Essay on Corporate Finance Intoduction

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Ch. 1 Introduction to Corportae finance 1.1 What is corporate finance
1. the balance sheet model of the firm
(a) Assets (On the left of the BS) * Fixed Assets: Last a long time, such as building (Tangible or Intangible) * Current Assets: Short lives, such as inventory * Capital budgeting: Process of making and managing expenditures on long-lived assets
(b) Liabilities and Shareholders’ Equity (On the right of the BS) * Current Liabilities: Short term loans or obligations to be repaid within a year * Long-term Debt: Debt does not have to repaid in one year * Shareholders’ Equity: Difference between the value of assets and the debt of the firm (Residual claim on the firm’s asset) * Capital Structure: Proportions of the firm’s financing from current and long-term debt and equity * Net Working Capital: Current Assets less Current Liabilities (Manage short-term finance)
2. the financial manager
(a) CFO and Vice President * Treasurer: Report to CFO, handle cash flows, manage capital expenditure decisions, and making financial plans * Controller: Report to CFO, handle the accounting function, which include taxes, cost and financial accounting, and information systems. 1.2 The corporate firm
1. The sole proprietorship
Business owned by one person. No separation between the business and owner. * Cheapest business to form * Pay no corporate tax: all profits are taxed as individual tax * Owner has unlimited liability for business debt and obligation * The life of the business is limited by the life of the owner * Equity can be raised is limited to the proprietor’s personal wealth
2. Partnership
(a) General Partnership * All partners agree to provide some fraction of the work and cash and to share P&L * Each partner is liable for all of the debt of the partnership * The partnership agreement specifies the nature of the arrangement (could be oral)
(b) Limited Partnership (e.g. PE, VC) * Permits limited partners to have liabilities limited to the amount of investment * At least one GP and LP don’t participated in managing the businesses
(c) Properties * Cheap and easy to form. Require written documents in complicated arrangement * General Partnership is terminated when a GP (not LP) dies or withdraws * Difficult to transfer ownership for GP (unanimous agreement) * LP may sell their interest in a business without dissolving * Difficult for a partnership to raise large amount of cash (depends on partners’ ability and desire to contribute) * Income is taxed as personal income to the partners * Management control resides with the general partners (majority vote is required on important matters)
3. the corporation
Exists as a distinct legal entity. (Enter contracts, sue or be sued but cannot vote)
Three sets of distinct interests: Shareholders, directors and officers (top management).
Shareholders select a board of directors, which in turn select top management (to manage the operations of the corporation in the best interest of the shareholders.) * Ownership can be transferred easily. No limit to the transferability of shares * Unlimited life * Shareholders’ liability limited to the amount invested in the ownership shares * Double taxation: Corporate -> pay tax -> distribute revenue (dividend) -> Shareholders pay personal income tax
4. limited liability company
Operate and be taxed like a partnership (Partners pay personal taxes on partnership profits only. Partnerships themselves are not taxable) but retain limited liability for owners. It is a hybrid of partnership and corporation.

1.3 the importance of cash flows
The firm should buy assets that generate more cash than they cost and sell bonds and stocks and other financial instruments that raise more cash than they cost. Thus the firm must create more cash flow than it uses. Therefore, cash flows paid to bondholders and
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