Valuating organizational capital structure

Business Finance details  November 5, 2016 – 06:09 pm
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Business Finance details

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3Business FinanceLecture 2Review of the Previous Lecture* Finance: Four Basic Areas- Business Finance- Investment- Financial Institutions- International FinanceTopics Under Discussion* Why Study Finance* The Role of the Financial Manager* Financial Management Decisions- Capital Budgeting- Capital Structure- Working Capital Management* Forms of Business OrganizationWhy Study Finance? * Marketing and Finance- Marketers have to work with budgets- Need to get greatest payoffs from marketing expenditures and programs- Cost and Benefit analysis of projects- So finance is vital for* Marketing research* Design of marketing and distributions channels* Product pricing* Accounting and Finance- Accountants are required to make financial decisions as well as understand theimplications of new financial contracts- Financial analysts make extensive use of accounting information* Management and Finance- Business Strategy is always disastrous if financial planning is not adhered to.What is Business Finance* In order to start any new business, the following issues become vital- What long-term investment should be taken on? - From where to get the long-term financing to pay for investment? Bring in other ownersor borrow the money? - How to manage everyday financial activities? 4The Financial ManagerTo create value, the financial manager should:* Try to make smart investment decisions.* Try to make smart financing decisions.Hypothetical Organization ChartBusiness Finance and Financial Manager* Financial Management Decisions- Capital Budgeting- Capital Structure- Working Capital ManagementFinancial Management Decisions* Capital Budgeting- The process of planning and managing a firm’s long-term investments* Financial managers concern with how much, when and how likely is cash expected toreceive* Evaluating the size, timing and risk of future cash flows is the essence of capitalbudgetingChairman of the Board & Chief Executive Officer (CEO)Board ofPresident & Chief Operating Officer (COO)Vice President & Chief Financial Officer (CFO)Treasure ControlleCash ManagerCapital ExpendituresCredit ManagerFinancialTax ManagerFinancial AccountingCost AccountingData Processing5Financial Management DecisionsFinancial Management DecisionsCurrentAssetsFixed Assets1 Tangible2 IntangibleTotal Value of Assets:Shareholders’EquityCurrentLiabilitiesLong-TermDebtTotal Firm Value to Investors:CurrentAssetsFixed Assets1 Tangible2 IntangibleShareholders’EquityCurrentLiabilitiesLong-TermDebtWhat long-terminvestmentsshould the firmengage in? The Capital Budgeting Decision670%Debt30%EquityFinancial Management DecisionsThe Capital Structure DecisionCapital Structure* The value of the firm can be thought of as a pie.* The goal of the manager is to increase the size of the pie.* The Capital Structure decision can be viewed as how bestto slice up the pie.* If how you slice the pie affects the size of the pie, thenthe capital structure decision matters.How can the firmraise the money forthe requiredinvestments? Current AssetsFixed Assets1 Tangible2 IntangibleShareholders’EquityCurrent LiabilitiesLong-Term Debt7Financial Management DecisionsThe Net Working Capital Investment DecisionThe Corporate Firm* The corporate form of business is the standard method for solving the problems encountered inraising large amounts of cash.* However, businesses can take other forms.Forms of Business Organization* Three major forms- Sole proprietorship- Partnership* General* Limited- Corporation* Limited liability companySole Proprietorship* Advantages- Easiest to start- Least regulated- Single owner keeps all the profits- Taxed once as personal incomeHow much shorttermcash flowdoes a companyneed to pay itsbills? NetWorkingCapitalShareholders’EquityCurrent LiabilitiesCurrent AssetsFixed Assets1 Tangible2 IntangibleLong-Term Debt8* Disadvantages- Limited to life of owner- Equity capital limited to owner’s personal wealth- Unlimited liability- Difficult to sell ownership interestPartnership* Two or more owners (partners)- General partnership: all partners share in gains and losses and all have unlimited liabilityfor all partnership debts- Limited partnership: one or more general partners will run the business and have unlimitedliability but there will be one or more limited partners who do not actively participate inthe business and their liability is limited to their contribution.* Advantages- Two or more owners- More capital available- Relatively easy to start- Income taxed once as personal income* Disadvantages- Unlimited liability* General partnership* Limited partnership- Partnership dissolves when one partner dies or wishes to sell- Difficult to transfer ownershipSummary* Why Study Finance* The Role of the Financial Manager* Financial Management Decisions- Capital Budgeting- Capital Structure- Working Capital Investment* Forms of Business OrganizationUpcoming Topics* Forms of Business Organizations (Cont.)* Goals of the Corporate Firm* Agency Problem* Firm and the Financial Markets

Source: Business cycle accounting

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