Career opportunities Issues of the early 2000 Forms of business organization

1. Lecture One An Overview of Financial Management Career opportunities Issues of the early 2000 Forms of business organization Goals of the corporation Agency relationships

2. Career Opportunities in Finance • Money and capital markets • Investments • Financial management

3. Financial ManagementIssues of Early 2000 • Communication Systems Development:: Use of computers, electronic transfers of information and cellular communication • The globalization of business

4. Responsibilities of the Financial Staff • Forecasting and planning • Investment and financing decisions • Coordination and control • Transactions in the financial markets

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

6. Sole Proprietorship • Advantages: • Ease of formation • Subject to few regulations • No corporate income taxes • Disadvantages: • Limited life • Unlimited liability • Difficult to raise capital

7. Partnership • A partnership has roughly the same advantages and disadvantages as a sole proprietorship.

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

10. The Responsibilities of the Financial Manager • Invest Funds • In Real Assets • In Financial Assets • Manage the Assets Acquired • Distribute the Proceeds • Raise Funds • From Financial Institutions • From the Savers Directly .

11. Goals of the Corporation • The primary goal is shareholder wealth maximization, which translates to maximizing stock price. • Do firms have any responsibilities to society at large? • Is stock price maximization good or bad for society? • Should firms behave ethically?

12. Factors that Affect Stock Price • Projected cash flows to shareholders • Timing of the cash flow stream • Riskiness of the cash flows

13. Factors that Affect the Level and Riskiness of Cash Flows • Decisions made by financial managers: • Investment decisions • Financing decisions (the relative use of debt financing) • Dividend policy decisions • The external environment

14. Agency Relationship and Ethical Issues in Finance Goals of the Corporation • The primary goal is shareholder wealth maximization, which translates to maximizing stock price. • Do firms have any responsibilities to society at large? • Is stock price maximization good or bad for society? • Should firms behave ethically?

15. Agency Relationships • An agency relationship exists whenever a principal hires an agent to act on their behalf. • Within a corporation, agency relationships exist between: • Shareholders and managers • Shareholders and creditors

16. Shareholders versus Managers • Managers are naturally inclined to act in their own best interests. • But the following factors affect managerial behavior: • Managerial compensation plans • Direct intervention by shareholders • The threat of firing • The threat of takeover

17. Shareh olders versus Creditors • Shareholders (through managers) could take actions to maximize stock price that are detrimental to creditors. • In the long run, such actions will raise the cost of debt and ultimately lower stock price.

18. Fiduciary Duty “The duty of the finest loyalty”--Supreme Court Justice Benjamin Cardozo, 1928. The fiduciary relationship is one founded on trust or confidence reposed by one person in the integrity, fidelity and honor of another.

19. Obligations of a Fiduciary 1. an affirmative duty to disclose to the principal any and all information I his or her possession that bears upon any decision the principal is about to make. 2. a special duty of care in the exercise of any and all delegated authority, the said duty being generally defined as the degree of care, skill, and diligence which an ordinary prudent person would exercise in the management of ones own affairs. 3. see next slide...

20. 3. a specific obligation to avoid taking any personal advantage from ones position, especially (though not only) when to do so would result in any detriment whatsoever to the principal. The only exception to this obligation would be specific authority spelled out in the legal contract. This obligation is sometimes referred to as the fiduciary ban on self-dealing, or appropriating corporate opportunities to oneself. This would include insider trading.

21. 3. a specific obligation to avoid taking any personal advantage from ones position, especially (though not only) when to do so would result in any detriment whatsoever to the principal. The only exception to this obligation would be specific authority spelled out in the legal contract. This obligation is sometimes referred to as the fiduciary ban on self-dealing, or appropriating corporate opportunities to oneself. This would include insider trading.

22. STATUTORY LAW THE COMPOSITION OF US LAW COMMON LAW SEC, FED, etc. Business Judgement Rule Fiduciary Prudential Paramount Communication, Inc. v. Time, Inc. The Supreme Court and other courts: 1. Interpret the U.S. Constitution 2. Interpret Statutory Law 3. Apply Common Law when necessary Statutory Law = Set forth by US Congress and State Legislatures. US Constitution is the foremost example. Common Law = Law based upon rules deduced (mainly by judges) over time from the basic customs and institutions of the people and related to their socio/political/economic condition.

23. Major Factors affecting Stock Price External Constraints 1. Antitrust Laws 2. Environmental Regulations 3. Product and Work-Place Safety Regulations 4. Employment Practices Rules 5. And So Forth 6. A Democratic Society 7. A Healthy Capitalist System for which TRUST is a necessary condition 8. Agency Problem - ETHICAL Stock Market Conditions Level of Economic Activity and Corporate Taxes Strategic Policy Decisions Controlled by Management 1. Types of Products or Services Produced 2. Production Methods Used 3. Relative Use of Debt Financing (4) 4. Dividend Policy (5) 5. And So Forth Expected (1) Profitability (EPS) Stock Market Timing of Cash Flows (3) Degree of Risk (2)