COB 300B Test 1 summary and elaborations | Updated
Sole Proprietorship *** Single Owner and Manager
Sole Proprietorship Advantages *** • Inexpensive and simple to set up
• Little to no regulation or reporting requirements
• Single taxation-Business income treated like regular income
Sole Proprietorship Disadvantages *** • Unlimited Personal Liability
• Difficult to transfer ownership
• Limited access to capital
Partnership *** Owned and managed by two or more people
-Partnership agreement
Partnership Advantages *** • Inexpensive and simple to set up
• Little to no regulation or requirements
• Single taxation-Business income treated like regular income
Partnership Disadvantages *** • Unlimited Personal Liability
• Difficult to transfer ownership
• Limited access to funds
Corporation *** • Organized as a separate legal entity from owners
• Ownership divided proportionally into shares of stock
"C" Corporation Advantages *** • Limited Personal Liability
• Separation of management and ownership
• Easy to transfer ownership
• Easier access to larger amounts of capital
"C" Corporation Disadvantages *** • Double taxation
• Corporate and personal tax
• More complex and costly to set up
• Regulations and requirements
• Separation of management and ownership
"S" Corporations *** • Hybrid
• Operates like "C" Corp, taxed like a partnership
-Limited Liability, Single Taxation
• No more than 100 owners
Limited Liability Corporations *** • Hybrid
, • Limited Liability, Single Taxation
• Looser regulations and restriction
Basic Structure of a Corporation *** • Shareholders (stockholders) own the business
• Managers/employees work on behalf of shareholders
What should the objective of the corporation be? *** Maximize Market Value of
Company Stock
Why maximizing stock value? *** •Owners of the corporation want management to act
in such a way that the stock value gets maximized.
Stock Value is? *** Long Term
Stock Price is? *** Current
True Characteristics ________ *** Value
Perception______ *** Price
Job of a Financial Manager *** • Make decisions that maximize long-term value of
future cash flows
Friedman's Argument *** The "social responsibility" of a business is to increase its
profits
Zingales and Hart Arguments *** arguing that executives' obligation is not to maximize
shareholder value, but shareholder welfare.
The Agency Problem *** what happens when the owners are not the managers
-Separation of ownership and management causes this problem
Self-Interest *** • Manager's interests may not be the same as shareholders
• Manager may be interested in:
• Fame/Public image
• Career stability
• Being well-liked by employees
• Shareholders' interest: maximizing wealth• Separation of ownership and management
Managers =
Shareholders= *** Agents
Principals
Agency Problem occurs when? *** there is a conflict of interest between the managers
and owners
• Problem solved when incentives for both parties lead to the same desired outcome
Sole Proprietorship *** Single Owner and Manager
Sole Proprietorship Advantages *** • Inexpensive and simple to set up
• Little to no regulation or reporting requirements
• Single taxation-Business income treated like regular income
Sole Proprietorship Disadvantages *** • Unlimited Personal Liability
• Difficult to transfer ownership
• Limited access to capital
Partnership *** Owned and managed by two or more people
-Partnership agreement
Partnership Advantages *** • Inexpensive and simple to set up
• Little to no regulation or requirements
• Single taxation-Business income treated like regular income
Partnership Disadvantages *** • Unlimited Personal Liability
• Difficult to transfer ownership
• Limited access to funds
Corporation *** • Organized as a separate legal entity from owners
• Ownership divided proportionally into shares of stock
"C" Corporation Advantages *** • Limited Personal Liability
• Separation of management and ownership
• Easy to transfer ownership
• Easier access to larger amounts of capital
"C" Corporation Disadvantages *** • Double taxation
• Corporate and personal tax
• More complex and costly to set up
• Regulations and requirements
• Separation of management and ownership
"S" Corporations *** • Hybrid
• Operates like "C" Corp, taxed like a partnership
-Limited Liability, Single Taxation
• No more than 100 owners
Limited Liability Corporations *** • Hybrid
, • Limited Liability, Single Taxation
• Looser regulations and restriction
Basic Structure of a Corporation *** • Shareholders (stockholders) own the business
• Managers/employees work on behalf of shareholders
What should the objective of the corporation be? *** Maximize Market Value of
Company Stock
Why maximizing stock value? *** •Owners of the corporation want management to act
in such a way that the stock value gets maximized.
Stock Value is? *** Long Term
Stock Price is? *** Current
True Characteristics ________ *** Value
Perception______ *** Price
Job of a Financial Manager *** • Make decisions that maximize long-term value of
future cash flows
Friedman's Argument *** The "social responsibility" of a business is to increase its
profits
Zingales and Hart Arguments *** arguing that executives' obligation is not to maximize
shareholder value, but shareholder welfare.
The Agency Problem *** what happens when the owners are not the managers
-Separation of ownership and management causes this problem
Self-Interest *** • Manager's interests may not be the same as shareholders
• Manager may be interested in:
• Fame/Public image
• Career stability
• Being well-liked by employees
• Shareholders' interest: maximizing wealth• Separation of ownership and management
Managers =
Shareholders= *** Agents
Principals
Agency Problem occurs when? *** there is a conflict of interest between the managers
and owners
• Problem solved when incentives for both parties lead to the same desired outcome
