Three Questions Addressed by the Study of Finance: 1. What long-term investments should the firm undertake? (capital budgeting decisions) 2. How should the firm fund these investments? (capital structure decisions) 3. How can the firm best manage its cash flows as they arise in its day-today operations? (working capital management decisions) Modified by Dr. Hla Theingi
modified by Assist Prof Dr. Hla Theingi
Forms of Business Organization • Three major forms – Sole Proprietorship – Partnership • General • Limited
– Corporation • Limited Liability Company • Limited Liability Partnerships
modified by Assist Prof Dr. Hla Theingi
1-2
Corporation • Advantages – Limited liability – Unlimited life – Separation of ownership and management – Transfer of ownership is easy – Easier to raise capital
• Disadvantages – Separation of ownership and management – May involve double taxation in some countries (income taxed at the corporate rate and then dividends taxed at the personal rate)
modified by Assist Prof Dr. Hla Theingi
1-3
Goal of Financial Management • What should be the goal of a corporation? – Maximize profits? – Minimize costs? – Maximize market share? – Maximize the current value of the company’s stock?
modified by Assist Prof Dr. Hla Theingi
1-4
Maximizing Shareholders’ Wealth • Maximizing the share price is equivalent to maximizing shareholders’ wealth • Why is this a valid goal? – – – –
Decisions are made in shareholders‘ best interest Considers cash flows not profits Incorporates time dimension Does not consider profitability but modified by Assist Prof Dr. Hla also risk Theingi
Financial Markets • Primary market – A market where the firm sells its securities to public for the first time
• Secondary markets – A market in which the securities issued by firms are traded • Listed securities trade in an organized exchange, e.g. the stock market (NYSE) • Over-the-counter securities are bought from or sold to a dealer modified by Assist Prof Dr. Hla Theingi
1-6