Complete Fundamentals of Finance Notes | High-Yield Exam Prep Pack

Complete Fundamentals of Finance Notes | High-Yield Exam Prep Pack 1. The corporations and financial markets When founding a new company, the founders must decide if they want to exist as a partnership (Sole partnership, Partnership (OHG) or limited Partnership (KG)) or as a corporation (Limited Liability Company (GmbH), StockCompany (AG)). Another key decision is how to finance the firm. Firms are financed by equity and debt. Equity holders bear more risk as they only have a residual claim on the Profit of the firm. Therefore, equity is more expensive than debt. Ownership versus control of corporations (focus on Stock Companies) In a stock company many small shareholders own a company. The Problem with this is that direct control does not work. To solve this Problem all shareholders, meet in a general assembly (Generalversammlung) and elect a supervisory board (Aufsichtsrat). The supervisory board than appoints the management board (Vorstand) including the most important roles like CEO or CFO. This board has the direct control. This class focuses on the main tasks of the Chief Financial Officer (CFO): 1) Cash management - ensure that a company has enough cash for meeting the daily business 2) Investment decisions - weigh all potential investments and project and select the best 3) Financing decisions - raise money from (new) owners (Shareholders) or by borrowing money (Debtholders) Sometimes managers have different goals to maximise their personal value. This could reduce the corporate value and least at worst case into bankruptcy. The solution to this "Agency Problem" is to incentivise the managers by according to compensation. The main goal of a firm and its management should be to increase the Share- and Stakeholders value. These two goals partly collide with the benefit of a firm for the society. Public regulations are needed to align the corporate interests with those of the whole society.