·
Accounting – information, trends and facts
o “There is no chief accounting officer, just controller”
· Finance – strategy, decision
o External – investment (dealing with other people’s money)
§ Valuation
§ Cash flow
o Internal – financial management (dealing with own company’s money)
§ Dividends
§ Merger and acquisition
o Business structures
§ Proprietorships
· Individual owner (or husband and wife)
· Direct accountability for company debts
· Easiest form of business to own and operate
§ Partnerships
· Two or more owners who share liability
· Limited or unlimited versions
o Limited partnerships cannot be sued for their own personal property (LLP = limited liability partnership)
o Individuals pay taxes, not the company
o Company makes decisions
§ Versus unlimited liability where individuals in the company all make decisions
o Must have a record of working as a group, so the group is responsible.
§ Corporations
· S-corporation versus C-corporation
o C-corporation
§ Most companies are C-corps
§ Minimum cost of $800 corporate taxes per year in CA
· Must file annual report of CEO, CFO, secretary
§ Double taxation
· Corporate taxes (~15%), plus personal income tax (~25%).
o Ends up with only 60% of profits paid to shareholders.
· Interest is tax deductable.
§ Delaware has two protective laws
· Does not show the public who is the CEO
· Has a court system to deal with business disputes so expedites business issues.
§ Nevada is similar.
o S-corporation
§ Only up to 100 stockholders, cannot sell stock on the open market.
§ No double taxation.
· Limits personal liability
· LLC is a limited liability corporation, but it can have shareholders. Not public.
· Affords the rights of an individual to the company
§ Investment
· Risk vs. Return
o Example: CD and oil exploration
o Systematic versus unique
§ Systematic – whole market has risk
§ Unique – risks associated with a specific investment
o Diversified portfolio?
o Beta 1, 0, -1, etc.
§ Variability in the valuation of a company relative to market indices (measure of risk)
· Coca-cola is Beta=1, so it follows the market
§ Going against the market is a negative beta.
· Allows you to balance out your risk.
· Stock and stock market
o Stock Indices: S&P 500 (big companies), Wilshire 5000 (largest 5000), Nikkei 225 and Dow Jones 30 (oldest and most famous, but not representative of the whole market)
o Standard IPO is $10/share to make return historically about 10% using P/E ratio.
§ Since DJ started tracking the total return for all companies is ~7.6%
§ Average P/E ratio is 16.
§ Also need to know growth rate.
· Could not be earning money but still valuable.
· Book value assets (real estate, equipment, reputation) could represent value
o Buy and liquidate to get money back
§ What is the challenge of continuing to sell stock?
· Take over potential
· Diluted value of shares
· Alternatives:
o Borrow money
§ Have to pay interest
§ Must be able to “service the debt”
§ Need collateral
o Issue Corporate bonds
§ Sells your debt to the public
§ Issue coupons at a “par value” but they can be resold at a different price.
§ Interest rate on bond is fixed, outside interest rate and bond price are negatively correlated.
o Options
§ Pay for option to buy by a defined date “CALL OPTION”
§ “PUT OPTION” is an option to sell.
§ Chicago option exchange, minimum 100 shares, keep 50% for processing fee.
o Stock options
§ Must pay taxes on exercised gain on stock options, even if you hold the stocks and it goes down in value.
§ Works differently than founder’s stock.
· Founder’s stock has a “nominal price” and you pay taxes when you sell on the appreciated value from the nominal price to the sale price.
o Mergers and Acquisitions
§ Why?
· Diversify
· Improve sales and earnings
· Purchase an undervalued company
· Lower operating costs with economies of scale
§ Mergers are friendly, acquisitions are hostile
· Absolute power is 51% but could take much less to elect your people to the board.
o If you buy more than 10% must inform the SEC
· Poison pill
o Protects against takeover
o Use all cash and borrow from bank to buy shares back, share price goes up and you take on debt so makes the company less attractive.
o New contract to employees, if company sold to new company everyone get a significant raise (25% in Yahoo’s case in defending against Microsoft)
o Can also fight in court.
· After M&A
o Reduced wages
o Layoffs
§ Typical layoff strategy is layoff half, give other half a raise to signal no more layoffs. Otherwise everyone looks for jobs.
o Lower cost
o Reduce working capital needs
o Gain access to pension fund
§ Laws against it but it does happen
o Sell assets (real estate, patents, divisions)
§ Leveraged buyout
o Mutual funds and hedge funds
No comments:
Post a Comment