Mia El Maalouf
Fina210
Chap 1 Introduction to corporate finance
Study of the relationship between business decisions and the value of the stock in the business.
FINANCIAL MANAGEMENT DECISIONS
Capital Budgeting: planning and managing a firm’s long-term investment.
Capital structure: The mixture between debt and equity maintained by a firm.
Working Capital: Firm’s short-term assets and liabilities.
FORMS OF BUSINESS ORGANIZATION
Sole proprietorship: business owned by a single individual.
Owner keeps all the profits. Unlimited liabilities for business debt.
Partnership: business formed by two or more individuals.
Partners shares in gains and losses(agreement). Unlimited liabilities for all partnerships debts.
Disadvantages of the 2: limited life of business-difficulty of transferring business
Corporation: businesses created as distinct legal entity composed of one or more individuals.
Limited liabilities for corporate debts. Double taxation.
The GOAL OF FINANCIAL MANAGEMENT is to maximize the current value per share of the existing
stock. (or owner’s equity)
AGENCY RELATIONSHIP between stockholders and management.
Agency problem: conflict of interest between the principle and the agent.
Agency cost: costs of the conflicts of interest between stockholders and management.
Stakeholder: other than the stockholder that has a claim on the cash flow of the firm.
FINANCIAL MARKET
Brings buyers and sellers together. Debts and equity are bought and sold.
Cash Flow:firm issue security to raise cash->invest the cash in current and fixed assets->generates cash->
pay corporates taxes->reinvest in the firm/the rest cash paid to creditors and shareholders.
Primary market: corporation is the seller, and the transactions raises money for the corporations.
Secondary market: owner or creditor selling to another; provide the means for transferring ownership of
corporate securities.
Dealer markets: buys and sells for themselves. (OTC)
Auction markets: physical place; match those who wish to sell and buy.
Mia El Maalouf
Fina210