c1: overview to finance

• The 2 main goals of all successful companies are:

  1. Having products/services that are highly valued by customers
  2. Selling products/services at prices high enough to cover costs and reward investors
• advantages of starting up as a proprietorship:

  • Ease of formation
  • Subject to few regulations
  • No corporate income taxes
• Disadvantages of starting up as a proprietorship:

  • Difficult to raise capital to support growth
  • Unlimited liability
  • Limited life span
• A partnership involves 2 or more entities with various privileges and responsibilities with about the same advantages and disadvantages as a sole proprietorship. the 2 types of partnerships are General versus limited partner and Limited liability partnership (LLP)
• A corporation is a legal entity that is separate from its owners and managers
• advantages of a corporation:

  • Unlimited life
  • Easy transfer of ownership
  • limited liability
  • Easy to raise capital
• disadvantages of a corporation:

  • Double taxation
  • Higher setup cost
  • Endless report filing
• the primary objective of a corporation is to maximize shareholder wealth through managerial actions
• managers maximize shareholder wealth now and in the future by focusing on generating cash flows
• FCF are cash flows available or free for distribution to all investors (stockholders and creditors).
• weighted average cost of capital (wacc) is the average rate of return required by all of the company’s investors. its another factor in determining a firm’s value and its long-term stock price.
• A company goes public when it sells shares to the public in an initial public offering. As the firm grows, it might issue additional shares or debt.
• an agency problem occurs when the managers of the firm act in their own self-interests and not in the interests of the shareholders.
• Corporate governance is the set of rules that control a company’s behaviour towards its directors, managers, employees, shareholders, creditors, customers, competitors, and community.
• maximizing wealth not only focuses on The current market price but also maximizing the intrinsic share price
• the separation theorem shows that all investors are best off if the company’s investment decisions are separate from the owners’ preferences.
• a financial security are pieces of paper with contractual provisions entitling their owners to specific rights and claims on specific cash flows or values.
• financial securities can be classified as Time until maturity and, Debt or equity
• supply and demand for funds determine the cost/price of money
• interest rate is called the price/cost of debt and equity capital
• factors that affect the cost of money:

  • production opportunities
  • expected inflation
  • risk
  • time preferences for consumption
• a Physical (aka tangible/real) asset markets include Products like wheat and real estate. Financial asset markets consist of Primitive securities (ie. stocks, bonds, mortgages, etc.) and derivative securities.
• Spot (aka cash) markets are where Assets are bought or sold for “on-the-spot” delivery and Futures markets are where Assets are bought or sold for delivery at a future date
• Money markets are meant For short-term, highly liquid debt securities while Capital markets are meant For intermediate or long-term debt and corporate stocks
• Primary markets are where Issuers receive the proceeds from the sale an a Secondary market is when an Existing owner sells to another party; the Issuing firm doesn’t receive proceeds and isn't directly involved.
• Private markets include Transactions are worked out directly between two parties, with little liquidity. Public markets consist of Standardized contracts which are traded on organized exchanges. much more liquid.
• A manager’s primary job is to increase the firm’s intrinsic value
• Intrinsic value is the present value of the firm’s expected free cash flows (FCF), discounted at WACC.
• 2 ways a firm can increase its intrinsic value by improving FCF and/or Reducing WACC