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Fin. Mgt. Quiz 2
Class 2135 Financial Management
Type Reviewer - Quiz
CB Rnoux
Forms of Business Organization Proprietorship single owner; the business is NOT separate from the owner Partnership owned by two (2) or more parties partnered a formal arrangement partners share profits and liabilities Corporation a separate legal entity formed by group of people that operates for profit; shareholders and board of directors Pros and Cons Proprietorship and Partnership Pros Ease of formation; does not have much papers to register or file to SEC; low-cost and straightforward; less paperwork Subject to fewer regulations; less paperwork; usually only includes keeping business records, filing, and paying taxes apart from its operations; does not require further and elaborately financial disclosures
No corporate income tax; since the owner and business are one and not separate, proprietors only pay taxes for the income made from the business Cons Difficult to raise capital; can only and mostly able to rely on their own resources, relatives, and financial institution loans Unlimited liability; no legal distinction between business and personal assets hence in case of insolvency, the owner shoulders the liabilities and may even use their personal assets to pay their creditors Limited life; not transferrable nor can be inherited, it is in a sense that the business or partnership in enter liquidation when on of the partner dies or leave the partnership, while renewal is needed if a business is bound to have another owner, like the previous owner’s child LLPs and/or LLCs partnerships that enjoys some limited personal liability like in corporations. (ex. professional businesses like lawyers, architects, accountants offering customized and knowledge-based services.
Corporations
Pros Unlimited life; legal entity so it does no dissolve at the mere death or retirement of one of the SH or BOD Easy transfer of ownership; transferrable, inheritable; shares can be sold to have a new owner; Limited liability; a separate legal entity, hence liabilities are paid through the company’s assets and not the SH, BOD, etc. assets Ease of Capital raise; there are more options to raise capital like issuance of shares, and higher chances of approval in applying loans from financial institutions Cons
- Threat of Takeover: a form of discipline to make managers act on SH interests
Stockholder-Debtholder Conflicts
Stockholders: prefers riskier projects for higher gains if it succeeds Bondholders: have fixed payment so they tend to prefer limiting risk on company ventures; particularly concerned about the use of additional debt; attempts to protect themselves by including covenants in bond agreements that limit the use of additional debt and constrain managers’ actions
Balancing SH interests and Society Interests
Primary financial goal of management: SH wealth maxim → maxim stock price Value of asset = present value (PV) of CF stream to owners Significant decisions are evaluated in terms of its financial consequences changes in conditions + investors’ information on company’s prospects = stock price change
