Professional Documents
Culture Documents
1 - An Introduction to
Financial Management
What is Finance?
Perspective of Finance
Past Financial Statement Analyses
Present Short-Term Financial Management
Future Capital Budgeting
Learning Objectives
1. Identify the 3 primary business decisions that
financial managers make.
2. Identify the key differences between 3 major
legal forms of business.
3. Understand the role of the financial manager
within the firm and the goal for making
financial choices.
4. Memorize the 4 principles of finance that
form the basis of financial management for
both businesses and individuals.
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FIN3000, Liuren Wu
Learning Objectives
1. Identify the 3 primary business decisions that
financial managers make.
2. Identify the key differences between 3 major
legal forms of business.
3. Understand the role of the financial manager
within the firm and the goal for making
financial choices.
4. Memorize the 4 principles of finance that
form the basis of financial management for
both businesses and individuals.
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b) UNCERTAINTY of Returns
(Risk - Ch. 6)
FIN3000, Liuren Wu
2) Partnership
Similar to a sole proprietorship, except
that there are two or more owners.
Investors
Investors
Government
cash
Government
Investors
cash
securities
Government
Investors
cash
Investors
securities
Secondary
markets
Government
cash
Investors
securities
Secondary
markets
Government
cash
Investors
securities
Secondary
markets
Government
cash
Investors
securities
Cash flow
Government
Secondary
markets
cash
Investors
securities
Cash flow
tax
Government
Secondary
markets
Corporation
Investors
securities
reinvest
Cash flow
tax
Government
Secondary
markets
Corporation
Investors
reinvest
Cash flow
Interest,
dividends
tax
Government
Secondary
markets
Secondary Market
Secondary Market
Market in which previously issued
securities are traded.
T-Bills
Federal Agency Discount Notes
Short Term Munis
Federal Funds
Negotiable Certificate of Deposits
Commercial Paper
Bankers Acceptance
Repos
Mortgage Markets
o Common Shares
o Preferred Shares
Bond Markets
o
o
o
o
T-Bonds
Agency Debt
Munis Bonds
Corporate Bonds
One shall take extra risk only if one expects to be compensated for
extra return.
FIN3000, Liuren Wu
BUSINESS
INVESTMENT
ASSETS
FINANCE
C A +
F A
C L
+ LTD + EQUITY
Cash
Plant & Equipment
Short Term Loan
Long Term Preferred
Marketable Securities
Current Maturities
Debt
Share
Machinery
Accounts Payable
Bank Loans Ordinary Share
Accounts Receivables
Capital WIP
Notes
Share Premium
Notes
Treasury Stock
Inventory
Land
Accrued Expenses
Bonds
Retained Earnings
Others
Investments (Land)
Proposed Dividend
Reserves
What is Finance?
Finance is the study of how people and businesses
evaluate investments and raise capital to fund them.
(-- How to get and use money)
Three questions addressed by the study of finance
1. What long-term investments should the firm undertake?
(capital budgeting decisions how to spend the money?)
2. How should the firm fund these investments? (capital
structure decisions -- How to get the money?)
3. How can the firm best manage its cash flows as they arise
in its day-to-day operations? (working capital management
decisions how to manage cash (liquid) money?)
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Sole Proprietorship
It is a business owned by a single individual that is
entitled to all the firms profits and is responsible for all
the firms debt.
There is no separation between the business and the
owner when it comes to debts or being sued.
Sole proprietorships are generally financed by personal
loans from family and friends and business loans from
banks.
Advantages:
Easy to start
No need to consult others while making decisions
Taxed at the personal tax rate
Disadvantages:
FIN3000, Liuren Wu
Partnership
A general partnership is an association of two or
more persons who come together as co-owners for the
purpose of operating a business for profit.
There is no separation between the partnership and
the owners with respect to debts or being sued.
Advantages:
Disadvantages:
FIN3000, Liuren Wu
Limited Partnership
In limited partnerships, there are two classes of
partners: general and limited.
The general partners runs the business and face
unlimited liability for the firms debts, while the
limited partners are only liable on the amount
invested.
One of the drawback of this form is that it is
difficult to transfer the ownership of the general
partner.
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FIN3000, Liuren Wu
Corporation
Corporation is an artificial being, invisible, intangible,
and existing only in the contemplation of the law.
Corporation can individually sue and be sued, purchase,
sell or own property, and its personnel are subject to
criminal punishment for crimes committed in the name
of the corporation.
Corporation is legally owned by its current stockholders.
The Board of directors are elected by the firms
shareholders. One responsibility of the board of directors
is to appoint the senior management of the firm.
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Disadvantages
Greater regulation
Double taxation of dividends
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Hybrid Organizations
These organizational forms provide a cross between a
partnership and a corporation.
Limited liability company (LLC) combines the tax benefits
of a partnership (no double taxation of earnings) and limited
liability benefit of corporation (the owners liability is
limited to what they invest).
S-type corporation provides limited liability while allowing
the business owners to be taxed as if they were a partnership
that is, distributions back to the owners are not taxed twice
as is the case with dividends in the standard corporate form.
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