Chapter 1 Revival

High Growth
4 Types of firms Chance to survive <50%

Sole Proprietorships:
Decline
o Easy to set up, many new business Maturity Stage
o 0 separation between business and owner
o 1 owner
o Life of the business = owner life

Introduction Stade
Partnership

o More than one owner.

o All partners are liable for the firm’s debt
A lender can require any partner to repay all the firm’s outstanding debts
o The partnership ends on the death or withdrawal of any single partner
o Partners can avoid liquidation if the partnership agreement provides for alternatives
such as a buyout of a deceased or withdrawn partner
 A limited partnership is a partnership with two kinds of owners, general partners and
limited partners
— General partners
P Have the same rights and privileges as partners in any general partnership
P Are personally liable for the firm’s debt obligations
— Limited partners
P Have limited liability and their ownership interest is transferable
P They have no management authority

Limited Liability Companies (LLC)

o No general partner
o All the owners have limited liability, but they can also run the business
o Have different names in different countries

Corporations
o A corporation is a legal entity that is separate from its owners
— It has many of the legal powers that people have
— It can enter into contracts, acquire assets, and incur obligations, and it enjoys
protection under most jurisdictions against the seizure of its property
o A corporation is solely responsible for its own obligations
o The owners of a corporation are not liable for any obligations the corporation enters
into
o The corporation is not liable for any personal obligations of its owners
— Formation of a Corporation
— Must be legally formed
P Setting up a corporation is more costly than setting up a sole proprietorship
 P A corporate charter includes formal articles of incorporation and a set of
bylaws – i.e., specifies the initial rules that govern how the corporation is
run
— Ownership of a Corporation
P No limit on the number of owners
P The entire ownership stake of a corporation is divided into shares known as
stock
P The collection of all the outstanding shares of a corporation is known as the
equity of the corporation
P An owner of a share of stock in the corporation
is known as a shareholder, stockholder, or
equity holder
P Shareholders are entitled to dividend payments
Usually receive a share of the dividend payments that is proportional
to the amount of stock they own
P No limitation on who can own its stock
- Tax Implications for Corporate Entities
P A corporation’s profits are subject to taxation separate from its owners’ tax
obligations
P Shareholders of a corporation pay taxes twice
— The corporation pays tax on its profits
— When the remaining profits are distributed to the shareholders, the
shareholders pay their own personal income tax on this income

Financial Manager

The financial manager has three main tasks:

 Make investment decisions
 Make financing decisions
 Manage short-term cash needs

- Making Investment Decisions

o The financial manager must weigh the costs and benefits of each investment or project
o They must decide which investments or projects qualify as good uses of the money
stockholders have invested in the firm
- Making Financing Decisions
o 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 the money
instead (bonds and other debt)
- Managing Short-Term Cash Needs
o The financial manager must ensure that the firm has enough cash on hand to meet its
obligations from day to day
o This job is also known as managing working capital

Stock Market
o Corporations can be private or public
  A private corporation has a limited number of owners and there is no organized
market for its shares.
 A public corporation has many owners and its shares trade on an organized market,
called a stock market

o Primary vs. Secondary Markets

— Physical Stock Markets
P Auction Market
 NYSE
P Designated Market Makers (DMM)
 Specialists
P Bid-Ask Spread
 Bid price
 Ask price
 Transaction Cost
— Over-the-Counter Stock Markets
P Dealer Markets
 NASDAQ
— Listing Standards
P Outlines of the requirements a company must meet to be traded on the
exchange
 The NYSE’s listing standards are more stringent than those of
NASDAQ
— Other Financial Markets
P Bond Market
P Foreign Exchange Market
P Commodities Market
P Derivative Securities

Financial Institution

 Entities that provide financial services, such as taking deposits,

managing investments, brokering financial transactions, or making
loans
— In the financial cycle:
P People invest and save their money
P Through loans and stock, that money flows to companies
who use it to fund growth through new products,
generating profits and wages
P The money then flows back to the savers and investors

Types of Financial Institution: Banks and Credit Unions, Insurance Companies, Mutual Funds,
Pension Funds, Hedge Funds, Venture Capital Funds, Private Equity Funds
— Role of Financial Institutions
— Move funds from savers to borrowers
— Move funds through time
— Help spread out risk-bearing