ActSc371_Lecture 2_Chapter 1 cont'd (Ross)

ActSc371_Lecture 2_Chapter 1 cont'd (Ross) - ActSc 371...

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Lecture 2 Sections 1.3-1.6 from Chapter 1: Introduction to Corporate Finance (Corporate Finance by Ross et al.) ActSc 371 – Corporate Finance 1 Instructor: Dr. Lysa Porth 1
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Introduction Introduction to Corporate Finance 1.3 The Corporate Firm 1.4 Goals of the Corporate Firm 1.5 Financial Institutions, Financial Markets, and the Corporation 1.6 Trends in Financial Markets and Management 2
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Introduction to Corporate Finance 1.3 The Corporate Firm The firm is a way of organizing the economic activity of many individuals. Not all businesses are corporations. However, most large firms are corporations rather than any of the other legal forms that firms can assume (i.e. GM, Microsoft, General Electric). A basic problem of the firm is how to raise cash. The corporate form of business is the standard method for solving problems encountered in raising large amounts of cash. Three basic legal forms of organizing firms Sole proprietorship Partnership Corporation How do firms go about the task of raising large amounts of money under each form? 3
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Introduction to Corporate Finance The Sole Proprietorship Sole proprietorship: a business owned by one person. Obtain a business license. Hire as many people as need, borrow whatever money needed. At year-end, all profits and losses are yours. Important factors: Cheapest type of business form. No formal charter required, only a few government regulations must be satisfied. Pays no corporate income taxes. All profits of the business are taxed as individual. Has unlimited liability for business debts and obligations. There is no distinction between personal and business assets. The life of the sole proprietorship is limited by the lift of the sole proprietor. The equity money that can be raised by the sole 4
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Introduction to Corporate Finance The Partnership Partnership: any two or more people that get together. Two categories: General partnerships : all partners agree to provide some fraction of the work and cash and to share the profits and losses. Limited partnerships: permit the liability of some of the partners to be limited to the amount of cash each has contributed to the partnership. Usually requires that at least one partner is a general partner and the limited partners do not participate in managing the business. Important factors: Usually inexpensive and easy to form. General partners have unlimited liability for all debts. General partnership is terminated when a general partner dies or withdraws (but not so for a limited partner). 5
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Introduction to Corporate Finance Sole Proprietorship and Partnership Overview It is very difficult for large business organizations to exist as sole proprietorships or partnerships. The main advantage is the cost of getting started. Afterwards, the disadvantages, which may become severe, are:
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This note was uploaded on 12/16/2011 for the course ACSTC 371 taught by Professor Lisaporth during the Fall '11 term at Waterloo.

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ActSc371_Lecture 2_Chapter 1 cont'd (Ross) - ActSc 371...

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