Financial Management Chapter 1

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shareholders

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In a corporate form of business, there is a need to employ separate managers who will govern the business in behalf of the owners, known as?

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shareholders

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These managers, as agents, are given the power to decide on the investments, finance and operations of the corporation.

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Financial Management

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is the process of planning, directing, organizing, controlling, and monitoring of the monetary resources in order to achieve objectives and goals of the business

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financial managers

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are responsible for the management of these monetary resources of the business.

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• Sole Proprietorship

• Partnership

• Corporation

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Kinds of Business Organizations

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Sole Proprietorship

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• is regarded as the simplest form of business organization.

• is owned by an individualknown as the sole proprietor, who has the full authority in managing the assets of the business.

• this kind of business organization is subject to fewer government regulations as compared to partnership andcorporation.

• the registration is only through the Department of Trade and Industry (DTI)

• the business income is not subject to separate taxation.

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• Unlimited Liability

• Limited Life

• Small Capital

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Disadvantages of Sole Proprietorship:

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Partnership

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• is a contract of two or more persons who bind themselves to contribute money, property on industry to a common fund, with the intention of dividing the profits among themselves.

• Two or more persons may also form a partnership for the exercise of profession.

• has a juridical personality separate and distinct from that of each partners.

• may be constituted in any form, whether oral or written, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

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• In public instrument

• Recorded in the Office of the Securities and Exchange Commission (SEC)

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the contract of partnership having a capital of P3,000 or more, in money or property, is required to be:

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• General Partnership

• Limited Partnership.

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Partnership may be classified as:

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General Partnership

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in this classification of partnership, all the partners have unlimited liability like the sole proprietor, wherein creditors of the partnership may have claim against the separate assets of the partners for payment of debt in case of bankruptcy.

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Limited Partnership

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in this classification of partnership, there are partners known as limited partners that have liability to the creditors only up to the extent of their capital contribution, thus, their separate assets are safe from the claims of these creditors.

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• Retirement of a partners

• Admission of a partner/s

• Incorporation of partnership

• Death of a partner/s

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usual causes of dissolution of the partnership:

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Corporation

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is an artificial being created by the operation of the law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

• this juridical entity is composed of five (5) or more natural persons, not exceeding fifteen, who are called incorporators and it must be also be registered with the Securities and Exchange Commission (SEC).

• is regarded as the most complex form of business organization because of its fund raising capabilities, unlimited life and being subject to strictergovernment regulations.

• The owners are referred as shareholders of the corporation who have limited liability.

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dual taxation

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wherein the income of the corporation is subject to corporate tax while the earnings of the owners or shareholders are subject to separate individual income tax.

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doctrine of piercing the veil of corporate fiction

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this doctrine shall disregard the separate personality of the corporation because the veil ofcorporate fiction was used as a shield to perpetuate fraud, justify wrong, defeat public convenience or defendcrime.• the effect of this doctrine is to make the directors, officers and shareholders, involved in fraud or crime, liable for the obligation of the corporation.

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• De Jure Corporation

• De Facto Corporation

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Types of Corporation as to legal status:

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De Jure Corporation

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• this is a corporation organized in accordance with the law.

• there is a strict or substantialcompliance with the statutory requirements for its incorporation.

• it exists in fact and in law.

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De Facto Corporation

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• this is a corporation that existsonly in fact but not in law because there is a flaw in itsincorporation.

• it has no legal right to corporate existence as against the state.

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• Public Corporations

• Private Corporations

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Types of Corporation as to functions and governing law:

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Public Corporation

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• these are organized by the state for the government to promote general welfare of thepublic.

• these are governed by Special Laws and the Local Government Code of the Philippines.

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Private Corporation

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• these are organized by privateindividuals for the purpose of generating profit

• these are governed by the Law on Private Corporation.

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• Stock Corporation

• Non-stock Corporation

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Types of Corporation as to existence of stocks:

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Stock Corporation

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• A corporation in which capitalstock is divided into shares and is authorized to distribute to the holders thereof of such sharesdividends or allotments of the surplus profits on the basis of the shares held

• the owners are called as shareholders or stockholders.

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Non-stock Corporation

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• A corporation which has nostocks issuances and no distribution of dividends to itsmembers.

• the owners are called members

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True

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t/f

a corporation is not automatically considered as a stock corporation if there is a statement of capital stock. The Supreme Court ruled that if thedividends are not supposed to be declared or there is nodistribution of retained earnings, the corporation is stilla non-stock corporation.

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• Publicly-listed Company

• Privately owned Company

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Types of Corporation as to shares being traded in stock exchange:

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Publicly-listed Company

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• this is a corporation whoseshares are offered to public or traded in the Philippine stock exchange.

• this corporation undergoesinitial public offering (IPO)

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Privately-owned Company

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• this is a corporation whoseshares are not traded in the stock market.

• this is a corporation "going private" because it restrictsthe stockholders to a certain group, usually, family member. • sometimes called a close or closely-held corporation or privately-held Corporation.

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• Limited Liability Company

• Professional Corporation

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The following corporations are not acceptable in Philippine Law:

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Limited Liability Company

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this is a business structure which combines the tax advantage of a partnership (General Professional Partnership) and limited liability advantage of a corporation.

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Professional Corporation

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this is composed of personswith same professions such as Doctors, Lawyers or Certified Public Accountants.

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TRUE

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t/f

Thus, profit maximization, as a measure of success of the business, may be the end goal of the sole proprietor or the partners who personally manage their business.

However, for a corporate form of business, this profit maximization is just a means to an ultimate end goal of the corporation.

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dividend yield and capital gains yield.

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The shareholders of the corporation will earn incomefrom their capital investments through ________ and ________.

The former is earned throughdividend declarations approved by the board of directors (BOD) while the latter is through selling of stocks or ownership to either prospective investors orexisting stockholders at a gain. This is when the stockprice is higher than the cost of investment.

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TRUE

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t/f

In connection with this, the ultimate goal of a corporation is shareholder's wealth maximization.

This is sometimes referred to as stock price maximization -the increase in the value of stock price resulting to capital gains that shareholders will yield on their investments.

This is one of the reasons whyshareholders want the financial managers to maximize the market value of the firm and not just to maximize its profits.

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TRUE

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t/f

The goal of maximizing the market value of the corporation is more important than the goal of maximizing profits becausethe following reasons:

• In maximizing the market value of the corporation, discount rate which reflects the risks of capitalization and the time value of money is taken into consideration while profit maximization does not consider such.

• In maximizing future profits, the company may opt to decrease and postpone its dividend declaration and instead, it will reinvest the freed up cash. If the reinvestment is too risky and will not be successful, this will be detrimental to the shareholders. Thus,shareholder's wealth is not maximized.

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TRUE

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t/f

Stock price or market value per share considers both cash flows for the current and future years.

Profit on the other hand, may refer to either current year's profit or future year's profit. If the goal is profit maximization,the question is which year's profit are we referring to?

For example, the company may maximize current year's profit by decreasing advertising and promotion cost. However, this may decrease the future years' profit because sales of new products in the future may bedecreased by these costs cutting done in the currentyear.

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Financial managers

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are employees who are responsible for managing the monetary resources of the corporation in order to maximize firm's value. They are also responsible for dealing with the different financial markets such as stock market or bond market; and with financial institutions like banks. These managers, who are the agents of the shareholders (owners), are given the authority to perform investment, financing andoperating decisions that will benefit the corporation.