Week 4 Notes for FIN 305
Week 4 Notes for FIN 305 FIN 305
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This 10 page Class Notes was uploaded by Alia Coughlan on Friday September 16, 2016. The Class Notes belongs to FIN 305 at Colorado State University taught by John D. Hopkins in Fall 2016. Since its upload, it has received 6 views. For similar materials see Fundamentals of Finance in Business at Colorado State University.
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Date Created: 09/16/16
Week 4 Notes for FIN 305 Fundamentals of Finance 9/12 Review of Chapter 4 and 5 9/14 Chapter 1 – Finance and the Firm Field of Finance Financial guidelines determine how money is raised/spent Cash impacts all decisions Hiring, investments, production, etc There are different finance career paths Financial Mangers Chief financial office, entrepreneurs, small business owners Duties: Analyze past performance & predict future performance Assess risk Select investment opportunities Decide how much money to return to investors Decide how much cash to raise, when to, and where to get it Chief Financial Officer Directs firm’s financial activities Treasurer = responsible for cash/credit management planning activities Controller = responsible for cost & financial accounting information system activities Financial Markets and Institutions Bankers, stockbrokers Duties: Handle/manage flow of money in markets and institutions Trade in markets where financial assets are sold Analyze impact of interest rates on that flow of funds Makes society more productive Faster transactions Better allocation of resources Investments Security analysts, money managers Duties: Locate, select, manage incomeproducing assets Analyze money manager performance Create new investment vehicles *Liabilities and Equity = sources of funds *Assets = uses of funds *Liabilities = debt to claim *Equity = ownership claim *Capital Budgeting = Deals with the firm’s investment in longterm assets *Capital Structure Policy = Deals with longterm financing of the firm’s activities LT liabilities are loans by bondholders/banks Equity is cash raised by the sale of stock to investors *Work Capital Management = Deals with management of short term (current) assets Basic Goal of the Business Firm To maximize wealth of the firm’s owners Maximize value of the firm Maximize stock price *Maximizing value of firm is NOT the same as maximizing profits Profits is an accounting term Value is a finance term *The value of the firm is determined by what people are willing to pay for it Depends on future prospects and risks Factors that Affect Value Amount of future cash flow Need to pay bills Not the same as sales/profits Timing of future cash flow Cash received sooner is more valuable than cash received later Risk of getting future cash flow Definite cash inflows are preferred to uncertain cash flows Riskier the cash flow, lower the value Cash Flow and Market Value Cash Flow = Cash moving in and out of the firm Sales are not necessarily cash inflow Expenses not necessarily cash outflow Cash flow is NOT income Legal & Ethical Challenges Principals vs Agents Principals = owners of company Agents = management of the company *Agents should maximize principal’s wealth Agency Issues Conflict between agents and principal’s Conflicts impose costs to protect the principals Audits, Incentive bonus Conflict between profits and societal needs *Interest of society as a whole may not coincide with interests of owners of firm Government can impose rules that force companies to respond with best interest for society Conflict between what is best for the firm and the interests of others Interests of nonowner stakeholders Workers, creditors, suppliers, customers *Stockholders = owners of the firm *Bondholders = creditors of the firm From Investors Perspective What matters: Risk return tradeoff The risk associated with an investment Expected rate of return on an investment Want high return to low return Want low risk to high risk Investors rate of return represents a cost of funds to the firm 9/16 Forms of Business Organizations Sole Proprietorship Issues to consider: Unlimited owner liability Ease of creation Easily established Minimum cost Ability to raise capital Limited to Owners credit Who pays taxes Owners on their tax return Schedule C on Form 1040 Continuity Business ends when owner dies Partnership General Partnerhsip Issues to consider: Unlimited liability Liable for partners actions Ease of creation Easily established Minimum cost Ability to raise capital Limited to Partner’s credit Who pays taxes Partners on each partners tax return Schedule E on form 1040 Continuity Either dissolved or reorganized when owner dies, leaves partnership or incapacitated Limited Partnership (LP) General Partners Limited Partners *Every partnership must have at least one general partner and one limited partner Advantages Limited liability Disadvantages Not active in management Less favorable allocation of profits/losses Limited Liability Partnership (LLP) For professionals Partnership not taxed Income passed through to partners and then partners are taxed Limited liability Corporation Regular corporation (CCorp) Shareholders are owners Have equity Bondholders are lenders Have contract for payment Issues to consider: Limited liability Ease of creation Must have Articles of Incorporation Some cost Ability to raise capital Unlimited – can sell stock IPO Who pays taxes Double taxation Corporation pays taxes on income Owners pay taxes on dividends Continuity Infinite life Owners death does not impact Subchapter S Corporation (SCorp) Issues to consider: Limited liability Ease of creation Must have Articles of Incorporation Must meet IRS rules Ability to raise capital Limited = can only have 100 owners Who pays taxes Shareholders Pro rata basis Continuity Infinite life Transferability Can’t sell shares to other corporations, partnerships, etc Professional corporation Owners are all professionals conducting business together Lawyers, doctors, accountants, etc Benefit Corporations Must be BLab certified Requirements such as Transparency, social standards, environmental standards Corporate Forms Privately traded Stock sold informally Stock owned privately by small number of owners Publicly traded Shares offered to anyone Everything is the same as a regular corp EXCEPT Taxed at highest marginal tax rate for individuals Limited Liability Company Newer form of business organization Provides limited liability w/o incorporation Must register with Secretary of State Issues to consider: Limited liability Ease of creation 10 minutes to file online Ability to raise capital Limited = can’t raise as much as regular corp & can’t do IPO Who pays taxes Depends, it can be taxed as: Sole Proprietorship General Partnership SCorporation Regular Corporation Continuity Infinite life Transferability Can sell membership interests to others
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