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Chapter I
Current liabilities
Current assets
Long-term debt
Shareholders equity
Total Value of the Firm to Investors
50% debt
50% equity
Capital Structure 1
Capital Structure2
Financial markets
Taxes
0 -900,000 $ - 900,000
Risk
Pessimistic Europe $ 75,000 Japan $ 0 Most Likely $ 100,000 150,000 Optimistic $ 125,000 200,000
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6. Life is limited by the life of the owner 7. Opportunities to raise funds limited
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The Partnership
1. Any two or more persons can get together and form a partnership. 2. Two categories: 1) General partnership 2) Limited partnership 3. Easy & inexpensive to form 4. Written documents are required in complicated arrangements 5. General partners have unlimited liability for all debts 6. The general partnership is terminated when a general partner dies or withdraws 7. It is difficult for a partnership to transfer ownership 8. Difficult to raise large amount of cash 9. Income from a partnership is taxed as personal income to the partners ( No corporate taxes) 10. Management control resides with general partners 11. Usually a majority vote is required on important matters
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Shares can be exchanged without termination of the corporation. Common stock can be listed on stock exchange. Usually each share of common stock entitles the holder to one vote per share on matters requiring a vote & on the election of the directors. Directors determines top management. Corporations have double taxation: Corporate income is taxable, and dividends to shareholders are also taxable. Corporations have broad latitude on dividend payout decisions.
Voting rights
Taxation
Partnerships are not taxable. Partners pay personal taxes on partnership profits. Partnerships are generally prohibited from reinvesting partnership cash flow. All net cash flow is distributed to partners. Limited partners are not liable for obligations of partnerships. General partners may have unlimited liability Partnerships have limited life. 16
Shareholders are not personally liable for obligations of the corporation. Corporations have a perpetual life.
Continuity of existence
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Managerial Goals
Expense Preference Survival: Organizational survival means that management will always try to command sufficient resources to avoid the firms going out of business. Independence & Self-sufficiency: This is freedom to make decisions without encountering external parties or depending on outside financial markets.
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Financial Markets
Classification According To Maturity Of Securities Money Markets: The markets for debt securities that will pay off in short term (usually less than one year)
Capital Markets: The markets for longterm (with a maturity at over one year) debt securities and for equity shares
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Financial Markets
Further Classified as: The primary market The secondary markets
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Financial Markets
The Primary Market: New Issues Where governments and corporations will initially sell securities Corporations engage in two types:
Initial Public Offering Private Placement
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Financial Markets
Secondary Markets
After debt & equity securities are originally sold, they are traded in the secondary markets. Types: Auction Markets & Dealer Markets The Auction Market: Mostly for equity securities, e.g. Karachi Stock Exchange, NYSE The Dealer Markets: Mostly debt securities Over-the-counter (OTC) market: Dealer market for equity securities, e.g. NASDAQ
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