Professional Documents
Culture Documents
Getting
Started
Principles of
Finance
Slide Contents
Introduction
1.Finance: An Overview
2.Three Types of Business Organizations
3.The Goal of the Financial Manager
4.The Five Basic Principles of Finance
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What is Finance?
Finance is the study of how people and
businesses evaluate investments and raise
capital to fund them.
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Sole Proprietorship
It is a business owned by a single individual
who is entitled to all of the firms profits and
is responsible for all of the firms debt.
The sole proprietors typically raise money by
investing their own funds and by borrowing
from a bank.
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Disadvantages:
Personally liable for the business debts
The business ceases on the death of the
proprietor
Harder to raise money
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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.
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Partnership (cont.)
Advantages:
Relatively easy to start
Taxed at the personal tax rate
Access to funds from multiple sources or partners
Disadvantages:
Partners jointly share unlimited liability
It is not always easy to transfer ownership
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Partnership (cont.)
In limited partnerships, there are two
classes of partners: general and limited.
The general partner runs the business and
faces unlimited liability for the firms debts,
whereas the limited partner is only liable up
to the amount the limited partner invested.
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Corporation
If very large sums of money are needed to
build a business, then the typical
organizational form chosen is the corporation.
The corporation is legally owned by its current
set of stockholders, or owners.
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Corporation (cont.)
Corporation legally functions separately and
apart from its owners (the shareholders).
Corporation can individually sue and be
sued.
The Board of directors are elected by the
shareholder, and the board appoints the
senior management of the firm.
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Corporation (cont.)
Advantages
Disadvantages
Greater regulation
Double taxation of dividends
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Corporate Mission
While managers have to cater to all the
stakeholders (such as consumers,
employees, suppliers etc.), they need to pay
particular attention to the shareholders.
If managers fail to pursue shareholder
wealth maximization, they will lose the
support of investors and lenders. The
business may cease to exist and ultimately,
the managers will lose their jobs!
Copyright 2014 Pearson Education, Inc. All rights reserved.
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Ethics in Finance
Although ethics is not one of the 5 principles
of finance, ethic is fundamental to the notion
of trust and is therefore essential to doing
business.
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