Finance ch 1

Toronto Metropolitan University **We aren't endorsed by this school
FIN 300
Oct 25, 2023
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Finance Chapter 1 - Types of Firms -Sole Proprietorship One individual owns and manages the business Bears all costs, but keeps all the profits No separation between business and individual Advantages: Ease of establishment and lack of regulation Disadvantages: Unlimited liability- that individual is personally liable for all the firms liabilities ( Financial and legal) Limited life Difficult to transfer ownership - Partnerships: Partnerships can be organized as general partnership or limited partnerships Income from the partnership is slip among partners according to their ownership in the partnership (eg; one partner owns 30%, while the other owns 70%) Types of partnerships General partnership (only general partners, similar to sole proprietorship) Limited partnership (general partners and limited partners) Limited liability partnership (LLP) in Canada - Corporations: A business which is legally separated from its owners, who are called shareholders. The entire ownership stake of a corporation is divided into shares known as stock Advantages: Limited liability (financial and legal) More Flexible & Permanent (mangers and shareholders come & go, firm remains) Formation of a Corporations Defined under the provincial Business Corporation Act or the Canada Business Corporation Act The articles of incorporation of the corporate charter is the constitution of the corporation Setting up a corporation is more costly than setting up a sole propitorship Ownership of Corporation No limit on the number of owners The entire ownership stake of corporation is divided into shares known as stock The collection of all the outstanding shares of corporation is known as the equity of the corporation
Tax Implication Disadvantages: Taxations (firm profit + dividends to tax payers) Agency issues Regulations and Costs Canada Revenue Agency: allowed an exemption for double taxation flow through entities (income trust) - Business Income Trusts - Energy Trusts - Real Estate Investments Trust (REIT) Key terms and Definitions - Stock: The ownership or equity of a corporation divided into shares - Equity : The collection of all outstanding shares of a corporation - Shareholder (also stockholder or equity holder): An owner of a share of stock or equity in a corporation - Dividend payments : Payments to the corporation's equity holders made at the discretion of corporation's board of directors - Flow through Entity: A business in which all income produced flows to the investors and virtually no earnings are retained within the business ( Passes all its earnings and income to the owners/shareholders) - Income Trust: A trusts that hold income producing assets directly or holds all the debt and equity securities of an income-producing within the trust - Business Income Trust: An income trust that holds all the debt and equity securities of a corporation (the underlying business) - Energy Trust: An income trust that holds resource properties directly or holds all the debt and equity securities of a resource corporation within the trust - Unit Holders: The owners of an income trust - Real Estate investments trust (REIT): An income trust that holds real estate properties directly or holds all the debt and equity securities of a corporation that owns real estate properties. - Board of directors: A group of people elected by shareholders who have the ultimate decision-making authority in the corporation. - Chief executive officer (CEO): The person charged with running the corporation by instituting the rules and policies set by the board of directors.
- Taxes - What is Corporate Finance - Role of the Financial Manager Financial managers try to answer some or all of these questions: - What long term investments should the firm take on - Where will we get the long term financing investment - How will we manage the everyday financial activities of the firm? The top financial manager within a firm is usually the Chief Financial Officer (CFO) - Treasurer: Overseas cash management, capital expenditures and financial planning - Controller: oversees taxes, cost accounting, financial accounting and data processing The Financial manager has 3 tasks 1. Make investment decisions The financial manager must weigh the costs and benefits of each investment or project They must decide which investments or projects qualify as good uses of the stockholders money 2. Make financing decisions The financial manager must decide whether to raise more money from new and existing owners by selling more shares of stock (equity) or to borrow money instead (debt) 3. Manage short-term cash needs The financial manager must ensure that the firm has enough cash on hand to meet its obligations at each point in time. The job is also known as managing working capital
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