FIF -- Principles of managerial finance.pdf - Chapter 1 The...

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Chapter 1 The Role of Managerial Finance 1.1. Finance and business What is finance Finance : the science and art of managing money Personal Level how much of their earnings they spend Business Level how firms raise money from investors how much they save how firms invest money in an attempt to earn a profit how they invest their savings how they decide whether to reinvest profits in the business or distribute them back to investors Career opportunity Financial services are the area of finance concerned with the design and delivery of advice and financial products to individuals, businesses, and governments. Managerial finance is concerned with the duties of the financial manager working in a business. Financial managers administer the financial affairs of all types of businesses: private and public, large and small, profit seeking and not for profit. Legal forms of business organization Sole proprietorship A business owned by one person and operated for his or her own profit. A major drawback to the sole proprietorship is unlimited liability, the condition of a sole proprietorship (or general partnership), giving creditors the right to make claims against th e owner’s personal assets to recover debts owed by the business. Partnership A business owned by two or more people and operated for profit. Most partnerships are established by a written contract known as articles of partnership, the written contract used to formally establish a business partnership. Corporation An entity created by law. Stockholders -- The owners of a corporation, whose ownership, or equity, takes the form of common stock or, less frequently, preferred stock. Stockholders of a corporation enjoy limited liability A legal provision that limits stockholders’ liability for a corporation’s debt to the amount they initially invested in the firm by purchasing stock. Common stock -- the purest and most basic form of corporate ownership. Stockholders expect to earn a return by receiving Dividends -- Periodic distributions of cash to the stockholders of a firm. The board of directors is typically responsible for approving strategic goals and plans, setting general policy, guiding corporate affairs, and approving major expenditures. The president or chief executive officer (CEO) is responsible for managing day-to-day operations and carrying out the policies established by the board of directors. The CEO reports periodically to the firm’s directo rs. Other Limited Liability Organizations S corporation (S corp) A tax-reporting entity that allows certain corporations with 100 or fewer stockholders to choose to be taxed as partnerships. Its stockholders receive the organizational benefits of a corporation and the tax advantages of a partnership.
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Christopher Reinemann
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