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COO marketing, production, human resources, and other operating

departments.

CFO accounting, treasury, credit, legal, capital budgeting, and investor


relations.

S Corporation taxed separately from its owners

C Corporation not taxed separately

Shareholder Wealth Maximization The primary goal for managers of publicly


owned companies implies that decisions should be made to maximize the long-
run value of the firms common stock.

Shareholder Wealth number of shares outstanding times the market price per
share.

Stock Prices based on cash flows expected in future years, not just in current
year.

True returns and risk that investors would expect if they had all of the
information that existed about a company. (Stocks Intrinsic Value)

Perceived means what investors expect, given the limited information they
actually have. (Stocks Market Price)

Intrinsic Value an estimate of a stocks true value based on accurate risk


and return data. The intrinsic value can be estimated but not measured
precisely.

Market Price the stock value based on perceived but possibly incorrect
information as seen by the marginal investor.

Marginal Investor an investor whose views determine the actual stock price.
Equilibrium the situation in which the actual market price equals the intrinsic
value, so investors are indifferent between buying or selling a stock.

Sarbanes-Oxley Bill requires the CEO and CFO of a firm to certify that the
firms financial statements are accurate.

Business Trends:

- The points discussed in the preceding section have led to profound


changes in business practices.
- Increased globalization of business.
- Having a profound effect on financial management is ever-improving
information technology.
- Corporate Governance, or the way top managers operate and interface with
stockholders.

Business Ethics a companys attitude and conduct toward its employees,


customers, community, and stockholders.

Managers versus Stockholders

- Managers personal goals may compete with shareholder wealth


maximization.
- Managers might be more interested in maximizing their own wealth than
their stockholders wealth, therefore, managers might pay themselves
excessive salaries.
- If a firms stock is undervalued, corporate raiders will see it as a bargain
and will attempt to capture the firm in a hostile takeover.
- Corporate Raider an individual who targets a corporation for takeover
because it is undervalued.
- Hostile Takeover the acquisition of a company over the opposition of its
management.

Stockholders versus Bondholders


- Bondholders generally receive fixed payment regardless of how well the
company does, while stockholders do better when the company does
better.
- Another type of conflict arises over the use of additional debt. The more
debt a firm uses to finance a given amount of assets, the riskier the firm
is.
- Bondholders attempt to protect themselves by including covenants in the
bond agreements that limit firms use of additional debt and constrain
managers actions in other ways.