Fundamentals of Financial Management 13 Ed Brigham Chapter 1

Financial Management (Corporate Finance)
Focuses on decisions relating to how much and what types of assets to acquire, how to raise the capital needed to purchase assets, and how to run the firm so as to maximize its value.
Capital markets
Relate to the markets where interest rates, along with stock and bond prices, are determined.
Security analysis
Deals with finding the proper values of individual securities
Portfolio theory
Deals with the best way to structure portfolios of stocks and bonds
Market analysis
Deals with the issue of whether stock and bond markets at any given time are “too high, too low, about right”
Proprietorship
An unincorporated business owned by one person. ADV: 1. They are easily and inexpensively formed. 2. They are subject to fewer government regulations. 3. They are subject to lower income taxes than are corporations. DISADV: 1. Have unlimited personal liability for the businesses debts. 2. The life of the business is limited to the life of the individual who created it. 3. They have difficultly obtaining large sums of capital.
Partnerships
A legal arrangement between two or more people who decide to do business together. Partners are subject to unlimited personal liability.
Corporation
Legal entity created by a state, and it is separate and distinct from its owners and mangers. The corporation can lose all of its money, but it’s owner can lose only the funds that they invested in the company. Corporations have unlimited lives and it is easier to transfer shares of stock. Most corporation earnings are subject to double taxation. Earnings are taxed and the dividends are taxed as personal income to the shareholders .
S Corporations
Taxed as if they were partnerships so that they are exempt from the corporate income tax.
Limited liability company (LLC)
A hybrid between a partnership and a corporation.
Limited liability partnership (LLP)
Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It had limited liability like corporations, but are taxed like partnerships.
Shareholder wealth maximization
The primary goal for managers of publicly owned companies implies that decisions should be made to maximize the long run value of the firms common stock
Intrinsic Value
An estimate of a stocks true value based on accurate risk and return data.
Market price
Actual market price based on perceived but possibly incorrect information seen by the marginal investor.
Marginal investor
An investor whose views determine the actual stock price.
Equilibrium
The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying or selling a stock
Important business trends
1. Increased globalization
2. Improved information technology
3. Corporate governance- the way top managers operate and interface with stockholders
Useful motivation tools for managers
1. Reasonable compensation packages-
2. Firing managers who don’t perform well
3. Threat of hostile takeovers
Corporate Raider
An individual who targets a corporation for takeover because it is undervalued.
Hostile takeover
The acquisition of a company over the opposition of its management
Managers vs stockholders
Managers should try to maximize their stocks intrinsic value and then communicate effectively with stockholders. That will cause the intrinsic value to be high and the actual stock price to remain close to the intrinsic value over time.
Stockholders vs bond holders
Bond holders generally receive fixed payment regardless of how well the company does, while the stockholders do better when the company does better.