1. Ch. 1: Introduction to Financial Management
Contents
What is Finance?
Forms of Business Organization
Business Goals
The Agency Problem
Market Incentives & Undesirable Behavior
Financial Markets

2. What is Finance?

3. Forms of Business Organization
Sole Proprietorship
Partnership
Corporation (C Corporation)
Hybrids
Limited Partnership
Limited Liability Company
Professional Corporation
S Corporation

4. Sole Proprietorship/ Partnership
About 80% of businesses are sole prop.s
Advantages
easy to form
subject to few regulations
no corporate income taxes
Disadvantages
limited life
unlimited liability
difficult to transfer ownership in partnership
can be difficult to raise capital

5. Corporation About 80% of $ sales are by corporations Advantages
Disadvantages

6. Limited Liability Company
hybrid between partnership & corporation
has limited liability
easy to form
avoids corporate income tax
but!

7. Business Goals ??
“It is not from the benevolence of the butcher, the brewer,
or the baker, that we expect our dinner, but from their
regard to their own self-interest. We address ourselves,
not to their humanity but to their self-love, and never talk
to them of our own necessities but of their advantages.”
(Adam Smith, An Inquiry into the Nature and Causes of
the Wealth of Nations, 1776, p. 14 in Modern Library 1937 edition)

8. The Agency Problem

9. Market Incentives & Undesirable Behavior
Relate Agency Problem to Ethics p. 14
Expected Costs of Undesirable Behavior
probability of detection
level of sanctions
publicity
market assessment
Expected Benefits of Undesirable Behavior

10. Financial Markets Primary, Secondary
Raising cash, increasing liquidity
Auction, Over-the-Counter (OTC)