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In the united states a corporation is incorporated in

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Unformatted text preview: tate. Forming a corporation requires preparing a charter and a set of bylaws. Public corporations must incur the expense of preparing and disclosing information to their shareholders and various regulatory bodies. various Double taxation. Unlike income from a sole proprietorship and Double general partnership, which is taxed once, income paid to owners is subject to double taxation. That is, the corporation pays taxes on taxable income and individual shareholders pay taxes on the income received. taxes Separation of ownership and management. In many Separation corporations, especially larger ones, managers and owners 21 21 represent separate groups. Their interests may conflict. represent 21 Financial management involves three major types of Financial decisions: (1) long-term investment decisions, (2) long-term financing decisions, and (3) working capital management decisions. decisions. These decisions concern the acquisition and allocation of These resources among the firm’s various activities. The first two decisions are long term in nature and the third is short term. Managers should not consider these decisions on a Managers piecemeal basis but as an integrated whole because they are seldom independent of one another. Investment decisions typically affect financing decisions and vice versa. For example, a decision to build a new plant or to buy new For equipment requires other decisions on how to obtain the funds needed to finance the project and to manage the asset once acquired. once 22 22 22 23 23 23 Long-term investment decisions involve determining the Long-term type and amount of assets that the firm wants to hold. That is, investing concerns allocating or using funds. The financial manager makes investment decisions about all The types of assets – items on the left-hand side of the balance sheet. These decisions often involve buying, holding, reducing, replacing, selling, and managing assets. The process of planning and managing a firm’s long-term The investments is called capital budgeting. Common questions capital Common involving long-term investments include: involving • In what lines of business should the firm engage? In • Should the firm acquire other companies? Should • What sorts of property, plant, and equipment should the firm hold? hold? 24 24 24 • Should the firm modernize or sell an old production facility? Should • Should the firm introduce a more efficient distribution system than the current one? than As these examples show, investment decisions involve not only As those that create revenues and profits, but also those that save money. The answers to these questions flow from the firm’s long-term investment strategy. long-term Making investment decisions requires applying a key principle Making of financial management. The investment principle states that the firm should invest in The assets and projects yielding a return greater than the minimum acceptable hurdle rate. A hurdle rate is the minimum acceptable rate of return for investing...
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