INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
An Overview of Financial
Management
Forms of Business Organization
Creating Value for Investors
Stockholder-Manager Conflicts
Stockholder-Debtholder Conflicts
Balancing Shareholder Interests and Society
Interests
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INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Finance Within the Organization
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part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Forms of Business Organization
• Proprietorship
• Partnership
• Corporation
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part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Proprietorships and Partnerships
• Advantages
Ease of formation
Subject to few regulations
No corporate income taxes
• Disadvantages
Difficult to raise capital
Unlimited liability
Limited life
• Often set up through LLCs/LLPs.
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in
part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Corporation
• Advantages
Unlimited life
Easy transfer of ownership
Limited liability
Ease of raising capital
• Disadvantages
Double taxation
Cost of setup and report filing
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part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Stock Prices and Intrinsic Value
• In equilibrium, a stock’s price should equal its
“true” or intrinsic value.
• Intrinsic value is a long-run concept.
• To the extent that investor perceptions are
incorrect, a stock’s price in the short run may
deviate from its intrinsic value.
• Ideally, managers should avoid actions that
reduce intrinsic value, even if those decisions
increase the stock price in the short run.
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part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Determinants of Intrinsic Values and Stock
Prices
Managerial Actions, the Economic
Environment, Taxes, and the Political Climate
“True” “Perceived” Investor “Perceived”
Risk Cash Flows Risk
Stock’s Stock’s
Intrinsic Value Market Price
Market Equilibrium:
Intrinsic Value = Stock Price
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in
part.
INTRO ORGANIZATION CREATING VALUE STK-MGR CONFLI STK-DBT CONFLI BAL INTERESTS
CTS CTS
Stockholder-Manager Conflicts
• Managers are naturally inclined to act in their
own best interests (which are not always the
same as the interest of stockholders).
• But the following factors affect managerial
behavior:
Managerial compensation packages
Direct intervention by shareholders
The threat of firing
The threat of takeover
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part.
INTRO ORGANIZATION CREATING VALUE STK-MGR STK-DBT BAL INTERESTS
CONFLICTS CONFLICTS
Stockholder-Debtholder Conflicts
• Stockholders are more likely to prefer riskier
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.
• Bondholders are particularly concerned about
the use of additional debt.
• Bondholders attempt to protect themselves by
including covenants in bond agreements that
limit the use of additional debt and constrain
managers’ actions.
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© 2018 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in
part.
INTRO ORGANIZATION CREATING VALUE STK-MGR STK-DBT BAL INTERESTS
CONFLICTS CONFLICTS
Balancing Shareholder Interests and Society
Interests
• The primary financial goal of management is
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.
• Managers recognize that being socially
responsible is not inconsistent with maximizing
shareholder value.
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part.