IFM10 Ch31 Lecture

IFM10 Ch31 Lecture - Chapter31 FinancialManagementin...

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    Chapter 31 Financial Management in Not-for-Profit Businesses
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    Topics in Chapter For-profit (investor-owned) vs. not-for- profit businesses Goals of the firm
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    What are the key features of investor-owned firms? Owners (shareholders) are well defined,  and they exercise control by voting for  the firm’s board of directors. Firm’s residual earnings belong to the  owners, so management is responsible  to the owners for the firm’s profitability. Firm is subject to taxation at the federal,  state, and local levels.
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    What is a not-for-profit  corporation? One that is organized and operated  solely for religious, charitable, scientific,  public safety, literary, or educational  purposes. Generally, qualify for tax-exempt status.
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    Investor-Owned vs. Not-for- Profit Businesses Not-for-profit corporations have no  shareholders, so all residual earnings  are retained within the firm. Control of not-for-profit firms rests with a  board of trustees composed mainly of  community leaders who have no  economic interests in the firm.
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    Goals for Investor-Owned and  Not-for-Profit Businesses Because not-for-profit firms have no  shareholders, they are not concerned with the  goal of maximizing shareholder wealth. Goals of not-for-profit firms are outlined in the  firm’s mission statement.  They generally  relate to providing some socially valuable  service in a financially sound manner.
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    Is the WACC relevant to not- for-profit businesses? Yes.  The WACC estimation for not-for- profit firms parallels that for investor- owned firms.
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  WACC for Investor-Owned  and Not-for-Profit Businesses Because not-for-profit firms pay no  taxes, there are no tax effects  associated with debt financing. A not-for-profit firm’s cost of equity, or 
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This note was uploaded on 04/08/2011 for the course FIN 360 taught by Professor Smith during the Spring '10 term at Park.

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IFM10 Ch31 Lecture - Chapter31 FinancialManagementin...

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