1. Why is finance important
 Finance allows individuals to make better decisions about their money/personal finances
e.g. whether a car loan or a lease is more advantageous, whether a particular share is a good
investment, when to start saving and how much to save for retirement
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In your business career you face questions such as which supplier should your firm choose,
should your firm issue a new stock or borrow money instead, should your firm launch a new
product – must consider competition e.c.t.
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Finance ultimately helps us create value and understand the future effects of value today
2. Understand the important features of the three main types of firms
Sole trader: Business owned and operated by one person
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Few, if any, employees.
Easy to create. It is the most common type of firm in the world but it does not contribute
much sales revenue in the economy
Limited life; dependent on the death of the owner
Difficult to transfer ownership
Unlimited liability
No separate legal entity i.e. no separation between owner and firm
E.g. hairdressers, freelancers such as designers and writers
Partnership (general): Business owned and operated by two or more people (2-20)
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Unlimited liability; All partners are responsible for all business debt
Partnership ends with the death or withdrawal of any single partner
Extra source of capital as instead of relying on your own, as required for a sole trader, you
are able to raise additional capital from the other partners
Limited partnership: Requires a general partner (1) and unlimited partners (no limit)
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General partners have the same characteristics as would in a general partnership, in that
they have unlimited liability (responsible for all firms debt) and typically run the business on
a day to day basis
Limited partners have limited liability (can’t lose more than their initial investment). No
management authority.
Corporation: Legally defined artificial being (a legal entity), separate from its owners
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Limited liability; owners are not responsible for corporations obligation and vice versa
More costly than a sole trader and partnership as it must be legally formed (requires legal
documentation)
No limit on number of owners/who can be owners
Entire ownership stake of the corporation is divided into shares. Collection of outstanding
shares is known as equity. Owning a share makes you a shareholder or equity holder.
Shareholders are entitled to dividend payments which are proportional to the amount of
shares they own
Legal entity: Individual, company or organization that has legal rights and obligations
3. See why the advantages of the corporate form have led it to dominate economic activity
- Personal liability protection: Corporation provides more personal protection to its owners
than any other entity type e.g. if a corporation is sued the shareholders are not personally
responsible for corporate debts or legal obligations
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Infinite life: If an owner dies, their ownership stock can easily be transferred to another
individual OR if owner wants to leave the company they can simply sell off their stock
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Easier access to capital: Most corporation sell ownership through publicly traded stock, they
can easily raise funds by selling stock
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Tax benefits: Imputation tax system, shareholders taxed at different rates (dependent on
their income)
4. Explain the goal of the financial manager and the reasoning behind that goal, as well as
understand the three main types of decision a financial manager makes
Financial manager is responsible for the financial health of the organization and to implement the
goals of the firm. The main goal of the financial manager is to maximise shareholder wealth (increase
company’s stock price) i.e. maximizing purchasing power as well as the flow of dividends to
shareholders. Important goal as due to
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Make investing decisions: Financial manager must weight the costs and benefits of each
investments and project and decide which of them qualify as a good use of the SH money
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Make financing decisions: Financial manager must decide how the investment will be
financed e.g. must decide whether to raise capital from new/existing shareholders by selling
more shares (equity) or to borrow money (bonds and other debt)
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Manage short term cash needs: FM must ensure the firm has enough cash on hand to meet
obligations
Bond: Security sold by governments and corporations to raise money from investors today in
exchange for a promised future payment i.e. a loan from the investor to the issuer
5. Understand how a corporation is managed and controlled, the financial manager’s place in it,
and some of the ethical issues financial managers face.
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6. Understand the importance of financial markets, such as stock markets, to a corporation and
the financial manager’s role as a liaison to those markets.
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7. Recognize the role that financial institutions play in the financial cycle of the economy
Financial institutions: Entities that provide financial services such as taking deposits, managing
investments, brokering financial transactions or making loans
Valuation principle: Shows how to make the costs and benefits of a decision comparable so that we
can weigh them properly e.g. comparing loan options, investments and projects