Chapter 1: The Corporation and Financial Markets
o Sole Proprietorship: owned and run by 1 person (most common type of business)
Straightforward to set up
Principal limitation: no separation between firm and its owner
Owner has unlimited personal liability for any of the firm’s debt
Life of firm = life of owner, difficult to transfer ownership
o Partnership: same as sole proprietorship but with more than one owner
All partners are liable for the firm’s debt
Can end with death or withdrawal of any single partner, this is avoidable if the
partnership agreement provides alternatives (e.g. buyout of a deceased partner)
Limited partnership: 2 types of owners: general partners (same rights &
privileges as partnership) and limited partners (have limited liability and no
management authority)
o Limited Liability Company (LLC): limited partnership without a general partner
All owners have limited liability but can also run the business
Relatively new business form
o Corporation: a legally defined, artificial being separate from its owners
Many legal powers that individuals have (own assets, borrow money, etc)
Limited liability of the owners = shareholders
Control: Board of Directors
Double taxation: #1 on corporate profits (corporate income tax) and #2 as shareholders
(personal dividend tax)
S corporations: corporations exempt from paying corporate taxes on their profits
Corporate Management Team: (ownership and direct control separated)
Board of Directors: controlling organ, elected by shareholders, have ultimate authority
Chief Executive Officer (CEO): runs corporation by instituting rules and policies set by the
board of directors (day to day decisions)
Chief Financial Officer (CFO): reports directly to CEO (investing, financing, etc)
Picking right investment projects (positive Net Present Value)
Determine the optimal mix of financing instruments (equity vs. debt)
Cash management: safeguarding balance between cash inflows and outflows
Firm objectives (goals): Maximize shareholder value (can cause negative externalities) so
also care about other objectives: environment, social, governance
Agency Problems: managers act in their own interest instead of the shareholder interest
Hostile takeover: Low stock prices may entice a Corporate Raider to buy enough stock so
they have enough control to replace current management. The stock price will rise after the
new management team “fixes” the company
Bankruptcy: transfer of ownership and control from shareholders to creditors (bondholders/
banks), arises when corporate cash flows constantly fall below required interest payments
, Private company: limited set of shareholders, stock may be traded privately
Public company: stock is traded by the public on a stock exchange
Primary markets: When a corporation itself issues new shares of stock and sells them to
investors, they do so on the primary market
Secondary markets: After the initial transaction in the primary market, the shares continue
to trade in a secondary market between investors
New York Stock Exchange (NYSE): market makers/specialists, each stock has only one
market maker
NASDAQ: doesn’t meet in a physical location, may have many market makers for a stock
Bid-ask Spread: the amount by which the ask price exceeds the bid price for an asset in the
market, it is a transaction cost
Limit order: an order to buy or sell a set amount at a fixed price
Limit order book: the collection of all limit orders
Market orders: orders that trade immediately at the best outstanding limit order
High Frequency Traders (HFTs): A class of traders who, with the aid of computers,
execute trades many times per second in response to new information
Dark pools: do not make their limit order books visible, instead, they offer investors the
ability to trade at a better price with the trade-off being that their order might not be filled if
an excess of either buy or sell orders is received
Fintech: relation between financial innovation and technical innovation
Blockchain: A technology that allows a transaction to be recorded in a publicly verifiable
way without the need for a trusted third party to certify the authenticity of the transaction
Cryptocurrency: A currency whose creation and ownership is determined via a public
blockchain
Robo-advisors: Computer programs that are intended to replace the work of financial
advisors by providing detailed and customized investment recommendations
Machine learning (ML): the study of computer algorithms that improve automatically when
fed with new data. It is seen as a subset of artificial intelligence
Chapter 2: Introduction to Financial Statement Analysis
Disclosure requirements for listed companies: send periodic financial information to stock
exchange (SEC, Euronext) + Annual report to shareholders
Balance sheet / statement of financial position:
Snapshot in time of the firm’s financial position
Assets = Liabilities + Stockholders’ Equity
Distinguish short and long term assets/liabilities
o Sole Proprietorship: owned and run by 1 person (most common type of business)
Straightforward to set up
Principal limitation: no separation between firm and its owner
Owner has unlimited personal liability for any of the firm’s debt
Life of firm = life of owner, difficult to transfer ownership
o Partnership: same as sole proprietorship but with more than one owner
All partners are liable for the firm’s debt
Can end with death or withdrawal of any single partner, this is avoidable if the
partnership agreement provides alternatives (e.g. buyout of a deceased partner)
Limited partnership: 2 types of owners: general partners (same rights &
privileges as partnership) and limited partners (have limited liability and no
management authority)
o Limited Liability Company (LLC): limited partnership without a general partner
All owners have limited liability but can also run the business
Relatively new business form
o Corporation: a legally defined, artificial being separate from its owners
Many legal powers that individuals have (own assets, borrow money, etc)
Limited liability of the owners = shareholders
Control: Board of Directors
Double taxation: #1 on corporate profits (corporate income tax) and #2 as shareholders
(personal dividend tax)
S corporations: corporations exempt from paying corporate taxes on their profits
Corporate Management Team: (ownership and direct control separated)
Board of Directors: controlling organ, elected by shareholders, have ultimate authority
Chief Executive Officer (CEO): runs corporation by instituting rules and policies set by the
board of directors (day to day decisions)
Chief Financial Officer (CFO): reports directly to CEO (investing, financing, etc)
Picking right investment projects (positive Net Present Value)
Determine the optimal mix of financing instruments (equity vs. debt)
Cash management: safeguarding balance between cash inflows and outflows
Firm objectives (goals): Maximize shareholder value (can cause negative externalities) so
also care about other objectives: environment, social, governance
Agency Problems: managers act in their own interest instead of the shareholder interest
Hostile takeover: Low stock prices may entice a Corporate Raider to buy enough stock so
they have enough control to replace current management. The stock price will rise after the
new management team “fixes” the company
Bankruptcy: transfer of ownership and control from shareholders to creditors (bondholders/
banks), arises when corporate cash flows constantly fall below required interest payments
, Private company: limited set of shareholders, stock may be traded privately
Public company: stock is traded by the public on a stock exchange
Primary markets: When a corporation itself issues new shares of stock and sells them to
investors, they do so on the primary market
Secondary markets: After the initial transaction in the primary market, the shares continue
to trade in a secondary market between investors
New York Stock Exchange (NYSE): market makers/specialists, each stock has only one
market maker
NASDAQ: doesn’t meet in a physical location, may have many market makers for a stock
Bid-ask Spread: the amount by which the ask price exceeds the bid price for an asset in the
market, it is a transaction cost
Limit order: an order to buy or sell a set amount at a fixed price
Limit order book: the collection of all limit orders
Market orders: orders that trade immediately at the best outstanding limit order
High Frequency Traders (HFTs): A class of traders who, with the aid of computers,
execute trades many times per second in response to new information
Dark pools: do not make their limit order books visible, instead, they offer investors the
ability to trade at a better price with the trade-off being that their order might not be filled if
an excess of either buy or sell orders is received
Fintech: relation between financial innovation and technical innovation
Blockchain: A technology that allows a transaction to be recorded in a publicly verifiable
way without the need for a trusted third party to certify the authenticity of the transaction
Cryptocurrency: A currency whose creation and ownership is determined via a public
blockchain
Robo-advisors: Computer programs that are intended to replace the work of financial
advisors by providing detailed and customized investment recommendations
Machine learning (ML): the study of computer algorithms that improve automatically when
fed with new data. It is seen as a subset of artificial intelligence
Chapter 2: Introduction to Financial Statement Analysis
Disclosure requirements for listed companies: send periodic financial information to stock
exchange (SEC, Euronext) + Annual report to shareholders
Balance sheet / statement of financial position:
Snapshot in time of the firm’s financial position
Assets = Liabilities + Stockholders’ Equity
Distinguish short and long term assets/liabilities
