Professional Documents
Culture Documents
THEORY &
MANAGEMENT
PRACTICE
JIMMY WANG
LAURENTIAN
UNIVERSITY
CHAPTER 1
AN OVERVIEW OF
FINANCIAL
MANAGEMENT AND THE
FINANCIAL
ENVIRONMENT
CHAPTER 1 OUTLINE
The Five-Minute Business Degree
The Corporate Life Cycle
The Primary Objective of the
Corporation: Value Maximization
An Overview of the Capital Allocation
Process
Financial Securities and the Cost of
Money
Financial Institutions
Types of Financial Markets
The Big Picture
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Starting Up as a Proprietorship
Advantages:
Ease of formation
Subject to few regulations
No corporate income taxes
Disadvantages:
Difficult to raise capital to support
growth
Unlimited liability
Limited life span
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Becoming a Corporation
A corporation is a legal entity
separate from its owners and
managers.
File papers and prepare reports with
Corporation Canada.
Articles of incorporation
Bylaws
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Disadvantages:
Double taxation
Higher setup cost
Endless report filing
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Income trusts
Created to distribute all of a businesss
free cash flow to investors in a taxefficient manner
Appropriate for businesses with stable
cash flows and not requiring significant
capital expenditures
Only allowable for real estate (REIT) now
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Financial Securities
Simply, pieces of paper with
contractual provisions entitling their
owners to specific rights and claims on
specific cash flows or values
Can be classified along two
dimensions:
Time until maturity
Debt or equity
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Production opportunities
Time preferences for consumption
Risk
Expected inflation
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Financial Institutions
Investment banks
Commercial banks
Trust companies
Credit unions
Life insurance companies
Mutual funds
Money market funds (MMFs)
Exchanged traded funds (ETFs)
Pension funds
Hedge funds
Private equity funds
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Regulation of Financial
Institutions
Rationale: Ensure their safety and protect
investors
Examples: Separation of different types
of services and limiting the types of
services an institution could provide
Regulatory changes
Deregulation to ensure free flow of capital
and efficiency of capital markets
Blurring the distinctions between different
types of institutions and leading to financial
superstores
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Futures markets
Assets are bought or sold for delivery at
some future date.
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Secondary
Existing owner sells to another party
Issuing firm doesnt receive proceeds
and is not directly involved
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Public markets
Standardized contracts are traded on
organized exchanges.
More liquid and transparent
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