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0324289081_52401 - Chapter The Role and Objective of...

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This introductory chapter provides an overview of corporate finance. Included in this chapter are discussions of the types of business organizations, the objective of financial management and that of the corporation, and the decision areas of the financial manager. Also discussed in Chapter 1 are the major elements of the financial decision making process, the interrelationship between finance and other functional areas of business, possible careers in finance, and professional finance affiliations. I. Finance is concerned with several important questions that confront all business firms. Examples of financial management questions include: A. The assets that a firm should acquire; B. The acquisition of assets to be financed; i.e., what are the costs and sources of funds? C. The proper mix of the various sources of funds used to finance a firm's activities; i.e. what is the optimal capital structure? D. The distribution of the profits from an enterprise; i.e., what is the optimal dividend policy? E. The nature of the trade-offs between risk and expected return that have to be made in financial management decisions; F. The level of inventory that a firm should hold; G. Determination of a firm's credit policy; H. Is a merger or acquisition advisable? I. How much cash, or access to cash, does the firm need to meet its daily operating needs? J. Are there “intangible” benefits from an investment project that will impact the decision? 1 Chapter 1 The Role and Objective of Financial Management
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Contemporary Financial Management II. The three principal forms of business organization are the sole proprietorship, partnership, and corporation. A. A sole proprietorship is simply a business owned by one person. 1. Ease of formation is an advantage of sole proprietorships. 2. The primary disadvantages are unlimited personal liability and difficulty raising funds to finance growth. 3. About 75 percent of all businesses in the United States are sole proprietorships accounting for less than 6 percent of total U.S. business revenues. B. A partnership is a business organization of two or more persons. 1. Partnerships may be classified as either general or limited partnerships. In a general partnership, each partner has unlimited liability for all the obligations of the business. In a limited partnership, the one or more general partners have unlimited liability and the one or more limited partners have limited liability (the extent to which is spelled out in the partnership agreement). Approximately 90 percent of all partnerships in the United States are classified as general partnerships. Overall, partnerships account for 7 percent of all U.S. businesses and less than 5 percent of total U.S. business revenues. 2. When one partner dies or quits, the partnership is dissolved and another one must be formed.
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0324289081_52401 - Chapter The Role and Objective of...

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