1. Sole Proprietorship 2. Partnership 3. Corporation Essence of capital budgeting Forms of business organizations Goal of financial management Secondary markets

Forms of business organizations

Chapter 1 - Financial Management

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Finance - Personal Finance

michael1tekrzp Created by 10 mon ago

Cards in this deck(21)

all the activities concerned with obtaining money and using it effectively

1) what long-term investments should the firm take on (capital budgeting) 2) where will we get the long-term financing to pay for the investment? (financial structure) 3) how will we manage the everyday financial activities of the firm? (working capital management)

LONG-TERM INVESTMENTS; the process of planning and managing a firm's long-term investments

evaluating the size, timing, and risk of future cash flows

RAISING MONEY TO FUND CAPITAL INVESTMENTS; the mixture of debt and equity maintained by a firm -how should we pay for our assets? -should we use debt or equity?

current assets - current liabilities CA = cash, inventory, accounts receivable CL = accounts payable, notes payable, short-term debt **make sure you have enough cash to cover accounts payable, notes payable, interest, employees

1. Sole Proprietorship 2. Partnership 3. Corporation

a business owned by a single individual Advantage: easiest to start, least regulated, single owner keeps all the profits, taxed once as personal income Disadvantage: limited life of owner, equal capital limited to owner's personal wealth, unlimited liability, difficult to sell ownership interest

a business formed by 2 or more individuals or entities Advantages: 2 or more owners, more capital available, relatively easy to start, income taxed once as personal income Disadvantages: unlimited liability (general vs limited partnership), partnership dissolves when 1 partner dies or wishes to sell, difficult to transfer ownership

all the partners share in gains or losses, and all have unlimited liability

1 or more general partners will run the business and have unlimited liability, but there will be 1 or more limited partners who will not actively participate in the business (common in real estate)

a business created as a distinct legal entity composed of one or more individuals or entities Advantages: limited liability, unlimited life, separation of ownership and management, transfer of ownership is easy, easier to raise capital Disadvantages: double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)

maximize the current value per share of the existing stock **general (if firm doesn't have traded stock): maximize the market value of the existing owner's equity

intended to protect investors from corporate abuses

the possibility of conflict of interest between the stockholders (PRINCIPALS) and management (AGENTS) of a firm

refers to the costs of the conflict of interest between stockholders and management

an important mechanism by which unhappy stockholders can act to replace existing management

a firm issues securities (stocks and bonds) to raise cash for investments (usually in real assets) -the operating cash flows generated from the investment in assets allows for the payment of taxes, reinvestment in new assets, payment of interest and principal on debt, and payment of dividends to stockholders

refers to the original sale of securities by governments and corporations

those in which these securities are bought and sold after the original sale

1. Auction markets 2. Dealer markets (over-the-counter)

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Chapter 1 - Financial Management

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