FINANCE 1613 FINAL EXAM NOTES
CHAPTER 1 Basic Concepts
Forms of Business Organisations
Advantages - business owned by one person. It is simple and easy to start and the owner keeps all the profits. Disadvantages: difficult to raise large sums of finance, unlimited liability, difficult to transfer ownership, taxed at personal income rate.
Partnership – business organization owned and operated by two or more individuals or entities. Can be General (all partners share in outcomes and have unlimited liability) or Limited (limited partners do not actively participate and liability is limited to their contribution). Advantages: Same as sole proprietorship
Disadvantages: Same as sole proprietorship
Corporation – a business created as a distinct legal entity owned by one or more individuals. Advantages: ownership can be transferred easily, unlimited life, limited liability, easy to raise large sums of money. Disadvantages: earnings are liable for corporate taxation, legal formalities associated with running a corporation are complicated and costly.
Financial Management Decisions
Investment Decision – the way in which funds raised are used in productive activities. This process is called Capital Budgeting
Capital Budgeting – The process of planning and managing a firm’s long-term investments. Most important factors to consider are size, timing and risk of cash flows.
Financing Decisions: Capital Structure – the mixture of debt and equity maintained by a firm. Working Capital Management – day to day activities to ensure a firm has sufficient resources to continue operations.
Goals of Financial Management: The primary goal of any business is to maximize the value of the firm to shareholders. i.e. maximizing the market value of existing owner’s equity, maximizing a firm’s current market share price.
Intermediate objectives: social and ethical responsibilities. Ensuring safety and welfare of employees, etc. etc.
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