Principles of Finance
Principles of Finance BUAD 381A
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This 2 page Class Notes was uploaded by Zelda Zboncak on Friday October 23, 2015. The Class Notes belongs to BUAD 381A at University of Mary Washington taught by Robert Strassheim in Fall. Since its upload, it has received 59 views. For similar materials see /class/228387/buad-381a-university-of-mary-washington in Business Administration at University of Mary Washington.
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Date Created: 10/23/15
ll What is Finance 1 1c Corporate Finance Capital Markets and Investments Finance is divided into three areas nancial management corp n capital markets and investments Financial Management focuses on decisions relating to how much and what types of assets to acquire how to raise the capital needed to buy assets and how to run the rm so as to maximize it s value Capital Markets relate to the markets where interest rates along with stock and bond prices are determined Also studied are the nancial institutions that supply capital to businesses and governmental organizations that regulate the markets Investments relate to decisions concerning stocks and bonds and include Security analysis deals with nding the proper values of individual securities stocks bonds Portfolio theory deals with the best ways to structure portfolios of stocks and bonds Market analysis deals with the issue of whether stock and bond markets at any time are either too high or too low or about right 12 Jobs in Finance 7 skim book 13 Forms of business organization 7 skim paper notes l4 Stock Prices and Shareholder Value 7 primary goal of any organization is to maximize shareholder value Shareholder Wealth Maximization 15 Intrinsic Values Stock Prices and Executive Compensation Stock prices are based on cash ows expected in the future years not just the current years This requires a longterm view of operations Fig 12 page 11 True vs Perceived 7 True the returns and risk that investors would expect if they had all the information that existed about a company Perceived what investors expect given the limited information they already have Intrinsic Value 7 An estimate of the stock s true value as determined by a competent analyst who has the best available risk and return data Market Price The actual market price based on perceived but possibly incorrect information as seen by the marginal investor Marginal Investor An investor whose views determine the actual stock price Market Equilibrium When the actual market price equals the intrinsic value Investors are indifferent about buying or selling stock when it is at market equilibrium Estimating intrinsic value is what security analysis is all about and is what distinguishes success ll investors from unsuccessful investors Management s goal should be to take actions designed to maximize the firm s intrinsic value not it s current market price Maximizing the intrinsic value will maximize the average price over the long run but not necessarily the current price at every point in time 16 Important Business Trends Four important trends should be noted 1 Dishonest management has led to the passing of SarbOx which requires the CEO and CFO of a rm to certify the accuracy of nancial reports Business beefed up their internal and external auditing procedures and the accuracy of published statements has improved 2 Increased Globalization 3 Improving IT technology 4 Corporate governance the way top managers operate and interface with stockholders 17 Business Ethics 18 Con icts Between Managers Stockholders and Bondholders l8a Managers versus Stockholders It has long been recognized that managers may be at times more interested in maximizing their own wealth than their stockholders Stockholders can intervene directly with managers Years ago most stock was owned by individuals Now the majority of stock is owned by institutional investors such as insurance companies pension funds hedge and mutual funds and private equity funds are ready to step in and take over underperforming firms Large holders like TIAACREF and CalPERS can lobby for the body of stockholders l8b Stockholders versus Bondholders Bondholders receive fixed payments no matter how well the company does whereas stockholders do better when the company does better A large investment may look attractive to stockholders but the risk is high to bondholders if it fails and even if successful it will do nothing for the bondholders Bondholders attempt to protect themselves by including covenants in the bond agreements that limit firms use of additional debt and constrain managers actions in other ways