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Terms in this set (39)
Working Capital ManagementHow do we manage the day-to-day finances of the firm?Chief Financial Officer (CFO)The top financial manager within a firm is usually theTreasureroversees cash management, credit management, capital expenditures, and financial planningControlleroversees taxes, cost accounting, financial accounting and data processingForms of Business Organizationsole proprietorship, partnership (general, limited) corporationSole Proprietorship AdvantagesEasiest to start Least regulated Single owner keeps all the profits Taxed once as personal incomesole proprietorship disadvantagesLimited to life of owner Equity capital limited to owner's personal wealth Unlimited liability Difficult to sell ownership interestPartnership AdvantagesTwo or more owners More capital available Relatively easy to start Income taxed once as personal incomePartnership DisadvantagesUnlimited liability Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownershipGeneral Partnershipall partners are responsible for the management and financial obligations of the businesslimited partnershipone or more partners can have limited liability restricted to the amount of capital. Investment in the partnership There must be at least one general partner with unlimited liability Limited partner cannot partner cannot participate in the management of the business and their names cannot appear in the name of the firmCorporationA legal "person" distinct from owners and a resident of a stateCorporation AdvantagesSeparation of ownership and management Transfer of ownership is easy; easier to raise capital Unlimited life; limited liabilityCorporation DisadvantagesSeparation of ownership and management Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate)Agency ProblemConflict of interest between managers and shareholders Conflict of interest between principal and agentAgency Relationship-Principal hires an agent to represent his/her interests -Stockholders (principals) hire managers (agents) to run the companyinternal governance1. Annual meeting and proxy vote 2. Board monitoring 3. Incentive compensation 4. Threat of firingExternal governance5. The market for corporate control 6. Debt discipline 7. RegulationsThree ways to transfer capital in the economy1. Direct transfer 2. Indirect transfer using the investment banker 3. Indirect transfer using the financial intermediaryAngel Investorsa wealthy private investor who provides capital for a business start-upventure capitalistan investment firm (or individual investor) that provides money to business start-upssecondary marketThe issuing corporation does not get any money for stocks traded on the secondary marketInitial Public Offering (IPO)This is the market in which new issues of a securities are sold to initial buyersSeasoned Equity Offering (SEO)It refers to sale of additional shares by a company whose shares are already publicly traded.Private or Direct PlacementThe securities are offered and sold directly to a limited number of investorspublic offeringBoth individuals and institutional investors have the opportunity to purchase securities. The securities are initially sold by the managing investment bank firm. The issuing firm never actually meets the ultimate purchaser of securities.Selling Securities to the Public1. Management obtains permission from the Board of Directors 2. Firm files a registration statement with the SEC 3. SEC examines the registration during a 20-day waiting period 4. Securities may not be sold during the waiting period 5. A preliminary prospectus, called a red herring, is distributed during the waiting period - If problems, the company amends the registration, and the waiting period starts over 6. Price per share determined on the effective date of the registration and the selling effort beginsInitial Public Offering (IPO)This is the market in which new issues of a securities are sold to initial buyersSeasoned Equity Offering (SEO)It refers to sale of additional shares by a company whose shares are already publicly traded.