FINANC 3000 1st Edition Lecture 1 Outline of Current Lecture I. What is Finance?II. Goals of Financial ManagementIII. Organizational Form of the BusinessIV. The Agency ProblemCurrent Lecture- Three Main Principles of Finance Cashflowo Increase Inflowso Decrease Outflows Timing of those flowso A dollar today is worth more than a dollar tomorrowo Timelines Risk of those flowso Less certain the flows, the less they are wortho = Price of the cashflows- Financial Management Applying financial principles in organizations Manage finances of the firm Assess risk Evaluate and select investments How much money to raise Financial Manager Decisions Maximize owner’s equity value- Corporate Goals Maximize value of owner’s equityo Increase current value per share (stock price) of existing shares Tempting alternativeso Maximize net income or profito Maximize costsThese 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.o Maximize market shares- Firm Goals Managers seeks to maximize shareholder wealth and company’s value through:o Decisions about- Attracting additional funds- Projects in which to invest- Returning vs. investing profits over time- Finance vs. Accounting Accountingo Tracks what happens to the firms money in the past Financial Managemento Combines historical figures and current informationo Determines what should happen with firm’s money now and in the future- Business Organization Single owners, partners, and corporations operate businesses Advantages and disadvantages related to o Controls and ownership of firmo Owner’s riskso Access to capital and tax ramifications- Business Form Types Sole Proprietorshipso Not legally separate from the owner- Advantageso Easy to starto Light regulatory and paperwork burdeno Single taxation at the personal tax rate- Disadvantageso Unlimited liabilityo Limited access to capital General Partnershipso Partners own the business together- Advantageso Relatively easy to starto Single taxation- Disadvantageso Partners jointly share unlimited liabilityo Personally liable for legal actions and debts of the firmo Difficult to raise large amounts of capital Corporationso Legally independent entity entirely separate from its owners- Advantageso Limited liability for ownerso Can raise large amounts of capital (public corporations)o Easy to transfer ownership- Disadvantageso Double taxation (corporate level and personal level) Hybrids (LLC, LLP, LP)o Combines attributes of several forms- Advantageso Offer single taxation and limited liability to all owners S Corporations Limited Liability Partnerships (LLP) Limited Liability Companies (LLC)- Disadvantageso Available for relatively small firmso Difficult to raise large amounts of capital- Agency Theory Problems arise when principal (shareholder) hires agent (manager) to operate firm but cannot monitor the agent’s actions Manager’s interests may not be aligned with shareholder’s goalso Three approaches to minimizing this conflict of interest- Ignore if effect is minimal - Use accountants, debt holders to monitor managers- Provide incentives to managerso Equity stakeso Stock optionso Employee Stock Option Plan (ESOP)- Corporate Governance Set of laws, policies, incentives, and monitors designed to handle issues arising from the separation of ownership and controlo Inside monitors- Board of Directorso Hires the CEOo Evaluates managemento Designs compensation planso Outside monitors- Auditors- Analysts- Banks- Credit rating