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Week One Notes

by: Elizabeth Gruber

Week One Notes PSC1001

Marketplace > Political Science > PSC1001 > Week One Notes
Elizabeth Gruber
GPA 3.9

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Nation-States - Lectures 1 and 2
Introduction to Comparative Politics
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Class Notes
Comparative Politics
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This 4 page Class Notes was uploaded by Elizabeth Gruber on Sunday January 24, 2016. The Class Notes belongs to PSC1001 at a university taught by a professor in Fall. Since its upload, it has received 17 views.

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Date Created: 01/24/16
Chapter 1 • Forms of Businesses o Sole owner § Hard to raise money § Assume liability o Corporation § Easier to raise money § More responsibility for disclosure • Auditing • Publicly released financial statements § Cheaper source of financing • Venture Capital -> more risk, want more return • Public release -> less risk, more information available, investors don’t ask for as much return o Finance within the organization § Board of Directors - serve the best interest of investors, law in 2002 -> large % of the board of directors must be independent (i.e. from other companies, outside of the firm) • CEO o COO § Marketing § Production § Human Resources § Other Operating Departments o CFO § Accounting § Treasury § Credit § Legal § Capital Budgeting § Investor Relations o Proprietorship & Partnership § Owners assume all liability and ownership § Advantages • Easy to form • Subject to few regulations • No corporate income taxes • Don’t have to answer to shareholders § Disadvantages • Difficult to raise capital • Unlimited liability • Limited life § Often set up through LLCs/LLPs o Corporation § Separate entity § Advantages • Unlimited life o Exists beyond life of owners/creators • Easy transfer of ownership • Limited liability • Ease of raising capital o Lower rates of return expected by investors § Disadvantages • Double taxation o Firm’s income is taxed before investor’s returns are paid out o Investors then have to pay taxes on their returns o Income is “taxed twice” • Cost of set-up and report filing o Accountants o Lawyers o New laws after every financial crisis • Goals of the Corporation o Primary: maximizing stock price § Management wants to maximize shareholder wealth -> maximizing stock price • Value of any asset is present value of cash flow stream to owners • Most significant decisions are evaluated in terms of their financial consequences • Stock prices change over time as conditions change and as investors obtain new information about a company’s prospects § Managers recognize that being socially responsible is not inconsistent with maximizing shareholder value • Investors drop when companies are not socially responsible o Factors that affect stock price § Projected cash flow to shareholders § Timing of the cash flow stream § Riskiness of the cash flows • A dollar from a risky business is worth more than a dollar from a risk-free business o Risk-free § Want to be compensated for waiting and inflation § Only ask about 5% for return § The higher the price, the lower the return • Stock Prices and Intrinsic Value o In equilibrium, stock price = intrinsic value § We won’t know it, but it exists § Price is based on the distribution of what investors will pay for the stock § Determinants • Stock’s intrinsic value o “true” investor returns o “true” risk • Stock’s market price o “perceived” investor returns o “perceived” risk o Agency Relationships § Exists whenever a principle hires an agent to act on their behalf § Within a corporation, agency relationships exist between • Shareholders and managers • Shareholders and bondholders • Some Recent Trends • Conflicts Between Managers and Shareholders o How to incentivize managers to keep the best interest of the company in mind § Managerial compensation packages • Bonuses o If stock price stays above a certain level -> manager gets a bonus o Fixed salary for a manager is bad • Stock options o Option to buy the stock at a fixed price – no obligation o Makes manager an owner o Manager now has “skin in the game” o Free to manager o Manager will only use the stock option when the option price is lower than actual price § Manager wants to increase the stock price § Threat of take over • Another company thinks they can run a company better § Direct intervention of shareholder • Proxy statements o Class action lawsuit o Suing company for not acting in the best interest of shareholders § Threat of firing • Conflicts between Stockholders and Bondholders o Bondholders want safe projects o Stockholders want risky projects o Managers are supposed to act in the best interest of shareholders o Bondholder protect themselves with contracts and covenants


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