Professional Documents
Culture Documents
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
1-6
Stock Prices and Intrinsic Value
1-7
Determinants of Intrinsic Values and
Stock Prices
Managerial Actions, the Economic
Environment, Taxes, and the Political Climate
Stock’s Stock’s
Intrinsic Value Market Price
Market Equilibrium:
Intrinsic Value = Stock Price
1-8
Some Important Business Trends
1-9
Conflicts Between Managers and
Stockholders
Managers are naturally inclined to act in their
own best interests (which are not always the
same as the interest of stockholders).
But the following factors affect managerial
behavior:
Managerial compensation packages
Direct intervention by shareholders
The threat of firing
The threat of takeover
1-10
Conflicts Between Stockholders and
Bondholders
Stockholders are more likely to prefer riskier
projects, because they receive more of the upside
if the project succeeds. By contrast, bondholders
receiving fixed payments are more interested in
limiting risk.
Bondholders are particularly concerned about the
use of additional debt.
Bondholders attempt to protect themselves by
including covenants in bond agreements that limit
the use of additional debt and constrain
managers’ actions.
1-11