Thread: share holders wealth

This question is very important for those companies where we have shareholders, who do not manage the company by themselves, i.e. shareholders hire managers who manage the business.

Usually the performance of the management and their bonuses depend on the results of operations, on the profitability and other factors which might not necessary increase shareholders value.

For example if bonuses of the management depend on the short-term profitability, they will seek to increase it, even accepting significant risks related to the certain transactions which provide high profitability in order to earn the bonuses. Such transactions might have a negative impact on the increase of shareholders wealth.

You could explore a bit more about such confilcts referring to the agency theory, as a starting point this could be Wikipedia. Also there is a lot of information on other websites. http://en.wikipedia.org/wiki/Principal-agent_problem

To avoid the above issues the main task is to create proper motivation system for the management which will ensure that shareholders wealth is maximized.

Ana

Asset Protection:
Corporation owns equipment to severe inclusion in shareholder/officer's estate in:
B.K. Court, Divorce or Family Court, State and Federal Tax Court.

Tax related consideration:
S Corporation strategy: Distribute shareholder dividends FY closure. Why?
S Corp shareholders' tax liability, similar rule with partnerships, extends to dividends distributed
or retained at the corporation level, so-called undistributed net-profits, forcing shareholders to
pay state and federal taxes from their personal accounts at 1040 Time (variables apply according
to character of income).

C Corporation strategy: Same. Align bonus to officers to equal dividend income. Why?
A bonus is deductible to the C Corp as a business expense and taxed to the recipient. C Corps.
pay tax on income before distribution to shareholder(s), hence the topic of Corporation
double taxation to Corp. and shareholder. Nonpublicly traded C Corps are relatively rare today,
I'm exposing my age.

Second, consider depreciation advantages in the following light:
Corporation purchases auto for dentist, an officer/employee/sole shareholder of Dentist
Corporation. Dentist drives Dentist Corporation auto for work related travel. Dentist
Corporation purchases auto with Corporation funds derived from FY Gross Receipts.

Alternatives, Dentist or Dentist Corporation allocates:
a. dividends
b. bonus
c. dentist's salary
d. dentist's capital gain realized from sale of stock
e. phantom stock plan income
f. 401(k)

Notation:
Fuel, insurance, registration, depreciation and maintenance are allocatable to corporation's pretax income.

Waiting since 2008 for an answer. I didn't see the date of inquiry.

Helse asks Pat rhetorically: an attempt to maximize capital gains increases shareholder value, hence
my exclusion of the concept.

Above comments from Pat remind me:

1. Nonprofit corporation accounting
Excludes concept of owner's equity or shareholder value.
Includes system of valuation of services performed (free food, credit counseling, church services, etc)

2. Allocation of loss from multi-entity structure.
Occasionally a "tree" of corporations, partnership entities and/or trusts are created with the
specific design to distribute losses or tax prejudiced items such as depreciation to shareholders
with an eye toward offsetting income from alternative sources.

Example:
Doctor with professional income from LLP entity (1065 filer) desires to receive disproportionate
rate of tax loss and depreciation from apartment building investment. The real estate is isolated
in an LLC with 4 owners (ignore potential active/passive loss or attribution rule violation):
Doctor
Doctor's brother
Doctor's trust for children
Doctor's trust for grandchildren

Doctor seeks 100% of depreciation and allocation of state/local taxes on the LLC's 1065 K-1.
Real Property LLC Agreement mandates rental income shall be allocated to payment of mortgage
ensuring building will pass to children and grandchildren upon death of Doctor and Doctor's brother.
LLC agreement stipulates interests in LLC are nontransferable (assume issue of gift abated).

hi guys,

Capital Budgeting is deciding which projects the firm is considering are most profitable. Usually done by an NPV or IRR analysis.By focusing on the best projects a company will maximize shareholder wealth. In order to maximize shareholder wealth over the long term, firms need to chose projects with positive NPVs and fit with their strategic vision.

Shareholder wealth (more commonly referred to as shareholder value) is talking about the value of the company generally expressed in the value of the stock. Companies often decide to forgo marginal increases in profit if they feel the lower margins on the incremental gains in profit will have a negative impact share price. They actually increase shareholder value by NOT making more profit.

Most stock pricing models use some form of a discounted value of future cash flow or dividends. A management who looks only to short-term considerations may be able to please The Street this quarter, but will not likely be able to execute a program that will create shareholder wealth over the long term. Often planning for the future involves making decisions today, which is one way to define strategic planning.

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