5. THE CORPORATION
Why study Corporate Finance?
An understanding of why and how financial decisions
are made is essential.
The focus on this course is to understand and learn …
how to make optimal corporate financial
decisions.
how a corporation is structured and its related
business forms.
how is the role of financial managers in making
financial decisions for the firm.
how the decision making of financial managers
requires information (firm’s fin. statements).
FTC Pembroke Pines - Corporate Finance - Manuel Christiansen, MBA 5
6. THE CORPORATION
SPECIFIC CONTENT OBJECTIVES
UPON COMPLETION OF THIS WORKSHOP, THE STUDENT
WILL BE ABLE TO:
1. List and define the four major types of
firms in the U.S.; describe major
characteristics of each type, including the
means for distributing income to owners.
2. Distinguish between limited and
unlimited liability, and list firm types
that are subject to each type of liability.
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7. THE CORPORATION
SPECIFIC CONTENT OBJECTIVES
3. Understand the difference between
a Public and a Private Company.
4. Understand the difference between
a Primary and a Secondary Market.
5. Discuss the division of corporate
ownership into shares of stock.
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8. THE CORPORATION
THE FOUR TYPES OF FIRMS
• Sole Proprietorship
• Partnership
• Limited Liability Company (LLC)
• Corporation (Corp.)
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9. THE CORPORATION
THE FOUR TYPES OF FIRMS
Video: Types of Businesses
http://www.youtube.com/watch?v=gQkjdbHqGaQ
Activity: Scaffolding activity (groups of
3 students) using a Chart/Matrix
diagram to describe the business
characteristics, similarities, and
differences. You all have 10’; then you
will teach each other.
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10. THE CORPORATION
THE FOUR TYPES OF FIRMS
AS OF 2013 IN THE U.S.
Source: www.bizstats.com
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11. THE CORPORATION
THE FOUR TYPES OF FIRMS (CONT.)
Sole Proprietorship
• Business is owned and run by one person
• Typically has few, if any, employees
• Advantages
Easy to create
• Disadvantages
Unlimited personal liability
Limited life
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12. THE CORPORATION
THE FOUR TYPES OF FIRMS (CONT.)
Partnership
• Similar to a sole proprietorship, but with
more than one owner
• All partners are personally liable for all of
the firm’s debts. A lender can require any
partner to repay all of the firm’s
outstanding debts.
• The partnership ends with the death or
withdrawal of any single partner.
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13. THE CORPORATION
THE FOUR TYPES OF FIRMS (CONT.)
Limited Liability Company (LLC)
• All owners have limited liability but they
can also run the business.
• Relatively new business form in the U.S.
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14. THE CORPORATION
THE FOUR TYPES OF FIRMS (CONT.)
Corporation
A legal entity separate from its owners.
• Has many of the legal powers individuals have
such as the ability to enter into contracts, own
assets, and borrow money.
• The corporation is solely responsible for its
own obligations. Its owners are not liable for
any obligation the corporation enters into.FTC Pembroke Pines - Corporate Finance - Manuel Christiansen, MBA 14
15. THE CORPORATION
THE FOUR TYPES OF FIRMS (CONT.)
Corporation
Ownership.
• Represented by shares of stock.
• Owner of stock is called: Shareholder;
Stockholder; or Equity Holder.
• Sum of all ownership value is called equity.
• Owner is entitled to dividend payments.
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16. THE CORPORATION
Ownership versus Control of Corporations
Financial Manager
Responsible for:
• Investment Decisions
• Financing Decisions
• Cash Management
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17. THE CORPORATION
Ownership versus Control of Corporations
Financial Manager
Activity: Scaffolding activity (groups of 3
students) using the 5 W’s diagram.
Article: “Ten tips for leading companies out of
crisis,” (Yakola, 2014).
http://www.mckinsey.com/insights/corporate_finance/ten_tips_for_leading_companies_ou
t_of_crisis
In groups, analyze the Five W's (Who, When,
Where, What, and Why) to evaluate this paper.
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18. THE CORPORATION
Ownership versus Control of Corporations
Goal of the Firm
Shareholders will agree that they
are better off if management
makes decisions that maximizes
the value of their shares.
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19. THE CORPORATION
The Stock Market
• Public Company
Stock is traded by the public on a
stock exchange.
• Private Company
Stock may be traded privately.FTC Pembroke Pines - Corporate Finance - Manuel Christiansen, MBA 19
20. THE CORPORATION
The Stock Market (cont.)
• Primary Markets
When a corporation itself issues new shares
of stock and sells them to investors, they do
so on the primary market.
• Secondary Markets
After the initial transaction in the primary
market, the shares continue to trade in a
secondary market between investors.
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21. THE CORPORATION
The Stock Market (cont.)
Video: Types of Common Stock
http://www.youtube.com/watch?v=Hca0PMDv6WA
Activity: use a Y-Chart diagram to analyze
and describe, with respect of
3 variables, a Common Stock.
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22. THE CORPORATION
The Stock Market (cont.)
Largest Stock Markets (Volume of shares and
Value of domestic corporations)
• New York Stock Exchange (NYSE)
Market Makers/Specialists
Each stock has only one market maker
• NASDAQ
Does not meet in a physical location
May have many market makers for a single stock
• London Stock Exchange and Tokyo Stock Exchange
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23. THE CORPORATION
Worldwide Stock Markets Ranked by Two Common
Measures as of 2013
Source: www.world-exchanges.org
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24. THE CORPORATION
Vocabulary
• NASDAQ
• NYSE
• CEO-Chief Financial Officer
• Partnership
• Primary Market
• Private Companies
• Public Companies
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25. THE CORPORATION
Vocabulary
• “S” corporation
• Secondary Market
• Shareholder
• Sole proprietorship
• Stock
• Stock Market (or Stock Exchange)
• Stockholder
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26. THE CORPORATION
Q & A
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27. THE CORPORATION
Assessment - Chapter Quiz
1. What are the four types of firms?
2. What type of firm generates most revenue
in the United States?
3. What are the advantages and
disadvantages of a Sole Proprietorship?
4. What is the number 1 stock market based
on total volume of transactions worldwide?
5. What is the number 1 stock market based
on total value of transactions worldwide?
6. Multiple choice questions
7. T – F questions
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28. THE CORPORATION
References
Berk, J. & DeMarzo, P. (2014). Corporate Finance: The Core. 3rd ed.
Boston, MA: Pearson Prentice Hall.
ISBN: 978-0-13-299247-3
Enchanted Learning.com. (2003). Graphic Organizers. Retrieved from
http://www.enchantedlearning.com/graphicorganizers
The Brandow Company. (2012). The Four Types of Firms. Retrieved from
www.bizstats.com
Yakola, D. (2014). Ten tips for leading companies out of crisis. Retrieved
from
http://www.mckinsey.com/insights/corporate_finance/ten_tips_for_leadi
ng_companies_out_of_crisis
World Federation of Exchanges. (2014). Worldwide Stock Markets Ranked
by Two Common Measures. Retrieved from www.world-
exchanges.org/statistics
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29. THE CORPORATION
Thank you all and I
will see you on our
next class!
FTC Pembroke Pines - Corporate Finance - Manuel Christiansen, MBA 29