Week 1
Chapter 1
Why Study Finance?
● The Valuation Principle shows how to make the costs and benefits of a decision
comparable so that we can weigh them properly
Types of Firms
Sole proprietorship
● One individual owns and manages the business
● Bears all the costs, but keeps all of the profits
● No separation of business and individual
Advantages
➢ Ease of establishment and lack of regulation
Disadvantages
➢ Unlimited liability - that individual is personally liable for all of the firms’
liabilities (financial and legal)
➢ Limited Life
➢ Difficult to transfer ownership
Partnerships
● Partnerships can be organized as general partnerships or limited partnerships
● Income from partnership is taxed at the personal level
● The income is split among partners according to their ownership in the
partnership
Types of partnerships
➔ General partnership - only general partners, similar to sole proprietorship
- General partnership: is a partnership owned and run by more
than one owner—each called a general partner
Key Features of General Partnerships
➢ a lender can require any partner to repay all the firm’s
outstanding debts
➢ in a legal judgment against the partnership, each partner
is fully liable; thus, partners must be chosen carefully, as
any single partner’s actions can affect the exposure of all
the partners
➔ Limited partnership - general partners and limited partners
- Limited Partnership: is a partnership with two kinds of owners:
general partners and limited partners
- Limited partners have limited liability—that is, their liability is
limited to their investment. Their private property cannot be seized
to pay off the firm’s outstanding debts
- the death or withdrawal of a limited partner does not dissolve the
partnership, and a limited partner’s interest is transferable
➔ Limited liability partnership (LLP) in Canada
, - Limited Liability Partnership (LLP): A form of Partnership used
in Canada for law and accounting firms that provides partial
limitations of a partners liability
- An LLP is similar to a general partnership in that the partners can
be active in the management of the firm, and they do have a
degree of unlimited liability
- while a partner’s personal assets are protected from the negligent
actions of other partners, the investment in the overall partnership
may be lost
Corporations
● A business which is legally separate from its owners, who are called
shareholders
● Shareholders are not liable for any obligations the corporation enter, and the
corporation is not liable for any personal obligation of its owners
● The entire ownership stake of a corporation is divided into shares known as stock
Advantage
➢ Limited liability (financial and legal)
➢ More flexible & permanent (managers & shareholders come and go, firm
remains)
Disadvantage
➢ Taxation (firm profit + dividends to tax payers)
➢ Agency Issues
➢ Regulations and costs
Formation of Corporation
● In most provinces, corporations are defined under the provincial Business
Corporations Act or the Canada Business Corporations Act
● Corporations must be legally formed, meaning that the articles of incorporation
must be filled with relevant registrar of corporation
● The Article of Incorporation (Corporate Charter): is similar to a corporate
constitution that sets out the terms of the corporation’s ownership and existence
Ownership of a Corporation
● Stock: The entire ownership stake of a corporation is divided into shares
● The Equity of the Corporation: The collection of all the outstanding shares of a
corporation
● Shareholder (Stockholder or Equity Holder): An owner of a share of stock in the
corporation
- Shareholders are entitled to dividend payments; that is, payments made
at the discretion of the corporation’s board of directors to the equity
holders
● Dividend Payments: payments made at the discretion of the corporation’s board
of directors to the equity holders
● Market Capitalization: the wealth in the company the owners collectively owned
or the total value of all shares outstanding
Chapter 1
Why Study Finance?
● The Valuation Principle shows how to make the costs and benefits of a decision
comparable so that we can weigh them properly
Types of Firms
Sole proprietorship
● One individual owns and manages the business
● Bears all the costs, but keeps all of the profits
● No separation of business and individual
Advantages
➢ Ease of establishment and lack of regulation
Disadvantages
➢ Unlimited liability - that individual is personally liable for all of the firms’
liabilities (financial and legal)
➢ Limited Life
➢ Difficult to transfer ownership
Partnerships
● Partnerships can be organized as general partnerships or limited partnerships
● Income from partnership is taxed at the personal level
● The income is split among partners according to their ownership in the
partnership
Types of partnerships
➔ General partnership - only general partners, similar to sole proprietorship
- General partnership: is a partnership owned and run by more
than one owner—each called a general partner
Key Features of General Partnerships
➢ a lender can require any partner to repay all the firm’s
outstanding debts
➢ in a legal judgment against the partnership, each partner
is fully liable; thus, partners must be chosen carefully, as
any single partner’s actions can affect the exposure of all
the partners
➔ Limited partnership - general partners and limited partners
- Limited Partnership: is a partnership with two kinds of owners:
general partners and limited partners
- Limited partners have limited liability—that is, their liability is
limited to their investment. Their private property cannot be seized
to pay off the firm’s outstanding debts
- the death or withdrawal of a limited partner does not dissolve the
partnership, and a limited partner’s interest is transferable
➔ Limited liability partnership (LLP) in Canada
, - Limited Liability Partnership (LLP): A form of Partnership used
in Canada for law and accounting firms that provides partial
limitations of a partners liability
- An LLP is similar to a general partnership in that the partners can
be active in the management of the firm, and they do have a
degree of unlimited liability
- while a partner’s personal assets are protected from the negligent
actions of other partners, the investment in the overall partnership
may be lost
Corporations
● A business which is legally separate from its owners, who are called
shareholders
● Shareholders are not liable for any obligations the corporation enter, and the
corporation is not liable for any personal obligation of its owners
● The entire ownership stake of a corporation is divided into shares known as stock
Advantage
➢ Limited liability (financial and legal)
➢ More flexible & permanent (managers & shareholders come and go, firm
remains)
Disadvantage
➢ Taxation (firm profit + dividends to tax payers)
➢ Agency Issues
➢ Regulations and costs
Formation of Corporation
● In most provinces, corporations are defined under the provincial Business
Corporations Act or the Canada Business Corporations Act
● Corporations must be legally formed, meaning that the articles of incorporation
must be filled with relevant registrar of corporation
● The Article of Incorporation (Corporate Charter): is similar to a corporate
constitution that sets out the terms of the corporation’s ownership and existence
Ownership of a Corporation
● Stock: The entire ownership stake of a corporation is divided into shares
● The Equity of the Corporation: The collection of all the outstanding shares of a
corporation
● Shareholder (Stockholder or Equity Holder): An owner of a share of stock in the
corporation
- Shareholders are entitled to dividend payments; that is, payments made
at the discretion of the corporation’s board of directors to the equity
holders
● Dividend Payments: payments made at the discretion of the corporation’s board
of directors to the equity holders
● Market Capitalization: the wealth in the company the owners collectively owned
or the total value of all shares outstanding
