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Lecture 1: An Overview of Financial Management - Coggle Diagram
Lecture 1: An Overview of Financial Management
Forms of Business Organisations
Proprietorship
Advantages
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages
Difficult to raise capital
Unlimited liability
Limited life
Partnership
Corporations
Advantages
Easy transfer of ownership
Unlimited life
Limited liability
Ease of raising capital
Disadvantages
Cost of set up and report filing
Double taxation
Financial Goals of Corporation
Shareholder wealth maximisation --> maximising intrinsic value of stock
Stock Price
Set by marginal investor based on her perceived value of stock
Intrinsic Value
An estimate of the true value based on best available information
Agency Problems
Managers are naturally inclined to act in their own best interests which may not always be the same as the interest of stockholders.
Solving Agency Problems
Managerial Compensation Packages
Direct intervention by shareholder
Threat of firing
Threat of takeover