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Chapter 1

FIN3403 Chapter Notes - Chapter 1: Limited Liability Company, Limited Liability Partnership, Modern Portfolio Theory

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Financial Management Chapter 1
Finance - system that includes circulation of money, granting of credit, making of investment
provision of banking facilities
Areas of Finance
o Financial management (Corporate Finance)
Focuses on decision relating to how much/types of assets to acquire, capital to
acquire assets and how to maximize value
o Capital Market
Relate to markets where interest rates, stock and bond prices are determined
Banks, stockbrokers, mutual funds
o Investments concerning stocks and bonds
Security Analysis deals with finding proper values of individual securities
Portfolio theory best way to structure portfolios
Market analysis stock/bond trends
Finance within organization
o CEO and CFO certify to the SEC that reports are accurate
Finance VS Economics and Accounting
o Finance requires both
Forms of Business
o More than 80% of business are in the form of a corporation
Most small businesses convert to corporations
o Proprietorship unincorporated business owned by one individual
Advantages Easy and inexpensive, subject to few regulations, and lower
income tax
Disadvantages personal liability, business life is limited to owner, hard to get
large sum capital
o Partnership owned by 2 or more people who decide to do business together
Advantages are the same as proprietorship
Unlimited liability makes it difficult to raise large amounts of capital
o Corporation legal entity created by the state
Limits stockholders’ losses to the amount they invested
Unlimited life
Expensive to set up
Taxes are high
S corporations are taxed like proprietorship
o Limited Liability Company (LLC)
Hybrid of partnership and corporations
o Limited liability partnership
Professional firms
o LLC and LLP
Reduces risk for investors
Lowers firms risk and higher its value
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