BUAD 306 Chapter 1 Introduction to Corporate finance

BUAD 306 Chapter 1 Introduction to Corporate finance - BUAD...

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BUAD 306 Chapter 1 Introduction to Corporate Finance 1. Corporate Finance and the Financial Manager What is Corporate Finance? - Starting a business requires asking three questions: o What long- term investments should you take on? That is, what lines of business will you be in and what sorts of buildings, machinery, and equipment will you need? o Where will you get the long- term financing to pay for your investment? Will you bring in other owners or will you borrow the money? o How will you manage your everyday financial activities such as collecting from customers and paying suppliers? The Financial Manager - In a large corporation, the owners (stockholders) are usually not directly involved in making business decisions but employs managers to represents the owners’ interest and make decision on their behalf - Financial management function associated with vice president of finance or CFO and coordinates activities of the treasurer and the controller o Controller’s office handles cost and financial accounting, tax payments, and management information systems o Treasurer’s office is responsible for managing the firm’s cash and credit, its financial planning, and its capital expenditures Activities that are related to the three questions Financial Management Decisions - Capital Budgeting - process of planning and managing a firm’s long- term investments o Identify investment opportunities that are worth more to the firm than they cost to acquire o Concerned with how much cash they expect to receive (size), when they expect to receive it (timing), and how likely they are to receive it (risk) - Capital Structure - specific mixture of long- term debt and equity the firm uses to finance its operations o What percentage of the firm’s cash flow goes to creditors and what percentage goes to shareholders
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- Working Capital Management - firm’s short term assets, such as inventory, and its short term liabilities, such as money owned to suppliers o Ensure firm has sufficient resources to continue its operations and avoid costly interruptions 2. Forms of Business Organization Sole Proprietorship - business owned by one person - Simple to start up so there are more proprietorships than any other type of business - Owner keeps all the profit - Owner has unlimited liability for business debt ( creditors can look beyond business assets to the proprietor’s personal assets for payment) - No distinction between personal and business income, so all business income is taxed as person income - Life of a sole proprietorship is limited to the owner’s life span and the amount of equity that can be raised is limited to the amount of the proprietor’s personal wealth - Difficult to transfer ownership because it requires sale of entire business Partnership - similar to a proprietorship except that there are two or more owners - General partnership- all the partners share in gains or losses and all have unlimited liability for all partnership debt - Limited partnership- one or more general partners will run the business and have
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BUAD 306 Chapter 1 Introduction to Corporate finance - BUAD...

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