Professional Documents
Culture Documents
The firm and the financial manager face two basic decisions:
• The Capital Budgeting Decision
• Which operating (real) assets to invest in
• The assets need to generate expected cash flows that are greater than the cash
needed to buy them
• In order to achieve this, the manager needs to account for the:
• Amounts of the benefits
• Timing of the benefits
• Risks associated with the benefits
• The Financing Decision
• How to pay for the assets
• Internally generated funds (i.e., retained earnings)
• Externally generated funds
• Debt financing
• Borrow from bank or other institution
• Issue Debt (sell bonds)
• Equity financing
• Issue Stock
• The choice between Debt and Equity is the Capital Structure Decision
• It is important to understand the distinction between Real and Financial Assets
• Real Assets
• Assets used to produce goods and services
• Tangible assets - Machinery, factories
• Intangible assets – patents, trademarks, technical knowledge
• Financial Assets
• Financial claims to the income generated by the firm’s real assets
• Shares of stock, Bonds, Bank loans
What is a Corporation?
• A business owned by shareholders who are not personally liable for the business’s
liabilities (Limited Liability)
• Shareholders are owners, but the corporation is run by employees led by the CEO
• Separation of ownership and management adds flexibility to the operation and gives
permanence to the corporation
• Ownership or management can change, but the business continues
• A corporation can sue or be sued
• Shareholders can sell shares (ownership)
• A corporation has a Board of Directors
• Elected by the shareholders
• Oversees activities of corporation
• Appoints and monitors top management
• A corporation can be costly, in both time and money
• Public corporations pay exchanges to list their shares
• Public corporations must abide by the rules of exchanges, accounting standards,
and securities laws
• Must share information with shareholders
• Corporate income is taxed twice
• The corporation is taxed on its corporate profits
• The shareholders are taxed on dividends and capital gains received from the
corporation