Political Science 1020E Lecture Notes - Lecture 6: Financial Audit, Subordinated Debt, High-Yield Debt
20 Nov 2016
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The science or study of the management of funds. Maximise the price of the existing common stock. Serves as an arbitrator and moderator between conflicting interest groups or stakeholders and objectives. Creditors, managers, employees and customers hold contractual claims against the company. All the value of the company once the contractual claims have been paid. Management must balance contractual claims and residual claims. If employees are paid too little, they"ll leave. If employees are paid too much, money is taken away from shareholders. Three basic issues addressed by the study of finance: what long-term investments should the firm undertake. Capital budget decision: how should the firm raise money to fund these investments. Two general ways of raising money: ownership, borrowing money. Capital structure decision: how to manage cash flows arising from day-to-day operations. Accounting profits are not equal to cash flows.
