liable
2. limited partners enjoy limited liability, they are silent partners, and their stake is transferable to someone else
partnership- advatages
ease and inexpensive to form, income allocated on pro rate basis, no corp income taxes
Partnership Disadvantages
unlimited liability, all partners are liable, limited life, difficult to raise capital
corporation
is a "judicial person", they are entity seperate from its owners thus they enjoy limited liability
corporation- advantages
no limit on number of owners, unlimited life, easy to transfer ownership, limited liability, ease of raising capital
corporations- disadvantages
double taxation (corporate level and personal income), costly to setup and report filing
s corpotation
exempt from corporate tax income and no more than 100 stockholders
Sole Proprietorship
What makes up most percent of businesses?
corporations
what makes up most of revenue?
shareholders
firm owners
-own stocks
-entitled to residual earnings
-may also be managers
-no limited on number of owners
managers should maximize shareholder wealth
What do shareholders want?
agency problem
the possibility of conflict of interest between the stockholders (own firm) and management (control decisions) of a firm
self serving and personal interests may differ from shareholders
why would managers deviate from objective?
agency costs
costs to firm that result from agency conflict
corporate governance
mechanisms to deal with the agency problem
Aligning managers and shareholders- pay them?
offer to reward good performance and penalize bad, fixed salary vs incentive compensation
aligning shareholders and managers- watch them?
-board of directors: large shareholders (internal)
-takeover threats, scrutiny when raising capital (external)
aligning managers and shareholders- regulate them?
-legal system and security watchdogs
-disclosure requirements
-anti fraud laws
stock exchange
markets where already-issued securities of public companies are bought and sold
a public company
shares can be freely traded in a public market
private company
shares do not trade on a public market
primary market
company creates shares and sells them to public
secondary market
investors trade among themselves shares sold by company
physical location exchange
-New York Stock Exchange
-one specialist per stock recieves buy and sell orders
bid-ask
prices at which a securities dealer offers to buy and sell stock
law of one price
if two identical investment opportunities are available in competitive markets, they should have the same price