FINANCE
(fa-nanś or fī΄ nans)
… the science of managing money matters
- Webster
Three areas of finance:
1. Managerial Finance – concerned with the financial management of a
firm
- buying/ selling assets (Something of value to the company)
- financing choices; loans and leasing
- control costs
2. Investments – concerned with purchasing & holding assets and
securities
- stocks
- bonds
3. Financial Markets -
- Money market; short term market. Treasury bills
- Capital markets; stock markets, long term
- Financial intermediaries; using the banks and brokers
Major Principles of Finance:
1. Risk – Return Tradeoff
- the higher the risk, the higher the return you require
2. Time Value of Money (TVOM)
- Money now will be less than money in the future
3. Cash is king (not profits)
- Need to have cash flow coming in
4. Incremental cash flows
- the change, difference, or improvement in cash flows
5. Competitive Markets
6. Efficient Capital Markets
- information spreads quickly and is reflected in the stock price
7. Agency Issue
- Who do managers really work for?
- Unless you own part of the company you tend to think of yourself
8. Tax Impact
- investment decisions should be viewed after tax
9. Diversification
- Do not put all your eggs in one basket
10. Ethics
Business Organization Set-up:
1. Sole Proprietorship; Generally, one person who owns the company. (As
long as they are alive) Pay taxes one time.
2. General Partnership; Made up of two or more people and all general
partners. (Doesn’t have to be equal) Pay taxes one time.
3. Limited Partnership; One general partner who assumes responsibility.
(Alive as long as the general partner)
4. LLP Limited Liability Partnership (hybrid); only liable for so much
5. Corporation – a legal entity. The company pays the taxes. (Alive
forever)
6. subchapter s
How does the particular set-up affect:
- liability
- taxation
- raising capital
- selling
- continuity
