FIN300: Week 1 Powerpoint Notes
Chapter 1
Types of Firms
Type of Firm Advantage Disadvantage
Sole Proprietor ● One individual owns and ● Ease of ● Unlimited liability – that
manages the business establishment individual is personally liable
● Bears all the costs, but and lack of for all of the firm’s liabilities
keep all of the profits regulation (financial and legal)
● No separation of business ● Limited life
and individual ● Difficult to transfer ownership
Partnership ● Partnerships can be N/A N/A
organized as general
partnerships or limited
partnerships.
● Income from the
partnership is taxed at the
personal level.
● The income is split among
partners according to their
ownership in the
partnership.
Type of Partnership
1. General partnership (only
general partners, similar to
sole proprietorship)
2. Limited partnership
(general partners and
limited partners)
3. Limited liability partnership
(LLP) in Canada
Corporation ● A business which is legally ● Limited liability ● Taxation (firm profits +
separate from its owners, (financial and dividends to tax payers)
who are called legal) ● Agency Issues (more later)
shareholders ● More flexible & ● Regulations and costs
● The entire ownership permanent
stake of a corporation is (managers and
divided into shares known shareholders
as stock. come and go,
firm remains)
What is Corporate Finance?
1. What long-term investments should you take on?
Capital budgeting(E.g. Apple developed IPhone, Google purchased YouTube)
2. Where will you get the long-term financing to pay for your investment?
Capital structure(E.g. IPOs, seasoned equity offerings, bank debts)
, 3. How will you manage day-to-day financial activities?
Working capital management(E.g. collecting from customers, paying suppliers)
Role of the Financial Manager
Goals of the Corporation
● Goals of the Corporation
➔ Increasing market value increases shareholder wealth.
➔ Thus, the objective is to maximize current share price.
➔ But not at the cost of unethical behavior! (e.g. Enron, WorldCom)
● How to maximize shareholder wealth?
➔ To improve a firm’s ability to generate Cash Flows now and in the future
Agency Problems
● Agency Problems
➔ Resulting from the separation of management and ownership
➔ Conflicts of interest between the firm’s owners (principals) and its managers
(agents)
● Can be reduced in several ways:
➔ Compensation plans: firm stock and options
➔ Board of Directors
➔ Threat of takeovers
➔ Specialist monitoring
Financial Markets
Chapter 1
Types of Firms
Type of Firm Advantage Disadvantage
Sole Proprietor ● One individual owns and ● Ease of ● Unlimited liability – that
manages the business establishment individual is personally liable
● Bears all the costs, but and lack of for all of the firm’s liabilities
keep all of the profits regulation (financial and legal)
● No separation of business ● Limited life
and individual ● Difficult to transfer ownership
Partnership ● Partnerships can be N/A N/A
organized as general
partnerships or limited
partnerships.
● Income from the
partnership is taxed at the
personal level.
● The income is split among
partners according to their
ownership in the
partnership.
Type of Partnership
1. General partnership (only
general partners, similar to
sole proprietorship)
2. Limited partnership
(general partners and
limited partners)
3. Limited liability partnership
(LLP) in Canada
Corporation ● A business which is legally ● Limited liability ● Taxation (firm profits +
separate from its owners, (financial and dividends to tax payers)
who are called legal) ● Agency Issues (more later)
shareholders ● More flexible & ● Regulations and costs
● The entire ownership permanent
stake of a corporation is (managers and
divided into shares known shareholders
as stock. come and go,
firm remains)
What is Corporate Finance?
1. What long-term investments should you take on?
Capital budgeting(E.g. Apple developed IPhone, Google purchased YouTube)
2. Where will you get the long-term financing to pay for your investment?
Capital structure(E.g. IPOs, seasoned equity offerings, bank debts)
, 3. How will you manage day-to-day financial activities?
Working capital management(E.g. collecting from customers, paying suppliers)
Role of the Financial Manager
Goals of the Corporation
● Goals of the Corporation
➔ Increasing market value increases shareholder wealth.
➔ Thus, the objective is to maximize current share price.
➔ But not at the cost of unethical behavior! (e.g. Enron, WorldCom)
● How to maximize shareholder wealth?
➔ To improve a firm’s ability to generate Cash Flows now and in the future
Agency Problems
● Agency Problems
➔ Resulting from the separation of management and ownership
➔ Conflicts of interest between the firm’s owners (principals) and its managers
(agents)
● Can be reduced in several ways:
➔ Compensation plans: firm stock and options
➔ Board of Directors
➔ Threat of takeovers
➔ Specialist monitoring
Financial Markets
