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22 Cards in this Set
- Front
- Back
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Intrinsic Value |
An estimate of a stocks "true" value based on accurate risk and return data. The intrinsic value can be estimated, but not measure precisely. |
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What are the two determinants of Intrinsic value? |
1) True risk 2) Perceived Risk |
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What does the SOX act entail? |
After the defrauding of investors in world-com and Enron congress passed the law in 2001 to make CEO's and CFO's sign off on financial statements holding them liable. |
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Strengths of Proprietorship |
1- cheap to start 2- low tax bracket 3- few government regulations |
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weakness of Proprietorship |
1) limited life 2) hard to raise capital 3) Unlimited Liability |
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Strength of Partnership |
1) Low tax 2) relatively inexpensive to form |
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Weakness of Partnership |
1)Unlimited Liability for Partners acts 2) Hard to raise Capital |
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Strength of Corporation |
1) Unlimited Life 2) Low Liability 3)Easy to raise Capital "buy and trade stock" |
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Weakness of Corporation |
1) Heavily Taxed 2) Heavily regulated |
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Market Price |
The stock value based on perceived buy possibly incorrect information as seen by the marginal investor |
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Equilbrium |
The situation in which the actual market price equals the intrinsic value, so investors are indifferent between buying and selling a stock. |
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Who prefers riskier projects bondholders or stock holders? why? |
Stockholders, their gain on investment as no ceiling. They share in overall profits of business. They can only lose up to their investment but can gain infinitely. |
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What are bondholders out to receive? |
principal plus interest. Therefore they prefer less riskier projects that aim to keep company afloat so they can receive interest payments. They do not share in overall profits of comany. |
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Self test 1 What are some reasons the value of a business other than a small one is generally maximized when it is organized as a corporation? |
-they have stock options they can provide CEO's -They have more capital generally and can therefore afford highly skilled people to run the company "expensive investment in human capital" |
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Self Test 2 Suppose you are relatively wealthy and are looking for a potential investment. You do not plan to be active in the business. Would you be more interested in investing in a partnership or in a corporation? Why or why not? |
-more interested in corporation because it has less liability. -downside of corporation is it has double taxation "once on profits and once on dividends" |
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Self test 3 Who would be better able to judge the effect of a new jet liner on Boeing's profits-its manager or its stockholders explain? |
Its managers should have inside knowledge |
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self test 4 Do stocks have provable intrinsic value, or might different people reach different conclusions about intrinsic values? |
different conclusions no two people will value the same stock the same |
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Self test 5 Should managers estimate intrinsic values or leave that to outside security analysts |
managers should estimate intrinsic value |
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self test 6 Should a firms managers help investors improve their estimates of the firms intrinsic value? |
better to help investors know the intrinsic value of stock so they know the upside and true value of what they're purchasing so they ll purchase more |
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Self test-7 should managers focus directly on the stocks market price or its intrinsic value, or both? |
you focus on both a high intrinsic value means nothing if it has no monetary correlation on stock market |
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Stock holder Wealth Maximization |
The primary financial goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firms's common stock. |
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Marginal investors |
An investor whose views determine the actual stock price |
