2 Career Opportunities in Finance Financial Markets and Institutions Investments Managerial Finance
3 Alternative Forms of Business Organization Proprietorship Partnership Corporation
4 Proprietorship Advantages: Ease of formation Subject to few government regulations No corporate income taxes Limitations: Unlimited personal liability Difficult to raise capital Transferring ownership is difficult Limited life
5 Partnership Like a proprietorship, except two or more owners A partnership has roughly the same advantages and limitations as a proprietorship
6 Corporation Advantages: Unlimited life Easy transfer of ownership Limited liability Ease of raising capital Disadvantages: Double taxation Cost of set-up and report filing
7 Finance in the Organizational Structure of the Firm Board of Directors President TreasurerController Credit Manager Inventory Manager Director of Capital Budgeting Cost Accounting Financial Accounting Tax Department Vice-President: Finance Vice-President: Sales Vice-President: Information Systems Vice-President: Operations
8 The Financial Manager’s Responsibilities Forecasting and planning Major investment and financing decisions Coordination and control Dealing with financial markets
9 Goals of the Corporation Primary goal: stockholder wealth maximization maximizing stock price Managerial incentives Social responsibility SP max. and social welfare: Requires efficient low-cost plant high quality goods produce goods needed by people new: tech, goods, jobs efficient services, well-located businesses, etc…
10 Managerial Actions to Maximize Stockholder Wealth Capital Structure Decisions Capital Budgeting Decisions Dividend Policy Decisions
11 Factors Influenced by Managers that Affect Stock Price Projected earnings per share Timing of earnings streams Riskiness of projected earnings Use of debt (capital structure) Dividend policy
12 Agency Relationships An agency relationship exists whenever a principal hires an agent to act on their behalf. Within corporations, agency relationships exist between: Stockholders and managers, and Stockholders and creditors.
13 Stockholders versus Managers Managers are naturally inclined to act in their own best interests. But the following factors affect managerial behavior: The threat of firing The threat of takeover Structuring managerial incentives
14 Stockholders versus Creditors Stockholders (through managers) could take actions to maximize stock price that are detrimental to creditors. In the long run, such actions will raise the cost of debt and ultimately lower stock price.
15 External Constraints: 1.Antitrust Laws 2. Environmental Regulations 3. Product and Workplace Safety Regulations 4.Employment Practices Rules 5. Federal Reserve Policy 6.International Developments Strategic Policy Decisions Controlled by Management 1.Types of products and services produced 2.Production methods used 3.Relative use of debt financing 4.Dividend policy Level of Economic Activity and Corporate Taxes Stock Market Conditions Expected Profitability Timing of Cash Flows Degrees of Risk Summary of Major Factors Affecting Stock Prices Stock Price