Chapter 1
The Valuation Principle shows how to make costs and benefits of a decision comparable so that we
can weigh them properly.
1) Sole proprietorships = a business owned and run by one person
a) have the advantage of being straightforward to set up
b) no separation between the firm and the owner – can only have one owner
c) owner has unlimited personal liability for the firm’s debts
d) difficult to transfer ownership
2) Partnership = a business owned and run by more than one owner
a) all partners are liable for the firm’s debt
b) the partnership ends if one owner dies of withdraws
c) partners can avoid liquidation if the partnership agreement provides for
alternatives such as a buyout of a partner
Limited partnership = a partnership with two kinds of owners: general partners and limited partners.
Limited partners have limited liability (limited to their investment).
3) Limited liability companies = the owners’ liability is limited to their investment in shares
Private limited companies: owners are not allowed to trade their shares on an organized exchange.
Public limited companies: owners are allowed to trade their shares on an organized exchange.
4) Corporations = a legally defined, artificial being, separate from its owners
a) the owners are not liable for any obligations the corporation enters into
b) the entire ownership stake of a corporation is divided into shares known as stock
c) the collection of all outstanding shares of a corporation is known as the equity
d) an owner of a share or equity is a shareholder (stockholder or equity holder)
e) shareholders get dividend payments which are payments made at the discretion
f) can raise substantial amounts of capital because they can sell ownership shares
to anonymous outside investors
Shareholders of a corporation pay taxes twice: double taxation or classical system – C corporations
The imputation system doesn’t have double taxation – S corporations
The financial manager has three main tasks (maximize wealth of owners – shareholders):
1. Making investment decisions
2. Making financing decisions
3. Managing the firm’s cash flow – managing working capital
Bond = a security sold by governments and corporations to raise money from investors today in
exchange for a promised future payment.
The board of directors + the management team headed by the CEO possess direct control.
Board of directors = group of people elected by shareholders who have the ultimate decision-making
authority in the corporation.
Chief executive officer = person charged with running the corporation by instituting the rules and
policies set by the board of directors
The Valuation Principle shows how to make costs and benefits of a decision comparable so that we
can weigh them properly.
1) Sole proprietorships = a business owned and run by one person
a) have the advantage of being straightforward to set up
b) no separation between the firm and the owner – can only have one owner
c) owner has unlimited personal liability for the firm’s debts
d) difficult to transfer ownership
2) Partnership = a business owned and run by more than one owner
a) all partners are liable for the firm’s debt
b) the partnership ends if one owner dies of withdraws
c) partners can avoid liquidation if the partnership agreement provides for
alternatives such as a buyout of a partner
Limited partnership = a partnership with two kinds of owners: general partners and limited partners.
Limited partners have limited liability (limited to their investment).
3) Limited liability companies = the owners’ liability is limited to their investment in shares
Private limited companies: owners are not allowed to trade their shares on an organized exchange.
Public limited companies: owners are allowed to trade their shares on an organized exchange.
4) Corporations = a legally defined, artificial being, separate from its owners
a) the owners are not liable for any obligations the corporation enters into
b) the entire ownership stake of a corporation is divided into shares known as stock
c) the collection of all outstanding shares of a corporation is known as the equity
d) an owner of a share or equity is a shareholder (stockholder or equity holder)
e) shareholders get dividend payments which are payments made at the discretion
f) can raise substantial amounts of capital because they can sell ownership shares
to anonymous outside investors
Shareholders of a corporation pay taxes twice: double taxation or classical system – C corporations
The imputation system doesn’t have double taxation – S corporations
The financial manager has three main tasks (maximize wealth of owners – shareholders):
1. Making investment decisions
2. Making financing decisions
3. Managing the firm’s cash flow – managing working capital
Bond = a security sold by governments and corporations to raise money from investors today in
exchange for a promised future payment.
The board of directors + the management team headed by the CEO possess direct control.
Board of directors = group of people elected by shareholders who have the ultimate decision-making
authority in the corporation.
Chief executive officer = person charged with running the corporation by instituting the rules and
policies set by the board of directors
