Introduction to Financial
Forms of Business Organization
Stock Prices and Shareholder Value
Intrinsic Values, Stock Prices, and
Important Business Trends
Conflicts Between Managers,
Stockholders, and Bondholders
Finance Within the
Forms of Business
Ease of formation
Subject to few regulations
No corporate income taxes
Difficult to raise capital
Easy transfer of ownership
Ease of raising capital
Cost of set-up and report filing
Stock Prices and Shareholder
The primary financial goal of management
is shareholder wealth maximization, which
translates to maximizing stock price.
Value of any asset is present value of cash
flow stream to owners.
Most significant decisions are evaluated in
terms of their financial consequences.
Stock prices change over time as conditions
change and as investors obtain new
information about a company’s prospects.
Stock Prices and Intrinsic Value
In equilibrium, a stock’s price should
equal its “true” or intrinsic value.
Intrinsic value is a long-run concept.
To the extent that investor perceptions
are incorrect, a stock’s price in the short
run may deviate from its intrinsic value.
Ideally, managers should avoid actions
that reduce intrinsic value, even if those
decisions increase the stock price in the
Determinants of Intrinsic Values
and Stock Prices
Managerial Actions, the Economic
Environment, Taxes, and the Political
Intrinsic Value = Stock
Some Important Business
Recent corporate scandals have