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Fundamentals of Financial Management (13th thedition)by
Fundamentals of Financial Management (13 edition)by
JJ.Van
.VanHorneHorne
Jhon
JhonM.
M.Wachowicz
Wachowicz

2.1 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business, Tax, and
Financial Environments
• The Business Environment
• The Tax Environment
• The Financial Environment

2.2 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business Environment
Four basic forms of business
organization:
• Sole Proprietorships
• Partnerships (general and limited)
• Corporations
• Limited liability companies

2.3 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business
Environment
Sole Proprietorship – A business form
for which there is one owner. This
single owner has unlimited liability for
all debts of the firm.
• Oldest form of business organization.
• Business income is accounted for on your
personal income tax form.
form
2.4 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Summary for
Sole Proprietorship
Advantages Disadvantages
• Simplicity • Unlimited liability
• Low setup cost • Hard to raise
• Quick setup additional capital
• • Transfer of
Single tax filing on
individual form ownership
difficulties

2.5 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business
Environment
Partnership – A business form in
which two or more individuals act
as owners.
• Business income is accounted for on each partner’s
personal income tax form.
form

2.6 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Types of Partnerships
General Partnership – all partners have
unlimited liability and are liable for all
obligations of the partnership.
Limited Partnership – limited partners have
liability limited to their capital contribution
(investors only). At least one general partner is
required and all general partners have unlimited
liability.
2.7 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Summary for Partnership
Advantages Disadvantages
• Can be simple • Unlimited liability for the
• Low setup cost, higher than general partner
sole proprietorship • Difficult to raise additional
• Relatively quick setup capital, but easier than sole
• Limited liability for limited proprietorship
partners • Transfer of ownership
difficulties

2.8 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business
Environment
Corporation – A business form legally
separate from its owners.
• An artificial entity that can own assets and incur liabilities.
• Business income is accounted for on the income tax form
of the corporation.
corporation

2.9 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Summary for Corporation
Advantages Disadvantages
• Limited liability • Double taxation
• Easy transfer of • More difficult to
ownership establish
• Unlimited life • More expensive to
• Easier to raise large set up and maintain
quantities of capital

2.10 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 The Business
Environment
Limited Liability Companies – A business
form that provides its owners (called
“members”) with corporate-style limited
personal liability and the federal-tax
treatment of a partnership.
• Business income is accounted for on each
“member’s” individual income tax form.
form

2.11 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Limited Liability
Company (LLC)
Generally, an LLC will possess only the first
two of the following four standard
corporation characteristics
• Limited liability
• Centralized management
• Unlimited life
• Transfer of ownership without other owners’ prior
consent
2.12 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Summary for LLC
Advantages Disadvantages
• Limited liability • Limited life
• Eliminates double taxation (generally)
• No restriction on number • Transfer of
or type of owners ownership difficulties
• Easier to raise additional (generally)
capital

2.13 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS

SECONDARY MARKET

SAVINGS SECTOR

2.14 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT
SECTOR INVESTMENT
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Businesses

SECONDARY MARKET Government

Households
SAVINGS SECTOR

2.15 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT
SECTOR SAVINGS
SECTOR

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Households

SECONDARY MARKET Businesses

Government
SAVINGS SECTOR

2.16 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT
SECTOR FINANCIAL
BROKERS

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Investment
Bankers
SECONDARY MARKET
Mortgage
Bankers
SAVINGS SECTOR

2.17 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT
SECTOR FINANCIAL
INTERMEDIARIES

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Commercial Banks
Savings Institutions
SECONDARY MARKET Insurance Cos.
Pension Funds
Finance Companies
SAVINGS SECTOR
Mutual Funds

2.18 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 INVESTMENT
SECTOR SECONDARY
MARKET

INTERMEDIARIES
FINANCIAL
FINANCIAL BROKERS
Security
Exchanges
SECONDARY MARKET
OTC
Market
SAVINGS SECTOR

2.19 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Allocation of Funds
• Funds will flow to economic units that are
willing to provide the greatest expected return
(holding risk constant).
• In a rational world, the highest expected returns
will be offered only by those economic units with
the most promising investment opportunities.
• Result: Savings tend to be allocated to the most
efficient uses.
2.20 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.
 Risk-Expected Return
Profile
Speculative Common Stocks
EXPECTED RETURN (%)

Conservative Common Stocks

Preferred Stocks
Medium-grade Corporate Bonds
Investment-grade Corporate Bonds
Long-term Government Bonds
Prime-grade Commercial Paper
US Treasury Bills (risk-free securities)

RISK
2.21 Van Horne and Wachowicz, Fundamentals of Financial Management, 13th edition. © Pearson Education Limited 2009. Created by Gregory Kuhlemeyer.