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Financial Management Overview: Business Forms and Objectives

Explore forms of businesses, financial goals, agency relationships, and solutions to agency problems in financial management. Learn about sole proprietorships, partnerships, corporations, and maximizing shareholder wealth. Gain insights into aligning management interests with shareholder welfare.

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Financial Management Overview: Business Forms and Objectives

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  1. CHAPTER 1An Overview of Financial Management • Forms of businesses • The basic goal: to create stock-holder value • Agency relationship: Stockholders versus managers

  2. Organizing Finance by Academic Studies and Career Paths

  3. Forms of Business • Forms of business • Advantages and Disadvantages of each form

  4. Alternative Forms of Business Organization • Sole proprietorship • Partnership • Corporation

  5. Sole proprietorship

  6. Partnership

  7. Corporation

  8. Separation of Ownership & Control

  9. Sole proprietorships & Partnerships • Advantages • Ease of formation • Subject to few regulations • No corporate income taxes • Disadvantages • Difficult to raise capital • Unlimited liability • Limited life

  10. Corporation • Advantages • Unlimited life • Easy transfer of ownership • Limited liability • Ease of raising capital • Disadvantages • Double taxation • Cost of set-up and report filing

  11. The issue of liability • Sole proprietorship & Partnerships* • Unlimited liability: Loss can exceed investment • Corporations • Limited liability: Loss is limited to investment • * except for special types of partnerships

  12. Food for thought • If you were the CEO of a large, publicly owned corporation, would you make decisions to maximize stockholders’ welfare or your own personal interests? • What are some of the actions stockholders could take to ensure that management’s interests and those of shareholders coincided?

  13. Financial objective • Maximize Shareholder wealth • Narrower: Maximize Stock Price

  14. Financial objective - Criticism • Against the interest of Employees • Against the interest of Customers • Against the interest of the Society

  15. Agency Problem • Meaning • Types of agency problems • Agency costs • Solutions

  16. What is an agency relationship? An agency relationship arises whenever one or more individuals, called principals, (1) hires another individual or organization, called an agent, to perform some service and (2) then delegates decision-making authority to that agent.

  17. Agency Costs Costs arising out of managers not working in the interest of shareholders and in making them do so.

  18. Solutions • Incentives and Threats: • Align compensation with stock performance • Active Board can fire a CEO who does not deliver • Outside investor can takeover the company and fire the under-performing management

  19. Students who understand this focus have a major advantage in the job market. This applies both to the initial job, and the career path that follows.

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