Overview Flashcards
Successful companies have: (3)
- skilled people
- strong external relationships
- enough funding (to operate and/or scale business)
What is a provider vs user?
provider - entity with cash now
user - entity that has opportunities to convert cash now into cash later
What are 2 problems with connecting providers and users?
- how to P’s and U’s identify one another (financial markets)
- how do P’s assess the level of risk of a U (financial analysis)
sole proprietorship qualities- (3)
easy to form, no corporate taxes, subject to few regulations but unlimited personal liability to partners
partnership qualities (2)
generally similar to a proprietorship, gains/losses shared by partners to varying degrees, potentially unlimited liability to the partners
subset of partnership
limited partnership
how is partnership and limited partnership different?
limited partnership gives some members limited liability and capacity -> general (unlimited liability) vs limited partners (limited liability)
how is a limited partnership and a limited liability (LLC) partnership different?
LLC - all members have limited liability unlike in a limited partnership where at least one partner still has unlimited liability
qualities of a corporation (5)
- unlimited life
- limited liability
- easy tranferability
- setup according rules/protocols/laws
- taxation scheme is different than proprietorship and partnership
What does a charter consist of?
1 name
2. purpose
3. amount of capital stock
4. # of directors
5. director names and addresses
Set up rules drawn up by the founders of a corporation for how the corporation should operate.
bylaws
Type of corporation that elects to be taxed as a partnership or sole proprietorship.
S corp.
corporation that has limited economic liability but not professional
professional corp.
What determines a corporation’s value?
the company’s ability to generate cash flow now and into the future.
cash flows have three properties
- size
- timing
- risk-level
Define free cash flows (FCF)
FCF = Revenues - operating costs - operating taxes - new investments in operating capital
What is the rate of return expected by investors?
WACC - weighted average cost of capital
What is the relationship between WACC, FCF and a firms value?
FCF/ (1+WACC)^1+ …..FCFn/(1+WACC)^n
measurement that incorporates all information regarding expected future free cash flows and the cost of capital
intrinsic or fundamental value
How is the market price related to the intrinsic value?
market price = intrinsic value if all investors have relevant information regarding the company
problem where managers are hired to act in the best interest of shareholders but can sometimes act in their own self-interest or the self-
agency problem
agency problems are addressed by
corporate governance
set of rules for a company’s disposition towards people internal and external to the company
corporate governance
primary fiduciary responsibility of a corporation
maximize shareholder wealth
corporation that expands corporate interests outside only shareholder interest
benefit corporation (B-corp)
intrinsic value is increased by (3)
1) increasing sales
2) decreasing expenses
3) decreasing cost of capital
Sarbanes Oxley (SOX) vs Dodd-Frank
SOX whistleblowers who are penalized by their company can receive an investigation by OSHA.
Dodd-Frank created the SEC whistleblower division
4 classifications of providers and users
- individuals
- financial organizations
- non-financial organizations
- government
any claim on future cash flow
financial instrument
a claim on future cash flow thats standardized by the government
financial security
4 financial securities
- debt
- equity
- derivatives
- hybrid
debt
claim on residual cash flow
equity
claim on residual value (after of claimants have been paid) – stock
derivative
options and futures (dependent on some other asset value
hybrid
mix of debt, equity, and derivatives e.g. preferred stock
interest rate from investor perspective
required rate of return
interest rate from the user perspective
cost of equity
4 factors affecting the supply and demand or the cost of money
- risk
- inflation
- production opportunities
- time preferences for consumption
induces a higher rate of return
risk
opportunities for future cash flows
production opportunities
decision to consume resources or save
time preference for consumption
increases interest rates and required rate of return (also decreases the amount that can be purchased per unit)
inflation
4 economic policies and procedures that affect the required rate of return
- Federal Reserve Policy
- Federal budget deficit or surplus
- level of business activity
- foreign trade balance
Describe Federal Reserve Policy
Treasury securities purchased by Fed (bank) gives banks cash for lending and stimulates the economy. This leads to a Fed increased money supply which stimulates inflationary processes.
Describe Federal budget deficit/surplus
A deficit requires the Fed (gov’t) to either borrow money or create more treasury securities which lead to an expectation of long-term inflationary processes.
Describe foreign trade deficit
If there is a deficit, borrowing and thus interest rates are increased. If the US tries to lower interest rates foreign countries may sell US bonds resulting in higher rates which would decrease US ability to reduce interest rates and combat recession.
