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Canada (158,081)
York University (12,350)
Finance (91)
FINE 2000 (79)
Chapter 1

Chapter 1 The Firm and the Financial Manager.docx

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York University
FINE 2000

1.1 ORGANIZING A BUSINESS Corporation Corporation: permanent, legal entity owned by shareholders/stockholders who are not personally liable for the business’ liabilities - Confers limited liability (principle that the owners of the corporation are not personally responsible for its obligations - Prepare articles of incorporation and can incorporate under Canadian Business Corporation Act (Federal) or provincial laws - Public Company: Corporation whose shares are listed for trading on a stock exchange o Have flexibility when raising finances, can offer shares to any investor, in return must provide detailed financial information in annual reports o Advantage: convenience of selling shares in stock market - Private Company: Corporation whose shares are privately owned (by small groups of managers and investors) o Not required to provide much financial information - All have board of directors, a group selected by shareholders, given responsibility of overseeing activities including appointment of top managers; in private company, shareholders are on the board - Legal separation of ownership and management, which gives the corporation permanence, is a distinctive feature  ex. If manager is fired and replaced, corporation still survives - Some public companies have shareholder who owns more than 50% of shares who is most likely involved in operations - Not all are public due to cost (in time and money), complications with governance requirements, sharing of information with public - Tax drawbacks  taxed separately and so corps. pay tax on profits, shareholders taxed when they receive dividends Sole Proprietorships Sole Proprietorship: Sole owner of a business that has no partners and no shareholders. Proprietor is personally liable for all of the firm’s obligations - Keep profits after taxed by CRA - Advantage: ease of establishing, lack of regulations - Disadvantage: unlimited liability Partnerships Partnership: Business owned by two or more people who are personally responsible for all its liabilities - Partners pay personal income tax - Partnership agreement sets out how management decisions are made - Sole proprietorships and partnerships are flow-through entities because they do not pay income tax on operating profits and do not have to file tax return Hybrid Forms of Business Organization - Limited Partnership  partners are general or limited; general have unlimited liability and limited are liable for only the amount contributed - Limited liability partnerships (LLPs) or Limited liability companies (LLCs)  all partners have limited liability - Both are flow-through entities - Professional Corporation (PC)  commonly used by doctors, lawyers, and accountants; limited liability and taxed as a corp. - Income trust  investment fund; legally known as mutual fund trust; sells units to investors to raise money to purchase shares and debt of operating businesses; flow through entity; only invests in one company making a unit similar to a share 1.2 INVESTMENT AND FINANCING DECISIONS The Investment (Capital Budgeting) Decision - Investment Decision/Capital Budgeting Decision: decision as to which real assets the firm should acquire; starts with the identification of investment opportunities, called capital investment projects - Financial manager (F.M.) helps firm identify promising projects and decide how much to invest (decision is called capital budgeting) - Tangible and intangible assets - The longer a c
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