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Business Finance Cheat Sheet (DRAFT) by

This is a draft cheat sheet. It is a work in progress and is not finished yet.

Basic Areas Of Finance

Finance examines how the firm can best manage its scarce resources and assets. It is usual to divide finance into four basic areas:
Corporate finance
deals with how the firm raises funds and utilises them.
Invest­ments
Work with financial assets such as stocks and bonds
 
Value of financial assets, risk versus return, and asset allocation
Financial instit­utions
bring together people, companies or the government who need funds with people, firms or the government that have excess funds to invest. Companies that specialize in financial matters
 
- Banks: commercial and invest­ment, credit unions, savings and loans
 
- Insurance companies
 
- Brokerage firms
Intern­ational finance
An area of specia­lis­ation within each of the areas discussed so far
 
May allow you to work in other countries or at least travel on a regular basis
 
Need to be familiar with exchange rates and political risk
 
Need to understand the customs of other countries; speaking a foreign language fluently is also helpful

Basic Areas Of Finance

Business Finance

Some important questions that are answered using finance
- What long-term invest­ments should the firm take on?
- Where will we get the long-term financing to pay for the
invest­ments?
- How will we manage the everyday financial activities of the firm?

Why Study Finance?

Marketing
Budgets, marketing research, marketing financial products
Accounting
Dual accounting and finance function, prepar­ation of financial statements
Management
Strategic thinking, job perfor­mance, profit­ability
Personal finance
Budgeting, retirement planning, college planning, day- to-day cash flow issues

Financial Manager

Fina­ncial managers try to answer some, or all, of these questi­ons
The top financial manager within a firm is usually the Chief Financial Officer (CFO)
* Treasurer – oversees cash manage­ment, credit manage­ment, capital expend­itures, and financial planning
 
* Controller – oversees taxes, cost accoun­ting, financial accoun­ting, and data processing

Financial Management Decisions

Capital budgeting
What long-term invest­ments or projects should the business take on?
Capital structure
How should we pay for our assets?
 
Should we use debt or equity?
Working capital management
How do we manage the day-to-day finances of the firm?

Forms of Business Organi­zation

Sole propri­eto­rship
Business owned by one person
Partne­rship
General
Business owned by two or more persons
 
Limited
consists of general partner(s) and limited partne­r(s). There is no limit on the number of the partner
 
Limited Liability
LLPs give owners the flexib­ility of operating as a partne­rship whilst giving them limited liability
  
- Private Limited Company (Pte. Ltd.)
  
- Public Limited Company
  
- Public Company Limited by Guarantee
Companies
Privately held companies that can be used for a variety of purposes. These companies have fewer than fifty shareh­olders.
 

Sole Propri­eto­rship

Adva­nta­ges
Disa­dva­nta­ges
Easiest to start
Limited to life of owner
Least regulated
Equity capital limited to owner’s personal wealth
Single owner keeps all of the profits
Unlimited liability
Taxed once as personal income
Difficult to sell ownership interest

Partne­rship

Adva­nta­ges
Disa­dva­nta­ges
Two or more owners
Unlimited liability:
 
- General partne­rship
 
- Limited partne­rship
More capital available
Partne­rship dissolves when one partner dies or wishes to sell
Relatively easy to start
Difficult to transfer ownership
Income taxed once as personal income

Corpor­ation

Adva­nta­ges
Disa­dva­nta­ges
Limited liability
Separation of ownership and management (agency problem)
Limited liability
Separation of ownership and management (agency problem)
Unlimited life
Double taxation (income taxed at the corporate rate and then dividends taxed at personal rate, while dividends paid are not tax deduct­ible)
Separation of ownership and management
Transfer of ownership is easy
Easier to raise capital

Goal Of Financial Management

What should be the goal of a corpor­ati­on?
 
- Maximize profit?
 
- Minimize costs?
 
- Maximize market share?
 
- Maximize the current value per share of the company’s existing stock
 
- Maximize the market value of the existing owners’ equity
Does this mean we should do anything and everything to maximize owner wealth?
 
- Outsou­rcing?
 
- Off-sh­oring?
 
- Enron?
 
- Corporate support of charities?

The Agency Problem

Agency relati­onship
Principal hires an agent to represent its interests
 
Stockh­olders (princ­ipals) hire managers (agents) to run the company
Agency problem
Conflict of interest between principal and agent
Management goals and agency costs

Do Managers Act in the Shareh­olders’ Interests?

Managerial compen­sation
Incentives can be used to align management and stockh­older interests
 
Incent­ive­sne­edt­obe­car­efu­lly­str­uctured toinsu­rethat they achieve their goal
Corporate control
Threat of a takeover may result in better management
Other stakeh­olders