Summary Of:
Fundamentals Of Financial Management 12the Edition
By Brigham And Houston
Summarized: Chapters 1,2,3,4,5,11
Chapter 1 An Overview Of Financial Management
1-1 What Is Finance
Finance Is Generally Divided Into Three Areas:
1. Financial Management
Decisions Related To Assets, Capital, Running Of The Firm So To Maximize Its Value
2. Capital Markets
Deals With Interest Rates, Stock, Bonds
3. Investments
Deals With Stock, Bonds, Security Analysis, Portfolio Theory, Market Analysis
1-3 Forms Of Business Organization
Proprietorship
An Unincorporated Business Owned By One Individual.
Advantages:
• They Are Easily And Inexpensively Formed,
• They Are Subject To Few Government Regulations, And
• They Are Subject To Lower Income Taxes Than Are Corporations.
Limitations:
• Proprietors Have Unlimited Personal Liability For The Business’s Debts,
• The Life Of The Business Is Limited To The Life Of The Individual Who
Created It
• Proprietorships Have Difficulty Obtaining Large Sums Of Capital
Partnership
An Unincorporated Business Owned By Two Or More Persons.
• Two Or More Persons Come Together As Co-Owners
• General Partnership: All Partners Are Fully Responsible For
Liabilities Incurred By The Partnership.
• Limited Partnerships: One Or More Partners Can Have Limited Liability,
,Restricted To The Amount Of Capital Invested In The Partnership. There
Must Be At Least One General Partner With Unlimited Liability. Limited
Partners Cannot Participate In The Management Of The Business And
Their Names Cannot Appear In The Name Of The Firm.
,Corporation (C-Corporation)
A Legal Entity Created By A State, Separate And Distinct From Its Owners And
Managers, Having Unlimited Life, Easy Transferability Of Ownership, And Limited
Liability.
▪ Legally Functions Separately And Apart From Its Owners
Corporation Can Sue, Be Sued, Purchase, Sell, And Own
Property
▪ Owners (Shareholders) Dictate Direction And Policies Of The
Corporation, Often Through Elected Board Of Directors.
▪ Shareholder’s Liability Is Restricted To Amount Of Investment In Company
▪ Life Of Corporation Does Not Depend On The Owners …
Corporation Continues To Exist Through Easy Transfer Of
Ownership
▪ Taxed Separately
Benefits: Limited Liability, Easy To Transfer Ownership, Easier To Raise Capital,
Unlimited Life (Unless The Firm Goes Through Corporate Restructuring Such As
Mergers And Bankruptcies)
Drawbacks: No Secrecy Of Information, Maybe Delays In Decision Making,
Greater Regulation, Double Taxation. The Corporations Earnings Are Taxed, And
Paid Out Dividends Are Taxed Again.
Example Double Taxation
Assume Earnings Before Tax = $1,000
Federal Tax @25% = $250
After Tax Income Available For Distribution To Shareholders= $750
Examine The Tax Effects, If The Company Chooses To Distribute The After-
Tax Profits To Shareholders As Dividends.
If Corporation Distributes All The Profits As Dividends To Shareholders ==>
Shareholders Will Be Taxed Again.
Assume Dividends Are Taxed @15%
= 15% Of $750 = $112.50
==>Total Tax = 250 + 112.5 = $362.5 Or 36.25%
The Following Are Hybrid Organizations
S Corporation
A Special Designation That Allows Small Businesses That Meet Qualifications To
Be Taxed As If They Were A Proprietorship Or A Partnership Rather Than A
Corporation.
Benefits
• Limited Liability
, • Taxed As Partnership (No Double Taxation Like
Corporations) Limitations
• Owners Must Be People So Cannot Be Used For Joint Ventures Between
Two Corporations
Fundamentals Of Financial Management 12the Edition
By Brigham And Houston
Summarized: Chapters 1,2,3,4,5,11
Chapter 1 An Overview Of Financial Management
1-1 What Is Finance
Finance Is Generally Divided Into Three Areas:
1. Financial Management
Decisions Related To Assets, Capital, Running Of The Firm So To Maximize Its Value
2. Capital Markets
Deals With Interest Rates, Stock, Bonds
3. Investments
Deals With Stock, Bonds, Security Analysis, Portfolio Theory, Market Analysis
1-3 Forms Of Business Organization
Proprietorship
An Unincorporated Business Owned By One Individual.
Advantages:
• They Are Easily And Inexpensively Formed,
• They Are Subject To Few Government Regulations, And
• They Are Subject To Lower Income Taxes Than Are Corporations.
Limitations:
• Proprietors Have Unlimited Personal Liability For The Business’s Debts,
• The Life Of The Business Is Limited To The Life Of The Individual Who
Created It
• Proprietorships Have Difficulty Obtaining Large Sums Of Capital
Partnership
An Unincorporated Business Owned By Two Or More Persons.
• Two Or More Persons Come Together As Co-Owners
• General Partnership: All Partners Are Fully Responsible For
Liabilities Incurred By The Partnership.
• Limited Partnerships: One Or More Partners Can Have Limited Liability,
,Restricted To The Amount Of Capital Invested In The Partnership. There
Must Be At Least One General Partner With Unlimited Liability. Limited
Partners Cannot Participate In The Management Of The Business And
Their Names Cannot Appear In The Name Of The Firm.
,Corporation (C-Corporation)
A Legal Entity Created By A State, Separate And Distinct From Its Owners And
Managers, Having Unlimited Life, Easy Transferability Of Ownership, And Limited
Liability.
▪ Legally Functions Separately And Apart From Its Owners
Corporation Can Sue, Be Sued, Purchase, Sell, And Own
Property
▪ Owners (Shareholders) Dictate Direction And Policies Of The
Corporation, Often Through Elected Board Of Directors.
▪ Shareholder’s Liability Is Restricted To Amount Of Investment In Company
▪ Life Of Corporation Does Not Depend On The Owners …
Corporation Continues To Exist Through Easy Transfer Of
Ownership
▪ Taxed Separately
Benefits: Limited Liability, Easy To Transfer Ownership, Easier To Raise Capital,
Unlimited Life (Unless The Firm Goes Through Corporate Restructuring Such As
Mergers And Bankruptcies)
Drawbacks: No Secrecy Of Information, Maybe Delays In Decision Making,
Greater Regulation, Double Taxation. The Corporations Earnings Are Taxed, And
Paid Out Dividends Are Taxed Again.
Example Double Taxation
Assume Earnings Before Tax = $1,000
Federal Tax @25% = $250
After Tax Income Available For Distribution To Shareholders= $750
Examine The Tax Effects, If The Company Chooses To Distribute The After-
Tax Profits To Shareholders As Dividends.
If Corporation Distributes All The Profits As Dividends To Shareholders ==>
Shareholders Will Be Taxed Again.
Assume Dividends Are Taxed @15%
= 15% Of $750 = $112.50
==>Total Tax = 250 + 112.5 = $362.5 Or 36.25%
The Following Are Hybrid Organizations
S Corporation
A Special Designation That Allows Small Businesses That Meet Qualifications To
Be Taxed As If They Were A Proprietorship Or A Partnership Rather Than A
Corporation.
Benefits
• Limited Liability
, • Taxed As Partnership (No Double Taxation Like
Corporations) Limitations
• Owners Must Be People So Cannot Be Used For Joint Ventures Between
Two Corporations
