MBA702 - Test 1
What is Finance? - answer covers the use and management of money
derives in part from economics, but accounting is essential as an underpinning
Why do we study finance? - answer Managers need to understand the financial health
of their firms
Departmental budget management
You need to be able to make the financial argument for the funding of your projects
Key Financial decisions for a firm - answer Capital Budgeting
Capital Structure
Working Capital
Capital Budgeting - answerWhat long-term investments should the firm take on?
process of planning and managing a firm's investments in fixed assets. (Size, Timing,
Riskiness)
Capital structure - answerWhere will we get the long-term financing to pay for the
investment?
mix of debt (borrowing) and equity (ownership interest) used by a firm. (Least
expensive, Optimal mix).
Working Capital - answerHow will we manage the everyday financial activities of the
firm?
managing short-term assets and liabilities. (credit, inventory, loans, accounts payable
and receivable).
Sole Proprietorship - answerbusiness owned by one person
Benefits
• Ease of startup no special forms
• Lower regulations
• Single owner keeps all the profits
• Taxed once as personal income
Drawbacks
, • Limited life - when owner dies, the firm dies or is sold
• Limited equity capital - this is limited to the funds available to the individual
• Unlimited liability - in firm bankruptcy, the owner is liable for all debts of the firm.
Losing one's house and savings is a possibility
• Low liquidity - it is harder to get funding or bank loans for a sole proprietorship
Partnership - answerA business with multiple owners but not incorporated
Benefits
• More equity capital than is available to a sole proprietorship
• Relatively easy to start (although written agreements are essential)
• Income taxed once at personal tax rate
Drawbacks
• Unlimited liability for general partners
• Dissolution of partnership when one partner dies or wishes to sell
• Low liquidity (hard to raise funds)
General Partnership - answerall partners share in gains or losses and all have unlimited
liability for all partnership debts.
Limited partnership - answerone or more general partners run the business and have
unlimited liability (these are known as the General Partners). is limited to his or her
contribution to the partnership and they cannot help in running the business.
Corporation - answerA distinct legal entity composed of one or more owners.
Benefits
• Limited liability
• Unlimited life
• Separation of ownership & management
• Ease of raising capital
Drawbacks
• Separation of ownership and management (agency costs)
• Double taxation - a firm's profits are taxed, and after that, dividends are paid to
shareholders.
can much more easily raise funds for the firm than can other business forms.
S-Corps - answerprovide limited liability while allowing the business's owners to be
taxed as if they were a partnership - taxed twice which sucks.
this business form has been losing ground in recent years in favor of the limited liability
company.
What is Finance? - answer covers the use and management of money
derives in part from economics, but accounting is essential as an underpinning
Why do we study finance? - answer Managers need to understand the financial health
of their firms
Departmental budget management
You need to be able to make the financial argument for the funding of your projects
Key Financial decisions for a firm - answer Capital Budgeting
Capital Structure
Working Capital
Capital Budgeting - answerWhat long-term investments should the firm take on?
process of planning and managing a firm's investments in fixed assets. (Size, Timing,
Riskiness)
Capital structure - answerWhere will we get the long-term financing to pay for the
investment?
mix of debt (borrowing) and equity (ownership interest) used by a firm. (Least
expensive, Optimal mix).
Working Capital - answerHow will we manage the everyday financial activities of the
firm?
managing short-term assets and liabilities. (credit, inventory, loans, accounts payable
and receivable).
Sole Proprietorship - answerbusiness owned by one person
Benefits
• Ease of startup no special forms
• Lower regulations
• Single owner keeps all the profits
• Taxed once as personal income
Drawbacks
, • Limited life - when owner dies, the firm dies or is sold
• Limited equity capital - this is limited to the funds available to the individual
• Unlimited liability - in firm bankruptcy, the owner is liable for all debts of the firm.
Losing one's house and savings is a possibility
• Low liquidity - it is harder to get funding or bank loans for a sole proprietorship
Partnership - answerA business with multiple owners but not incorporated
Benefits
• More equity capital than is available to a sole proprietorship
• Relatively easy to start (although written agreements are essential)
• Income taxed once at personal tax rate
Drawbacks
• Unlimited liability for general partners
• Dissolution of partnership when one partner dies or wishes to sell
• Low liquidity (hard to raise funds)
General Partnership - answerall partners share in gains or losses and all have unlimited
liability for all partnership debts.
Limited partnership - answerone or more general partners run the business and have
unlimited liability (these are known as the General Partners). is limited to his or her
contribution to the partnership and they cannot help in running the business.
Corporation - answerA distinct legal entity composed of one or more owners.
Benefits
• Limited liability
• Unlimited life
• Separation of ownership & management
• Ease of raising capital
Drawbacks
• Separation of ownership and management (agency costs)
• Double taxation - a firm's profits are taxed, and after that, dividends are paid to
shareholders.
can much more easily raise funds for the firm than can other business forms.
S-Corps - answerprovide limited liability while allowing the business's owners to be
taxed as if they were a partnership - taxed twice which sucks.
this business form has been losing ground in recent years in favor of the limited liability
company.
