Finance 306 – Summaries in preparation for exams
1. 4 Basic Areas of Finance: Corporate finance, investments, financial institutions, international
finance
2. Investments: deals with stocks and bonds; stock brokers, portfolio management (managing
money for investors), and security analysis (researching individual in- vestments)
3. Financial Institutions: businesses that deal primarily in financial matters; banks and insurance
companies;
4. International Finance: specialization involving in international aspects of either corporate
finance, investments, or financial institutions
5. What is business finance?: the study of how to answer the following questions
1) What long-term investments should you take on?
2) Where will you get the long-term financing to pay for your investments? New owners?
Borrow?
3) How will you manage your everyday financial activities?
6. The financial manager: The financial management function is usually associat- ed with the
Chief Financial Officer (CFO)
-Under the CFO is the treasurer's office which is responsible for managing the firm's cash and
credit, its financial planning, and its capital expenditures
7. Financial Management Decisions: 1) Capital Budgeting
2) Capital Structure
3) Working Capital Management
8. Capital Budgeting: -the process of planning and managing a firm's long-term investments; the
financial manager tries to identify investment opportunities that are worth more to the firm than
they cost to acquire;
-regardless of specific investment the financial manager must be concerned with how much
cash they expect to receive, when they expect to receive it, and how likely they are to receive it
9. Capital Structure: (AKA financial structure) refers to the specific mixture of long-term debt and
equity the firm uses to finance its operations; the financial manager is concerned with: how
much should the firm borrow? and what are the least expensive sources of funds for them? the
financial manager also has to decide exactly how and where to raise the money
10.Working Capital Structure: working capital= firm's short-term assets; man- aging the
firm's working capital is a day-to-day activity that ensures the firm has sufficient resources
continue its operations and avoid costly interruptions;
how much cash/inventory should we keep on hand? should we sell on credit to our customers?
how ill we obtain any needed short-term financing?
11.Sole Proprietorship: business owned by only one person, the simplest type of business to
start and is the least regulated form of organization; there are MORE
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, Finance 306 – Summaries in preparation for exams
PROPRIETORSHIPS than ANY OTHER type of business; many businesses that later become large
corporations start out as small proprietorships
-the owner keeps all the profits, but also has unlimited liability for business debts; all business
income is taxed as personal income
12.Partnership: two or more owners;
-general partnership= all the partners share in gains or losses and all have unlimited liability,
partnership agreements states how gains/loses are divided
-limited partnership= one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in the
business, limited partner has limited liability
-partnership terminates when a general partner wishes to sell out or dies
13.Primary disadvantages of Sole Proprietors and Partnerships: 1) unlimited liability for business
debts on the part of the owners
2) limited life of the business 3)difficulty of
transferring ownerships
-adds up to a single problem: the ability of such businesses to grow can be seriously limited by
an inability to raise cash for investment
14.Corporation: most important type of organization in terms of size
-legal "person" separate and distinct from its owners and it has many of the rights, duties, and
privileges of an actual person
-forming a corporation involves preparing articles of incorporation and a set of bylaws,
corporation is a "resident" of the state in which it incorporates
-the stockholders have limited liability, can only lose what they invested
-SUPERIOR when it comes to raising cash because of the relative ease of transfer- ring
ownership, the limited liability for business debts, and the unlimited life of the business; if a
corp needs new equity, it can sell new shares to attract new investors
-double taxation occurs which is a significant disadvantage, corporate profits are taxed at the
corporate level when they are earned and again at the personal level when they are paid out at
dividends
15.Goal of Financial Management in a Corp: To maximize the current value per share of the
existing stock
16.Goal of General Financial Management: To maximize the market value of the existing owners'
equity
17.Sarbanes-Oxley Act: intended to strengthen protection against corporate ac- counting fraud
and financial malpractice
-contains a number of requirements to insure that companies tell the truth in their financial
statements
-extensive requirements makes compliance with Sarbox very costly, which has
2/
8
1. 4 Basic Areas of Finance: Corporate finance, investments, financial institutions, international
finance
2. Investments: deals with stocks and bonds; stock brokers, portfolio management (managing
money for investors), and security analysis (researching individual in- vestments)
3. Financial Institutions: businesses that deal primarily in financial matters; banks and insurance
companies;
4. International Finance: specialization involving in international aspects of either corporate
finance, investments, or financial institutions
5. What is business finance?: the study of how to answer the following questions
1) What long-term investments should you take on?
2) Where will you get the long-term financing to pay for your investments? New owners?
Borrow?
3) How will you manage your everyday financial activities?
6. The financial manager: The financial management function is usually associat- ed with the
Chief Financial Officer (CFO)
-Under the CFO is the treasurer's office which is responsible for managing the firm's cash and
credit, its financial planning, and its capital expenditures
7. Financial Management Decisions: 1) Capital Budgeting
2) Capital Structure
3) Working Capital Management
8. Capital Budgeting: -the process of planning and managing a firm's long-term investments; the
financial manager tries to identify investment opportunities that are worth more to the firm than
they cost to acquire;
-regardless of specific investment the financial manager must be concerned with how much
cash they expect to receive, when they expect to receive it, and how likely they are to receive it
9. Capital Structure: (AKA financial structure) refers to the specific mixture of long-term debt and
equity the firm uses to finance its operations; the financial manager is concerned with: how
much should the firm borrow? and what are the least expensive sources of funds for them? the
financial manager also has to decide exactly how and where to raise the money
10.Working Capital Structure: working capital= firm's short-term assets; man- aging the
firm's working capital is a day-to-day activity that ensures the firm has sufficient resources
continue its operations and avoid costly interruptions;
how much cash/inventory should we keep on hand? should we sell on credit to our customers?
how ill we obtain any needed short-term financing?
11.Sole Proprietorship: business owned by only one person, the simplest type of business to
start and is the least regulated form of organization; there are MORE
1/
8
, Finance 306 – Summaries in preparation for exams
PROPRIETORSHIPS than ANY OTHER type of business; many businesses that later become large
corporations start out as small proprietorships
-the owner keeps all the profits, but also has unlimited liability for business debts; all business
income is taxed as personal income
12.Partnership: two or more owners;
-general partnership= all the partners share in gains or losses and all have unlimited liability,
partnership agreements states how gains/loses are divided
-limited partnership= one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in the
business, limited partner has limited liability
-partnership terminates when a general partner wishes to sell out or dies
13.Primary disadvantages of Sole Proprietors and Partnerships: 1) unlimited liability for business
debts on the part of the owners
2) limited life of the business 3)difficulty of
transferring ownerships
-adds up to a single problem: the ability of such businesses to grow can be seriously limited by
an inability to raise cash for investment
14.Corporation: most important type of organization in terms of size
-legal "person" separate and distinct from its owners and it has many of the rights, duties, and
privileges of an actual person
-forming a corporation involves preparing articles of incorporation and a set of bylaws,
corporation is a "resident" of the state in which it incorporates
-the stockholders have limited liability, can only lose what they invested
-SUPERIOR when it comes to raising cash because of the relative ease of transfer- ring
ownership, the limited liability for business debts, and the unlimited life of the business; if a
corp needs new equity, it can sell new shares to attract new investors
-double taxation occurs which is a significant disadvantage, corporate profits are taxed at the
corporate level when they are earned and again at the personal level when they are paid out at
dividends
15.Goal of Financial Management in a Corp: To maximize the current value per share of the
existing stock
16.Goal of General Financial Management: To maximize the market value of the existing owners'
equity
17.Sarbanes-Oxley Act: intended to strengthen protection against corporate ac- counting fraud
and financial malpractice
-contains a number of requirements to insure that companies tell the truth in their financial
statements
-extensive requirements makes compliance with Sarbox very costly, which has
2/
8
