The Business,Tex,and financial environments

460 views

Published on

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
460
On SlideShare
0
From Embeds
0
Number of Embeds
6
Actions
Shares
0
Downloads
11
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

The Business,Tex,and financial environments

  1. 1. 1 Chapter 2 The Business, Tax, and Financial Environments
  2. 2. 2 The Business, Tax, and Financial Environments The Business Environment The Tax Environment The Financial Environment
  3. 3. 3 The Business Environment The PAK has four basic forms of business organization: Sole Proprietorships Partnerships (general and limited) Corporations Limited liability companies
  4. 4. 4 The Business Environment Sole Proprietorship -- A business form for which there is one owner. This single owner has unlimited liability for all debts of the firm. Oldest form of business organization. Business income is accounted for on the owner’s personal income tax form. form
  5. 5. 5 Summary for Sole Proprietorship Advantages Disadvantages Simplicity Unlimited liability Low setup cost Hard to raise additional capital Quick setup Single tax filing on individual form Transfer of ownership difficulties as compared to corporations.
  6. 6. 6 The Business Environment Partnership -- A business form in which two or more individuals act as owners. Business income is accounted for on each partner’s personal income tax form. form
  7. 7. 7 Types of Partnerships General Partnership -- All partners have unlimited liability and are liable for all obligations of the partnership. Limited Partnership -- Limited partners have liability limited to their capital contribution (investors only). At least one general partner is required and all general partners have unlimited liability.
  8. 8. 8 Summary for Partnership Advantages Can be simple Low setup cost, higher than sole proprietorship Relatively quick setup Limited liability for limited partners Disadvantages Unlimited liability for the general partner Difficult to raise additional capital, but easier than sole proprietorship Transfer of ownership is difficult because of legal requirements.
  9. 9. 9 The Business Environment Corporation -- A business form legally separate from its owners. An artificial entity that can own assets and incur liabilities on its name.Business income is accounted for on the income tax form of the corporation. corporation
  10. 10. 10 Summary for Corporation Advantages Disadvantages Limited liability Double taxation Unlimited life More difficult to establish Easier to raise large quantities of capital More expensive to set up and maintain
  11. 11. 11 The Business Environment Limited Liability Companies -- A business form that provides its owners (called “members”) with corporatestyle limited personal liability and the federal-tax treatment of a partnership. Business income is accounted for on each “member’s” individual income tax form. form
  12. 12. 12 Limited Liability Company (LLC) Generally, an LLC will possess only the first two of the following four standard corporation characteristics Limited liability Centralized management Unlimited life Transfer of ownership without other owners’ prior consent
  13. 13. 13 Summary for LLC Advantages Limited liability Eliminates double taxation No restriction on number or type of owners Easier to raise additional capital Disadvantages Transfer of ownership difficulties (generally)
  14. 14. 14 TYPES Public limited company Shares are given to general public. S ALLIED BANK OF PAKISTAN ASKARI COMMERCIAL BANK Minimum number of shareholders is 7. Private limited company Ownership is restricted Minimum number of shareholders is 2 and maximum is 20
  15. 15. 15 Depreciation Depreciation represents the systematic allocation of the cost of a capital asset over a period of time for financial reporting purposes, tax purposes, or both. Generally, profitable firms prefer to use an accelerated method for tax reporting purposes.
  16. 16. 16 Common Types of Depreciation Straight-line (SL) Accelerated Types Double-Declining-Balance (DDB) Modified Accelerated Cost Recovery System (MACRS)
  17. 17. 17 Interest Deductibility Interest Expense is the interest paid on outstanding debt is an expense and is tax deductible. deductible Cash Dividend is the cash distribution of earnings to shareholders and is not a tax deductible expense.
  18. 18. 18 What are career opportunities in managerial finance for you Financial analyst Cash manager Credit analyst Pension fund manager Foreign exchange manager Project finance manager
  19. 19. 19 Financial Environment Businesses interact continually with the financial markets. Financial Markets are composed of all institutions and procedures for bringing buyers and sellers of financial instruments together. The purpose of financial markets is to efficiently allocate savings to ultimate users.
  20. 20. 20 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET SAVINGS SECTOR FINANCIAL INTERMEDIARIES INVESTMENT SECTOR
  21. 21. 21 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET FINANCIAL INTERMEDIARIES INVESTMENT SECTOR INVESTMENT SECTOR Businesses Government Households SAVINGS SECTOR
  22. 22. 22 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET FINANCIAL INTERMEDIARIES INVESTMENT SECTOR SAVINGS SECTOR Households Businesses Government SAVINGS SECTOR
  23. 23. 23 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET SAVINGS SECTOR FINANCIAL INTERMEDIARIES INVESTMENT SECTOR FINANCIAL BROKERS Investment Bankers Mortgage Bankers
  24. 24. 24 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET SAVINGS SECTOR FINANCIAL INTERMEDIARIES INVESTMENT SECTOR FINANCIAL INTERMEDIARIES Commercial Banks Savings Institutions Insurance Cos. Pension Funds Finance Companies Mutual Funds
  25. 25. 25 Flow of Funds in the Economy FINANCIAL BROKERS SECONDARY MARKET SAVINGS SECTOR FINANCIAL INTERMEDIARIES INVESTMENT SECTOR SECONDARY MARKET Security Exchanges OTC Market
  26. 26. 26 Allocation of Funds Funds will flow to economic units that are willing to provide the greatest expected return (holding risk constant). In a rational world, the highest expected returns will be offered only by those economic units with the most promising investment opportunities. Result: Savings tend to be allocated to the most efficient uses.
  27. 27. 27 Financial markets Not physical places as they are mechanism for channeling savings to the ultimate investors in real assets.
  28. 28. 28 Money and capital market Money market: it is the market for short term government and debt securities. Capital market: the maturity for relatively long term financial instruments(e.g;bonds and stocks)
  29. 29. 29 Financial institutions An intermediary that channels the savings of individuals,business,and government. Many financial institutions directly or indirectly pay savers interest on deposited funds, other provide services for a fee( for example, checking accounts)
  30. 30. 30 Financial intermediary These are financial institutions that accept money from savers and use those funds to make loans and other financial investments in their own name.
  31. 31. 31 Financial markets Forums in which suppliers of funds and demanders of funds can transact business directly Primary market: private placement; is the sale of a new security issue, typically bonds or preferred stock, directly to an investor or group of investor Secondary market: place where renowned securities are traded public offering; the nonexclusive sale of either bonds or stocks to the general public
  32. 32. 32 Financial Broker Certain financial institutions perform a necessary brokerage function. when brokers bring together parties who need funds with those who have savings, they are not performing a direct lending function but rather are acting as middlemen Investment bankers: financial institutions that underwrites new securities for resale. Mortgage bankers: financial institution that buys mortgages primarily for resale. (involve in acquiring and placing mortgages)
  33. 33. 33 Types of brokers Brokerage firms Customers can choose the type of broker they wish to use. They can be classified according to the services offered and fees charged. FULL SERVICE BROKERS: A brokerage firm offering a full range of services including information and advice. Today investors need more information about economy,industries,individual companies and the bond market from full time brokers. DISCOUNT BROKERS: Brokerage firms offering execution services at prices typically significantly less than full-line brokerage firms.Commisions vary widely by amount and the manner in which they are determined. Some discount brokers offer research information and investment recommendations .
  34. 34. 34 EXPECTED RETURN (%) Risk-Expected Return Profile Common Stocks Preferred Stocks Medium-grade Corporate Bonds Investment-grade Corporate Bonds Long-term Government Bonds Prime-grade Commercial Paper U.S/Pakistan Treasury Bills (risk-free securities) RISK
  35. 35. 35 What Influences Security Expected Returns? Default Risk is the failure to meet the terms of a contract. Marketability is the ability to sell a significant volume of securities in a short period of time in the secondary market without significant price concession.
  36. 36. 36 Ratings by Investment Agencies on Default Risk MOODY’S INV SERVICE STANDARD & POOR’S Aaa Best Quality AAA Highest Grade Aa High Quality AA High Grade A Upper Med Grade A Higher Med Grade Baa Medium Grade BBB Medium Grade Ba Possess Speculative BB Speculative Elements C Lowest Grade D In Default Investment grade represents the top four categories. Below investment grade represents all other categories.
  37. 37. 37 What Influences Expected Security Returns? Maturity is concerned with the life of the security; the amount of time before the principal amount of a security becomes due. Taxability considers the expected tax consequences of the security.
  38. 38. 38 0 2 4 6 8 10 YIELD (%) Term Structure of Interest Rates Upward Sloping Yield Curve (Usual) Downward Sloping Yield Curve (Unusual) 0 5 10 15 20 25 30 YEARS TO MATURITY A yield curve is a graph of the relationship between yields and term to maturity for particular securities.
  39. 39. 39 What Influences Expected Security Returns? Embedded Options provide the opportunity to change specific attributes of the security. Inflation is a rise in the average level of prices of goods and services. The greater inflation expectations, then the greater the expected return.
  40. 40. 40 Assignment /oral quiz In general, what would be the likely effect of the following occurrences on the money and capital markets? The saving rate of individuals in the country declines. Individuals increases their savings at saving and loan associations and decreases their savings at banks.

×