Fundamentals of financial management doc

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[...]... major advantage of a partnership is its low cost and ease of formation The disadvantages are similar to those associated with proprietorships: (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty of raising large amounts of capital The tax treatment of a partnership is similar to that for proprietorships, which is often an advantage,... limited to the amount of their investment Limited Liability Partnership (Limited Liability Company) A hybrid form of organization in which all partners enjoy limited liability for the business’s debts It combines the limited liability advantage of a corporation with the tax advantages of a partnership Professional Corporation (Professional Association) A type of corporation common among professionals that... professionals such as doctors, lawyers, and accountants is the professional corporation (PC), or in some states, the professional association (PA) All 50 states have statutes that prescribe the requirements for such corporations, which provide most of the benefits of incorporation but do not relieve the participants of professional (malpractice) liability Indeed, the primary motivation behind the professional... International Rules 7 And So Forth 1 Types of Products or Services Produced 2 Production Methods Used 3 Research and Development Efforts 4 Relative Use of Debt Financing 5 Dividend Policy 6 And So Forth Level of Economic Activity and Corporate Taxes Expected Cash Flows Timing of Cash Flows Perceived Riskiness of Cash Flows 26 CHAPTER 1 I AN OVERVIEW OF FINANCIAL MANAGEMENT Stock Market Conditions Stock... and a set of bylaws Although personal computer software that creates charters and bylaws is now available, a lawyer is required if the fledgling corporation has any nonstandard features The charter includes the following information: (1) name of the proposed corporation, (2) types of activities it will pursue, (3) amount of capital stock, (4) number of directors, and (5) names and addresses of directors... Shleifer and Robert Vishny, “A Survey of Corporate Governance,” Journal of Finance, June 1997, 737–783 Another paper that looks at managerial stockholding worldwide is Rafael La Porta, Florencio Lopez-De-Silanes, and Andrei Shleifer, “Corporate Ownership Around the World,” Journal of Finance, April 1999, 471–517 22 CHAPTER 1 I AN OVERVIEW OF FINANCIAL MANAGEMENT interests of stockholders, who are primarily... proposals are nonbinding and are limited to issues outside of day-to-day operations, the results of such votes are clearly heard by top management. 9 3 The threat of firing Until recently, the probability of a large firm’s management being ousted by its stockholders was so remote that it posed Performance Shares Stock that is awarded to executives on the basis of the company’s performance Executive Stock Option... serving as CEO only a short period of time Most of these departures were no doubt due to their companies’ poor performance 4 The threat of takeovers Hostile takeovers (when management does not want the firm to be taken over) are most likely to occur when a firm’s stock is undervalued relative to its potential because of poor management In a hostile takeover, the managers of the acquired firm are generally... 24 CHAPTER 1 I AN OVERVIEW OF FINANCIAL MANAGEMENT holders’ point of view, this amounts to a game of “heads I win, tails you lose,” which is obviously not good for the creditors Similarly, suppose its managers borrow additional funds and use the proceeds to repurchase some of the firm’s outstanding stock in an effort to “leverage up” stockholders’ return on equity The value of the debt will probably... agents of both shareholders and creditors, managers must act in a manner that is fairly balanced between the interests of the two classes of security holders Similarly, because of other constraints and sanctions, management actions that would expropriate wealth from any of the firm’s other stakeholders, including its employees, customers, suppliers, and community, will ultimately be to the detriment of . JERRY'S$F3CHAPTER 1 ■ AN OVERVIEW OF FINANCIAL MANAGEMENT 4The purpose of this chapter is to give you an idea of what financial management is all about. After. determining the optimal mix of securities for a given investor. FINANCIAL MANAGEMENT Financial management is the broadest of the three areas, and the one
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