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Business Finance

by: Erin Kihn

Business Finance FIN 3303

Erin Kihn
GPA 3.73

Alan Mc Intyre

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Alan Mc Intyre
Class Notes
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This 3 page Class Notes was uploaded by Erin Kihn on Sunday October 25, 2015. The Class Notes belongs to FIN 3303 at University of Oklahoma taught by Alan Mc Intyre in Fall. Since its upload, it has received 16 views. For similar materials see /class/229230/fin-3303-university-of-oklahoma in Finance at University of Oklahoma.


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Date Created: 10/25/15
Q1 How can Finance be defined generally A1 Finance is the management of money invested in assets that are expected to produce at least a fair return for the Owner by the appreciation ofthe asset s market value andor future cash ows to be received 02 How can quotBusiness Finance be defined generally A2 Business Finance is the management of money invested in business assetsprojects that are expected to produce at least a fair return for the Owner by the appreciation ofthe asset s market value andor future cash ows to be received Q3 How can quotBusiness Financequot be defined by different kinds of Finance professionsbusinesses A3 Corporate Finance Commercial Banking Money Management ie Professional Investing Investment Banking Consulting Q4 How can quotBusiness Financequot be defined by the five 5 kinds of Financerelated corporate functions A4 External Financing Capital Budgeting aka Business Development Financial Management Risk Management Corporate Governance 05 How is Finance different from Accounting A5 Accounting is about recording and reporting accurately according to Generally Accepted Accounting Principles the financial impact ofan entity s historical business transactions Finance is about investing in an assets with a reasonable expectation of receiving at least a fair return in cash value terms in the future plus the original cash value ofthe amount invested 06 What is the primary goal of Business Finance A6 To maximize the market value ofthe shareholders equity investment by working to produce enough Free Cash Flow pro tability to at least cover the company s Weighted Average Cost of Capital The focus is on making the market value ofthe business assets increase in value and this will lead to an increase in the value of the Business Owner s equity investment Q7 What formula summarizes what management needs to do in order to achieve the primary goal A7 Free Cash Flow gt Weighted Average Cost of Capital QB Why is quotprofit maximization not strong enough to be the primary goal of business financial management A8 Because it only addresses Accounting Net Income and not Free Cash Flow Because Accounting Net Income ignores managing a company s level of riskiness Because Accounting Net Income ignores the company s Weighted Average Cost of Capital WACC Because focusing only on Free Cash Flow would also ignore risk and WACC 09 Which ofthe 5 Business Finance functions is aimed at managing a company s Weighted Average Cost of Capital A9 External Financing Risk Management Corporate Governance Q10 What is the Agency Problem in Business Finance and What are Agency Costs A10 Agency Problem When Management fails to achieve the Primary Goal Conflicts between the Business Owner s goals and Management s Goals Agency Costs The various costs of the Agency Problem Q11 How can Stockholders manageminimizethe Agency problem A11 Aligning Management compensation to the Primary Goal Sell the company to another company so Management may lose their jobs Incurring monitoring and bonding costs Have more independent outside directors on the board Separate the role of Chairman of the BOD from the CEO position Require Management ie corporate officers and BOD members Q12 What are the two basic legal categories of Business Organization A12 Unincorporated and Incorporated Q13 What are the advantages and disadvantages to a business of being unincorporated What two forms of unincorporated businesses were described in the text A13 Adv simple to form subject to only the Individual Income Tax Code Disadv Personal Assets at risk harder to nance and to sell must sell assets separately Forms Sole Proprietorships and Partnerships Q14 What are the basic forms of being incorporated A14 Limited Partnerships Corporations Incquot or Corp S Corporations Income Tax Code designation Limited Liability Companies LLCs 15 What are the advantages and disadvantages of Incorporation A15 Adv Lower risk to Owners Management and Employees because an incorporated business in all of its forms is a legally separate Person Easier to sell the company ie just sell the stock to sell all assets Easier to obtain external nancing Disadv More complicated to form and maintain Subject to the Corporate Income Tax Code Double Taxation Business Net Earnings are subject to Corporate Income Tax and any distributed Net Earnings to shareholders dividends are subject to either the Personal or Corporate Income Tax Code


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