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Getting Started - Principles of Finance
Getting Started - Principles of Finance
Getting
Started
Principles of
Finance
Slide Contents
Learning Objectives
Introduction
1.
2.
3.
4.
Finance: An Overview
Three Types of Business Organizations
The Goal of the Financial Manager
The Five Basic Principles of Finance
Key Terms
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Learning Objectives
1. Understand the importance of finance in
your personal and professional lives and
identify the three primary business
decisions that financial managers make.
2. Identify the key differences between the
three major legal forms of business.
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1.1 FINANCE:
AN OVERVIEW
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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
Copyright 2014 Pearson Education, Inc. All rights reserved.
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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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Profit
People
Portfolio
Partners
Planet
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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
What do we mean by Ethics?
Give examples of recent financial scandals
and discuss what went wrong from an
ethical perspective.
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Key Terms
Agency problem
Capital budgeting
Capital structure
Corporation
Debt
Dividends
Equity
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Financial markets
General partner
General partnership
Limited liability company (LLC)
Limited partner
Limited partnership
Opportunity cost
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Partnership
Shareholders
Shares
Sole proprietorship
Stockholders
Working capital management
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