Summary Corporate Finance week 1-3 Vrije Universiteit Amsterdam | H1.1, 1.2 and 14 to 17 Berk & DeMarzo
16 views 0 purchase
Course
Corporate Finance (E_EBE2CF)
Institution
Vrije Universiteit Amsterdam (VU)
Book
Corporate Finance, Global Edition
Summary of the book Corporate Finance by Berk & DeMarzo. This is the material for the mid-term quiz for the Corporate Finance course at the Vrije Universiteit in Amsterdam.
Occasionally Dutch words in the summary, but overall it is written in English.
Week 1
Chapter 1.1
Types of firms:
• Sole proprietorship: business owned + run by one person
o Characteristics:
§ Straightforward to set up
§ No separation between firm and owner à only one owner
§ Owner has unlimited personal liability for any of the firm’s debts
§ The life of a sole proprietorship is limited to the life of the owner à di?icult to transfer ownership
• Partnership: identical to sole proprietorship, except it has more than one owner
o Characteristics:
§ All partners are liable for the firm’s debt
§ Partnership ends on the death or withdrawal of any partner à could avoid liquidation if partnership agreement
provides alternatives à buyout
o Limited partnership: partnership with two kinds of owners
§ General partners: have the same rights and privileges as partners in a (general) partnership
§ Limited partners: have limited liability à dependent on their investment
- Private property cannot be seized to pay o? debts
- Death/withdrawal of limited partner does not dissolve partnership
- Limited partner’s interest is transferable
- No management authority + cannot legally be involved in managerial decisions
• Limited liability company (LLC): limited partnership without a general partner
o All owners have limited liability + run the business
o Similar to the Dutch BV and German GmbH
• Corporation: a legal entity, separate from its owners à solely responsible for its own obligations, owners are not liable for any
obligations and corporation is not liable for any personal obligations
o No limit on number of owners + no limitation on who can own its stock
o Stock = shares: that are derived from an entire ownership stake
o Equity: all outstanding shares
o Shareholder = stockholder = equity holder: owner of a share of stock
§ Receive dividend payments
o Free trade in shares
S corporation: corporation that elect subchapter S tax treatment à no double taxation
• Profits/losses are not subject to corporate tax à are allocated directly to shareholders based on ownership share
o Include these profits to their own tax returns à even when no money is received
Chapter 1.2
Board of directors: group of people who have the decision rights/authority
• Are selected by shareholders à investors with most shares have most influence
CEO = chief executive o?icer: running corporation by following rules and policies set by board of directors
CFO = chief financial o?icer: most senior financial manager
• Tasks:
o Investment decisions à weigh costs and benefits which project to do
o Financing decisions à how to pay for the project
§ Raise money from new and existing money = equity
§ Borrow money = debt
o Cash management = managing working capital à ensure the firm has enough cash to meet obligations
Agency problem: when managers put their own interest above the interests of shareholder, the group where managers work for
• Decrease this agency problem:
o Minimizing the number of decisions managers must make
Shareholders can encourage managers to work in their interest to set pressure on the board à make the CEO resign
• Also: dissatisfied investors often sell their shares à only by lowering the price someone will buy the shares
• Stock price is a barometer for corporate leaders for feedback on their performance
Hostile takeover: individual or organization purchases a large fraction of the stock + has enough votes to replace the board of directors and
CEO
• Could be called a corporate raider
Corporate bankruptcy is not the same as liquidation à sometimes debt holders and equity holders have no need to liquidate the organization
• Corporate bankruptcy is a change in ownership à debt holders can take control of the firm if the company cannot meet its
obligations
2
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller yannigiskes. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $6.05. You're not tied to anything after your purchase.
