Lecture 1 Flashcards
(42 cards)
Corporate finance (definition)
Refers to and deals with day-to-day operations of the firm.
Capital budgeting
What long term investments should you take on
Capital structure
Where will you get the long term financing to pay for your investment.
Working capital management
How will you manage your everyday financial activities (short term cash needed to manage organization)
Other areas of corporate finance
Profitability: How much money will you make?
Risk: What risks are involved and are you being adequately compensated?
Financial Manager and their role
Financial managers try to answer some or all of these questions (capital budgeting, capital structure, working capital management, profitability and risk)
- top financial manager is usually the CFO
Types of financial managers
Treasurer – oversees cash management, capital expenditures and financial planning
Financial Manager
Controller – oversees taxes, cost accounting, financial accounting and data processing
Capital Budgeting
- determining the mix and type of assets on the left side of the firms balance sheet. What long term investments/projects should the business take on.
- maintain optimal levels of each type of current asset, decides which fixed assets to acquire, modify, replace, or liquidate.
Why are capital budgeting decisions important for firms
They affect the firms success in achieving its goals and creating shareholders wealth
Capital structure
Making financial decisions
- Financing decisions deal with the right-hand side of
the firm’s balance sheet - Mix of debt and equity maintained by the firm
Should we use debt or equity to pay for our assets
Working capital management
- short term financing
- planning and managing the firms current assets and liabilities
Form of business organizations
Three major forms in Canada
-Sole proprietorship
-Partnership General
-Limited Corporation
In other countries, corporations are also called joint stock companies, public limited companies and limited liability companies
Sole proprietorship
Owned by a single individual
• Advantages
– Easiest to start
– Least regulated
– Single owner keeps all the profits
– Taxed once as personal income
• Disadvantages
– Unlimited liability
– Limited to life of owner ( business dies with you)
– Equity capital limited to owner’s personal wealth ( taxed personally, business can’t explore new things due to restrictions)
– Difficult to sell ownership interest
Partnership
A business formed by two or more co-owners
(1) General partnership: Unlimited personal liability and actively participate in business.(similar to sole propritorship)
(2) Limited partnership: Must have at least one general partner; limited partners do not actively participate in business and their liability for any debts of the Limited Partnership is capped at their investment in the corporation
Advantages of a partnership
Advantages
Two or more owners
More human and financial capital available Relatively easy to start
Income taxed once as personal income
Disadvantages of a partnership
Disadvantages Unlimited liability
- General partnership
- Limited partnership - (liabilities capped at amount of investment)
Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership
Possible disagreements between partners
Corporations
a separate legal entity in the eyes of the law- so death of one shareholder does not dissolve the firm
Other names for corporations in other countries and their definition
- Joint stock companies: Companies whose stocks are owned jointly by the shareholders.
- Public limited companies: Operate as separate legal entities from their owners and their shares are listed and traded at stock exchanges (e.g., TSX) freely.
- Limited liability companies: Shareholders cannot be held personally liable for the companies’ debts or liabilities unless they sign as guarantors
Advantages of corporations
Advantages
Limited liability for stockholders
Unlimited life for the business
Ownership can be easily transferred Separation of ownership and management Easier to raise capital
Disadvantages of corporations
Disadvantage
Separation of ownership and management
Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)
More complex and expensive form of organization to establish
Forms of business organizations
- Canadian companies incorporated under federal law
Entitled to carry on business anywhere in Canada under its name, subject only to registering the corporation in the particular province in which its business will be conducted - A corporation incorporated in one province under one name
Might not be able to use that same name in another province if the name or a similar name is already used by another person
What are all Canadian companies incorporated under
• “Federal Canada Business Corporation Act” or
• Provincial Law.
Other form of non-corporate business
Income trust (aka income funds)
- investment holds assets. Theses assets produce income that is passed to shareholders.
- holds debt and equity of an underlying business
- popular historically as income to the trust is not taxes (eliminated in 2006)
- income generated is distributed to shareholders
Co-operative Business
- Co-operative (Co-op)
Ex/ using co-op # and getting $ back
•An enterprise equally owned by its members
•Members share any benefits of their cooperation based on how much they use the services of the cooperative
•Potentially difficult to reach decisions based on the premise of equal ownership by memberships
•Examples include Consumer, Producer, Worker, and Multi- Stakeholder Co-ops
