keownfof5e_ch01 intro found fin mgt .....done

7/25/2019 KeownFOF5e_CH01 Intro Found Fin Mgt .....DONE

1/32

Chapter ObjectivesChapter Objectives

Identify the goal of the firm.Identify the goal of the firm.

Compare the various legal forms ofCompare the various legal forms ofbusiness organization and explainbusiness organization and explain

why the corporate form of businesswhy the corporate form of business

is the most logical choice for a firmis the most logical choice for a firmthat is large or growing.that is large or growing.

Describe the corporate tax featuresDescribe the corporate tax featuresthat affect business decisions.that affect business decisions.

Describe the corporate tax featuresDescribe the corporate tax featuresthat affect decisions.that affect decisions.

xplain the !" principles that formxplain the !" principles that formthe foundations of financialthe foundations of financial

management.management.

xplain what has led to the era ofxplain what has led to the era ofthe multinational corporation.the multinational corporation.


2/32

#he $oal of the %irm#he $oal of the %irm

#he goal of the firm is#he goal of the firm is

maximization ofmaximization of

shareholder wealthshareholder wealth

oror

&aximization of the price&aximization of the price

of the existing commonof the existing common

stoc'stoc'

(rofit &aximization(rofit &aximization


3/32

)tresses the efficient use)tresses the efficient use

of capital resourcesof capital resources

*ot specific to time frame*ot specific to time frame

for profits to be measuredfor profits to be measured

$oals are not precise+$oals are not precise+

allow forallow for

misinterpretationmisinterpretation

Ignores uncertainty andIgnores uncertainty and

timingtiming


4/32

,enefits of,enefits of

&aximizing&aximizing)hareholder -ealth)hareholder -ealth

$ood decisions are those$ood decisions are those

that create wealth for thethat create wealth for theshareholdershareholder

)ocietal benefits as)ocietal benefits as

businesses compete tobusinesses compete to

create wealthcreate wealth

Includes effects of allIncludes effects of all

financial decisionsfinancial decisions


5/32

egal %orms ofegal %orms of,usiness,usiness

OrganizationOrganization

)ole (roprietorship)ole (roprietorship

(artnership(artnership

CorporationCorporation

)ole (roprietorship)ole (roprietorship


6/32

,usiness owned by an,usiness owned by an

individualindividual Owner maintains titleOwner maintains title

to assets and profitsto assets and profits

/nlimited liability/nlimited liability

#ermination occurs on#ermination occurs on

ownerowners death or bys death or by

ownerowners choices choice

(artnerships(artnerships

$eneral (artnershipeneral (artnership

ach partner is fullyach partner is fully

responsible forresponsible for

liabilitiesliabilities


7/32

imited (artnershipsimited (artnerships

#wo or more owners#wo or more owners

(artnerships(artnerships .imited (artnership andimited (artnership and

.imited .iability

imited .iability

ompany

ompany

0llows one or more0llows one or more

partners limited liabilitypartners limited liability

based on amount of capitalbased on amount of capital

investedinvested


8/32

&ust have one general&ust have one general

partner with unlimitedpartner with unlimited

liabilityliability

*ames of limited partners*ames of limited partners

may not appear in name ofmay not appear in name of

firmfirm

imited partners may notimited partners may not

participate in managementparticipate in management

decisions.decisions.

CorporationCorporation egally functions separateegally functions separate

and apart from its ownersand apart from its owners

Can sue+ be sued+ purchase+Can sue+ be sued+ purchase+

sell+ and own propertysell+ and own property

Owners who dictate directionOwners who dictate direction

and policiesand policies


9/32

lect a board of directorslect a board of directors

Investors liability is restrictedInvestors liability is restrictedto amount of investment into amount of investment in

companycompany

ife continues with transfer ofife continues with transfer of

ownershipownership

#axed separately#axed separately

Comparison ofComparison ofOrganizational %ormsOrganizational %orms

arge growing firmsarge growing firms

choose the corporatechoose the corporateformform


10/32

ase in raising capitalase in raising capital

imited liabilityimited liability

#ransfer of ownership is#ransfer of ownership issimplesimple

Comparison ofComparison ofOrganizational %ormsOrganizational %orms

)ole (roprietorship and)ole (roprietorship and

$eneral (artnership$eneral (artnership

/nlimited liabilities/nlimited liabilities

*ot as easy to raise capital*ot as easy to raise capital


11/32

imited (artnershipimited (artnership

imited liability for partnersimited liability for partners (ractical number of(ractical number of

partners restrictedpartners restricted

1estricted mar'etability of1estricted mar'etability of

interest in partnershipinterest in partnership

Organizational %orm andOrganizational %orm and

#axes#axes

CorporationCorporation

Double taxation ofDouble taxation of

dividendsdividends


12/32

#ax act of 2""3 limited#ax act of 2""3 limited

tax rate on dividends totax rate on dividends to

stimulate the economystimulate the economy

nds in 2""4 unlessnds in 2""4 unless

Congress ta'es actionCongress ta'es action

Organizational %orm andOrganizational %orm and#axes#axes

)5#ype Corporations)5#ype Corporations

,enefits,enefits


#axed as partnership#axed as partnership

imitationsimitations Owners must be peopleOwners must be people


13/32

CanCant be used for jointt be used for joint

ventures between twoventures between two

corporationscorporations

Organizational %orm andOrganizational %orm and

#axes#axes

imited iabilityimited iability

CorporationsCorporations

,enefits,enefits


#axed li'e a partnership#axed li'e a partnership

imitationsimitations 6ualifications vary from6ualifications vary from

state to statestate to state


14/32

CanCant appear li'et appear li'e

corporation otherwisecorporation otherwise

will be taxed li'e onewill be taxed li'e one

#he 1ole of the#he 1ole of the

%inancial &anager in%inancial &anager in

a Corporationa Corporation

Objectives of IncomeObjectives of Income

#axation#axation

1aise revenues for1aise revenues for

governmentgovernment

expendituresexpenditures


15/32

0chieve socially0chieve socially

desirable goalsdesirable goals

conomic stabilizationconomic stabilization

#ypes of #axpayers#ypes of #axpayers

Individualsndividuals

employees+ self5employedemployees+ self5employed

persons+ members ofpersons+ members ofpartnershipspartnerships

1eport income on personal tax1eport income on personal tax

returnreturn

orporationsorporations separate legal entityseparate legal entity


16/32

1eport income on corporate tax1eport income on corporate tax

returnreturn

Distributed dividends taxed toDistributed dividends taxed to

shareholdersshareholders

%iduciariesiduciaries

estates and trustsestates and trusts

(ay taxes on undistributed(ay taxes on undistributed

incomeincome

Computing #axableComputing #axable

IncomeIncome #axable Incomeaxable Income


17/32

$ross income less tax deductible$ross income less tax deductible

expenses+ plus interest incomeexpenses+ plus interest income

and dividend incomeand dividend income

$ross Incomeross Income

Dollar sales from a product orDollar sales from a product or

service less cost of production orservice less cost of production or

ac7uisitionac7uisition

#ax Deductible xpensesax Deductible xpenses

Operating expenses 8mar'eting+Operating expenses 8mar'eting+

depreciation+ administrativedepreciation+ administrative

expenses9 and interest expenseexpenses9 and interest expense

Dividends paid are notDividends paid are not

deductibledeductible

Computing #axable IncomeComputing #axable Income8:"""8:"""s9s9

)ales)ales :;"+""" :;"+"""


18/32

Cost of $oods )oldCost of $oods )old

23+"""23+"""

$ross (rofit$ross (rofit :2


19/32

:: " 5 :;"+"""" 5 :;"+""" !;?!;?

:;"+""! 5 :


20/32

/sed in financial decision5/sed in financial decision5

ma'ingma'ing

Other Corporate #axOther Corporate #ax

ConsiderationsConsiderations

Dividend xclusionividend xclusion

0 corporation may typically0 corporation may typically

exclude


21/32

Capital $ains taxed as ordinaryCapital $ains taxed as ordinary

income. Capital losses cannot beincome. Capital losses cannot be

deducted from ordinary income.deducted from ordinary income.

#en (rinciples #hat#en (rinciples #hat

%orm #he%orm #he%oundations of%oundations of

%inancial%inancial

&anagement&anagement

(rinciple !@ #he 1is'5(rinciple !@ #he 1is'5

1eturn #rade5off1eturn #rade5off


22/32

-e won-e wont ta'e ont ta'e on

additional ris' unless weadditional ris' unless we

expect to beexpect to be

compensated withcompensated with

additional return.additional return.

Investment alternativesInvestment alternativeshave different amounts ofhave different amounts of

ris' and expectedris' and expected

returns.returns.

#he more ris' an#he more ris' an

investment has+ theinvestment has+ the

higher its expected returnhigher its expected return

will be.will be.


23/32

(rinciple 2@ #he #ime(rinciple 2@ #he #ime

Aalue of &oneyAalue of &oney 0 dollar received today is0 dollar received today is

worth more than a dollarworth more than a dollar

received in the future.received in the future.

,ecause we can earn,ecause we can earn

interest on moneyinterest on money

received today+ it is betterreceived today+ it is better

to receive money earlierto receive money earlier

rather than later.rather than later.

(rinciple 3@ Cash(rinciple 3@ Cash

*ot (rofits*ot (rofitsIs BingIs Bing


24/32

Cash %low+ notCash %low+ not

accounting profit+ isaccounting profit+ isused as ourused as our

measurement tool.measurement tool.

Cash flows+ notCash flows+ not

profits+ are actuallyprofits+ are actually

received by the firmreceived by the firm

and can be reinvested.and can be reinvested.

(rinciple =@(rinciple =@

Incremental CashIncremental Cash%lows%lows


25/32

It is only what changesIt is only what changes

that countsthat counts

#he incremental cash#he incremental cash

flow is the differenceflow is the difference

between the projectedbetween the projected

cash flows if the projectcash flows if the project

is selected+ versus whatis selected+ versus what

they will be+ if the projectthey will be+ if the project

is not selected.is not selected.

(rinciple ;@ #he(rinciple ;@ #he

Curse of CompetitiveCurse of Competitive

&ar'ets&ar'ets


26/32

It is hard to find exceptionallyIt is hard to find exceptionally

profitable projectsprofitable projects

If an industry is generatingIf an industry is generating

large profits+ new entrants arelarge profits+ new entrants are

usually attracted. #heusually attracted. #he

additional competition andadditional competition and

added capacity can result inadded capacity can result in

profits being driven down toprofits being driven down to

the re7uired rate of return.the re7uired rate of return.

(roduct Differentiation+(roduct Differentiation+

)ervice and 6uality can)ervice and 6uality can

insulate products frominsulate products from

competitioncompetition

(rinciple >@ fficient(rinciple >@ fficient

Capital &ar'etsCapital &ar'ets


27/32

#he mar'ets are 7uic'#he mar'ets are 7uic'

and the prices areand the prices areright.right.

#he values of all#he values of allassets and securitiesassets and securities

at any instant in timeat any instant in time

fully reflect allfully reflect all

available information.available information.

(rinciple


28/32

&anagers won&anagers wont wor' fort wor' for

the owners unless it is inthe owners unless it is in

their best interesttheir best interest

#he separation of#he separation of

management and themanagement and the

ownership of the firmownership of the firm

creates an agencycreates an agency

problem.problem.

&anagers may ma'e&anagers may ma'e

decisions that are not indecisions that are not in

line with the goal ofline with the goal of

maximization ofmaximization of

shareholder wealth.shareholder wealth.


29/32

(rinciple 4@ #axes(rinciple 4@ #axes

,ias ,usiness,ias ,usinessDecisionsDecisions

#he cash flows we#he cash flows we

consider are the after5consider are the after5tax incremental cashtax incremental cash

flows to the firm as aflows to the firm as a

whole.whole.(rinciple @ 0ll 1is'(rinciple @ 0ll 1is'

is *ot 7ualis *ot 7ual


30/32

)ome ris' can be)ome ris' can be

diversified away+ anddiversified away+ andsome cannotsome cannot

#he process of#he process of

diversification candiversification canreduce ris'+ and as areduce ris'+ and as a

result+ measuring aresult+ measuring a

projectprojects or an assets or an assetss

ris' is very difficult.ris' is very difficult.

(rinciple !"@ thical(rinciple !"@ thical

,ehavior Is Doing the 1ight,ehavior Is Doing the 1ight

#hing+ and thical#hing+ and thicalDilemmas 0re verywhereDilemmas 0re verywhere

in %inancein %inance


31/32

ach person has his orach person has his or

her own set of values+her own set of values+which forms the basiswhich forms the basis

for personal judgmentsfor personal judgments

about what is the rightabout what is the right

thingthing

%inance and the%inance and the

&ultinational %irm&ultinational %irm

/.). corporations are/.). corporations are

loo'ing toloo'ing to

internationalinternational

expansionexpansion

Collapse of communismCollapse of communism


32/32

0cceptance of free0cceptance of free

mar'et systemmar'et system

developing in the #hirddeveloping in the #hird

-orld countries-orld countries

(C(Cs and the internets and the internet

%reer access to%reer access to

international mar'etsinternational mar'ets

keownfof5e_ch01 intro found fin mgt .....done

Documents