Lecture 3 - Goals & Governence Of The Corporation Flashcards Preview

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Flashcards in Lecture 3 - Goals & Governence Of The Corporation Deck (8):
1

What is the financial goal of firms ?

Maximise wealth of the shareholders
- maximise profits?
- maximise sales?

Efficient market hypothesis:
- the stock price reflects instantly all available information regarding the firm

Maximise the market value of the firm

2

Investment decision

Maximise the market value of the firm

How can we achieve this goal?

Invest in assets that earn a return higher than the minimum acceptable hurdle rate
- invest in real assets (tangible or intangible)
- the minimum acceptable hurdle rate it known a (opportunity) cost of capital

3

Financing decision

Maximise the market value of the firm

Invest in assets that earn a return higher than the minimum acceptable hurdle rate

How can we finance these investments ?
- find the right kind of debt for the firm and decide on the capital structure to fund operations

4

Dividend decision

Maximise the market value of the firm

- investment decision
- financing decision

What if we can’t find ‘good’ investments?

Return the cash to the shareholders either through dividends or through stock repurchases

5

Who takes these decisions ?

Financial manager (chief financial officer, treasurer, controller)
- firms operations/ investments, real assets
- investors, financial assets

1. Raises cash from investors
2. Invests cash in the firm
3. Cash is generated by operations
4. Reinvests cash in the firm and/or returns to investors

6

What is a corporation?

A business organised as a legal entity distinct from its owners

- confers limited liability

- can be public or private and in both cases can be closely held

- identified as by: inc(USA), plc. (UK), SA (FRANCE)

7

Corporate governance

CFO. COO. CTO

Chief Executive Officer - appointed & monitored by board

Board of Directors - elected by shareholders

Shareholders - Owners of the Firm

8

Agency issues

Is it realistic to expect managers to always act on the best interests of the shareholders?

A combination of ‘measures’ is required to reduce the principal-agent problem in corporations:
- diverse board of directors
- specialist monitoring
- appropriate compensation plans
- threat of a potential takeover