CHAPTER 1
Overview of Financial Management and the Financial Environment
CONCEPTS AND DEFINITIONS
I. Two main goals of all successful companies:
o Goods are highly valued by customers
o Selling prices are high enough to cover costs and reward investors
II. Two groups are involved in finance:
o Providers of cash now (individuals saving for retirement, banks)
o Users of cash now (students, entrepreneurs)
III. Two problems finance is solving:
o How providers and users identify one another and exchange cash now for claims on
risky future cash
o How providers evaluate user’s opportunities
IV. Key attributes of a Successful Company
o Skilled People
o Strong relationships
o Sufficient Funding
V. Business Entities
o Proprietorship
o Partnership
o Corporation (MAIN FOCUS!)
Proprietorship Partnership Corporation
Advantages
- Ease of formation Same as sole proprietorship - Unlimited life
- Subject to few regulations - Easy transfer of ownership
- No corporate income taxes - Limited liability
- Easy of raising capital
Disadvantages
- Difficult to raise capital to Same as sole proprietorship - Double taxation
support growth - Higher setup cost
- Unlimited liability - Endless report filing
- Limited life span
, 2) Partnership
- Involves two or more entities
a. General vs Limited Partnerships:
General Partnerships:
o Shared management rights and responsibilities binding decisions on behalf of the
business.
o Unlimited liability for all partners
Limited Partnerships:
o Have both general (at least 1) and limited partners (1 or more)
- General partners: manages the business -> unlimited liability
- Limited partners: primarily invest capital -> limited liability (for the amount of their
investment in the partnership)
b. Limited Liability Partnership (LLP)
All partners have limited liability (lawyers, accountants, and doctors)
3) Corporation
o Legal entity that is separate from its owners and managers
o Must file papers, prepare reports for Corp Canada:
- Articles of incorporation
- Bylaws
o Special Types:
- Professional Corp (PC): professionals such as doctors, lawyers, and accountants
- Income Trust: REIT – investors = unitholders
o Growing and managing a Corp
- Attract investors
Founder’s own resources
IPO (Initial Public Offering)
Borrowing from banks
Issuing bonds and additional shares
o Ownership and management must be separated:
- Agency Problem: shareholders vs mgmt.
(make decisions that benefit themselves rather than maximize shareholder returns)
- Corporate Governance:
Overview of Financial Management and the Financial Environment
CONCEPTS AND DEFINITIONS
I. Two main goals of all successful companies:
o Goods are highly valued by customers
o Selling prices are high enough to cover costs and reward investors
II. Two groups are involved in finance:
o Providers of cash now (individuals saving for retirement, banks)
o Users of cash now (students, entrepreneurs)
III. Two problems finance is solving:
o How providers and users identify one another and exchange cash now for claims on
risky future cash
o How providers evaluate user’s opportunities
IV. Key attributes of a Successful Company
o Skilled People
o Strong relationships
o Sufficient Funding
V. Business Entities
o Proprietorship
o Partnership
o Corporation (MAIN FOCUS!)
Proprietorship Partnership Corporation
Advantages
- Ease of formation Same as sole proprietorship - Unlimited life
- Subject to few regulations - Easy transfer of ownership
- No corporate income taxes - Limited liability
- Easy of raising capital
Disadvantages
- Difficult to raise capital to Same as sole proprietorship - Double taxation
support growth - Higher setup cost
- Unlimited liability - Endless report filing
- Limited life span
, 2) Partnership
- Involves two or more entities
a. General vs Limited Partnerships:
General Partnerships:
o Shared management rights and responsibilities binding decisions on behalf of the
business.
o Unlimited liability for all partners
Limited Partnerships:
o Have both general (at least 1) and limited partners (1 or more)
- General partners: manages the business -> unlimited liability
- Limited partners: primarily invest capital -> limited liability (for the amount of their
investment in the partnership)
b. Limited Liability Partnership (LLP)
All partners have limited liability (lawyers, accountants, and doctors)
3) Corporation
o Legal entity that is separate from its owners and managers
o Must file papers, prepare reports for Corp Canada:
- Articles of incorporation
- Bylaws
o Special Types:
- Professional Corp (PC): professionals such as doctors, lawyers, and accountants
- Income Trust: REIT – investors = unitholders
o Growing and managing a Corp
- Attract investors
Founder’s own resources
IPO (Initial Public Offering)
Borrowing from banks
Issuing bonds and additional shares
o Ownership and management must be separated:
- Agency Problem: shareholders vs mgmt.
(make decisions that benefit themselves rather than maximize shareholder returns)
- Corporate Governance:
