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Unformatted text preview: 9/13/2011 1 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 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 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 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 proprietor is limited to the proprietor’s personal wealth. 4 9/13/2011 2 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)....
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This note was uploaded on 02/08/2012 for the course ACTSC 371 taught by Professor Wood during the Fall '08 term at Waterloo.
- Fall '08