FINANCE

(fa-nanś or fī΄ nans)

… the science of managing money matters
- Webster
Three areas of finance:

1. Managerial Finance – concerned with the financial management of a

firm
- buying/ selling assets
- financing choices
- control costs

2. Investments – concerned with purchasing & holding assets and

securities
- stocks
- bonds

3. Financial Markets -
- Money market
- Capital markets
- Financial intermediaries

Major Principles of Finance:

1. Risk – Return Tradeoff

- the higher the risk, the higher the return you require

2. Time Value of Money (TVOM)

3. Cash is king (not profits)

4. Incremental cash flows

- the change or improvement in cash flows

5. Competitive Markets

6. Efficient Capital Markets

- information spreads quickly and is reflected in the stock price
7. Agency Issue
- Who do managers really work for?

8. Tax Impact
- investment decisions should be viewed after tax

9. Diversification

10. Ethics

Business Organization Set-up:

1. Sole Proprietorship

2. General Partnership

3. Limited Partnership

4. LLP Limited Liability Partnership (hybrid)

5. Corporation – a legal entity

subchapter s

How does the particular set-up affect:

- liability
- taxation
- raising capital
- selling
- continuity