Chapter 1: Goals And Governance of Corporation

Corporation

A business organized as a legal entity separate from its owners.

Owners

Stockholders (also known as shareholders or equity holders)

Limited Liability

•The shareholders are not personally liable for a corporation’s obligations.

Taxation

The corporation is taxed on profits; shareholders are then taxed on dividends received.

Lifespan

Unlimited, as shares are transferable.

Who owns the business in Sole Properitorships?

The Manager

Who owns the buisness in Partnerships?

Partners

Who owns the Corporations?

Stockholders

How are Coporate financial decisions divided

Investment Decision And Financing Decision

What is an Investment Decision?

Decision to invest in tangible or intangible real assets.

Tangible Assets

Factories, Equipment, Machinery, anything physical

Intangible Assets

Patents, Trademarked, R&D Research, anyrhing that’s not physical

What are Investment Decisions also called?

•Capital Budgeting Decision

•Capital Expenditure (C A P E X) Decision

Financial Decision

Decision on the sources and amounts of financing. It tries to answer the question on how we can pay for something.

Professional Coporations

Offices for Doctors, Lawyers, etc

Capital Structure

The mix of equity and long-term debt financing.

Are Managers and Owners seperate in Sole Proprietorships and Partnerships?

No

Are Managers and Owners seperate in a corporation?

Yes

Are the owner’s liable in Sole Proprietorships and Partnerships?

Yes, they owe all of the liabilities, Hence, unilimited.

Are the owner’s liable in a Corporation.

Liability is Limited

Are the owners and business taxed separately in

Real Assets

Assets used to produce goods and services. Could include intangible assets such as R&D.

Financial Assets

Financial claims to the income generated by the firm’s real assets

Who Is the Financial Manager?

CFO, Treasurer, and Controller

Chief Financial Officer (CFO)

•Financial policy.

•Corporate planning.

Treasurer.

•Cash management.

•Raising of capital.

•Banking relationships.

Controller

•Preparation of financial statements.

•Accounting and taxes.

What shareholders want?

They want manager to maximize shareholder value

Do managers maximize shareholder wealth or manager wealth?

No, b/c they care about their own bottom line. Managers have many constituencies called “stakeholders.”

Stakeholder

Anyone with a financial interest in the corporation.

Managers versus stockholders. What do they care about

They care about the asset value of a stock

Top Mananger Vs Lower Manager. What is their objective

Stockholder VS. Banks. What are their objectives?

Corporate Governence

The laws, regulations, institutions, and corporate practices that protect shareholders and other investors.

Elements of good corporate governance

•Legal requirements.

•Board of directors.

•Shareholder actions.

•Takeovers.

•Information for investors.