SUCCESSFUL PEOPLE DO WHAT UNSUCCESSFUL PEOPLE ARE NOT

"SUCCESSFUL PEOPLE DO WHAT UNSUCCESSFUL PEOPLE ARE NOT WILLING TO DO. DON'T WISH IT WERE EASIER; WISH YOU WERE BETTER. " -- Jim Rohn 1

WARREN BUFFETT ON GE, APPLE, AND CASH

Portfolio Considerations If we are going to create a stock portfolio, what are some things we would want to consider when choosing companies to add to the portfolio?

LET’S CREATE A STOCK PORTFOLIO

Revie w 1. Where has Professor Parkes taught Finance besides at NAU? 2. What is one of Sarah (your SI) majors or minor? 3. How should you always access Mind. Tap HW and resources? 4. How many HW assignments do you have for the semester? 5. Are grades rounded up at the end of the semester? 6. Is extra credit available?

Chapter 1: An Overview of Financial Management Forms of Business Organization Creating Value for Investors Stockholder-Manager Conflicts Stockholder-Debtholder Conflicts Balancing Shareholder Interests and Society Interests (including Ethics) 1 -6

Finance Within the Corporate Organization Board of Directors Chief Executive Officer (CEO) Chief Operating Officer (COO) Chief Financial Officer (CFO) Marketing, Production, Human Resources, and Other Operating Departments Accounting, Treasury, Credit, Legal, Capital Budgeting, and Investor Relations 1 -7

Areas of Finance ■ Financial Management – Corporate Finance ■ Capital Markets – Investment Banking, Brokerages, Commercial Banking ■ Investments – Financial Advising, Portfolio Theory and Creation 8

Forms of Business Organization ■ Proprietorship s s e n i s u r b o f e s d e e ■ Partnership e h t n f a o l e l v a ? a o e h c D s n a ■ Corporation form Fin ■ LLC, LLP, PC 1 -9

Proprietorships and Partnerships ■ Advantages – Ease of formation – Subject to few regulations – No corporate income taxes ■ Disadvantages – Difficult to raise capital – Unlimited liability – Limited life ■ Often set up through LLCs/LLPs. 1 -10

Corporations ■ Advantages – Unlimited life – Easy transfer of ownership – Limited liability – Ease of raising capital ■ Disadvantages – Double taxation; what is this? – Cost of setup and report filing 1 -11

Forms of Business Organization ■ LLC (Limited Liability Company), LLP, or PC – Firm pays no tax, passed through to stockholders (owners) like partnership – Not publicly traded – Limited liability to owners (like corporation) ■ Tax law changes! ■ Review the forms of business. Given the recent tax law changes determine as a team which form you would like to create and why.

Goal of the Firm ■ What should management maximize? ■ Why not maximize profits? ■ Can management decisions affect stock prices?

Balancing Shareholder Interests and Society Interests ■ Shareholder wealth maximization – Maximizing long-run stock price. – Value of any asset = present value of future cash flows. – Stock value and prices change over time as conditions change ■ Is being socially responsible inconsistent with maximizing shareholder wealth? 1 -14

Stock Prices and Intrinsic Value ■ Equilibrium: market stock price = intrinsic value. ■ Long-run concept. ■ In the short run, market price may = intrinsic value. ■ Managers should avoid actions that reduce intrinsic value – Even if those decisions increase the stock market price in the short run. 1 -15

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Determinants of Intrinsic Values and Stock Prices Managerial Actions, the Economic Environment, Taxes, and the Political Climate “True” Investor Cash Flows “True” Risk Stock’s Intrinsic Value “Perceived” Investor Cash Flows “Perceived” Risk Stock’s Market Price Market Equilibrium: Intrinsic Value = Stock Price 1 -17

Stockholder-Manager Conflicts ■ Managers tend to act in their own best interest ■ List some examples of behaviors in a manager’s best interest that are not in the shareholders’ best interests! ■ Factors affecting managerial behavior: – Managerial compensation packages – Direct intervention by shareholders – The threat of firing – The threat of takeover

Stockholder-Debtholder Conflicts ■ Stockholders generally prefer riskier projects – they receive more of the upside if the project succeeds. ■ Bondholders are more interested in limiting risk – Receive fixed payments – Concerned about the use of additional debt. – Protect themselves with covenants in bond agreements ■ i. e. Limit the use of additional debt and/or constrain managers’ actions.

Ethics in Corporate Finance ■ What are Ethics? – Ethics ■ society’s standards for judging whether an action is right or wrong – Business Ethics ■ society’s standards for acceptable behavior applied to business and financial markets ■ Consequences of Unethical Behavior – Inefficiency in the economy and costs to society – High legal and social costs – Recent financial crisis in the U. S.

Ethics, continued 1. In your mind, List a few examples of some recent unethical behavior in business news. 2. What role do ethics play in maximizing shareholder wealth?

Assignment ■ Mind. Tap HW 1 due Sunday, Sept. 3 rd by 11: 59 pm – Access through Bb. Learn ■ Read Chapter 2 for Tuesday