[FIN 3403] - Final Exam Guide - Ultimate 60 pages long Study Guide!

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29 Nov 2016
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FIN 3403
FINAL EXAM
STUDY GUIDE
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Financial Management of the Firm - Chapter 1 Notes
What is a firm?
-Business organization, company
-Collection of assets to be used in production
-Long term plant, property, equipment used to produce services and products
Types of Business Organizations
-Sole Proprietorship - business owned by one person
-Partnership - unincorporated business with multiple owners
-All funds, taxes, ownership is placed on a personal level on the owners
Advantages
-ease of start-up (partnership documents)
-single taxation
Disadvantages
-limited life (partnership limits)
-hard to transfer ownership
-limited capital
-equity capitals - funds put in by owners
-debt capital - borrowings that the company has made that they’ll have to pay back to
creditors
-It’s harder to access and get capital
-unlimited liability
-Corporation - distinct legal entity; legally a “person”
-owner(s) are called shareholders
Advantages
-limited liability
-only amount of money contributed towards business is at risk; not total amount of personal
assets
-easy to transfer ownership
-ease of raising capital
Disadvantages
-double taxation
-income distributed to shareholders as dividends are both paid to IRS as firm’s earnings and
then shareholder’s income tax
-separation of ownership and management
What are the responsibilities of financial management?
Three main important areas of decision-making:
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1. How to manage everyday financial activities of the firm (daily cash flow)
-Working capital management
2. What long-term investments the firm takes on
-Capital budgeting
-what business the company will be in, what assets to buy
3. What long-term funding is used? (equity or debt)
-Capital structure
Agency Relationships
-Brand and management are “agents”
-Agents represent shareholders in day-to-day operations
-Leads to possibility of conflicts of interest
-decisions that are not in the best interest of the shareholders - Agency Costs
Agency Costs:
-difference between direct and indirect costs not important
-overconsumption of perquisites (perqs) by management
-bonuses not tied to performance
-cost of creating and minoring policies
-cost of sub-optimal decisions
Controls of agent actions:
-equity compensation for boards and management
-threat of firing
Goal of Financial Management
-Why do we need a goal?
-Managers concerned most with shareholders’ interests
-Why do shareholders invest in company?
-to increase wealth
-increasing stock price creates wealth
-maximize vs. increase
-Goal = MAXIMIZE SHAREHOLDER WEALTH
= MAXIMIZE STOCK PRICE
What about other possible goals?
What about other stakeholders?
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