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CAS AS 105

Chapter 1: Corporate Finance and the Financial Manager Friday, January 17, 2014 4:08 PM I. Why Study Finance? ○ Valuation Principle: Weigh costs and benefits properly to make the best decision II. Four types of Firms a. Sole Proprietorships:Business owned by 1 person  Most commontype of business  Advantage in easy set up, no organization  No separation between firm and the owner □ Investors cannot have ownership  Unlimited personal liability for any debts  Life of the business depends on the life of the owner b. Partnerships: Business owned by 2 or more people  All partners are liable for debt  Ends with the death or withdrawal of a single partner □ Partners can avoid liquidation by buying out the partner that left  Limited Partners: Limited liability of just their investment  Limited Liability Companies (LLC):No general partners c. Corporations:Legal entity separate from its owners  Owners and employeesare not liable, vice versa  Protectedunder the Constitution i. Formationof a Corporation - Requires a charter by the state of business ii. Ownership of a Corporation - Stock: Ownership or equity divided to stockholders  No limitation of who can own stock - Equity: Collectionof all outstanding shares - Dividend: Paymentmade at the discretion of the corporation  Proportionalto the amount of stock every person owns iii. Tax Implications on Corporate Entities - Corporationspay tax on profit, then distribute - Since dividend is income, it is taxed again at the personal level 1) S Corporations:Under sub-chapter S of the IRS, they are exempt from double taxation 2) C Corporations:Not exempt from taxes because they do not restrict stockholders III. The Financial Manager a. Making InvestmentDecisions  Make profitable use of the stockholders' money b. Making Financing Decisions  Can sell more shares of stock or borrow from a lender c. Managing Short-TermCash Needs  Also known as managing work capital  Costs of developing new products and services d. The Goal of the Financial Manager  Maximize the profit for the owners, stockholders IV. The Financial Manager's Place in the Corporation a. The Corporate ManagementTeam  Board of Directors:Group of people elected by the shareholders to make decisions for the corporation □ Each share of stock gives the stockholder1 vote □ The Board sets rules and policies for the CEO to run the corporation □ The Board sets rules and policies for the CEO to run the corporation □ Most senior financial manager is the CFO, reports directly to the CEO along with the Chief Operating Officer b. Ethics and Incentives in Corporations i. Agency Problems □ Managers have little incentive to work in the interests of shareholders, and not s
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