FIN 300 Study Guide - Fall 2018, Comprehensive Midterm Notes - Cash Flow, Retained Earnings, Operating Cash Flow
12 Oct 2018
School
Department
Course
Professor
FIN 300
MIDTERM EXAM
STUDY GUIDE
Fall 2018
Sole Proprietorship
- Disadvantages
o Equity Capital Limited: Difficult to get money as an entrepreneur
Partnership
- Advantages
o More capital combined from two people
o Human Capital - More skillsets from two people
o Liabilities are split so risk is spread
- Disadvantages
o Disagreement between the two partners
Corporation
- Legal entity, something or someone who is responsible for their own legal actions
- Owned by shareholders
- Limited liability
- Taxed twice: Company is taxed (corporate tax) and shareholders are taxed (when they
receive dividends)
o Personal tax is progressive tax – you earn little, you pay little tax
o Corporate tax has a flat tax rate, you pay a flat rate despite the amount of
money you make
- Disadvantages of corporation
o Separation of ownership and management
▪ Shareholders hire CEO to run and manage their company
Type of Business
- Swimming Pool repair
o Sole Proprietorship
▪ Do not require a lot infrastructural cost
▪ Skills are not too hard to learn
- Flower Shop
o Sole Proprietorship
▪ Less money involved
▪ Less skills involved
- Internet-based specialty store
o Partnership or corporation
▪ Does not have to be in the country, internet availability
▪ Variety of skills involved
- Termite control service
o Partnership
▪ Different skillsets involved
- Law firm
o Partnership
- Underwear manufacturer
find more resources at oneclass.com
find more resources at oneclass.com
o Corporation
▪ Huge start-up cost
▪ Need to be able to get materials from suppliers, usually from overseas –
you need necessary infrastructure to ship textiles, have it made
Investment is something in which you put a sum of money in, and you get a sum of money out
- Conventional investment – little money in, more money out
- Investment involves investment Decisions
o Involves benefits + timing + risk (our ability to anticipate what is going to happen
in the future)
- Patent is an investment, but different from conventional because more money out is
not guaranteed; you are buying the option to sell the product only and prevent other
companies from selling
Financing Decisions: How Does A Company get its Money?
- Debt: Borrow money; get Investment; company pays interest on the investment (Bonds)
- Equity – stocks; company gets money, does not pay interest; pays off all its debts and
whatever is left over, the person lending the money gets a share
Profitability
- Increase the selling price
- Decrease the cost
- Mature companies that have reached a peak (Starbucks) pay off dividends
- Start-up companies do not pay dividends, they reinvest the money back into the business,
they make more money and pay off more dividend next year
- Principle needs to achieve a goal through the agent but goals are not aligned: Sol’s:
- Board of Directors to look over the actions of the CEO
o Problem: CEO appoints the BOD
- Preferred shares: Given a base salary to CEO – pay the salary and the remaining money
will be offered in stock options which they can sell at a certain time
- CEO has to do a good job otherwise the company will get acquired by a better one and
CEO gets fired
Activist shareholder – Shareholder who owns significant portion of the company and are active
shareholders – influece the copay’s decisio
Net Income is not a good indicator of performance: Having a large NI does not mean the
company has a lot of cash.
Investing – money that goes out to make more money
Financing – money that comes in company
Operating – money that circulates inside the company
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Disadvantages: equity capital limited: difficult to get money as an entrepreneur. Advantages: more capital combined from two people, human capital - more skillsets from two people, liabilities are split so risk is spread. Disadvantages: disagreement between the two partners. Legal entity, something or someone who is responsible for their own legal actions. Taxed twice: company is taxed (corporate tax) and shareholders are taxed (when they. Limited liability receive dividends: personal tax is progressive tax you earn little, you pay little tax, corporate tax has a flat tax rate, you pay a flat rate despite the amount of money you make. Disadvantages of corporation: separation of ownership and management, shareholders hire ceo to run and manage their company. Swimming pool repair: sole proprietorship, do not require a lot infrastructural cost, skills are not too hard to learn. Flower shop: sole proprietorship, less money involved, less skills involved.
