Review Sheet PRELIM ONE - Finance Prelim 1 Review Sheet...

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Finance Prelim 1 Review Sheet Chapter ONE: INTRO TO FINANCE Finance: Study of how we allocate our assets over time Capital budgeting: LT investments that are taken on by a firm Capital structure: Where we get LT financing to pay for the investment Working capital management: How to manage everyday financial activities Internal financing: A company finances itself through cash and retained earnings. Often how subsidiaries get funded External financing: Debt: bank loans, syndicate loans, bonds Equity (stock): Initial Public Offering (IPO), Seasoned Equity Offering (SEO) Equity is riskier than debt because bondholders get paid (dividends) before stockholders The top financial manager within a firm is usually the Chief Financial Officer (CFO) Treasurer – oversees cash management, credit management, capital expenditures and financial planning Controller – oversees taxes, cost accounting, financial accounting and data processing Sole Proprietorship Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income Disadvantages Limited to life of owner Equity capital limited to owner’s personal wealth Unlimited liability Difficult to sell ownership interest Partnership Advantages Two or more owners More capital available Relatively easy to start Income taxed once as personal income Disadvantages - 1 - Finance Prelim I Review
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Unlimited liability General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership Corporation Advantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of owner & management Taxed twice (corporate level and dividends) Types of Corporations: C-corp Standard type Taxed at corporate and personal level S-corp Meets IRS guidelines Limited Liability Taxed once: on personal level Smaller companies LLC Limited Liability Company No limit on # shareholders Goals of financial management Maximize profit Minimize costs Maximize market share Increase value of stock Agency problem Stockholders hire managers to run the company, conflicts arise. Managerial compensation Incentives to increase profit Monetary: ie Stock options or bonuses Threat Primary Market Company sells stock to people Secondary Market - 2 - Finance Prelim I Review
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Sales of stock between people, “stock market” Dealer Market Electronic, “NASDAQ” Auction Market Traders must be at location SHOUTING ie NYSE Firm issues securities invest in assets make money from assets
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