TOPIC 1 – INTRODUCTION


Introduction:

Key Terms:

Capital Structure/Financing Decision:
The mixture of debt/equity we need to finance our company and to finance assets. Think of this like a pie – how much of the pie should be debt or equity.

Capital Budgeting/Investment Decision:
Usually what long-term projects the company should take on, or the assets to buy etc. What the company should INVEST in. Need to consider size, timing and risk of the project/asset.

Working Capital Management:
For this one thinks day-to-day activities. How much cash to have on hand, how much inventory to have, when to pay our bills, when we make our customers pay their bills, when we pay wages etc.

Primary Market:
When stocks/shares/bonds are sold for the first time, this is also known as an IPO (Initial Public Offering). Facilitates capital-raising for companies.
Think of this as going directly to the clothing brand to buy your clothes, as opposed to the shops who on sell the brands.

Secondary Market:
This is what we know as the stock market. Where shares are bought and sold by traders – think Wolf of Wall St. This creates greater liquidity (liquidity is how easy it is to turn your assets/shares into cash).

Agency Problems:
Conflicts/issues that arise due to the mismatch of interests between shareholders and managers. Shareholders was increased firm value and managers just want to get paid no matter what. Good ways to combat this include giving managers some shares in the company, tying salary and bonuses to company performance etc.

 

Advantages Disadvantages
Sole Proprietorship Cheap and easy to set up.

Owner has all decision-making control.

Owner’s personal assets can be used to repay company debts – unlimited liability.

Difficult to transfer ownership.

Less capital available.

Partnership

NB: General (Limited) vs. Unlimited

Limited liability (depending).

Easier to raise capital.

Difficult to transfer ownership.
Company Limited liability – owners personal assets cannot be used to repay company debts.

Separate legal entity.

Easy to transfer ownership and raise capital.

More difficult to establish

Agency problems.

Taxed twice.

Quiz


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