An Introduction to Financial Management

Goal of the Firm

1) Profit Maximization? this goal ignores:

a. TIMING of Returns

b. UNCERTAINTY of Returns

2) Shareholder Wealth Maximization? this is the same as:

a) Maximizing Firm Value

b) Maximizing Stock Price

Legal Forms of Business

1) Sole Proprietorship

• A business owned by a single individual.

• Owner maintains title to the firm’s assets.

• Owner has unlimited liability.

2) Partnership

Similar to a sole proprietorship, except that there are two or more owners.

2a) General Partnership

All partners have unlimited liability.

2b) Limited Partnership

• Consists of one or more general partners, who have unlimited liability, and

• One or more limited partners (investors) whose liability is limited to the amount of their investment in the business.

3) Corporation

• A business entity that legally functions separate and apart from its owners.

• Owners’ liability is limited to the amount of their investment in the firm.

• Owners hold common stock certificates, and ownership can be transferred by selling the certificates.