Business Finance and Financial Manager

Financial Management Decisions– Capital Budgeting
– Capital Structure
– Working Capital Management
Financial Management Decisions

• Capital Budgeting

– The process of planning and managing a firm’s long-term investments

• Financial managers concern with how much, when and how likely is cash expected to receive

• Evaluating the size, timing and risk of future cash flows is the essence of capital budgeting

The Capital Structure Decision

Capital Structure

• The value of the firm can be thought of as a pie.
• The goal of the manager is to increase the size of the pie.
• The Capital Structure decision can be viewed as how best to slice up the pie.
• If how you slice the pie affects the size of the pie, then the capital structure decision matters.

The Net Working Capital Investment Decision

The Corporate Firm

• The corporate form of business is the standard method for solving the problems encountered in raising large amounts of cash.
• However, businesses can take other forms.

Forms of Business Organization

• Three major forms

– Sole proprietorship
– Partnership

• General
• Limited

– Corporation

• Limited liability company

Sole Proprietorship

• Advantages

– Easiest to start
– Least regulated
– Single owner keeps all the profits
– Taxed once as personal income

• Disadvantages

– Limited to life of owner
– Equity capital limited to owner’s personal wealth
– Unlimited liability
– Difficult to sell ownership interest

Partnership

• Two or more owners (partners)

– General partnership: all partners share in gains and losses and all have unlimited liability
for all partnership debts
– Limited partnership: one or more general partners will run the business and have unlimited
liability but there will be one or more limited partners who do not actively participate in
the business and their liability is limited to their contribution

• Advantages

– Two or more owners
– More capital available
– Relatively easy to start
– Income taxed once as personal income

• Disadvantages

– Unlimited liability

• General partnership
• Limited partnership

– Partnership dissolves when one partner dies or wishes to sell
– Difficult to transfer ownership

Summary

• Why Study Finance
• The Role of the Financial Manager
• Financial Management Decisions

– Capital Budgeting
– Capital Structure
– Working Capital Investment

• Forms of Business Organization

Upcoming Topics

• Forms of Business Organizations (Cont.)
• Goals of the Corporate Firm
• Agency Problem
• Firm and the Financial Markets