CFFM6 Ch 01 Slides Essay

Submitted By praisennorom
Words: 438
Pages: 2

Chapter 1
Introduction to Financial
Management
 Forms of Business Organization
 Stock Prices and Shareholder Value
 Intrinsic Values, Stock Prices, and




Executive Compensation
Important Business Trends
Conflicts Between Managers,
Stockholders, and Bondholders

1-1

Finance Within the
Organization

1-2

Forms of Business
Organization





Proprietorship
Partnership
Corporation

1-3

Proprietorships and
Partnerships



Advantages

 Ease of formation
 Subject to few regulations
 No corporate income taxes



Disadvantages

 Difficult to raise capital
 Unlimited liability
 Limited life
1-4

Corporation



Advantages

 Unlimited life
 Easy transfer of ownership
 Limited liability
 Ease of raising capital



Disadvantages

 Double taxation
 Cost of set-up and report filing
1-5

Stock Prices and Shareholder
Value
 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.

1-6

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.



1-7

Determinants of Intrinsic Values
and Stock Prices
Managerial Actions, the Economic
Environment, Taxes, and the Political
Climate
“True”
Risk

“Perceived”
Investor
Returns

Stock’s
Intrinsic
Value

“Perceived”
Risk

Stock’s
Market Price
Market Equilibrium:
Intrinsic Value = Stock
Price

1-8

Some Important Business
Trends





Recent corporate scandals have
reinforced the…