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Chapter 1

AFF 210 Chapter Notes - Chapter 1: Toronto Stock Exchange, Money Supply, Cibc World Markets


Department
Finance
Course Code
AFF 210
Professor
Laleh Samarbakhsh
Chapter
1

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all successful companies are able to accomplish two main goals:
1. They identify, create, and deliver products or services that are highly valued by
customersso highly valued that customers choose to purchase them from the
company rather than from its competitors.
2. All successful companies sell their products/services at prices that are high
enough to cover costs and to compensate owners and creditors for their
exposure to risk.
The key attributes of successful companies:
1. have skilled people at all levels inside the company, including leaders, managers, and a capable
workforce.
2. have strong relationships with groups outside the company. Eg. developing win–win relationships
with suppliers and excel in customer relationship management
3. have enough funding to execute their plans and support their operations. need cash to purchase land,
buildings, equipment, and materials.
skilled people, strong external relationships, and sufficient capital.
Different forms of corporation:
1. Sole proprietorship (an unincorporated business owned by one individual)
Provincial registration is needed when doing business under another name.
Advantages:
it is easily and inexpensively formed, (2) it is subject to few government regulations, and (3) its
income is not subject to corporate taxation but is taxed only as a part of the proprietor's personal
income.
Limitations:
(1) it is difficult for a proprietorship to obtain the capital needed for growth; (2) the proprietor
has unlimited personal liability for the business's debts, which can result in losses that exceed
the money he or she invested in the business (creditors may even be able to seize a proprietor's
house or other personal property!); (3) the life of a proprietorship is limited to the life of its
founder.
Usually for small businesses.
2. Partnership (two or more persons or entities associate to conduct a noncorporate business for profit)
Partnerships may operate under different degrees of formality, ranging from informal, oral
understandings to formal agreements. Province registration is needed.
Advantages and disadvantages are similar to sole proprietorship. But with regard to liability:
if any partner is unable to meet his or her pro rata liability, the remaining partners must make good
on the unsatisfied claims, drawing on their personal assets to the extent necessary.
So, here comes limited partnership:
certain partners are designated general partners and others limited partners.
the limited partners are liable only for the amount of their investment in the partnership, while
the general partners have unlimited liability.
However, the limited partners typically have no controlit rests solely with the general
partners
Limited partners must be aware that they can lose their limited liability status if they become
active in managing the business.
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common in real estate, oil, equipment leasing ventures, and venture capital
Limited Liability Partnership:
all partners enjoy limited liability with regard to their business partners' professional
negligence, and their potential losses are limited to their investment in the LLP.
Only lawyers and accountants can form LLPs, (at least for now)
3. Corporation:
legal entity created by provincial and federal laws, and it is separate and distinct from its
owners and managers.
many growth companies began life as a proprietorship or partnership, but at some point their
founders found it necessary to convert to a corporation. (mostly for attracting for capital to
grow)
Advantages:
1) unlimited life—a corporation can continue after its original owners and
managers are deceased; (2) easy transferability of ownership interest
ownership interests can be divided into shares of stock, which can be
transferred far more easily than can proprietorship or partnership interests;
and (3) limited liability—losses are limited to the actual funds invested.
Disadvantages:
1) Corporate earnings may be subject to double taxation—taxed at the corporate level, and
income tax to the shareholders. (2) Setting up a corporation involves preparing articles of
incorporation, writing a set of bylaws, and filing the required provincial and federal reports,
which is more complex and time consuming than creating a proprietorship or a partnership.
4. Professional Corporation(PC)
Usually for professionals like lawyers, accountants and doctors.
do not relieve the participants of professional (malpractice) liability.
avoid certain types of unlimited liability, yet still be held responsible for professional liability.
Growing and Managing a Corporation:
At first, they may use their own resource to start the business.
Then, external financing in order to make the company run and grow.
Banks are too risky for start-ups. So they sell shares to outsiders, such as friends, family, private
investors (often called angels), or venture capitalists.
If the corporation continues to grow, it may become successful enough to attract lending from
banks, or it may even raise additional funds through an initial public offering (IPO) by selling
shares to the public at large.
After an IPO, corporations support their growth by borrowing from banks, issuing debt, or selling
additional shares
In short, a corporation's ability to grow depends on its interactions with the financial markets.
Agency Problem:
What is to prevent managers from acting in their own best interests, rather than in the best interests
of the owners?
This is called an agency problem because managers are hired as agents to act on behalf of the owners.
Agency problems can be addressed by a company's corporate governance, which is the set of rules
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