Chapter 1 Scope and Nature of Managerial Finance
Learning objectives of this chapter: • Differentiate different forms of business • Understand financial management and its roles • Understand the responsibilities of financial staffs • Understand agency problems and its solution

Sole Proprietorships & Partnerships


Advantages
◦ Ease of formation ◦ Subject to few regulations ◦ No corporate income taxes



Disadvantages
◦ Difficult to raise capital ◦ Unlimited liability ◦ Limited life
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Corporation


Advantages
◦ ◦ ◦ ◦ Unlimited life Easy transfer of ownership Limited liability Ease of raising capital



Disadvantages
◦ Double taxation ◦ Cost of set-up and report filing

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Different Type of Businesses
Sole Proprietorship Who owns the business? Are managers and owners separate? What is the owner's liability? Are the owner and business taxed separately? The manager Partnership Partners Corporation Stockholders

No

No

Usually

Unlimited

Unlimited

Limited

No

No

Yes

Introduction to Corporation/Firm


Profit seeking organisations aim to maximise shareholders’ wealth in the form of:
◦ Dividends ◦ Capital appreciation



To achieve this, organisations must invest in projects that yield rates of return higher than the cost of financing those projects and better than competition financial objectives

The Finance Function


The finance function must plan the courses of action (i.e. the financial strategies) to achieve the organisation’s financial objectives by making:
◦ Investment decisions ◦ Financing decisions ◦ Dividend decisions



The finance function is the intermediary between the organisation and the financial environment, i.e. linking the business with the wider financial environment (e.g. banks and financial markets)

The Investment Decision


Decision to acquire assets: