Finance 234 Notes Chapter 1

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Chapter 1

Finance is the study how people allocate scarce resources over time.

Why should finance be studied?
• To manage your personal resources
• To deal with world business
• To pursue interesting and rewarding opportunities
• To make informed public choices as a citizen
• To expand your mind

Discuss and provide examples of the four basic financial decisions every household faces
• Consumption and saving decisions: How much of their current wealth should the y spend on consumption and how much of their current income should they save for the future?
• Investment decisions: How should they invest the money they have saved?
• Financing decisions: When and how should households use other people’s money to implement their consumption and investment plans?
• Risk-management decisions: How and on what terms should households seek to reduce the financial uncertainties they face or when should they increase their risks?

Describe the types of financial decisions firms make
• Strategic planning. What business the company wants to be in.
• Capital budgeting process. Determining what asset to acquire.
• Investment project. Investing in the selected asset.
• Working capital management. The long term and the day-to-day operations.

List the three types of business organizations, and describe the advantages and disadvantages of each
Sole Proprietorship- a firm owned by an individual or a family, in which the assets and liabilities for the firm are the personal assets and liabilities of the proprietor If the firm cannot pay its debts, the proprietor’s other personal assets can be seized to satisfy the demands of the firm’s creditors.
Partnership- is a firm with two or more owners who share the equity in the business A partnership agreement usually stipulates how decisions are to be made and how profits and losses are to be shared.
It is possible to…...

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