Corporate Finance
Written Notes
The Field of Finance
- Financial topics are usually grouped in five main areas:
- Corporate finance is the focus of this textbook
- Investments deals with financial assets
- Financial institutions are businesses that deal primarily in financial matters
- International finance careers generally involve international aspects of corporate
finance, investments, or financial institutions
- Fintech is the combination of technology and finance
- Ex. anything related to technology, starbucks app, venmo, gofundme
Corporate Finance
- Corporate finance is the study of ways to answer these three questions
1. What long-term investments should you take on what lines of business will you
be in and what sorts of buildings, machinery, and equipment will you need?
2. Where will you get the long-term financing to pay for your investment? Will you
bring in other owners or will you borrow the money?
3. How will you manage your everyday financial activities such as collecting from
customers and paying suppliers?
Financial Management Decisions
● The financial manager must be concerned with three basic types of financial questions
1. Capital budgeting is the process of planning and managing a firm's long-term
investments
2. Capital structure is the mixture of debt and equity maintained by a firm
3. Working capital management refers to a firm’s short-term assets and liabilities
Forms of Business Organizations
● The advantages and disadvantages of forms of Business organization can be expressed
through the following dimensions:
○ Who controls the firm
○ Who owns the firm
○ What are the owners’ risks
○ What access to capital exists
○ What are the tax ramifications
Sole Proprietorship
● Sole proprietorship is a business owned by a single individual
, ● Advantages
○ Simplest type of business to start
○ Least regulated form of organization
○ Owner keeps all the profits
● Disadvantages
○ Owner has unlimited liability for business debts
○ All business income is taxed as personal income
○ Life of sole proprietorship is limited to owner’s life span
○ Amount of equity that can be raised is limited to the amount of the proprietor’s
personal wealth
○ Ownership may be difficult to transfer
Partnership
● A partnership is a business formed by two or more individuals or entities
● Advantages and disadvantages are basically the same as those of a proprietorship
● Primary disadvantages of sole proprietorship and partnerships are the following which
add up to a single, central problem of the inability to raise cash for investments
○ Unlimited liability for business debts on the part of the owners
○ Limited life of the business
○ Difficulty of transferring ownership
Corporation
● A corporation is a business created as a distinct legal entity composed of one or more
individuals or entities
○ Legal “person”, separate and distinct from its owners with many of the rights,
duties, and privileges of an actual person
○ Stockholders and managers are usually separate groups
● Advantages include the following
○ Ownership can be readily transferred
○ Life of corporation is unlimited
○ Limited liability for stockholders
● Significant disadvantage includes the following
○ Double taxation, meaning corporate profits are taxed twice, first at the corporate
level when they are earned and again at the personal level when they are paid out
Goal of Financial Management
● In a for-profit business, the goal of financial management is to make money or add value
for the owners
Written Notes
The Field of Finance
- Financial topics are usually grouped in five main areas:
- Corporate finance is the focus of this textbook
- Investments deals with financial assets
- Financial institutions are businesses that deal primarily in financial matters
- International finance careers generally involve international aspects of corporate
finance, investments, or financial institutions
- Fintech is the combination of technology and finance
- Ex. anything related to technology, starbucks app, venmo, gofundme
Corporate Finance
- Corporate finance is the study of ways to answer these three questions
1. What long-term investments should you take on what lines of business will you
be in and what sorts of buildings, machinery, and equipment will you need?
2. Where will you get the long-term financing to pay for your investment? Will you
bring in other owners or will you borrow the money?
3. How will you manage your everyday financial activities such as collecting from
customers and paying suppliers?
Financial Management Decisions
● The financial manager must be concerned with three basic types of financial questions
1. Capital budgeting is the process of planning and managing a firm's long-term
investments
2. Capital structure is the mixture of debt and equity maintained by a firm
3. Working capital management refers to a firm’s short-term assets and liabilities
Forms of Business Organizations
● The advantages and disadvantages of forms of Business organization can be expressed
through the following dimensions:
○ Who controls the firm
○ Who owns the firm
○ What are the owners’ risks
○ What access to capital exists
○ What are the tax ramifications
Sole Proprietorship
● Sole proprietorship is a business owned by a single individual
, ● Advantages
○ Simplest type of business to start
○ Least regulated form of organization
○ Owner keeps all the profits
● Disadvantages
○ Owner has unlimited liability for business debts
○ All business income is taxed as personal income
○ Life of sole proprietorship is limited to owner’s life span
○ Amount of equity that can be raised is limited to the amount of the proprietor’s
personal wealth
○ Ownership may be difficult to transfer
Partnership
● A partnership is a business formed by two or more individuals or entities
● Advantages and disadvantages are basically the same as those of a proprietorship
● Primary disadvantages of sole proprietorship and partnerships are the following which
add up to a single, central problem of the inability to raise cash for investments
○ Unlimited liability for business debts on the part of the owners
○ Limited life of the business
○ Difficulty of transferring ownership
Corporation
● A corporation is a business created as a distinct legal entity composed of one or more
individuals or entities
○ Legal “person”, separate and distinct from its owners with many of the rights,
duties, and privileges of an actual person
○ Stockholders and managers are usually separate groups
● Advantages include the following
○ Ownership can be readily transferred
○ Life of corporation is unlimited
○ Limited liability for stockholders
● Significant disadvantage includes the following
○ Double taxation, meaning corporate profits are taxed twice, first at the corporate
level when they are earned and again at the personal level when they are paid out
Goal of Financial Management
● In a for-profit business, the goal of financial management is to make money or add value
for the owners
