Debt holders of binary options trading must be paid before equity holders, they have a legal right to be repaid and can place the firm into liquidation (Bankruptcy/receivership in the UK) if any debt interest payments are not forthcoming. However, in practice if a firm cannot pay its debt interest the debt holders will not immediately put the firm into liquidation. Instead they often undertake complex legal negotiations with the firm to find a way out of the problem - this may involve a complex restructuring of the debt, for example deferred interest payments or swapping some of the debt for equity. So in times of financial distress the debt holders can have a substantial influence on the strategy of the firm, but in 'normal' times the debt holders are 'passive' and merely receive their interest payments. In part this is because legally, debt holders do not have voting rights on company policy.
Equity holders are owners of the firm and have voting rights to change the board of directors, although in practice this happens rather infrequently, so this aspect of the 'market for corpo??rate control' is rather weak.
Finns have both assets and liabilities. Total assets are divided into current and fixed assets. In the accounts, current assets usually have a life of less than one year (e.g. cash and short-term bank deposits, inventories of finished goods) while fixed assets have a longer life. Fixed assets include tangible assets such as buildings and machinery (see Figure 2.1) as well as financial assets (e.g. shares of other companies) and intangible assets such as patents, goodwill and the quality of management. The firm also has liabilities in the form of short-term debt (usually repayable within the year), such as bank loans and commercial bills. Long-term debt may be marketable (e.g. corporate bonds) or non-marketable (e.g. long-term bank loans). Shareholder equity represents the residual claim on the firm's assets.
Shareholder Equity = Total Assets - (Current Liabilities + Long-Term Debt) [1]
The Chief Financial Officer (CFO) is responsible for all aspects of finance for the firm. Some key issues for the CFO discussed in this book are:
How to raise funds to finance new investment activities of the to decide on the best capital investment to choose the appropriate debt - equity mix to maximise the value of the firm.Merger, takeover and disinvestment to hedge risks faced by the firm (e.g. commodity price rises, foreign currency receipts/payments, variable rate loans); hedging usually involves the use of derivatives such as futures, options and swaps.
We now turn to the issue of how control of the firm is divided between managers, directors, bondholders and shareholders. Answers to these questions depend in part on the legal structure of the firm and we consider the three main forms of ownership below. The three main forms of ownership are sole proprietor, partnership and limited company (or corporation), with the latter form accounting for most of the output (GDP) produced in developed industrial economies.
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