Corporate Finance
Lecture 1:
The advantages of forming a corporation are: * Reduction of personal liability. A sole proprietor has unlimited liability * Taxes. Forming a corporation may mean that more expenses can be considered business expenses and be deducted from the company’s income. * Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. * Ability to attract investment. Corporations can raise capital through the sale of equity. * Continuous life. Sole proprietorships have a limited life, while corporations have a potentially perpetual life. * Transfer of ownership. It is easier to transfer ownership in a corporation through the sale of stock.
The biggest disadvantage is the potential cost including more expansive record-keeping.
Lecture 2 (chap 7+8)
ACCOUNTING RATE OF RETURN
Pros:
* ARR provides an accounting measure of investment or project return
Cons:
* Doesn’t consider cash flows or market values * Ignores the timing of the earnings stream * Ignores risk differences between projects * An arbitrary measure, based on a ratio of accounting numbers, so it is sensitive to the methods used * No guidance on the target level of ARR
--------------------------------
PAYBACK PERIOD (PBP): How long does it take to get the initial investment back in a nominal sense?
Pros:
* Simple to apply and easy to understand * Provides information on how long funds are committed to a project (measures risk, liquidity)
Cons:
* Time value of money is ignored (no discounting) * Risk is not taken into account * Ad hoc determination of acceptable payback period * Cash flows after PBP are ignored
--------------------------------
DISCOUNTED PAYBACK PERIOD (DPBP): Calculates the time required for the sum of an investment’s discounted CFs to equal its initial cost (same decision rule as PBP, with TVM)
Pros:
* Takes into account the
The advantages of forming a corporation are: * Reduction of personal liability. A sole proprietor has unlimited liability * Taxes. Forming a corporation may mean that more expenses can be considered business expenses and be deducted from the company’s income. * Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. * Ability to attract investment. Corporations can raise capital through the sale of equity. * Continuous life. Sole proprietorships have a limited life, while corporations have a potentially perpetual life. * Transfer of ownership. It is easier to transfer ownership in a corporation through the sale of stock.
The biggest disadvantage is the potential cost including more expansive record-keeping.
Lecture 2 (chap 7+8)
ACCOUNTING RATE OF RETURN
Pros:
* ARR provides an accounting measure of investment or project return
Cons:
* Doesn’t consider cash flows or market values * Ignores the timing of the earnings stream * Ignores risk differences between projects * An arbitrary measure, based on a ratio of accounting numbers, so it is sensitive to the methods used * No guidance on the target level of ARR
--------------------------------
PAYBACK PERIOD (PBP): How long does it take to get the initial investment back in a nominal sense?
Pros:
* Simple to apply and easy to understand * Provides information on how long funds are committed to a project (measures risk, liquidity)
Cons:
* Time value of money is ignored (no discounting) * Risk is not taken into account * Ad hoc determination of acceptable payback period * Cash flows after PBP are ignored
--------------------------------
DISCOUNTED PAYBACK PERIOD (DPBP): Calculates the time required for the sum of an investment’s discounted CFs to equal its initial cost (same decision rule as PBP, with TVM)
Pros:
* Takes into account the