Slide 1Premium Denim is ProfitableThe CompanyCapital StructureTerminologyCapital BudgetingNet Working CapitalGeneric Organization ChartLegal StructureThe Sole Proprietorship - ProsThe Sole Proprietorship - ConsThe Partnership - TypesThe Partnership - ProsThe Partnership - ConsThe CorporationThe CorporationThe Corporation - ProsThe Corporation - ConsThe Corporation Around the WorldLimited Liability CorporationsStructure Comparison SummaryFinancial SecuritiesImportance of Cash FlowsAccounting Value vs Financial ValueCash Flow Timing and RiskGoals of Financial ManagementPrimary Goal of ManagementAgency IssuesManagement Agency IssuesManagement Agency Issues© J. David Miller 2017The CorporationChapter 1Finance 357Premium Denim is ProfitableSource: Wall Street Journal2The CompanyHow do we acquire the money we need to run our business? ($10 million)Balance SheetTotal Value of Asset Total Value of the Firm to InvestorsCurrent AssetsFixed AssetsCurrent LiabilitiesLong-term DebtShareholders EquityNet Working Capital3Capital StructureCapital Structure – The proportion of financing that comes from debt and equity.Example 1 50% debt and 50% equity$5 million in long-term bonds and $5 million in StockExample 280% debt and 20% equity$7.5 million in long-term bonds, $0.5 million in short-term debt and $2 million in Stock4TerminologyPersons or Institutions that buy company Debt are known as Creditors, Debtholders or BondholdersPersons or Institutions that buy company Equity are known as ShareholdersFirm Value = B + SThink: Value = Bondholders + Shareholders5Capital BudgetingCapital Budgeting – Process of making and managing expenditures on long-lived assetsBalance SheetTotal Value of Asset Total Value of the Firm to InvestorsCurrent AssetsFixed AssetsCurrent LiabilitiesLong-term DebtShareholders EquityNet Working Capital6Net Working CapitalThe third important area of finance is the management of Net Working Capital.Net Working Capital is the firm’s current assets minus the firm’s current liabilities. Short-term cash flow problems often occur because the timing mismatch between current assets and current liabilities. 7Generic Organization ChartBoard of DirectorsBoard of DirectorsTreasurerTreasurerCash ManagerCash ManagerCredit ManagerCredit ManagerCapital ExpendituresCapital ExpendituresFinancial PlanningFinancial PlanningControllerControllerCost Accounting ManagerCost Accounting ManagerFinancial Accounting ManagerFinancial Accounting ManagerChief Executive Officer (CEO)Chief Executive Officer (CEO)Chief Operations Officer (COO)Chief Operations Officer (COO)Chief Financial Officer (CFO)Chief Financial Officer (CFO)Chief Technology Officer (CTO)Chief Technology Officer (CTO)8Legal StructureWhat legal structure should we use?Sole ProprietorshipPartnershipGeneral PartnershipLimited PartnershipCorporationLimited Liability CorporationC-CorpS-Corp9The Sole Proprietorship - ProsA business owned by one personProsCheapest form of business. No formal charter is required and few government regulations must be satisfiedNo corporate taxes. All profits are taxed as individual income10The Sole Proprietorship - ConsConsUnlimited Liability – Unlimited Liability for business debts and obligations. No distinction between personal and business assetsLimited Life - Sole Proprietorship is limited by life of sole proprietorLimited Equity – Only Sole Proprietors money can be invested in business as equity11The Partnership - TypesGeneral PartnershipEach partner liable for all debts of the partnershipPartnership agreement specifies how work and profits will be dividedPartnership agreement may be written or o ral contractLimited PartnershipsLiability of some partners is limited to the amount of cash contributed to the partnershipOne partner must act as the general partnerLimited Partners do not participate in managing the business12The Partnership - ProsProsInexpensive to form - Business filings and some documents may be necessaryIncome taxed as personal income – Income to both General and Limited Partners is taxed a personal incomeGeneral partners control management – Simple majority vote of general partners is only required on important matters13The Partnership - ConsConsGeneral Partners have Unlimited Liability – If one General Partner cannot pay liabilities, other General Partners must make up the differenceLimited life – Partnership is usually terminated when a General Partner dies. (Not true if Limited Partner dies)Difficult to transfer ownership – Partnerships usually dissolve and reformDifficult to raise large amounts of cash – Equity contributions usually limited to partner’s investment14The CorporationCorporation - a distinct legal entity with a name and many legal powers of a natural personCan acquire propertyCan sue and be suedCitizen of the state in which it is formedPays taxes separately from its ownersFounders establish Articles of Incorporation and Bylaws15The CorporationArticles of Incorporation – Include:NameIntended Life Business PurposeNumber of shares issued Statement of limitation and rights of shareholdersNumber of members of Board of DirectorsBylaws - Rules to be used by corporation to regulate its own existence16The Corporation - ProsProsEasy transfer of ownership – Ownership is represented by shares of stock, which can easily be transferred to new ownersUnlimited Life – Corporation is separate from its owners and can continue after their deathsLimited Liability – Shareholders are only liable for the amount they invested in the corporationEnhanced ability to raise cash – Unlimited life, limited liability of owners and ease of ownership transfer make raising cash much easier17The Corporation - ConsConsDouble TaxationFederal TaxesState TaxesLocal TaxesCorporations are first taxed on profits that is earns. Dividends and other payouts to shareholders are then taxed a second time as personal income of the shareholders. 18The Corporation Around the WorldThe corporate form of business has different names around the world.19Limited Liability CorporationsLLCs are a relatively new form of business.They are a hybrid of a partnership and a corporation. They operate and are taxed like a partnership but have limited liability like a corporation.20Structure Comparison