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Week 4 Notes for FIN 305

by: Alia Coughlan

Week 4 Notes for FIN 305 FIN 305

Marketplace > Colorado State University > Business > FIN 305 > Week 4 Notes for FIN 305
Alia Coughlan

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Week 4 Notes
Fundamentals of Finance
John D. Hopkins
Class Notes
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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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