Busi-2504

Essentials of Business Finance

Week 1: Chapter 1
September 11, 2015

John Jarecsni, CMA CPA MBA

1-1
 Announcements / Agenda

Introduction
Syllabus
expectations
cuLearn
Lab / TA
Chapter 1
Legal Forms of Business Organizations
Role of Financial Managements
Markets
1-2
Announcements / Agenda

1-3
 Class Composition
BUSI-2504 B
Class Composition
At September 10, 2015

Tota
Degree U1 U2 U3 U4
ls
(BIB) 0 3 1 1 5
(BA HON) 0 0 2 0 2
(BCOMM) 0 72 13 2 87
(BMATH) 0 0 1 0 1
Totals 0 75 17 3 95
1-4
 Class Composition
B.Comm Students by Program
Accounting & Finance 1
Bachelor of Commerce 13
Management 4
Supply Chain Mgmt 4
Accounting 35
Finance 21
Intern'l Business 3
Marketing 4

1-5
 Legal Forms of Business
Organizations

1. Sole Proprietorship
2. Partnership
3. Corporation

1-6
 Sole Proprietorship

Disadvantages
Advantages
Unlimited liability
Easiest to start
Limited to life of
Least regulated
owner
Single owner
Equity capital limited
keeps all the
to owners personal
profits
wealth
Taxed once as
Difficult to sell
personal income
ownership interest

1-7
 Partnership
Advantages Disadvantages

Two or more owners Unlimited liability

More capital General
available partnership
Relatively easy to Limited partnership
start Partnership
Income taxed once dissolves when one
as personal income partner dies or
wishes to sell
Difficult to transfer
ownership
1-8
 Corporation
Advantages Disadvantages
Limited liability Separation of
ownership and
Unlimited life management
Separation of
Double taxation
ownership and
(income is taxed at
management
the corporate rate
Transfer of and then dividends
ownership is easy are taxed at the
Easier to raise personal rate)
capital

1-9
Goal Of Financial Management
What should be the goal of a
corporation?
Maximize profit (short term or long
term)?
Minimize costs?
Maximize market share?
Maximize the current value of the
companys stock?
Does this mean we should do
anything and everything to
1 - 10
 Toronto Maple Leafs
Has not won the Stanley Cup since
1968
Out of the Play-offs for most of the
past several years
But it is the most valuable team in
the NHL
Revenues (Attendance, Merchandise)
Profitability
Worth Approximately $1 Billion USD
Owned by Bell and Rogers
Almost irrelevant their success on 1 - 11
 Financial Managers
Managerial compensation
Incentives can be used to align
management and stockholder interests
The incentives need to be structured
carefully to make sure that they achieve
their goal
Corporate control
Controls in place to ensure Managers act in
the best interested of the shareholders
Conflicts with other stakeholders

1 - 12
 Primary Goals of Financial
Management
Three goals of financial management:
1. Maximize shareholder wealth
2. Maximize share price
3. Maximize firm value

1 - 13
 The Agency Problem

Agency relationship
Stockholders (principals) hire managers
(agents) to run the company on their behalf
Agency problem
Agent has more information than the
principal
principal cannot directly ensure that its agent
is always acting in the principal's best
interests
Conflicts of interest can exist between the
principal and the agent
1 - 14
 Markets

1. Markets
2. Money Markets
3. Capital Markets
A. Primary Markets
B. Secondary
4. Financial Institutions

1 - 15
 Money Markets

Deals with the buying and

selling of short-term debt
securities (less than a year to
maturity)
Money market instruments
Bankers acceptances, Treasury
Bills
Dealer market - Chartered
Banks, Investment Dealers 1 - 16
 Capital Markets
Markets for the buying and selling
longer term debt and shares of
stock
TSX, New York, London, Tokyo,
Hong Kong
Consolidation of exchanges in
recent years
TSX owned by the Major
Canadian Financial Institutions
Main players: Banks, Investment 1 - 17
 Primary Markets
Corporation is the Seller - to raise
money
Initial Public Offering (IPO)
to the general public
are underwritten - Investment dealers
must be registered, e.g. Ontario
Securities Commission
Private Placement - private
transaction
Smaller amounts, often used in mining
and oil exploration industry
1 - 18
 Secondary Markets
Means of transferring ownership of
securities
The issuing company does not
receive additional funds from this
transaction

1 - 19
 Financial Institutions
Financial institutions act as
intermediaries between suppliers and
users of funds

Institutions earn income on services

provided:
Indirect finance Earn interest on
the spread between loans and
deposits
Direct finance Service fees (i.e. 1 - 20