corporate finance slides chapter one

Chapter 1
The Corporation

Chapter Outline
1.1 The Four Types of Firms

1.2 Ownership Versus Control of Corporations
1.3 The Stock Market

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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Learning Objectives
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.

3. Describe taxation consequences for C and S corporate forms.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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Learning Objectives (cont'd)
4. Discuss the division of corporate ownership into shares of stock; evaluate the implications of that division for corporate decision making.
5. Explain how corporate bankruptcy can be viewed as a change in firm ownership.
6. Compare and contrast characteristics of shares that are publicly traded and those that are not.

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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1.1 The Four Types of Firms
• Sole Proprietorship

• Partnership
• Limited Liability Company

• Corporation

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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Figure 1.1 Types of U.S. Firms

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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1.1 The Four Types of Firms (cont'd)
• Sole Proprietorship
 Business is owned and run by one person
 Typically have few, if any, employees
 Advantages
• Easy to create

 Disadvantages
• Unlimited personal liability
• Limited life

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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1.1 The Four Types of Firms (cont'd)
• 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