Week 1-4 Flashcards
3 forms of business organisation
Sole proprietorship
Partnership
Corporation
Sole proprietorship
A business owned by a single individual.
Partnership
A business formed by two or more individuals or groups
Advantage/disadvantage of sole proprietorship
Owner takes all the profits but is liable to debt and the equity is limited to their personal wealth
Advantage/disadvantage of partnership
Easy and inexpensive to form and risk spread out, but amount of equity limited to partners wealth
Corporation
A business created as a distinct legal entity composed of one or more individuals or entities
Advantages/disadvantage of corporations
Easy to transfer ownership/limited liability/easy to raise capital
But pay corporation tax
Type I agency problem
A possibility of conflict of interest between shareholders and management
Type II agency problem
Possibility of interest between the controlling and minority shareholders
Single tier vs two tier board
In single tier the shareholders elect board of directors and in two tiers the supervisory board does this
Cumulative voting
A procedure in which a shareholder may cast all votes for one member of the board of directors (1/n+1 + 1 share guarantees you get a vote)
Straight voting
A shareholder may cast all votes for each member of the board of directors. Favours the larger shareholders much more.
Proxy voting
A grant of authority by a shareholder to allow another individual to vote their shares. Can pool votes together
Class A vs Class B shares
One class of shares have unequal voting rights. Some shareholders keep control over the firm
Shareholders, directors and manager relationship
Shareholders own the firm and they elect directors who can hire or fire managers.
Who does financial management in the firm
The finance director or the CFO. They coordinate activity between the treasurer and the controller
Treasurer
Responsible for managing the firms cash and credit and capital expenditures
Controller
Handles financial accounting and tax payments
Capital budgeting
Process of planning and managing a firms long term investments. (i.e investing in machinery, land, tech)
Capital structure
How the firm obtains and manages the long term financing it needs to support long term investment (mixture of long term debt and equity)
Working capital management
A firms short term assets and liabilities. Making sure the firm has sufficient resources to continue operations. (Assets = inventory. Liabilities = money owed to suppliers)
Goal of financial management
Maximise firms value - maximise the value of the firms equity
Financial markets
Facilitate the flow of money from those who have surplus cash to those that need financing
Nature of investment in finance markets
Cash flows to firm > firm invests in short/long term assets > generate profits that are reinvested or pay back shareholders
