Shareholder Wealth
Present Value of expected future returns to owners(shareholders) of the firm.
How is Shareholder Wealth Measured and calculated?
Measured by the market value of common stock
equation: # of shares outstanding * Market Price per share
Discount rate
rate of interest used in process of finding present values; AKA required rate of return
Stakeholders
groups in a firm: customers, employees, suppliers, stockholders, bondholders, community neighbors and creditors
Agency Relationships
one or more individuals (principals) hire another individual (agent) to perform a service on their behalf
Agency Relationships often lead to agency ____ and ____?
Problems and cost
What are the 2 most important agency relationship in finance?
- b/w stockholders (owners) and managers
2. Owners and creditors
Agent
party who acts on behalf of the principal and has legal responsibility to act in best interests
Agency costs
cost incurred by owners of firm when managed by others
What are some examples of Agency Costs?
monitoring costs, bonding costs, and any losses that cannot be eliminated economically by monitoring and bonding
Profit
Revenue-Cost
Book value
historic cost of company’s assets
Cash Flow
amount of cash collected/paid out by firm
Sole Proprietorship
business owned by one person
What is an advantage and some disadvantages to Sole Proprietorship?
A: 1.Easy formation
D: 1. unlimited liability
2. difficulty raising funds for growth
Partnership and what are the 2 classifications?
owned by 2 or more persons
classified as general or limited
Corporation
“Legal Person” composed of one or more actual individuals/legal entities
What are some advantages and disadvantages of incorporating?
limited liability, permanency, and flexibility
ownership separate from management, complexity, double taxation
What are the 3 main types of Securities companies issue?
Debt Securities:
*Bonds-fixed income
Equity securities:
*Preferred stock-a hybrid:considered a fixed income security
*Common stock-ownership: dividends goes to owners
List in order the priority of corporate securities and mentions the risk level of ROR?
- Debt Securities (bonds): Least risky
- Preferred Stock: middle risk
- Common Stock: most risky
What is the primary goal of Financial Managers?
Maximize shareholder(stockholder) wealth
How is Market Capitalization calculated?
shares outstanding * price
T/F Maximizing profits is the same as maximizing shareholder wealth?
FALSE!!!!!!!!!
What determines value of cash flow?
Size, timing and risk