HB 311 Lecture 1 Current Lecture Finance Process of decision making relating to raising money making decisions Goal of the Firm Shareholder wealth maximization a Max Firm Value b Max Stock Price Is Profit Maximization Same as Wealth Maximization Risk Return Tradeoff No additional Risk Unless Compensated With Additional Return Financial Management Decisions Financing Decisions How do I raise capital Should we take the company public Can we reduce the firm s cost of capital How much credit do I want to give customers Investment decisions What investment will earn highest rate of return What are the risks What are alternate uses of funds When should existing funds be replaced Financial Management Cash not profits is king Cash flows are received by firm Accounting profits show income when earned and not when cash received Expenses recorded when incurred not when money actually paid Legal Organization has an impact on Raising Taxation These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute Financial Liability Virtually All Corporations Listed as C Level Corporations Sole Proprietorship Easy to start up not much documentation Profit taxed only once as a personal income Raising money is most difficult must obtain loan or ask friends family Corporation Requires legal process most hire lawyer time work and money Corps Taxed Twice Once for corporate tax rate 40 50 and second for personal dividends 18 20 Virtually All Corporations Listed as C Level Corporations Money raised by borrowing or offering stock to investors Limited Liability Stockholder is not liable for a corporations debts In sole proprietorship business owner stands to lose personal property if assets are not sufficient to cover liabilities S type Corporations Advantage over corporate Ability to raise money by issuing stock Disadvantage over corporate Double taxation of earnings Raising Money Financing means raising money to acquire something Forms of financing Issuing Borrowing Financial market framework where people can buy sell securities Financial assets are issued by corporation and bought by investors in financial markets Secondary market place where investors trade securities among themselves NYSE ext Primary market market where securities are initially sold I P O The Price of Securities A Link between Firm and Market Investors buy securities for the future cash flows expected from them Price depends on expectations Link between company and investors comes from relationship between price and results Everything firm does is evaluated by the market Management cares what grade it receives Critical link between market and firm stockholders own firm need to please them The Agency Problem Management controls resources owned by stockholders stockholders may not like decisions Abuse people provided with perks Controlling the agency problem efforts to manage agency problem Creditors vs Stockholders A creditor is anyone owed money by a business lenders venders employees gov t Actions taken by leveraged company that are risky place creditors at risk Lenders put clauses in loan agreements to prevent this