Chapter 1 – Introduction to Finance
Forms of Business Organization
- Sole Proprietorship
o Individually run
o Income added to personal income
Pros – Easy and little cost
Cons – Legal liability, ends with your life
- Partnership
o Run with 2 or more people
- Corporations – Private and Public
o Corporation is separate legal entity
Pro – Limited liability, ease of transfer of shares, continues after death of
shareholder
Con – Double taxation, expensive, harder to get in debt
Example: Apple
- 1976 – Started as a partnership
- 1997 – Incorporated but not listed on any stock exchange
- 1980 – Listed as a public company
- 1987 – Steve jobs got fired
- 1997 – Steve Jobs hired
- 2001 – Ipod was created
- 2007 – Iphone was created then company changed its name to Apple Inc
Financial Management Decisions
- Capital Structure
o Long term funding, mix of debt and equity
Debt (40%) Equity (60%) Company Capital Structure
- Working Capital Management
o Short term cash management
Less than 12 months
Example: payroll, rent, other short-term expenses
- Capital Budgeting
o Cash flow needed to purchase asset
Debt (Bank loan, Bonds) Equity (Common/Preferred shares)
Company
Example:
- Apple issues new shares on NASDAQ for individuals investing
o Apple provides shares to individuals, then apple receives cash. This is known as a
primary market
- NASDAQ
o Investor A – 100 Apple shares
o Investor B – Cash
o Investor B receives Apple shares and Investor A receives cash. Does not affect
Apple. This is known as secondary market
Agency Problem
- Conflict of goals between the employee and company
- Conflict of interest
o Example – Auditors
Arthur Anderson was the auditors for Enron, Worldcom, Nordel
Social Responsibility
- Main Goal: Maximize shareholder wealth otherwise known as share price
o Employee: Nike, Apple and Loblaws
o Community: Walmart
o Environment: Exxon and British Petroleum
o Customers: Volkswagen diesel
Lost sales and lawsuit
1. Why don’t they follow social responsibility?
a. Time and expense (Net income goes down)
b. Not always priority to shareholders or customers
c. Companies don’t perceive a direct loss of sales from their behaviour
2. Why do some companies follow social responsibility?
a. Reputation can impact sales and income
b. Failure to follow this will result in cost like lawsuit
Must still maximize shareholder value
