08/02
MN10500 Lecture 1: Basics of Corporations
Lecture Summary
● What is a corporation?
● Pros and cons of corporations
● Real/financial assets
● Investment & Financial Decisioты
● Objectives of corporate financial management: narrow/broad terms
● Conflicts of interest between corporate ownership and management: some simple
cases and remedies of such conflicts.
Investing & Financing Decisions
● The Investing Decision
○ Real Assets: Capital Budgeting or ‘CAPEX’ decisions
○ Decisions concerning tangible & intangible assets
● The Financing Decision
○ Financial Assets
○ Choice between alternative forms of financing: capital structure
What is a Corporation?
● A corporation is a business organized as a separate legal entity owned by the
shareholders.
○ The sum of all ownership is called equity.
○ There is no limit to the number of shareholders in the company, and thus the
amount of funds the company can raise by selling shares is huge.
○ The owners (called shareholders) are entitled to dividend payments.
○ The shareholders have limited liability in the company.
● Types of corporations:
○ Public Corporations
○ Private Corporations
Corporations: Pros & Cons
● Pros:
○ Limited liability, wherein the liability of the shareholder is restricted to the
portions of equity owned by the shareholders.
○ Infinite lifespan, irrespective of the owners’ lifespan.
○ Ease of raising capital, as companies can raise funds easily from the stock
market.
● Cons:
○ Double taxation, wherein the profits earned by the company are taxed twice
in the form of corporate tax, when the profits are earned & personal tax, when
the shareholder receives the profits in the form of dividend.
○ “Agency Problems”, wherein the personnel appointed by the shareholders
often act in their own interest, not in the collective interest of the company.
Role of Financial Manager
MN10500 Lecture 1: Basics of Corporations
Lecture Summary
● What is a corporation?
● Pros and cons of corporations
● Real/financial assets
● Investment & Financial Decisioты
● Objectives of corporate financial management: narrow/broad terms
● Conflicts of interest between corporate ownership and management: some simple
cases and remedies of such conflicts.
Investing & Financing Decisions
● The Investing Decision
○ Real Assets: Capital Budgeting or ‘CAPEX’ decisions
○ Decisions concerning tangible & intangible assets
● The Financing Decision
○ Financial Assets
○ Choice between alternative forms of financing: capital structure
What is a Corporation?
● A corporation is a business organized as a separate legal entity owned by the
shareholders.
○ The sum of all ownership is called equity.
○ There is no limit to the number of shareholders in the company, and thus the
amount of funds the company can raise by selling shares is huge.
○ The owners (called shareholders) are entitled to dividend payments.
○ The shareholders have limited liability in the company.
● Types of corporations:
○ Public Corporations
○ Private Corporations
Corporations: Pros & Cons
● Pros:
○ Limited liability, wherein the liability of the shareholder is restricted to the
portions of equity owned by the shareholders.
○ Infinite lifespan, irrespective of the owners’ lifespan.
○ Ease of raising capital, as companies can raise funds easily from the stock
market.
● Cons:
○ Double taxation, wherein the profits earned by the company are taxed twice
in the form of corporate tax, when the profits are earned & personal tax, when
the shareholder receives the profits in the form of dividend.
○ “Agency Problems”, wherein the personnel appointed by the shareholders
often act in their own interest, not in the collective interest of the company.
Role of Financial Manager
