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MSU HB 311 - Foundations
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HB 311 Lecture 1 Current LectureFinance – Process of decision making relating to raising money, making decisionsGoal of the Firm- Shareholder wealth maximization- a) Max. Firm Value- b) Max. Stock PriceIs Profit Maximization Same as Wealth Maximization?Risk-Return Tradeoff: No additional Risk Unless Compensated With Additional ReturnFinancial Management DecisionsFinancing 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 paidLegal Organization has an impact on- Raising $- TaxationThese 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 CorporationsSole 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/familyCorporation- Requires legal process, most hire lawyer (time, work, and money)- Corps. Taxed Twice: Once for corporate tax rate (40-50%) and second for personaldividends (18-20%)- Virtually All Corporations Listed as C-Level Corporations- Money raised by borrowing or offering stock to investorsLimited 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 earningsRaising 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 financialmarkets- 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 problemCreditors 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


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