Finance Chapter 1

Sole Proprietorship

• unlimited liability

  • owner can personally be sued..

• pass-through entities

• NO legal restrictions

• impossible to transfer ownership

• hardest to raise capital

• limited life

• simplest

Partnership GL

• impossible to transfer ownership

• limited life

general partnership

• unlimited liability

limited partnership

• must have one general (unlimited liab) and one limited partner (limited liab)

  • limited: cant run firm, but part of everyday operations (PASSIVE)

LLC

• limited liability

• possible to transfer ownership, harder to do so than corporation

Corporation

• easy to transfer ownership (easier if public)

• easiest to raise capital

• unlimited life

• cost complex (public corp MOST complex)

s-corp

• Limited Liability

• Restrictions:

  • Less than 100 owners

  • NO Retained Earnings

  • Must be domestic (U.S.)

  • Must be individuals, no institutional ownership

c-corp

• private or public

• limited liability

• double taxation (the only one with it!)

  • govt takes money (corporate tax), what’s left over is known as dividend, and will be taxed again

Double taxation

• income statement of a c-corp

• net income = change in retained earnings + dividends

Finance

the allocation of scarce funds used to produce or consume something real

business finance

• finance pertaining to the firm

• firm’s funds are called capital

personal finance

connected to business finance because households are the investors in securities issued by the firm

3 roles of the financial manager

1. capital budgeting (investing decisions)

2. financing decisions (capital structure, bank loans)

3. working capital management (acct receivable/payable, checkbook)

1 goal of the financial manager

maximize shareholder wealth

Stakeholder capitalism

E - emissions

S -  paying employees living wages

G

managerial agency conflict

shareholder (principal) hires manager (agent) to act on the shareholder’s beliefs

• costly to monitor the manager

• the manager will act in the manager’s interests

solution:

• monitoring doesn’t work

• compensate managers with stock-linked securities

  • wealth of manager is tied to success of company

  • manager will act in shareholders interests as a shareholder

market for corporate control

• arena where managerial teams fight for power to control corporate resources

• impact of antitakeover provisions in corporate governance such a staggered board of directors

financial markets

• buyers and sellers exchange tradable financial assets (securities) such as stocks and bonds

dealer v auction market

dealer - intermediaries (dealers) temporarily own security

• ex NASDAQ

auction - intermediaries (brokers) match buyers with sellers

• ex NYSE (hybrid or dealer auction)

primary v secondary markets

• Primary: The issuer of the security being traded is a party to the transaction

Ex. IPO (Initial public offering), SEO (Seasoned equity offering)

• Secondary Markets: The issuer of the security is not a party to the transaction

bid v ask price

bid - price a buyer offers to pay

ask - price a seller promises to accept

• bid < ask

limited v market orders

limited - trader submits a bid/ask and waits to see if the transaction goes through at that price

market - trader buys/sells at best price, buys at low ask sells at high bid

financial institutions

organizations that transform assets

• ex Bank takes depositors’ money, makes long-term loans, and obligates itself to pay deposits on demand