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

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

3. Announcements / Agenda

4. 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

5. 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

6. Legal Forms of Business Organizations
Sole Proprietorship
Partnership
Corporation

7. 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

8. 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

9. 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)

10. 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?

11. 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

12. 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

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

14. 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

15. Markets Markets Money Markets Capital Markets Primary Markets
Secondary
Financial Institutions

16. 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

17. 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

18. 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

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

20. 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)