Ch.

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Main forms of business organization o Proprietorship small ma & pa businesses Advantages Ease of formation just file a registration statement with state Subject to few govt regulations No corporate income taxes Just pay personal income taxes, not dividends Limitations Unlimited personal liability Loans, investments, etc. all fall on you o Personal property/assets are put up as collateral o Cant separate company from self Limited life Transferring ownership is difficult Difficult to raise capital o Partnership like proprietorship, but two or more owners Roughly same as proprietorship o Corporation widely held, publicly traded group of few or many (main topic of course) Ex. Wal-Mart, Coca-Cola, IBM, etc. Lots of stock holders (widely held) Advantages Unlimited life not limited to life of CEO Easy transfer of ownership Limited liability o Owners not liable for debt of the company o Raising capital is easier Easier to get loans as a big corporation Investors, stocks, etc. Ease of raising capital Disadvantages Cost of set-up and report filing Double taxation o Corporation pays taxes based on income o Owners pay taxes again based in dividends

Maximize value of the firm o Value of firm = present value of expected future cash flows considering risk o In publicly traded corporation, maximizing firm value = maximized shareholder wealth (stock price) Agency Relationships relationship between shareholders and managers o Agency problems disconnect between managers and shareholders wishes. o Fixed by: Corporate governance structures Strong board of directors o People voted in by shareholders to keep an eye over the managers o Keep managers in check Strong incentives o Compensation of CEO tied to performances o Bonuses, stock options, etc. Vulnerability to takeovers o Managers who underperform can be replaced easily

Private corporations have an edge over public corporations since they dont have to disclose anything Stock option part of contract/pay which allows you to purchase stock in your company at a certain price at a certain period in time o Coke offers me stock option to buy shares at $60 in five years, I accept, in five years, stock is worth $120, I get to buy at $60

Ch. 2

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Net Profit Margin net income / sales o Ex. 12% - every $1 in sales, company produces $0.12 in net profit Fixed assets plants, equipment, things that help generate cash over long periods B/S snapshot of moment in time of company finances Leverage (use of debt) can magnify gains but also losses

Ch. 4

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Time-Value of Money Find how much 100,000 is worth in 3 years at 10% o FVn = PV(1+r)n o #n, #I/Y, #PV, CPT, FV Find what we need to invest now to get $100,000 in 3 years at 10% o PV = FVn/(1+r)n o #n, #I/Y, #FV, CPT, PV

Ch. 5

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% return (Dollar income + capital gain) / beginning value Dollar income o Stock dividends o Bonds coupon payments/interest payments Capital gain ending value of your investments beginning value Realized Return (Yield) o Dollar income + (ending value beginning value) / beginning value

Ch. 6

1/17/2012 10:29:00 AM

Basic Bond Valuation Model Annual Coupon Bond o Rd = annual required rate of return (yield) on a debt instrument, quoted as APR o N = # of years before bond matures o INT = coupon payment = dollars of interest paid each year (coupon rate x par value) o M = par or face value of the bond to be paid off at maturity When interest rates increase, face value of bonds decrease When interest rates decrease, face value of bonds increase Coupon rate (INT) stays the same, set for the entire life of the bond But required rates of return can fluctuate depending on several factors (LP, MRP, RP) Short term bonds sink in value less than long term bonds Discount bonds bonds whose value is less than face value o Have required rate of return greater than coupon rate

Quiz 4/Test 2

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YTC = annual rate o When calculating with semiannual or quarterly bonds, make sure you multiply by 2 or 4 etc. to get APR When compounding semiannually or quarterly, make sure to divide discount rate by number of periods compounding as well Current yield is proportion of return you get just from coupon o 80/985 o 8 percent coupon, face value of 1000, sells for 985 Bonds with higher liquidity will demand lower interest rates More liquid, less risk, lower the yields required Corporations have right to discontinue paying dividends on common stock P/E ratio price/EPS o EPS net income/shares outstanding o 800 million annual income 900 million shares outstanding, $30/share o 30/(800/900) Higher the default risk, higher the cost of debt, all else equal

Ch. 8

1/17/2012 10:29:00 AM