FINS1613 Lecture Notes - Lecture 1: Sole Proprietorship, Root Mean Square
Wednesday, 1 March 2017
Business Finance
Introduction
-Projects (Key Characteristics):
•Profits & costs - cash flows (amount & timing)
•Uncertainty - risk (possible outcomes)
-Terminology:
•Ownership - Right to share in a firm’s profits
•Control - Right to directly manage or elect management of firm
•Personal liability - Responsibility to a firm’s financial obligations using personal
assets when firm cannot
•Limited liability - Limit that owner can only lose value of investment when firm
cannot pay its financial obligations
-Sole Trader: (aka sole proprietorships)
•Owned & controlled by single person - personally liable for firm’s debts
•Business ceases existence with death/ withdrawal of sole trader
•Profits taxed at personal level
-Partnership:
•Owned by several partners
-General - ownership, control, personal liability
-Limited - ownership, no control, limited liability
•Business ceases to exist with death/withdrawal of single general partner
•Profits taxed at personal level
•Simply the natural extension of sole traders (additional owners/ partners)
-Corporations - Organisational Structure:
•Board of Directors: Elected by firm’s owners, hire CEO, monitor firm & sets high
level strategy, maximise firm’s value
•CEO: Everyday manager, implement rules & policies set by board of directors,
advised by executives, maximise firm’s value
!1
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Document Summary
Projects (key characteristics): pro ts & costs - cash ows (amount & timing, uncertainty - risk (possible outcomes) Sole trader: (aka sole proprietorships: owned & controlled by single person - personally liable for rm"s debts, business ceases existence with death/ withdrawal of sole trader, pro ts taxed at personal level. Limited - ownership, no control, limited liability: business ceases to exist with death/withdrawal of single general partner, pro ts taxed at personal level, simply the natural extension of sole traders (additional owners/ partners) !1: cfo: evaluates investment & nancing decisions, maximise rm"s value. Separation between ownership & management: agency costs, we assume employees have personal objectives, they may not agree with value maximising objective of rm"s owners, arise when employee takes action serving own interests instead of rm"s. Examples: ceo may not invest in pro table, but risky project - red if project fails, employee outsourcing job - net pro t, advantages over partnerships & sole traders:
