FIN 345 1st Edition Lecture 7Current Lecture1. Reviewa. A proprietorship is an unincorporated business owned by one individual. It is easily and inexpensively formed, it is subject to few government regulations, and it is taxed as an individual not a corporation.b. 3 of 4 Disadvantages of proprietorship: unlimited personal liability for business debts, transferring ownership can be difficult, life is only as long as the person that owns it is alivec. Most significant advantage to corporations: Limited liability d. Most significant disadvantage to corporations: Double taxatione. A Limited Liability Company or S Corporation is a business structure that offers the limited personal liability associated with a corporation, but the company’s income is taxed like a partnership (to the partners as individual income).f. A corporation that has no more than 100 stockholders and only one type of stock outstanding can elect to file taxes as an S Corporation. The income passesthrough the company to the owners so that it is taxed only once.g. Management’s primary goal is stockholder wealth maximization, which translates into maximizing the value of the firm is measured by the price of it’s common stockh. Managerial actions to maximize value/shareholder wealthi. Managers actions must be consistent with the following:ii. The value of any investment, such as a stock, is based on the amount of cash flowiii. Investors prefer to receive an expected cash flow now rather than later.iv. Investors generally are risk averse, which means they are willing to pay more for investments with more certain future cash flows than investments with less certain, or riskier, cash flows, everything else equal.v. Wealth maximization is a long term goali. 2 of 3 mechanisms used by shareholders to get managers to act in shareholder’s best interests:i. Threat of a takeoverii. Incentives tied to manager performance2. New notes: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.a. Managers’ job: Maximize value of company. Increase in cash flows increases value of company. Need to generate cash flows sooner rather than later. Needs to increase certainty of cash flows. b. External environment same for everybody operating a business: legal restraints, health of the economy (robust or static), tax laws, conditions in financial marketsc. Taxesi. 2 components to US Federal tax system1. Individuals2. Corporationsii. Need to know marginal tax
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