Busi-2504 Essentials of Business Finance Week 1: Chapter 1 January 8, 2016 John Jarecsni, CMA CPA MBA

Announcements / Agenda Introduction Syllabus expectations cuLearn Lab / TA Chapter 1 Legal Forms of Business Organizations Role of Financial Managements Markets

Announcements / Agenda

Class Composition BUSI-2504 E Class Composition Degree U1 U2 U3 U4 At January 4, 2016 Degree U1 U2 U3 U4 Totals BIB 3 1 5 BA HON B.COMM 78 10 89 82 11 2 95

Class Composition B.Comm Students – by Program Bachelor of Commerce 20 Commerce: Accounting 17 Commerce: Finance 10 Commerce: Marketing Commerce: Intern'l Business 9 Commerce: Management 8 Commerce: Information Systems 5 Commerce: Supply Chain Mgmt 4 Commerce: Entrepreneurship 3 Accounting & Finance 1 Information Systems & Finance Management and Marketing

Legal Forms of Business Organizations Sole Proprietorship Partnership Corporation

Sole Proprietorship Disadvantages Advantages Unlimited liability Limited to life of owner Equity capital limited to owner’s personal wealth Difficult to sell ownership interest Advantages Easiest to start Least regulated Single owner keeps all the profits Taxed once as personal income

Partnership Disadvantages Unlimited liability Two or more owners General partnership Limited partnership Partnership dissolves when one partner dies or wishes to sell Difficult to transfer ownership Two or more owners More capital available Relatively easy to start Income taxed once as personal income

Corporation Advantages Disadvantages Limited liability Unlimited life Separation of ownership and management Transfer of ownership is easy Easier to raise capital Disadvantages Separation of ownership and management Double taxation (income is taxed at the corporate rate and then dividends are taxed at the personal rate)

Goal Of Financial Management What should be the goal of a corporation? Maximize profit (short term or long term)? Minimize costs? Maximize market share? Maximize the current value of the company’s stock? Does this mean we should do anything and everything to maximize owner wealth?

Toronto Maple Leafs Has not won the Stanley Cup since 1968 Out of the Play-offs for most of the past several years But it is the most valuable team in the NHL Revenues (Attendance, Merchandise) Profitability Worth Approximately $1 Billion USD Owned by Bell and Rogers Almost irrelevant their success on the ice http://www.forbes.com/teams/toronto-maple-leafs/

Financial Managers Managerial compensation Incentives can be used to align management and stockholder interests The incentives need to be structured carefully to make sure that they achieve their goal Corporate control Controls in place to ensure Managers act in the best interested of the shareholders Conflicts with other stakeholders

Primary Goals of Financial Management Three goals of financial management: Maximize shareholder wealth Maximize share price Maximize firm value

The Agency Problem Agency relationship Stockholders (principals) hire managers (agents) to run the company on their behalf Agency problem Agent has more information than the principal principal cannot directly ensure that its agent is always acting in the principal's best interests Conflicts of interest can exist between the principal and the agent

Markets Markets Money Markets Capital Markets Primary Markets Secondary Financial Institutions

Money Markets Deals with the buying and selling of short-term debt securities (less than a year to maturity) “Money market instruments” Bankers acceptances, Treasury Bills Dealer market - Chartered Banks, Investment Dealers

Capital Markets Markets for the buying and selling longer term debt and shares of stock TSX, New York, London, Tokyo, Hong Kong Consolidation of exchanges in recent years TSX – owned by the Major Canadian Financial Institutions Main players: Banks, Investment Dealers

Primary Markets Corporation is the Seller - to raise money Initial Public Offering (IPO) to the general public are underwritten - Investment dealers must be registered, e.g. Ontario Securities Commission Private Placement - private transaction Smaller amounts, often used in mining and oil exploration industry

Secondary Markets Means of transferring ownership of securities The issuing company does not receive additional funds from this transaction

Financial Institutions Financial institutions act as intermediaries between suppliers and users of funds Institutions earn income on services provided: Indirect finance – Earn interest on the spread between loans and deposits Direct finance – Service fees (i.e. bankers acceptance and stamping fees)