Provides vision for identification and selection of proper corporate strategies and business projects that add value to their concerns. Forecasting the fund requirements of Concerns and devise strategies for acquiring those funds. The various forms of organisation are- Sole Proprietorship Partnership Corporation Following are the advantages/ disadvantages of forms of organisation-
Sole Propreitorship Easy formation Few & liberal government regulations No corporate income taxes and other tax liabilities are also low. Amount of investment is low. No transfer of ownership Liability of Proprietor is unlimited. Life of Proprietorship concern is limited to the life of proprietor. Partnership Easy formation Involves low cost Good amount of Capital Unlimited liability Limited life of the organization, Difficulty of transferring ownership Difficulty of raising large amounts of capital. A Corporation Corporate have unlimited life Easy to transfer ownership & interest Limited liability of members. Corporate earnings may be subject to double taxation Formation is complex and involves large documentations. Corporations go public, by evaluating their assets and potential and presenting the potential to the public for sale. The Corporation sets a day for the initial public offering. An agency problem occurs when the managers of the firm act for their personal interests and not in the interests of the shareholders and company. Corporate governance is the set of policies, customs, laws & rules that control and provide guidelines about company’s behaviour towards its directors, shareholders & stakeholders. Managers primary goal is stockholder wealth maximization, which translates the price of the firm’s common stock. Firms have social responsibility to provide a safe working environment, to avoid air or water pollution and produce safe products. The most significant cost-increasing actions will have to be put on a mandatory basis rather than a voluntary basis to ensure that the burden falls uniformly on all businesses. Stock prices maximisation is good for society. It requires efficient, low-cost operations that produce high-quality goods and services at the lowest possible cost. Stock price maximization requires the development of products and services according to consumer’s need, so the profit motive of concern leads to new technology, to new products, and to new jobs in society. Yes, firms should behave ethically. According to the recent study, it indicate that the executives of most major firms in the United States believe that firms do try to maintain high ethical standards in all of their business dealings. Further, most executives believe that there is a positive correlation between ethics and long-run profitability. It’s true, conflicts often arise between profits and ethics but Companies must deal with these conflicts on a regular basis, and a failure to handle the situation properly can lead to huge product liability suits and even to bankruptcy. There is no place for unethical behaviour in the corporate world. Following are the 3 aspects affecting the value of investment- Amount of expected cash flows; Timing of the cash flow stream; and Risk of the cash flows. Free cash flows are the cash flows available for distribution to all investors (stockholders and creditors) after setting off all expenses (including taxes) and after retaining investments to support growth. A calculation of a firm’s cost of capital in which each category of capital is proportionately weighted. All capital sources including common stock, preferred stock, bonds and any other long-term debt are included in a WACC calculation. Other thing being equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. A firm’s value is the sum of all future expected free cash flows, converted into today’s dollars. Households are net savers of capital. Non-financial corporations, Governments are net borrowers. Non-financial corporation’s (i.e., financial intermediaries) are slightly net borrowers, but they are almost breakeven. Capital is transferred through: direct transfer (e.g., corporation issues commercial paper to insurance company); an investment banking house (e.g., IPO, seasoned equity offering, or debt placement); a financial intermediary (e.g., individual deposits money in bank, bank makes commercial loan to a company) The interest is the price paid by the borrower for borrowed capital. Return on equity capital comes in the form of dividends and capital gains. The four fundamental factors that affect cost of money are as follows- Production opportunities- It refers to the returns gained from investment in productive assets: the more productive a firm believes its assets will be, the more it will be willing to invest the capital necessary to acquire those assets. Time preference for consumption- It refers to consumers’ needs for current consumption versus savings for future consumption. Inflation – It refers to the tendency of prices to rise. The higher the expected rate of inflation, the larger the required rate of return. Risk -It refers in a money and capital market context. It is the chance that a loan will not be repaid as promised. The higher the perceived default risk, the higher the required rate of return. The cost of money will be influenced by the economic conditions as policy, fiscal deficits, business activity, and foreign trade deficits. The cost of money in case of international investment is also affected by country risk. It refers to the risk that arises from investing or doing business in a particular country This risk depends on the countries economic, political, and social environment. The cost of money for an international investment is also affected by exchange rate risk. When investment is made in overseas the security usually will be denominated in a currency other than the dollar, which means that the value of the investment will depend on exchange rates changes. Changes in relative inflation or interest rates will lead to changes in exchange rates Also, an increase in country risk will also cause the country’s currency to fall. Financial security is a type of financial instrument that is negotiable and having recognised financial worth. Financial Security will have the potential growth to generate some additional return above its face value. Financial Instruments are basically classified under two forms- Debt Security- It includes bonds, debenture and banknotes Equity Security- It includes common stocks, preferred stock and other stocks. Some Financial institutions are as follows- Mutual Funds LIC Credit unions Pension Funds Different types of markets are as follows- Physical/ non physical markets Money/ Capital market Primary /Secondary market Secondary markets are organised by Location like physical location, computer and telephone network locations. According to these locations, buyers and sellers orders are matched. Physical location exchanges include the NYSE, AMEX and Tokyo stock exchange. Computer/telephone networks includes Nasdaq, government bond markets, and foreign exchange markets. The NYSE and AMEX are the two largest auction markets (NYSE is a modified auction, with a “specialist”). In these auction market participants have a seat (or trading rights) on the exchange,they meet face-to-face, and place orders for themselves or for their clients; e.g., CBOT Some orders are called market orders, which are executed at the current market price, some are limit orders, which specify that the trade should be done only at a certain price within a certain time period . In dealer markets, “dealers” keep an inventory of the stock and place bid and ask for the “advertisements,” which are prices at which they are willing to buy and sell in market. A computerized quotation system keeps track of bid and ask prices, but does not automatically match buyers and sellers. Some examples of dealer markets are the Nasdaq national market, the Nasdaq small cap market, the London SEAQ ECNS are computerized systems that match orders from buyers and sellers and automatically execute the trades. Some examples are Instinet (US, stocks, owned by Nasdaq); Archipelago (US, stocks, owned by NYSE).
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