Chapter 1: Overview of Financial Managment and Financial Enviroment Flashcards
Attributes considered for “most admired companies”
- innovativeness
- quality of management
- long-term investment value
- social responsibility
- people management
- quality of products and services
- financial soundness
- use of corporate assets
- effectiveness in doing business globally
Three attributes of successful companies
- have skilled people at all levels (create high value for customers)
- have strong relationships with groups outside the company (suppliers and customers)
- have enough funding to execute their plans and support their growing operations (investments to raise funds)
Basic of finance
Providers of cash now = entities with more cash than they presently want to spend (investors)
Users of cash now = entities with opportunities to generate cash in the future (borrowers or investment opportunities)
giving cash to user gives provider claim on (potentially risky) future cash
financial markets
way of connecting providers of cash today with users of cash (by exchanging the cash now for claims on future cash)
means for trading securities once they have been issued
financial analysis
set of tools for evaluating (potentially risky) opportunities to exchange cash now for claims on future cash
Evaluating future cash flow
proprietorship
unincorporated business owned by one individual
advantages of proprietorship
- easy and inexpensive to start
- relatively unregulated by government
- pays no corporate income tax (included in proprietors taxable income)
Limitations of proprietorship
- Difficult for a proprietorship to obtain funding needed for growth
- proprietor has unlimited personal liability for business debts
- life of proprietorship is limited to life of its founder
partnership
whenever two or more persons or entities associate to conduct a noncorporate business for profit
partnership agreement defines structure
similar advantages and disadvantages to proprietorship
limited partnership
a partnership in which limited partner’s liabilities, investment returns, and control are limited (general partners have unlimited liability and control
not widely used
Limited liability partnership
LLP
combines the tax advantages of a partnership with the limited liability advantage of a corporation
a flow-through entity for taxes
Limited liability company
LLC
combines the limited liability advantage of a corporation with the tax advantages of a partnership.
no double taxation but liability limited to investment
Corporation
A legal entity created under state laws, separate and distinct from its owners and managers
Major advantages of a corporation
- unlimited life (survives beyond the individual)
- easy transfer of ownership interest (stock, also ease of raising funds)
- is it’s own legal entity (leads to limited liability)
- limited liability
combine to improve ease of raising money and growing the company
Disadvantages of corporate form
- potential double taxation of corporate earnings distributed as dividends
- complexity and potential cost of setting up corporate structure
- regulations
- agency costs: potential conflict of interest between shareholders and managers
Corporate Charter
The legal document that is filed with the state to incorporate a company
includes:
- name of the proposed corporation
- types of activities it will pursue
- amount of capital stock
- number of directors & their names and addresses
Once approved corporation exists and the required quarterly and annual reports must be filed with the state/federal government
Corporate bylaws
A set of rules drawn up by the founders of the corporation to specify how it will be governed.
- how and when directors are elected
- rights of existing shareholders (first right to buy newly issued shares)
- procedures for changing the bylaws
Professional Corporation
PC
Has most of the benefits of incorporation (limited financial liability) but the participants are not relieved of professional (malpractice) liability
Professional Association
PA
Professionals have most of the benefits of incorporation but are not relieved of professional (malpractice) liability
S corporations
Can elect to be taxed as if the business were a proprietorship / partnership (flow-though entity) if corp meets certain size/ number of stockholder requirements
Closely held stock
Stock in a closely held company - not actively traded and is owned by only a few people (usually the company’s managers)
Closely held corporation
companies that are so small that their common stocks are not actively traded - rather owned by only a few people (only the company’s managers)
Prospectus
Summarizes information about a new security issue and the issuing company. Part of the S-1 registration statement filed with the SEC in order to trade stock on a public market
Listed stock
a company’s stock that an SEC-registered stock exchange accepts for listing after the company has registered with the SEC to have its stock traded publicly. A company can be listed on only one exchange, but can be traded on many