WEEK 1 Flashcards
(32 cards)
What is a sole proprietor?
Bears all costs and keeps all the profits, the only owner of the business
ADVANTAGES AND DISADVANTAGES OF SOLE PROPRIETOR
ADVANTAGES: easy to establish, cheapest business to form and lack of regulations
DISADVANTAGES: Unlimited liability, life limited to owners life = own assets taken if the business goes in debt
But accounting records are needed to be kept for day-to-day management of the business
Wha is Partnership and the ADV/DIS
Partnership is an agreement that defines how management decisions are to be made and the proportion of the profits for each partner. 2 or more people manage the business. Also required to provide appropriate financial information in their tax return for submission to HMRC
ADVANTAGES: still flexible and mainly inexpensive
DISADVANTAGES: Unlimited liability, limited life
Corporation/Limited Companies
Ownership: the shareholders (also known as stockholders or equity-holders) are the owners of the corporation
It’s a legally distinct entity from its owners (Companies Act 2006 = set of regulations that apply to the companies and Companies House = registered through this first)
Control: unlimited control rests with the shareholders, but the managers control the day-to-day operations
Risk Bearing: All parties associated with the corporation bear the risk, but shareholders bear the residual risk; it is shared by many parties
Limited Companies
They are requird to be registeredwith Companis House as either a private limited company (LTD) or a public lmited company (PLC)
Public Limited Companies (PLC)
Companies commonly start as private limited companies (LTD) of which shares cannot be traded in th public arena - privately and closely held
Shares of PLC can be freely sold and traded to the general public and can be listed on a stock exchange but not all PLCs are traded in exchanges, they are also subjec to stricter rules
ADVANTAGES AND DISADVANTAGES
ADVANTAGES: limited liability, permanency, ransferability of ownership, and better access to capital markets
DISADVANATAGES: time and cost required to manage the legal machinery and tax
Possible objectives?
Increase market share, Keep employee agitations to a minimum (they will work harder if they enjoy the job and are happy), survival, maximisation of profit = profit isn’t a good proxy of share value, prospects (which year?), the risk is not considered, accounting is subject to judgement because it depends on the accountant, maximisation of long term share value is the MAIN GOAL OF OPERATIONS, such as investment and financing decision leading to that maximisation.
WHY MAXIMISATION OF SHAREHOLDERS WEALTH (SHARE VALUE)?
Although controversial, it needs to take into account other parties so it isn’t at an expense to others.
free market = if i am a shareholder, i can go invest in who i want
different parties have different interests = different goals that they want to maximise
Contractual theory = theory of the firm; all parties have a contract but not shareholders; therefore, they don’t have a guarantee of a profit, so they should be protected and thus maximize the profit as they are the owners of the firm.
Also, there is no obligation to give back to shareholders their money back, trying to defend them
What is the triple bottom line?
set of arguments that companies should not focus on the profit but the people, profit, and planet
What is share value maximization?
Share value maximisation is a long term objective which is beneficial to all since it will lead to a long term firm sustanale growth and value
The financial manager has 2 assets: it is also an intermediation of the firms operation and the financial markets
Real assets—assets used to produce good and services (tangible and intangible)
Financial assets—claims to the income generated by the real assets (shares of the firm)
Role of the financial manager?
to finance decision such as what time of financial asset to use, the capital structure such as the balance, and debts to equity ratios
Invest or budget capital—what assets should the firm acquire?
Treasury management—how much cash in liquid does the business have?
Risk management—decide if they want to reduce and how they want to do it
Strategy and value-based management involve financing objectives in their plans
Who’s the financial manager?
The chief financial officer sets the goals, and then the treasurer, the expert in finance, calculates the capital budget, and the controller, as the expert in accounting, speaks all accounting elements (that’s how they work together successfully).
Principles that form the foundations of finance?
Cash flow is what matters; the money has a time value—to measure value, we bring future benefits and costs to the present (different value in time).
Risk requires a reward—investors demand rewards for risks
marker prices are generally right—informational efficiency
Ethics are also important, and acting in an ethical manner is morally correct and a fundamental ingredient to long-term success.
Managing agency problems?
Link rewards to performance—compensation plans—manager has an incentive to defend the interests of the shareholders
promotion—to promote them = more motivated to work better
Directors sack—bring in new people = underperforming leads to them being sacked
corporate governance—monitor managers, pay them in shares, pay depends on how the company is doing (no fixed salary)
Agency costs?
Direct costs occur because of managers extraction of value or to ensure that managers act in the interest of the principals.
- expenditure that benefits managers at expense of shareholders-using money for themselves
- Expense related to the need to monitor behaviour
= monitor to be sure they don’t do it with the non-executive directors = However, this means more expense as they need to pay them
Indirect costs—lost opportunities; not taking risk in investments that are riskier in fear of losing the job = therefore taking the less risky one
Agency issues?
In large corporations, ownership is dispersed, and managers control the firm—any parties have different interests
agency problems—between principals (shareholders) and agents (managers) due to different objectives
agency costs
agency theory that describes the potential conflicts in the principals and agents relationships and purpose solutions for those conflicts.
Corporate Governance?
Mitigate problems by monitor the companies with the listing requirements (guidelines); they need to explain themselves if they dont use them in their annual report
TYPE 1 AGENCY PROBLEM
Happens between managers and shareholders due to different interest
TYPE 2 AGENCY PRBLEM
Controlling owners and minority shareholders (small and big shareholders)
majority will defend the interest and the expense of the minority
Agency probelms other?
Can happen between other stakeholder and the company
stakeholders;
- employees
- suppliers
- governments
-debtors
EACH PARTY DEFEND THEIR INTEREST AT THE EXPENSE OF THE SHAREHOLDERS
internal (staff)
connected (finance providers, customers, suppliers)
external (government, trade unions, pressure groups)
Time value of money, what is it?
Money has a time value due to inflation, and due to rational investments, theres rush in investing The money today is not worth the same in 20 years
Future values and compound interest rates CALCULATIONS
FV = PV (1 + R) t (squared)
T = time you leave money in bank
R = interest rate
Compound interest =
interest earned on interest (1 + r) t squared
Simple interest = interest earned only on the original investment
PV = present value
FV = future value
