Identify the three main areas of concern for financial management.. Assigned Readings:
Chapter 1. Introduction to Corporate Finance Chapter
2. Financial Statements and Cash Flow Chapter
3. Financial Statements Analysis and Financial ModelsChapter
19. Raising Capital
This week readings introduce corporate finance and different forms of business organizations. The major organizations are sole proprietorship, partnership, limited liability company, and corporations. The advantages and disadvantages of the business organizations are discussed. Sole proprietorship is a type of business owned by one person. The owner makes all the financial decisions and takes all the profits. However, sole proprietorship has unlimited liability and can be held responsible for business debts and obligations. Partnerships can enjoy limited liability but at least one partner must be a general partner, who will be responsible for business debts and obligations. Public corporations have shareholders who invest capital into the business. Corporation can raise huge amount of capital through the sale of stocks in the financial market. Also, corporations enjoy limited liability and unlimited life. We will learn the importance of financial statement analysis and how to compute financial ratios and operating cash flows. Financial managers review and analyze financial statements periodically to uncover financial problems and to assess the business’s progress towards achieving its goals. Ratio analysis enables potential investors to evaluate the firm’s financial performance and the potential for growth. Entrepreneurs with business ideas generally seek long-term capital from various sources including angel investors, venture capital firms, crowdfunding, initial coin offerings, and initial public offering depending on the stage of financing required. Financial planning modeling is used to prepare projected financial statements usually when external funds are needed.
- Define corporate finance.
- Identify the three main areas of concern for financial management.
- Compare various forms of business organizations.
- Explain the advantages and disadvantages of each form of business organization.
- Discuss the importance of cash flows to business organizations.
- Understand financial statement analysis and financial models.
- Compute and explain financial ratios.
- Understand the various ways of raising long-term capital for startup businesses.
1. BUSINESS ORGANIZATIONS
Jaffe Desk and Jordan Reilly just graduated from UC with a master’s degree in marketing and public health. They want to establish healthcare business that will source and distribute pharmaceutical products in the United States and internationally. Jaffe and Jordan know that before they can invest their time and other resources in the project, they must obtain financing, which means that they must raise money to pay for the investment cost and other operating expenses. Because the company might not be listed in any capital market right away, they will not be able to raise equity funding from the public. Therefore, they are considering raising long-term capital from various sources including angel investors, venture capital market, bank loans, crowdfunding, and initial coin offerings (ICOs). They learnt in corporate finance course the advantages and disadvantages of different forms of business organizations. They are worried about the legal concept of limited liabilityand how it will affect their personal fortunes in the future in case the business fails. They are not very sure which form of business organization to set up to protect their personal liability, reduce taxes, and access external funding. Therefore, they are considering a partnership, a limited liability, or a corporation. A cash budget they prepared shows that $5 million seed money would be needed to hire staff, buy computers, rent an office space, promote, and market the business as well as to meet other business development expenditures. They have agreed to share profits and losses equally if they decide to form a limited partnership. The general partner will, however, be paid a fixed salary of $6,000 per month before taxes and other payroll deductions.In order to make good and right decision, Jaffe and Jordan have approached you to help them understand the concept of limited liability, advantages, and disadvantages of the various forms of business organizations and possible sources of funding for the business.
- Explain the legal concept of limited liability to Jaffe and Jordan
- Give 2 advantages and 2 disadvantages of each of the following forms of business organization to Jaffe and Jordan:
- limited liability, and
- Ultimately, what form of business organization would you recommend Jaffe and Jordan to consider. Why?
- Based on your recommendation above, explain to Jaffe and Jordan if the following sources of raising long-term capital are appropriate for them:
- angel investors (angels)
- venture capital
- initial coin offering, and
- long-term debt
Question “2. FINANCIAL STATEMENT ANALYSIS AND FINANCIAL MODELS” is attached