This document contains all the crucial information described in Chapter 1 of the Corporate Finance: A focused approach book. These notes contains all the information to prepare yourself for the exam with the information of this chapter.
Chapter 1: An Overview of Financial Management and the Financial Environment
The primary objective of an MBA program is to provide managers with the knowledge and skills
they need to run successful companies, so we start there.
successful companies have skilled people
successful companies have strong relationships
successful companies have enough funding
individuals or organizations that have more cash than they presently want to spend (i.e.,
providers of cash now) and others with opportunities to generate cash in the future (i.e., users of
cash now). For example, providers of cash include individuals who are saving for retirement,
banks willing to make loans, and many other types of investors. Users of cash include:
(1)
students wishing to borrow money for tuition and planning to repay it with future earnings after
graduating,
(2)
entrepreneurs with ideas, and
(3)
corporations with growth plans.
financial markets
Ways of connecting providers of cash today with users of cash by exchanging the cash now for
claims on future cash.
financial analysis
Set of tools for evaluating opportunities to exchange cash now for claims on future cash.
, proprietorship
A business owned by one individual.
The proprietorship has three important advantages:
• (1) It is easy and inexpensive to start.
• (2) Relatively few government regulations affect it.
• (3) It pays no corporate income tax on profits—instead, they are included in the
proprietor’s personal taxable income.
the proprietorship also has three important limitations:
• (1)
It may be difficult for a proprietorship to obtain the funding needed for growth.
• (2)
The proprietor has unlimited personal liability for the business’s debts, which can result
in losses that exceed the money invested in the company. (Creditors may even be able to
seize a proprietor’s house or other personal property!)
• (3)
The life of a proprietorship is limited to the life of its founder.
about 73% of all companies are proprietorships, accounting for less than 5% of all sales revenue.
partnership
A partnership exists when two or more persons associate to conduct a business.
limited partnership
A partnership in which limited partners’ liabilities, investment returns, and control are limited;
general partners have unlimited liability and control.
Limited partners
Limited partners’ liabilities, investment returns, and control are limited in a limited partnership.
general partners
General partners in a limited partnership have unlimited liability and control of decisions made
by the partnership.
they are not widely used in other businesses because usually no partner is willing to be the
general partner due to the risk, and no partners are willing to be limited partners with no control.
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