Types of finance
-
personal
FINA2360 CHAPTER 1 -
Government FALL2021
-
corporate
CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE
WHAT IS CORPORATE FINANCE?
Corporate finance is the study of the answers to the following questions:
1. What long-term investments should we make? Capital budgeting - The process
{
}
maintain
' of planning and managing a firm's investments in fixed assets. of the
course
are
ima:¥¥s
2. Where will we get the funds to pay for our investment? Capital structure - The
mix of debt and equity used by a firm. What are the least expensive sources of funds?
Is there a best mix? When and where to raise funds?
3. How will we collect from customers and pay our bills? Working capital -
Managing short-term assets and liabilities. How much cash and inventory to keep on
hand? What is our credit policy? Where will we obtain short-term loans?
THE FINANCIAL MANAGER Highest position in the
Finance department
<
The Chief Financial Officer, CFO.
Controller - Handles cost and financial accounting, tax payments and information systems. He
focus of
handles the accounting aspects of the business > more
accounting as Dect the
Treasurer - Handles cash management, financial planning, and capital expenditures. He course
<
handles the financing aspects of the business > more on finance aspect
Corporate finance is primarily concerned with the issues faced by the treasurer.
sole proprietorship
CORPORATE FORM OF BUSINESS ORGANIZATION partnership
1. The Sole Proprietorship Corporation
Advantages
-Easiest and most inexpensive to set up.
-Owner solely controls the business
-Tax reporting is simple (does not require a separate corporate tax return).
Disadvantages
-Unlimited personal liability as there is no separation between the business and the
owner.
-Can be hard to raise capital via debt or equity financing (banks are reluctant to lend
to sole proprietorships and there are no shares to sell to equity investors).
-Difficult to sell.
2. The Partnership. General or Limited partnership
General all partners share all profits and losses, hence equal liability
Limited is a partnership consisting of a general partner, who manages the business
and has unlimited personal liability for the debts and obligations of the Limited
Partnership, and a limited partner, who has limited liability but cannot participate in
management.
Advantages
-Shared risk.
-Shared management.
-Tax reporting is simple (does not require a separate corporate tax return).
Disadvantages
-Risk of conflict between partners.
-Either partner can be held responsible for business debts incurred by the other
partner.
-Shared decision making.
-Buyouts can be problematical (when one partner wishes to quit the business).
MISHRA
, of
the
focus
course
"
Sdepropntorship Partnership Corporation
set up -
difficulty easy depends on Meske long process
Tax rate personal rate
personal rate corporate tax rate (double taxation)
liability unlimited unlimited or limited limited
Tranter of ownership difficult difficult is general Partner easy
easier it limited partner
<
After tax income
(
Net income
distributed to
L V
,a×e, anya,
,
m.mu , , gnann.ae, , ,
on the dividends
dividends
earned .
g General partnership V. Limited partnership
full management contract the business
-
unlimited tidbits and
-
Limited partners have little to no involvement but also have
limited liability .
Access to funds difficult More funds wiinmore many options
: share issue
partners bonds
sell ownership
, FINA2360 CHAPTER 1 FALL2021
3. The Corporation
Advantages
-Limited liability owners are not responsible for company debts or obligations.
-Easier to raise capital from investors or financial institutions.
-Being incorporated is often a requirement when doing business with government or
other businesses.
Disadvantages
-Most expensive form of business to set up and maintain.
-Involves a lot of ongoing paperwork (must file annual business tax returns).
-A lot more regulations.
-double taxation
THE GOAL OF FINANCIAL MANAGEMENT
A. Possible Goals Many goals
There are many possible goals max. profit, min. cost,
maintain steady growth, avoid financial distress and bankruptcy, beat the
Maxim isanon
B. A More General Goal value achieve other
This helps to
Maximize the market value of the owners' equity. •
goals .
THE AGENCY PROBLEM AND CONTROL OF THE CORPORATION
A. Agency Relationships
The relationship between stockholders and management is called an agency
relationship. This occurs when one party (principal) pays another (agent) to
represent them. The possibility of conflict of interest between the parties is
termed the agency problem.
be to B. Agency costs
Goal must Of
•
wealth Agency costs - Two types: direct and indirect. Direct costs come about in two
maximise
shareholders ways. One, corporate expenditure that benefits management but costs the
the
shareholders. The purchase of luxuries and unneeded corporate jet fall under
this category. The second direct agency cost is an expense that arises from the
need to monitor management actions or the incentive fee paid to the mangers to
act in the best interest of s/h. For example, audits, regular financial statements,
stock options. Indirect costs, are lost opportunities. For example management
avoiding risky investments., cost of an audit of the firm 's financial statement
.
C. Do Managers Act in the Stockholders' Interests?
FINANCIAL MARKETS AND THE CORPORATION
There's many Financial markets: As is typical of other markets, financial markets are a mechanism that
intermediaries
•
financial brings buyers and sellers together. Here debt and equity securities are bought and sold.
financial intermediaries bring together buyers and sellers they operate in financial Maners
-
nowadays funds
.
.
.
mutual
- Money versus Capital Markets
Insurance avoid'M Money market - The market in which short-term (1 year or less) securities are
µggµed"" " "
-
""
bought and sold. It is a dealer market, i.e., dealers buy and sell from their
traaedimnanmaf
"
*
inventories.
.
Capital market - The market for long-term debt and equity shares. It is primarily a
brokered market, i.e., brokers match up buyers and sellers.
MISHRA
, Problems with Profit maximisation as a Goal
to Accounting profit -
Revenue
( exp )
EBIT
"" ""
EBT
( tax)
EAT
(Dividends for Ps)
> NIC belongs to common shareholders
^
This can be manipulated
2- Timing -
profit for the short or long term ?
3. Risk is not considered
-
High risk > High reward 012 High loss
low risk >
low reward 012 low loss
-
personal
FINA2360 CHAPTER 1 -
Government FALL2021
-
corporate
CHAPTER 1: INTRODUCTION TO CORPORATE FINANCE
WHAT IS CORPORATE FINANCE?
Corporate finance is the study of the answers to the following questions:
1. What long-term investments should we make? Capital budgeting - The process
{
}
maintain
' of planning and managing a firm's investments in fixed assets. of the
course
are
ima:¥¥s
2. Where will we get the funds to pay for our investment? Capital structure - The
mix of debt and equity used by a firm. What are the least expensive sources of funds?
Is there a best mix? When and where to raise funds?
3. How will we collect from customers and pay our bills? Working capital -
Managing short-term assets and liabilities. How much cash and inventory to keep on
hand? What is our credit policy? Where will we obtain short-term loans?
THE FINANCIAL MANAGER Highest position in the
Finance department
<
The Chief Financial Officer, CFO.
Controller - Handles cost and financial accounting, tax payments and information systems. He
focus of
handles the accounting aspects of the business > more
accounting as Dect the
Treasurer - Handles cash management, financial planning, and capital expenditures. He course
<
handles the financing aspects of the business > more on finance aspect
Corporate finance is primarily concerned with the issues faced by the treasurer.
sole proprietorship
CORPORATE FORM OF BUSINESS ORGANIZATION partnership
1. The Sole Proprietorship Corporation
Advantages
-Easiest and most inexpensive to set up.
-Owner solely controls the business
-Tax reporting is simple (does not require a separate corporate tax return).
Disadvantages
-Unlimited personal liability as there is no separation between the business and the
owner.
-Can be hard to raise capital via debt or equity financing (banks are reluctant to lend
to sole proprietorships and there are no shares to sell to equity investors).
-Difficult to sell.
2. The Partnership. General or Limited partnership
General all partners share all profits and losses, hence equal liability
Limited is a partnership consisting of a general partner, who manages the business
and has unlimited personal liability for the debts and obligations of the Limited
Partnership, and a limited partner, who has limited liability but cannot participate in
management.
Advantages
-Shared risk.
-Shared management.
-Tax reporting is simple (does not require a separate corporate tax return).
Disadvantages
-Risk of conflict between partners.
-Either partner can be held responsible for business debts incurred by the other
partner.
-Shared decision making.
-Buyouts can be problematical (when one partner wishes to quit the business).
MISHRA
, of
the
focus
course
"
Sdepropntorship Partnership Corporation
set up -
difficulty easy depends on Meske long process
Tax rate personal rate
personal rate corporate tax rate (double taxation)
liability unlimited unlimited or limited limited
Tranter of ownership difficult difficult is general Partner easy
easier it limited partner
<
After tax income
(
Net income
distributed to
L V
,a×e, anya,
,
m.mu , , gnann.ae, , ,
on the dividends
dividends
earned .
g General partnership V. Limited partnership
full management contract the business
-
unlimited tidbits and
-
Limited partners have little to no involvement but also have
limited liability .
Access to funds difficult More funds wiinmore many options
: share issue
partners bonds
sell ownership
, FINA2360 CHAPTER 1 FALL2021
3. The Corporation
Advantages
-Limited liability owners are not responsible for company debts or obligations.
-Easier to raise capital from investors or financial institutions.
-Being incorporated is often a requirement when doing business with government or
other businesses.
Disadvantages
-Most expensive form of business to set up and maintain.
-Involves a lot of ongoing paperwork (must file annual business tax returns).
-A lot more regulations.
-double taxation
THE GOAL OF FINANCIAL MANAGEMENT
A. Possible Goals Many goals
There are many possible goals max. profit, min. cost,
maintain steady growth, avoid financial distress and bankruptcy, beat the
Maxim isanon
B. A More General Goal value achieve other
This helps to
Maximize the market value of the owners' equity. •
goals .
THE AGENCY PROBLEM AND CONTROL OF THE CORPORATION
A. Agency Relationships
The relationship between stockholders and management is called an agency
relationship. This occurs when one party (principal) pays another (agent) to
represent them. The possibility of conflict of interest between the parties is
termed the agency problem.
be to B. Agency costs
Goal must Of
•
wealth Agency costs - Two types: direct and indirect. Direct costs come about in two
maximise
shareholders ways. One, corporate expenditure that benefits management but costs the
the
shareholders. The purchase of luxuries and unneeded corporate jet fall under
this category. The second direct agency cost is an expense that arises from the
need to monitor management actions or the incentive fee paid to the mangers to
act in the best interest of s/h. For example, audits, regular financial statements,
stock options. Indirect costs, are lost opportunities. For example management
avoiding risky investments., cost of an audit of the firm 's financial statement
.
C. Do Managers Act in the Stockholders' Interests?
FINANCIAL MARKETS AND THE CORPORATION
There's many Financial markets: As is typical of other markets, financial markets are a mechanism that
intermediaries
•
financial brings buyers and sellers together. Here debt and equity securities are bought and sold.
financial intermediaries bring together buyers and sellers they operate in financial Maners
-
nowadays funds
.
.
.
mutual
- Money versus Capital Markets
Insurance avoid'M Money market - The market in which short-term (1 year or less) securities are
µggµed"" " "
-
""
bought and sold. It is a dealer market, i.e., dealers buy and sell from their
traaedimnanmaf
"
*
inventories.
.
Capital market - The market for long-term debt and equity shares. It is primarily a
brokered market, i.e., brokers match up buyers and sellers.
MISHRA
, Problems with Profit maximisation as a Goal
to Accounting profit -
Revenue
( exp )
EBIT
"" ""
EBT
( tax)
EAT
(Dividends for Ps)
> NIC belongs to common shareholders
^
This can be manipulated
2- Timing -
profit for the short or long term ?
3. Risk is not considered
-
High risk > High reward 012 High loss
low risk >
low reward 012 low loss
