UT FIN 357 - Chapter 1. Introduction to Corporate Finance (30 pages)

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Chapter 1. Introduction to Corporate Finance



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Chapter 1. Introduction to Corporate Finance

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Pages:
30
School:
University of Texas at Austin
Course:
Fin 357 - Business Finance

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The Corporation Chapter 1 Finance 357 J David Miller 2017 Premium Denim is Profitable 2 Source Wall Street Journal The Company How do we acquire the money we need to run our business 10 million Balance Sheet Current Liabilities Current Assets Net Working Capital Fixed Assets Total Value of Asset 3 Long term Debt Shareholders Equity Total Value of the Firm to Investors Capital Structure Capital 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 Stock 4 Terminology Persons or Institutions that buy company Debt are known as Creditors Debtholders or Bondholders Persons or Institutions that buy company Equity are known as Shareholders Firm Value B S Think Value Bondholders Shareholders 5 Capital Budgeting Capital Budgeting Process of making and managing expenditures on long lived assets Balance Sheet Current Liabilities Current Assets Net Working Capital Fixed Assets Total Value of Asset 6 Long term Debt Shareholders Equity Total Value of the Firm to Investors Net Working Capital The 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 7 Generic Organization Chart Board of Directors Chief Executive Officer CEO Chief Operations Officer COO Chief Financial Officer CFO Chief Technology Officer CTO Treasurer Cash Manager Capital Expenditures 8 Controller Credit Manager Financial Planning Financial Accounting Manager Cost Accounting Manager Legal Structure What legal structure should we use Sole Proprietorship Partnership General Partnership Limited Partnership Corporation Limited Liability Corporation C Corp S Corp 9 The Sole Proprietorship Pros A business owned by one person Pros 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 income 10 The Sole Proprietorship Cons Cons 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 equity 11 The Partnership Types General 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 oral contract Limited 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 business 12 The Partnership Pros Pros Inexpensive to



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