EXTRA — FIN 3403 Units 1 & 2

What are the four basic areas of finance?

Investments, financial institutions, international finance, and corporate finance.

Investments

The area of finance involving financial assets such as stocks and bonds, including their value, risk versus return, and asset allocation.

What are common careers in investments?

Stockbroker or financial advisor, portfolio manager, and security analyst.

Financial Institutions

Companies that specialize in financial matters, including commercial and investment banks, credit unions, savings and loans, insurance companies, and brokerage firms.

International Finance

An area of finance involving international financial activities, including exchange rates and political risk.

What should someone working in international finance understand?

Exchange rates, political risk, and the customs of other countries.

What three major questions does corporate finance answer?

What long-term investments should the firm make? How will the firm finance those investments? How will the firm manage its everyday financial activities?

Capital Budgeting

The process of making long-term investment decisions involving fixed assets.

Capital Structure

The firm's mix of debt and equity used to finance the business.

Where is capital structure shown on the balance sheet?

On the right-hand side through long-term debt and equity.

Working Capital Management

Management of the firm's current assets and current liabilities.

Examples of Current Assets

Cash, accounts receivable, and inventory.

Examples of Current Liabilities

Accounts payable and notes payable.

Who is usually the top financial manager of a firm?

The Chief Financial Officer (CFO).

Treasurer

Oversees cash management, credit management, capital expenditures, and financial planning

Controller

Oversees taxes, cost accounting, financial accounting, and data processing.

What is the main difference between the Treasurer and Controller?

The Treasurer focuses primarily on finance, while the Controller focuses primarily on accounting.

What are the three major forms of business organization?

Sole proprietorship, partnership, and corporation.

Sole Proprietorship

A business owned by one person.

Advantages of a Sole Proprietorship

Easy to start, least regulated, owner keeps the profits, and income is taxed once as personal income.

Disadvantages of a Sole Proprietorship

Limited life, limited access to equity capital, unlimited liability, and difficulty selling ownership.

Partnership

A business owned by two or more people.

Advantages of a Partnership

More capital is available, relatively easy to start, and income is taxed once as personal income.

Corporation

A separate legal business entity owned by shareholders.

Disadvantages of a Partnership

Unlimited liability, partnership dissolves when one partner dies or wishes to sell, and ownership is difficult to transfer.

Advantages of a Corporation

Limited liability, unlimited life, separation of ownership and management, easy transfer of ownership, and easier to raise capital.

Disadvantages of a Corporation

Separation of ownership and management can create agency problems, and corporate earnings can face double taxation.

Double Taxation

Corporate income is taxed at the corporate level, and dividends distributed to shareholders may then be taxed as personal income.

Managerial Compensation

Incentives can be designed to align managers' interests with stockholders' interests.

Corporate Control

The threat of a takeover can encourage managers to operate the company more effectively.

Stakeholders

Groups other than shareholders who have an interest in the firm's decisions, such as employees, customers, and creditors.