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Unformatted text preview: FINANCE Intro to Macro (ECON 0110) Torsten Jochem Finance b Content b 1. Types of Firms & Differences b 2. How Firms raise Funds: Stocks & Bonds s 2.1 Stocks 2 s 2.2 Risk & Diversification; The Trade-Off between Risk & Return s 2.3 Share Price & Fundamental Analysis s 2.4 Balance Sheet, Income Statement s 2.5 Bond, Bond Prices & Present Value Discounting b 3. How Firms deal with Risk s 3.1 Going long versus going short s 3.2 Future, Options, Swaps, Forwards & RePos. b 4. The Efficient Markets Hypothesis b 1. Types of Firms b There are 3 legal business forms in the U.S. s 1. Sole Proprietorship: 1 owner s 2. Partnership: 2 or more owner(s) 3 Finance s 3. Corporation: Separate legal entity with 1 or more owners; private or public. b Two main differences between them are s 1. Liability: who is liable for outstanding debt? s 2. Taxation: how are profits taxed? b 1. Types of Firms (contd) b Liability s Sole proprietorship and partnerships with full personal liability: The are liable with their private property. 4 Finance s Corporations have a separate legal entity, i.e. only the company (but not the owners) can be sued (e.g., for outstanding debt, law violations, ) s This limits the risk owners have. They are not liable with their private property. s Applies to shareholders: If GM entered Bankruptcy Protection under Chapter 11 (i.e., defaulted on its outstanding debts), the personal assets of shareholders were safe. b 1. Types of Firms (contd) b Taxation s Profits of sole proprietors and partnerships directly belong to the owner(s) of the firms. They are taxed with income tax 5 Finance (top marginal tax rate ~35%). s Profits of corporations are taxed with the corporate tax (max marginal corporate tax rate ~35%). s Dividends (payout to owners/shareholders) seen as income; taxed with income tax (top marginal tax rate ~35%) before-tax profits corporate taxes = after-tax profits after-tax profits = retained earnings + dividends Dividends are twice taxed! b 1. Types of Firms (contd) 6 Finance Advantages Sole Proprietorship Partnership Coorporation (1) Centrally control y owner (1) Work shared (1) Limited liability Disadvantages by owner (2) Taxed: income tax (1) Unlimited personal liability (2) Limited ability to raise funds (2) Risk shared (3) Taxed: income tax (2) Good to raise funds by selling equity (1) Costly to organ- ize/run (2) Double taxation of dividends b 2. How Firms raise Funds b 1. Own Funds (Retained Earnings) b 2. Equity/Stocks . Loans/Bonds 7 Finance b 3. Loans/Bonds b 2. How Firms raise Funds (contd) b 2.1 Stocks (a.k.a. Shares a.k.a. Equity) s Stocks represent partial ownership of a corporation. s If stocks are traded publicly at some stock exchange, then 8 Finance the firm is a public firm; if stocks are not publicly traded, it is private company (but could still have shareholders!)....
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This note was uploaded on 03/26/2012 for the course ECON 0100 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.
- Spring '08