Financial Management #1: Introduction

[samvara]

To my great sorrow the Tuesday class got cancelled and we’ve all been wodged into Monday. I had Plans for Monday and have had to let go of them. *woe* On the plus side our lecturer D. has some alternate room ideas and ran a quick poll “close your eyes, no influencing the vote” so we’ll get us a bigger room by week 4.

The first hour was devoted to housekeeping: assignments, assessment, timetable, tools etc. I have a sexy new calculator, just powerful enough to do cool tricks without being so cool it isn’t allowed into exams. I was hoping to try and get an electronic version of the text: Corporate Finance 2e but it looks like it’s web based only and doesn’t play on the anti-flash device known as the iPad. D. says he’ll email the publishers and try and find out if there are more options - I appreciate the effort.

I’m going to have a steep vocabulary learning curve on this, it’s using concepts I’ve been introduced to but don’t use often enough to be able to remember them easily. Thankfully my maths is not crap so I’ll probably survive.

High Points:

1. In general, there are four types of firms: sole proprietorships, partnerships, limited liability companies, and corporations.
2. Firms with unlimited personal liability include sole proprietorships and partnerships.
3. Firms with limited liability include limited partnerships and limited liability companies, which include private and public companies (corporations).
4. A corporation is a legally defined artificial being (a judicial person or legal entity) that has many of the legal powers people have. It can enter into contracts, acquire assets, incur obligations, and, as we have already established, it enjoys the protection under some jurisdictions against the seizure of its property.
5. Under the classical system, the shareholders in most companies effectively must pay tax twice. The corporation pays tax once and then investors must pay personal tax on any funds (dividends) that are distributed.
6. In the United States, “S” corporations are exempt from the corporate income tax.

Taxation of Corporate Earnings: (now with maths)

'C' Corporation:

• Corporation pays tax, then it pays shareholders, then shareholders pay tax. So if corporate pays 30% tax and personal pays 40% tax then total tax paid is 58%
• eg: Effective tax rate is 1 – [(1-tc) x (1-td)] = 1 – (0.7 x 0.6) = 58%

'S' Corporation

• Corporation pays no tax, you pay personal tax only BUT you must pay whether or not the company chooses to distribute the cash to you or not
• eg: Tax rate is 40%

'Imputation' Corporation

• Corporation pays tax, then it pays shareholders, shareholder declares 'tax credits' and either pays balance or gets money back if personal tax rate is lower than corporate tax rate.
• Only available to Eligible shareholders (residents), non-resident shareholders taxes as 'C' Corporation.

Other high points:

1. The ownership of a corporation is divided into shares collectively known as equity. Investors in these shares are called shareholders, stockholders, or equity holders.
2. The ownership and control of a corporation are separated. Shareholders exercise their control indirectly through the board of directors.
3. Financial managers within the firm are responsible for three main tasks: making investment decisions, making financing decisions, and managing the firm’s cash flows.
4. While the firm’s shareholders would like managers to make decisions that maximize the firm’s share price, managers often must balance this objective with the desires of other stakeholders (including themselves).
5. Corporate bankruptcy can be thought of as a change in ownership and control of the corporation. The equity holders give up their ownership and control to the debt holders.
6. The shares of public companies are traded on stock markets. The shares of private companies do not usually trade on stock markets.

Then we wound up and ran away.