Finance Case
Essay Preview: Finance Case
Report this essay
Finance
4 types of firms:
Sole proprietorship
Partnership
Limited liability firm
Corporation
Corporations make most revenue although there are more sole proprietorships in business
Sole Proprietorship:
Business owned and run by 1 person. Few, if any, employees
Advantages:
Easy to create
Disadvantages:
Unlimited personal liability = personal belongings can be taken to fiulfil debt
Limited Life
Partnership:
Similar to sole traders, but with more than one owner
All partners personally liable. Any can be asked to pay
Partnership ends with death of any partner or withdrawal
Limited Partnership:
Limited Partnership has 2 types of owners:
General Owners: same rights as normal partners and run day to day business
Limited Partners: limited liability; lose = initial investment; no management authority and cannot be involved in day to day managerial decision making.
Limited Liability Company:
All owners have limited liability. Private limited partners cant trade their shares. Public can on organised exchanges
Corporation:
Legal entity separate from owners:
Many legal powers individuals have ability to enter into contracts own assets and borrpw money
Solely responsible for its obligations. Owners not responsible for obligations a corporation enters into
Formation:
Legally formed. A legal document(corporation charter in US) is created on the formation of the corporation.
Corporate charter specifies the rules that govern how the corporation is run
Ownership v/s Control of Corporations:
Corporation Management Team:
Ownership and direct control typical separate.
Board of Director (BoD) = elected by shareholders; ultimate decision making authority
CEO = day-to-day decision making delegated to, by the BoD
Financial Manager = responsible for investment, financing decisions (e.g. issuing equity or not) and cash/treasury management (e.g. to see if there is a lot of cash then invest somewhere or make sure there is enough cash for day to day operations).
Goal of the Firm:
Managements should make decisions that increase the value of their shares.
Agency Problems:
Managers might act in their own interests than the shareholders (e.g. want more for themselves than increase share value)
Solution = tie managements compensation with firm performance (so if manager wants more for themselves they have to get more for the shareholders)
Measuring the performance of firm?
CEO Performance:
CEO = poor performance, shareholders dissatisfied = they sell their shares = share prices driven down.
Hostile Takeover:
Manager makes bad decisions = low share prices = Corporate Raider wants to enter = will want to buy enough shares to gain enough control to replace current management = share price rise as company is being “fixed”
Debt holders = investors
No control exercised byut can seize assets as compensation
To prevent this, renegotiate with debt holders or file for bankruptcy protection though judicial system.
If u cant repay or renegotiate, control of corporation assets transferred to the debt holders.
File for Bankruptcy??
Reorganisation: debt holders can take over control and reorganise too
Liquidation
Stock Market:
The stock market provides liquidity to shareholders.
Liquidity
The ability to easily sell an asset for close to the price you can currently buy it for.
Public Company
Shares are traded by the public on a stock exchange.
Private Company
Shares may be traded privately. (A corporation that is not listed on the stock exchange, for e.g.)
Primary Markets
When a corporation itself issues new shares and sells them to investors, they do so on the primary market.
Secondary Markets
After the initial transaction in the primary market, the shares continue to trade in a secondary market between investors.
Largest Stock Markets
New York Stock Exchange (NYSE)
Market Makers/Specialists
Each stock has only one market maker
NASDAQ
Does not meet in a physical location