FNBU 3221 Chapter Notes - Chapter 1: Limited Liability Company, Sole Proprietorship, Limited Liability

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5 Feb 2017

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Chapter 1
Corporate Finance and the Financial Manager
Corporate finance is the study of ways to answer the questions of:
o What long-term investments should you take on?
o Where will you get the long-term financing to pay for your investment? Bring in
other owners/borrow money?
o How will you manage your everyday financial activities such as collecting from
customers and paying suppliers?
Corporations typically employ managers to represent owners’ interests & make decisions on
their behalf
Financial management decisions
o Capital budgeting: process of planning & managing a firm’s long-term investments
Essence of capital budgeting is evaluating the size, timing, & risk of future
cash flows
o Capital structure: mixture of debt & equity maintained by a firm
Must decide on financial structure & how & where to raise money
o Working capital: firm’s short-term assets & liabilities
Managing firm’s working capital is day-to-day activity that ensures firm has
sufficient resources to continue its operations & avoid costly interruptions
Forms of Business Organization
Sole proprietorship: business owned by single individual
o Pros: simplest type of business to start, least regulated form of organization, & owner
keeps all profits
o Cons: owner has unlimited liability for business debts, life of business limited to
owner’s life span, amount of equity that can be raised limited to proprietor’s personal
wealth, & ownership difficult to transfer
Partnership: business formed by 2+ individuals/entities
o Similar advantages & disadvantages to sole proprietorship
Corporation: business created as a distinct legal entity composed of 1+ individuals/entities
o Pros: ownership can be easily transferred, unlimited life, can borrow money in its
own name, limited liability for stockholders, & easier to raise money
o Cons: double taxation, hardest to set up (requires articles of incorporation & bylaws)
o Limited liability company usually considered corporation by IRS
The Goal of Financial Management
Goal of financial management is to maximize current value per share of existing stock
More general goal is maximizing market value of existing owners’ equity (if no stock issued)
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