Thursday, July 12, 2012

Corporation Finance

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Chap. 1

1. The single overriding goal of the firm is to maximize the firm’s common stock price. Also referred to as stockholder wealth maximization.

. Agency Theory � the role of managers versus owners of the companies.

Problems

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1. Do executives consume excessively on unneeded things such as airplanes & golfing?

. Do managers avoid risks, which stockholders can diversify against.

. Do managers fight off takeover bids?

Remedies

1. Make the managers care about the stock price. Compensation tied to stock price performance. �Good idea to look for when buying a stock.

. V = f (I, F, D)

V = Value or stock price.

I = the investment portfolio of real assets of the company. Most important.

F = the financing decisions of the company. nd most important.

D = the companies Dividend policy. Not as important.

Chap.

4. Converting pre tax yields to after tax yields.

After Tax Yield = Pre Tax Yield (1-T)

5. Financial Markets � “mechanisms” by which borrowers and lenders get together.

1. Institutions � Investment banker and Financial Intermediaries

. Products � all different types of financial instruments

. Trends � are changing the role of financial institutions

a. Historically, highly specialized as to the product and geographic area.

b. Deregulation and technological advancements have altered the operating environment.

c. The result is the creation of large, diversified financial corporations.

6. Interest Rates � are affected by many different variables

1. IP � inflation premium

. DRP � default risk premium

. LP � liquidity premium

4. MRP � maturity risk premium

Effects of inflation � higher the inflation rate then the higher interest rates will be

Role of the FED � how they control the money supply has a big impact on interest rates

Yield curve � a graph showing the relationship between yields and maturities of securities, upward sloping yield curve in considered normal while a downward sloping yield curve is considered abnormal



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