Beruflich Dokumente
Kultur Dokumente
1
Topics covered
• Forms of business:
• -sole proprietorship,
• -partner,
• -corporation,
• -hybrid forms;
• Role of financial manager:
• -financing decision
• -and capital budgeting decision,
• Goal of firm:
• -maximize shareholder’s wealth,
• -however, agency problems inevitable.
2
1. Forms of a business
• Sole proprietorship
• Partnership
• Corporation
• Hybrid forms (LLP,…)
3
1.Forms of a business
-Sole Proprietorships
• Sole owner of the a business, no partners and no shareholders.
• The proprietor is personally responsible for all the firm’s obligation
•
• Advantages:
• 1)easy to start up and manage the business,
• 2)no regulations governing it,
• 3)only taxed once (your personal income tax),
• 4)good for small business at early stage.
• Disadvantages:
• 1)difficult to raise fund,
• 2)limited life of business,
• 3)unlimited liability, very risky for the owner,
•
*
• Unlimited liability: The owners of a business are personally responsible for its obligations;
• Limited liability: The owners of a business are not personally responsible for its obligations;
•
4
1.Forms of a business
-Partnership
• Partnership- business owned by two or more persons who agree to
abide by a partnership. A partnership is an agreement between
sole proprietors to pool their assets and talents in a business.
• Similar to sole proprietorships except that the business is shared by
several persons, thus more capital can be raised.
•
• Advantages:
• 1)pool money, and share expertise with friends or business
associates,
• 2)suitable to professional business, like accounting firm; no
corporation tax, only taxed once.
• Disadvantages:
• 1)limited life time,
• 2)unlimited liability for all partners.
5
1.Forms of a business
-Corporations
• Corporation-business organized as a separate legal entity owned by
stockholders.
• Characteristics of corporation:
• - Independent legal entity,
• - Separation of ownership and management,
• - Limited liability.
• - Double taxation.
• - Agency problems.
•
• Advantages:
• 1) Possible to raise large amount of capital (if go public)
• 2) Low risk for owners (limited liability),
• 3) Perpetual lifetime because of the separation of ownership and
management
• 4) Possible to make a business running in a large scale
6
1.Forms of a business
-Corporations (Cont’d)
• Disadvantages:
• 1) double taxation,
• 2) high legal cost and management cost,
• 3) agency problems.
•
7
1.Forms of a business
-Hybrid forms of business
• A limited partnership (LP) has both limited (limited liability)
partners and, at least, one general (unlimited liability) partner,
who is the primary manager.
• A limited liability partnership (LLP) is a partnership that enables
all partners to have limited liability similar to corporation
stockholders, but partners are taxed as individuals, avoiding
double taxation.
• The professional corporation (PC), used by doctors and other
professionals, has limited liability for owners, except in the area
of malpractice.
8
1.Forms of Business
-Characteristics of business organizations
9
2.Role of Financial Manager
Dividend policy
• Production cycle
Value added
What
Sell Product/ service Producing Buy real business
assets to enter
Financing decisions
How to pay for?
decisions
Investment
10
2.Role of Financial Manager
• Real Assets:
• - Assets can be used to produce goods and services, like land,
building, assembly line, office,
• - Real assets also can be categorized into tangible assets and
intangible assets. Tangible assets like land, building, etc;
Intangible assets like trademark, patents, etc;
• Financial Assets:
• - Claims to the income generated by the real assets, also called
securities, like stocks, bonds, promissory note.
11
2.Role of Financial Manager
(2) (1)
Firm's
Financial
operations (4a) Investors
Manager
Real assets
(3) (4b)
12
2.Role of Financial Manager
13
2.The Capital Budgeting Decision
(Investment Decision)
14
2.The Financing decision
15
2.Who is the financial manager?
16
2.Who is the financial manager?
Treasurer Controller
Preparation of financial statement
Cash Management
Accounting
Banking and other investor relationships
Taxes
Raising capital
17
3.The Goals of Corporation
18
3.Do Managers really maximize value?
- Agency problems
• The goal of maximizing the firm’s market value cannot always be
achieved because of the agency problems; Agency problems
will prevent this goal being reached;
• Agency Problems: the interests conflict between the agent and
principal.
• Stockholders are principals. Managers acting as the agents for
stockholders, may act in their own interests rather than the
interests of the shareholders, maximizing the firm value.
• - buy luxurious corporate jets, -expensive dinner - shy away from
the attractive but risky projects because they are worried more
about the safety of their jobs rather than the potential for superior
profits.
• Such problems can arise because the mangers of the firm, who are
hired as “AGENT” of the owners, may have their own axes to
grind (own interest), therefore these problems are called:
Agency PROBLEMS
• Agency problem is a hindrance to achieving a firm’s goal.
19
3.Ways to reduce agency problem
20
3.Corporation as an apple pie
21
3.Corporation as an apple pie
Stakeholders of a corporation: Lenders, stockholders,
Employees, Managers, Government, etc, who have a stake in
the company.
Government: Tax
Managers: compensations
Lenders: and job safety
repayment of
interests and
principals
Shareholders: dividend
22
4. Summary
• Forms of business:
• -sole proprietorship,
• -partner,
• -corporation,
• -hybrid forms;
• Role of financial manager:
• -financing decision
• -and capital budgeting decision,
• Goal of firm:
• -maximize shareholder’s wealth,
• -however, agency problems inevitable.
23