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Chapter 1

FIN 300 Chapter Notes - Chapter 1: Cash Flow, Financial Market


Department
Finance
Course Code
FIN 300
Professor
Michael Inglis
Chapter
1

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Chapter 1: Introduction to Corp Finance
1.1 Corp Finance and the Financial Manager
What is Corp Finance?
1. What long term investments should take? lines of bus/? shapes the jobs of managers centralize fin
function and measure performance
2. Where will get long term financing to pay for investment?
3. How manage everyday financial activities?
The Financial Manager
managers rep owner’s interests and m/ d/ on behalf
large corp fin manager answers 3 questions
globalization, tech, increased volatility of interest rates and foreign exchange rates raised stakes in fin
mgmt. d/
CFO President COO Chairman CEO
controller cost and fin acc, tax payments, mgmt. info systems
treasurer manage firms cash, fin planning, capital exp 3 questions
Financial Management Decisions
capital budgeting
o planning and managing long term investments
o fin manager find investment opp > cost to acquire = val of cash flow generated > cost of asset
size (how much), timing (when), risk (how likely) of future cash flows
Capital structure
o Mixture of s-t debt, l-t debt and equity firm uses to fin operations
1. How much should firm borrow Affects risk and val of firm
2. What least exp sources of funds
o What % cash flow goes to creditors and SH?
o Fin manager how and where raise $
Choosing lenders and loan types
Working Capital Management
o S-t assets, s-t liabilities
o Day to day activity ensure firm has sufficient resources and contin operations and avoid costly
interruptions re/ and disbursement of cash
1. How much cash and inv keep on hand?
2. Sell on credit? Terms? Whom extend them?
3. How obtain any s-t fin? Purchase on credit/ borrow s-t and pay cash?
1.2 Forms of Business Organization
Firm grows advantages of corp form outweigh disadv
Sole Proprietorship
Partnership
Corporation
Definition
Bus/ owned by 1 indiv
Bus/ formed by 2/more ppl
Bus/ created as distinct legal entity
owned by 1/more ppl/ entity
Most important form
Legal entity separate and distinct

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f/ owners
Rights, duties and privileges of
actual person
Borrow $ and own property
Can sue, be sued and enter into
contracts
Articles of incorporation (charter)
corp name, intended life,
purpose, number of shares issued
Bylaws rules of how corp
regulates own existence
SH control the corp elect the
directors
A Corporation by Another name
o Public ownership and limited
liability remain
o Joint stock companies, public
limited companies, limited
liability companies
o A professional corp limited
liability but still can be sues
for malpractice (lawyers,
dentist)
Pros
Simplest
Least regulated
Owner keep all the
profits
Simplest to start w/ little regulation
Owners keep all profit
Access to more human and financial
capital
Limited partnership unlimted liability
and rund the bus/
o Limited partners not actively
participate in bus/
o Limited to amount contributed to
partnership
Ownership easily transferred
Life not limited
Borrows $ in its own name
Limited liability
Cons
Unlimited liability
Personal assets for
payment
o No distinction b/
personal and bus/
income = bus/
income taxed as
personal income
Life limited to life of
owner
Limied ability to raise
financing
Ownership difficult to
transfer Req sale of
entire bus/ to new
owner
General partnership share in gains/
losses
o Unlimited liability for partnership
debts
Life of partnership limited to lives of
owners
Difficulty transferring ownership
Central problem: ability of bus/ to grw
limited by inability to raise cash for
investment
Partnership agreement way
partnership gains/losses divided
o Oral, written
All income is taxed as personal income
Possible disagreements over
partnerships
Limited liability if borrower
experience financial distress
unable to repay debt blocks
lenders access to the owners
personal assets = make personal
guarantees
Corp form pay taxes
o Double taxation corp profits
are taxed 2X when they are
earned and again at personal
level when paid out
o Dividend tax credit dividend
exclusion reduce the bite of
double taxation
More complex and extensive to
form
Income Trust
Non- corp form of bus/ org
Extended limited liability protection
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