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 short run.
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 reinforced the…