CFFM6 Ch 01 Slides Essay

Submitted By praisennorom
Words: 427
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…