Forms of businesses The basic goal: to create stock-holder value Agency relationship: Stockholders versus managers CHAPTER 1 An Overview of Financial.
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Forms of businesses The basic goal: to create stock-holder value Agency relationship: Stockholders versus managers CHAPTER 1 An Overview of Financial Management
Organizing Finance by Academic Studies and Career Paths
Forms of Business Forms of business Advantages and Disadvantages of each form
Alternative Forms of Business Organization Sole proprietorship Partnership Corporation
Sole proprietorships & Partnerships Advantages Ease of formation Subject to few regulations No corporate income taxes Disadvantages Difficult to raise capital Unlimited liability Limited life
Corporation Advantages Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages Double taxation Cost of set-up and report filing
The issue of liability Sole proprietorship & Partnerships* Unlimited liability: Loss can exceed investment Corporations Limited liability: Loss is limited to investment * except for special types of partnerships
Food for thought If you were the CEO of a large, publicly owned corporation, would you make decisions to maximize stockholders’ welfare or your own personal interests? What are some of the actions stockholders could take to ensure that management’s interests and those of shareholders coincided?
Financial objective - Criticism Against the interest of Employees Against the interest of Customers Against the interest of the Society
Agency Problem Meaning Types of agency problems Agency costs Solutions
What is an agency relationship? An agency relationship arises whenever one or more individuals, called principals, (1) hires another individual or organization, called an agent, to perform some service and (2) then delegates decision-making authority to that agent.
Agency Costs Costs arising out of managers not working in the interest of shareholders and in making them do so.
Solutions Incentives and Threats: Align compensation with stock performance Active Board can fire a CEO who does not deliver Outside investor can takeover the company and fire the under-performing management
Students who understand this focus have a major advantage in the job market. This applies both to the initial job, and the career path that follows.