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 StockExample 280% 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 + SThink: 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 ProprietorshipPartnershipGeneral PartnershipLimited PartnershipCorporationLimited Liability CorporationC-CorpS-Corp9The Sole Proprietorship - ProsA business owned by one personProsCheapest form of business. No formal charter is required and few government regulations must be satisfiedNo corporate taxes. All profits are taxed as individual income10The Sole Proprietorship - ConsConsUnlimited Liability – Unlimited Liability for business debts and obligations. No distinction between personal and business assetsLimited Life - Sole Proprietorship is limited by life of sole proprietorLimited Equity – Only Sole Proprietors money can be invested in business as equity11The Partnership - TypesGeneral PartnershipEach partner liable for all debts of the partnershipPartnership agreement specifies how work and profits will be dividedPartnership agreement may be written or o ral contractLimited PartnershipsLiability of some partners is limited to the amount of cash contributed to the partnershipOne partner must act as the general partnerLimited Partners do not participate in managing the business12The Partnership - ProsProsInexpensive to form - Business filings and some documents may be necessaryIncome taxed as personal income – Income to both General and Limited Partners is taxed a personal incomeGeneral partners control management – Simple majority vote of general partners is only required on important matters13The Partnership - ConsConsGeneral Partners have Unlimited Liability – If one General Partner cannot pay liabilities, other General Partners must make up the differenceLimited life – Partnership is usually terminated when a General Partner dies. (Not true if Limited Partner dies)Difficult to transfer ownership – Partnerships usually dissolve and reformDifficult 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 personCan acquire propertyCan sue and be suedCitizen of the state in which it is formedPays taxes separately from its ownersFounders establish Articles of Incorporation and Bylaws15The CorporationArticles of Incorporation – Include:NameIntended Life Business PurposeNumber of shares issued Statement of limitation and rights of shareholdersNumber of members of Board of DirectorsBylaws - Rules to be used by corporation to regulate its own existence16The Corporation - ProsProsEasy transfer of ownership – Ownership is represented by shares of stock, which can easily be transferred to new ownersUnlimited Life – Corporation is separate from its owners and can continue after their deathsLimited Liability – Shareholders are only liable for the amount they invested in the corporationEnhanced ability to raise cash – Unlimited life, limited liability of owners and ease of ownership transfer make raising cash much easier17The Corporation - ConsConsDouble TaxationFederal TaxesState TaxesLocal 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
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