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

What is Finance?

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

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

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

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

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)

The Agency Problem

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

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