Ch. 1 Introduction to Finance and Business Organization

Value Creation

The primary goal of a firm is maximizing value.

Profit Maximization

Short-term focus may harm long-term growth.

Time Value of Money (TVM)

Money's value changes over time due to interest.

Maximize Shareholder Wealth

Increase the value of the firm's equity.

Financing Decisions

Raising capital for business operations.

Investment Decisions

Utilizing capital for growth opportunities.

Agency Problem

Conflict of interest between managers and shareholders.

Agency Costs

Losses in shareholder wealth due to agency problems.

Sole Proprietorship

Business owned and operated by one individual.

Partnership Agreement

Document outlining roles and interests of partners.

General Partnership

All partners share personal liability for debts.

Limited Partnership

At least one partner has unlimited liability.

Corporation

Legal entity separate from its owners.

Limited Liability

Owners' losses are limited to their investment.

Double Taxation

Corporations taxed on profits and dividends.

S-Corporation

Taxed as a partnership with limited shareholders.

Limited Liability Company (LLC)

Flexible structure with limited liability for owners.

Cash Flow

Actual cash generated, crucial for business success.

Illiquidity

Failure due to insufficient cash flow despite profits.

Opportunity Cost

Potential earnings lost by choosing one investment.

Risk Aversion

Investors prefer lower risk for lower returns.

Market Efficiency

Prices reflect all available public information.

Corporate Finance

Finance jobs in non-financial firms.

Depository Institutions

Banks that provide lending and wealth management.

Investments

Managing portfolios of financial instruments.

Financial Planning

Advising clients on financial instruments and strategies.

Insurance/Risk Management

Specialized knowledge in managing financial risks.

Real Estate Finance

Field requiring expertise in property investments.

Shareholder Wealth Maximization

Aligning company goals with increasing stock price.