Financing Enterprises 200910 Textbook PDF

FINANCING ENTERPRISES 200910 Copyright © 2014. Pearson Education Custom Book...

FINANCING ENTERPRISES 200910 Copyright © 2014. Pearson Education Custom Books. All rights reserved. Compiled by Walid Bakry Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:45:27. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  A PEARSON AUSTRALIA CUSTOM BOOK Financing Enterprises 200910 Revised Edition This custom book is compiled from: BUSINESS IN ACTION GLOBAL EDITION, 7TH EDITION BOVEE & THILL FINANCIAL MANAGEMENT 7TH EDITION TITMAN, KEOWN, MARTIN & MARTIN ACCOUNTING 6TH EDITION ATRILL, MCLANEY & HARVEY FUNDAMENTALS OF CORPORATE FINANCE 2ND EDITION BERK, DEMARZO, HARFORD, FOR, MOLLICA & FINCH FINANCIAL MANAGEMENT 6TH EDITION PETTY, TITMAN, KEOWN, MARTIN, MARTIN, BURROW & NGUYEN MACROECONOMICS 3RD EDITION HUBBARD, GARNETT, LEWIS & O’BRIEN ESSENTIALS OF ECONOMICS Copyright © 2014. Pearson Education Custom Books. All rights reserved. 3RD EDITION HUBBARD, GARNETT, LEWIS & O’BRIEN PRINCIPLES OF ECONOMICS 4TH EDITION SLOMAN, NORRIS & GARRETT MACROECONOMICS PARKIN & BADE WESTERN SYDNEY UNIVERSITY Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:46:45. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  Pearson Australia Suite 1001 Level 10 151 Castlereagh St Sydney NSW 2000 Australia Ph: 02 9454 2200 www.pearson.com.au Copyright © 2016 This Custom Book Edition, Pearson Australia (a division of Pearson Australia Group Pty Ltd). Copyright © 2015 by Pearson Education Ltd for Business in action, Global ed., 7th ed. by Bovee & Thill. Copyright © 2016 by Pearson Australia for Financial management, 7th ed. by Titman, Keown, Martin & Martin. Copyright © 2015 by Pearson Australia for Accounting, 6th ed. by Atrill, McLaney & Harvey. Copyright © 2014 by Pearson Australia for Fundamentals of corporate finance, 2nd ed. by Berk, DeMarzo, Harford, Ford, Mollica & Finch. Copyright © 2012 by Pearson Australia for Financial management, 6th ed. by Petty, Titman, Keown, Martin, Martin, Burrow & Nguyen. Copyright © 2015 by Pearson Australia for Macroeconomics, 3rd ed. by Hubbard, Garnett, Lewis & O’Brien. Copyright © 2015 by Pearson Australia for Essentials of economics, 3rd ed. by Hubbard, Garnett, Lewis & O’Brien. Copyright © 2014 by Pearson Australia for Principles of economics, 4th ed. by Sloman, Norris & Garrett. Copyright © 2016 by Pearson Australia for Macroeconomics, by Parkin & Bade. Copyright © 2014. Pearson Education Custom Books. All rights reserved. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the written permission of the publisher. Project Management Team Leader: Jill Gillies Key Account Manager: Danielle Woods Project Manager: Lisa D’Cruz Production Controller: Brad Smith Indexer: Mary Coe Typeset by Midland Typesetters, Australia Printed and bound in Australia by The SOS + Print Media Group ISBN: 9781488613692 ISBN: 9781488614361 (Vital Source) Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:46:58. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  Contents in Brief Preface viii 1 Forms of Ownership 1 2 Understanding Financial Statements and Cash Flows 22 3 Entrepreneurship and Small-Business Ownership 53 4 Interest Rates and the Time Value of Money − The Basics 76 5 Financing the Business 103 6 Working Capital Management and Short Term Financing 132 7 Financial Analysis 153 8 The Australian Financial Markets 194 The Macroeconomic Environment and Enterprise Performance 216 9 GDP: Measuring Total Production, Income and Economic Growth 218 10 Economic Growth, the Financial System and Business Cycles 238 11 Unemployment and Inflation 268 12 Money, Banks and Interest Rates 303 13 Monetary Policy and Effects of Interest Rate Changes 317 Index 342 Copyright © 2014. Pearson Education Custom Books. All rights reserved. Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:08. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  Contents Preface viii 2.2 The Income Statement 25 Income Statement of H. J. Boswell Ltd 25 CHAPTER 1 Connecting the income statement and balance sheet 26 Interpreting firm profitability using the income statement 27 Forms of Ownership 1 IFRS and earnings management 27 BEHIND THE SCENES SCANNING THE SKIES FOR 2.3 The Balance Sheet 29 HELP AT SIRIUS SATELLITE RADIO 2 The balance sheet of H. J. Boswell Ltd 30 Introduction 2 Debt and equity financing 33 1.1 Sole Traders 2 Book values, historical costs and market values 33 Advantages of Sole Traders 3 2.4 The Cash Flow Statement 38 Disadvantages of Sole Traders 4 Sources and uses of cash 38 1.2 Partnerships 5 H. J. Boswell’s cash flow statement 40 Advantages of Partnerships 5 Example—H. J. Boswell Ltd 42 Disadvantages of Partnerships 6 Example—H. J. Boswell Ltd 43 KEY TERMS 46 Keeping It Together: The Partnership Agreement 6 KEY EQUATIONS 46 1.3 Corporations 7 SUMMARY 47 Advantages of Corporations 7 STUDY QUESTIONS 47 Disadvantages of Corporations 8 PROBLEMS AND APPLICATIONS 48 Types of Corporations 9 MINI CASE 50 Shareholders 10 REFERENCES 52 Board of Directors 10 ENDNOTES 52 Corporate Officers 12 1.5 Mergers and Acquisitions 12 Advantages of Mergers and Acquisitions 13 CHAPTER 3 Disadvantages of Mergers and Acquisitions 13 Entrepreneurship and Small-Business Merger and Acquisition Defenses 14 Ownership 53 1.6 Strategic Alliances and Joint Ventures 15 Strategic Alliances 15 BEHIND THE SCENES BRINGING TRADITIONAL Copyright © 2014. Pearson Education Custom Books. All rights reserved. Joint Ventures 16 HEALING WISDOM TO MODERN CONSUMERS AT SISTER SKY 54 BEHIND THE SCENES TEAMING UP FOR SURVIVAL AT SIRIUS XM 17 Introduction 54 KEY TERMS 19 3.1 The Big World of Small Business 54 STUDY QUESTIONS 19 Economic Roles of Small Businesses 54 PROBLEMS AND APPLICATIONS Characteristics of Small Businesses 55 ADDITIONAL PROBLEMS AND APPLICATIONS 20 Factors Contributing to the Increase REFERENCES 21 in the Number of Small Businesses 56 3.2 The Entrepreneurial Spirit 57 Why People Start Their Own Companies 57 CHAPTER 2 Qualities of Successful Entrepreneurs 58 Understanding Financial Statements Innovating Without Leaving: Intrapreneurship 58 and Cash Flows 22 3.3 The Start-Up Phase: Planning BEHIND THE SCENES WAKE-UP CALL: ONETEL’S and Launching a New Business 59 Small-Business Ownership Options 59 REVEALING FINANCIAL STATEMENTS 22 Blueprint for an Effective Business Plan 60 Introduction 23 3.4 The Growth Phase: Nurturing 2.1 An Overview of the Firm’s Financial Statements 23 and Sustaining a Young Business 62 Basic financial statements 23 The New Business Failure Rate 62 Why study financial statements? 24 Advice and Support for Business Owners 64 What are the accounting principles used to prepare financial statements? 24 Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:18. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  3.5 Financing Options for Small Businesses 66 5.3 Gearing and the Long-term Financing Decision 118 Private Financing 66 5.4 Raising Long-term Equity Finance 121 Public Financing 69 The role of the Australian Securities Exchange 121 Crowdfunding 69 Share issues 122 3.6 The Franchise Alternative 70 Private placing 124 Types of Franchises 70 SUMMARY 126 Advantages of Franchising 70 KEY TERMS 126 Disadvantages of Franchising 70 STUDY QUESTIONS 127 How to Evaluate a Franchising Opportunity 71 PROBLEMS AND APPLICATIONS 127 MINI CASE 130 BEHIND THE SCENES BUILDING AN AUTHENTIC AND PURPOSEFUL BUSINESS AT SISTER SKY 72 KEY TERMS 73 CHAPTER 6 STUDY QUESTIONS 73 Working Capital Management and PROBLEMS AND APPLICATIONS 73 Short Term Financing 132 ADDITIONAL PROBLEMS AND APPLICATIONS 74 Introduction 132 REFERENCES 74 6.1 Overview of Working Capital 133 The cash cycle 133 CHAPTER 4 Working capital needs by industry 135 Firm value and working capital 136 Interest Rates and the Time Value of 6.2 Trade Credit 137 Money—The Basics 76 Trade credit terms 137 Introduction 76 Trade credit and market frictions 138 BEHIND THE SCENES GETTING WISE TO PAYDAY Managing float 139 LOAN INTEREST RATES 76 6.3 Receivables Management 140 4.1 Using Timelines to Visualise Cash Flows 77 Determining the credit policy 140 4.2 Compounding and Future Value 78 Monitoring accounts receivable 141 Compound interest and time 80 6.4 Payables Management 144 Compound interest and the interest rate 80 Determining accounts payable days outstanding 145 Techniques for valuing cash flows at different points in time 80 Stretching accounts payable 145 Applying compounding to things other than money 82 6.5 Inventory Management 146 Compound interest with shorter compounding periods 82 Benefits of holding inventory 146 4.3 Discounting and Present Value 86 Costs of holding inventory 147 The mechanics of discounting future cash flows 86 6.6 Cash Management 148 Discounting with shorter discounting periods 87 Motivation for holding cash 148 Two additional types of discounting problems 89 Alternative investments 149 The Rule of 72 92 KEY TERMS 149 4.4 Making Interest Rates Comparable 93 STUDY QUESTIONS 149 Calculating the interest rate and converting it to an EAR 94 PROBLEMS AND APPLICATIONS 150 Copyright © 2014. Pearson Education Custom Books. All rights reserved. To the extreme: Continuous compounding 96 MINI CAS E4 KEY TERMS 97 152 KEY EQUATIONS 97 REFERENCES 152 SUMMARY 98 STUDY QUESTIONS 98 CHAPTER 7 PROBLEMS AND APPLICATIONS 99 Financial Analysis 153 MINI CASE 101 Introduction 153 ENDNOTE 102 BEHIND THE SCENES TAKING THE PULSE OF CHAPTER 5 BUSINESS 153 Financing the Business 103 7.1 Why Do We Analyse Financial Statements? 154 Introduction 103 7.2 Common-size Statements: Standardising 5.1 Sources of Finance 103 Financial Information 155 Internal sources of finance 103 The common-size income statement: H. J. Boswell Ltd 155 The common-size balance sheet: H. J. Boswell Ltd 156 5.2 External Sources of Finance 105 External sources of long-term finance 105 7.3 Using Financial Ratios 157 Liquidity ratios 157 External sources of short-term finance 111 Capital structure ratios 162 YOUR MONEY PERSONAL CREDIT RATINGS 115 Asset management efficiency ratios 163 Long-term v short-term borrowing 117 Profitability ratios 166 Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:18. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  Market value ratios 172 CHAPTER 9 Summing up the financial analysis of H. J. Boswell Ltd 176 7.4 Selecting a Performance Benchmark 179 GDP: Measuring Total Production, Trend analysis 179 Income and Economic Growth 218 Peer-firm comparisons 180 BEHIND THE SCENES NEAR NEIGHBOURS, BUT FAR 7.5 Limitations of Ratio Analysis 181 AWAY 218 KEY TERMS 182 KEY EQUATIONS 182 Introduction 219 SUMMARY 183 9.1 Gross Domestic Product Measures Total STUDY QUESTIONS 184 Production 220 PROBLEMS AND APPLICATIONS 184 Measuring total production: gross domestic product 220 MINI CASE 192 Measuring GDP using the value-added method 221 REFERENCES 192 Other measures of total production and total income 221 ENDNOTES 193 Methods of Measuring Gross Domestic Product 223 Production, income and the circular-flow diagram 223 CHAPTER 8 Components of GDP 225 An equation for GDP and some actual values 226 The Australian Financial Markets 194 9.2 Does GDP Measure What We Want It to Measure? 227 Introduction 194 Shortcomings in GDP as a measure of total production 227 8.1 What Are Financial Markets? 194 Shortcomings of GDP as a measure of wellbeing 228 8.2 Role of Financial Markets 195 9.3 Real GDP Versus Nominal GDP 230 8.3 Financial Intermediaries 198 Calculating real GDP 230 Commercial banks 198 9.4 Calculating the Economic Growth Rate 231 Non-bank authorised deposit-taking institutions 199 The GDP deflator 231 Investment banks 199 Conclusion 232 Insurance companies 199 KEY TERMS 234 Superannuation funds 200 SUMMARY 235 BEHIND THE SCENES THE GLOBAL FINANCIAL STUDY QUESTIONS 235 CRISIS EXPLAINED 200 PROBLEMS AND APPLICATIONS 235 ENDNOTES 237 Investment companies 201 Private equity firms 202 8.4 Movement of Funds 204 CHAPTER 10 Direct transfer of funds 204 Economic Growth, the Financial Indirect transfer using commercial banks 204 System and Business Cycles 238 Indirect transfer using other financial intermediaries 204 8.5 Components of Australian Financial Markets 205 BEHIND THE SCENES GROWTH AND THE BUSINESS The stock market 206 CYCLE AT GENERAL MOTORS HOLDEN 238 The bond market 207 Introduction 239 Copyright © 2014. Pearson Education Custom Books. All rights reserved. Foreign exchange market 208 10.1 Long-run Economic Growth Is the Key to Derivatives markets 208 Rising Living Standards 240 Money market and capital market 210 Calculating growth rates and the rule of 70 242 Public offerings and private placements 210 What determines the rate of long-run economic growth? 242 Primary markets and secondary markets 210 Potential GDP 245 The Australian Securities Exchange (ASX) 211 10.2 Saving, Investment and the Financial System 246 8.6 Pattern of Fund Flows in Australia’s Financial An overview of the financial system 247 Markets 212 The macroeconomics of saving and investment 248 KEY TERMS 213 The market for loanable funds 249 SUMMARY 213 10.3 The Business Cycle 254 WEB WORKS 214 Some basic business cycle definitions 254 STUDY QUESTIONS 214 What happens during the business cycle 255 MINI CASE 214 Why are business cycle fluctuations less severe? 260 ENDNOTES 215 Conclusion 262 KEY TERMS 264 SUMMARY 264 STUDY QUESTIONS 265 The Macroeconomic Environment and PROBLEMS AND APPLICATIONS 265 Enterprise Performance 216 ENDNOTES 267 What Is This Thing Called the Economy? 216 Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:18. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  CHAPTER 11 12.2 The Financial System in Australia 305 Unemployment and Inflation 268 The role of the financial sector 305 Banks 305 BEHIND THE SCENES WHY IS THE UNEMPLOYMENT Non-bank financial intermediaries 306 RATE IMPORTANT TO WOOLWORTHS? 268 The Reserve Bank of Australia 307 Introduction 269 12.3 The Supply of Money 308 11.1 Measuring the Unemployment Rate and the The creation of credit 309 Labour Force Participation Rate 269 Relationship between money supply and rate of interest 311 The labour force survey 269 12.4 The Demand for Money 311 Problems with measuring the unemployment rate 271 What determines the size of the demand for money? 312 Trends in labour force participation 273 12.5 Equilibrium 313 How long are people usually unemployed? 273 Equilibrium in the money market 313 Job creation and job destruction 275 The full effect of changes in money supply on 11.2 The Costs of Unemployment 276 interest rates 314 Costs to the economy 276 KEY TERMS 315 Costs to the individual 276 STUDY QUESTIONS 315 The distribution of unemployment 277 PROBLEMS AND APPLICATIONS 316 11.3 Types of Unemployment 277 MULTIPLE-CHOICE QUESTIONS 316 Cyclical unemployment 278 Frictional unemployment and job search 279 CHAPTER 13 Structural unemployment 279 Full employment 280 Monetary Policy and Effects of Interest 11.4 Explaining Frictional and Structural Unemployment 280 Rate Changes 317 Government policies and the unemployment rate 281 13.1 Objective, Framework and Tools 317 Social security and other payments to the unemployed 281 Monetary Policy Objective 317 Labour market regulation and deregulation 282 Statement on the Conduct of Monetary Policy 318 Minimum wages 283 A Prerequisite for Achieving the Goals of Monetary Policy 318 Trade unions 283 Responsibility for Monetary Policy 319 Efficiency wages 283 The Conduct of Monetary Policy 319 11.5 Measuring Inflation 284 How Open Market Operations Change the Monetary Base 322 The consumer price index 285 13.2 Monetary Policy Transmission 325 Is the cpi accurate? 287 Quick Overview 325 The producer price index 288 Interest Rate Changes 327 11.6 Using Price Indexes to Adjust for the Effects Exchange Rate Changes 327 Money and Bank Loans 328 of Inflation 288 The Long-Term Real Interest Rate 328 11.7 Does Inflation Impose Costs on the Economy? 290 Expenditure Plans 328 Inflation affects the distribution of income 290 The Reserve Bank Fights Recession 329 The problem with anticipated inflation 291 The Reserve Bank Fights Inflation 329 Copyright © 2014. Pearson Education Custom Books. All rights reserved. The problem with unanticipated inflation 291 Loose Links and Long and Variable Lags 330 Hyperinflation 292 A Final Reality Check 331 Deflation 292 13.3 Alternative Monetary Policy Strategies 334 11.8 What Causes Inflation? 293 How Well Does Inflation Targeting Work? 334 11.9 Is There a Short-run Trade-off Between Money Targeting 336 Unemployment and Inflation? 294 Nominal GDP Targeting 336 The Phillips curve 294 Why Targets and Rules? 337 Conclusion 295 KEY TERMS 339 KEY TERMS 297 SUMMARY 339 SUMMARY 297 STUDY QUESTIONS 340 STUDY QUESTIONS 299 PROBLEMS AND APPLICATIONS 340 PROBLEMS AND APPLICATIONS 299 MULTIPLE CHOICE QUESTIONS 341 ENDNOTES 302 Index 342 CHAPTER 12 Money, Banks and Interest Rates 303 Introduction 303 12.1 The Meaning and Functions of Money 303 The functions of money 304 What should count as money? 304 Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:18. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  Preface Welcome to Financing Enterprises 200910 at Western Sydney University. The contents in this book have been compiled specifically to meet Financing Enterprises course require- ments, which is a core unit in the Bachelor of Business. This book is also useful to readers with an interest in understanding important key concepts involved in financing enterprises. The book starts by outlining the different forms of ownership structures available when you start a business and its legal requirements. This includes the different types of financial statements issued and its components. This will be followed by a discussion of the different sources of finance (short and long-term) for both small and large enterprises. An important concept to understand is the cost of raising capital and how financial gearing can have a significant effect on the cost of financing and the value of an enterprise. We will also differ- entiate between key financial ratios for making business decisions and assess their implica- tions for the future performance of an enterprise. The second part of this book looks into the business environment that enterprises operate in starting with an introduction to the different types of financial markets and its main characteristics. This is followed by an analysis of the macroeconomic environment where we will focus on the key macroeconomic indicators such as economic growth, infla- tion and unemployment. We will also introduce the business cycle and explain the different phases of the business cycle and the use of macroeconomic indicators to predict where a business is heading in the business cycle. Finally we will describe the roles of the reserve bank, commercial banks, interest rates, and credit analysis in respect to decisions of finan- cial lending. This includes a discussion about the monetary policy techniques employed by the reserve bank to influence the level of interest rates and the economy and how this affects the cost of finance for an enterprise. This book is designed with one overriding aim: to make this subject exciting, highly relevant and as easy to understand as possible. Good luck with your studies, and have fun. Perhaps this will be the beginning of a lifelong interest in finance and economics. Copyright © 2014. Pearson Education Custom Books. All rights reserved. Walid Bakry Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:30. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  1 Forms of Ownership LEARNING OBJECTIVES After studying this chapter, you will be able to Define sole trader and explain the six advantages and six Identify the potential advantages of pursuing mergers 1 disadvantages of this ownership model 5 and acquisitions as a growth strategy, along with the potential difficulties and risks Define partnership and explain the five advantages 2 and three disadvantages of this ownership model Define strategic alliance and joint venture and explain 6 why a company would choose these options over a Define corporation and explain the four advantages 3 and six disadvantages of this ownership model merger or an acquisition Explain the concept of corporate governance and identify 4 the three groups responsible for ensuring good governance Copyright © 2014. Pearson Education Custom Books. All rights reserved. Dgrilla/Shutterstock Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Bovee, Created from wsudt on 2020-09-08 C. L. & Thill, J. V. (2015). Business in action (Global ed., 7th ed., pp. 138-159). Harlow, Essex: Pearson Education Ltd. 00:47:40. 1 Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  2 CHAPTER 1 Forms of Ownership BEHIND THE SCENES SCANNING THE SKIES FOR HELP AT SIRIUS SATELLITE RADIO Sirius had three in the sky, XM had four, and both companies kept a spare on the ground, so satellite costs alone pushed $3 billion. And the technology to transmit signals was only part of the cost. The companies spent millions more to snag high-profile personalities and popular sporting events. With costs like these, a company obviously needs a mammoth revenue stream to have any hope of turning a profit. However, that side of the equation wasn’t any easier. Accessing Evan Agostini/AP Images satellite radio requires a special receiver and a monthly subscription fee, which puts the service at a disadvantage when consumers compare it to free terrestrial radio (the regular old kind of radio). Sirius and XM countered that satellite is commercial- free and uncensored, and it offers content not available anywhere else. However, with the U.S. economy in the worst shape in decades, millions of consumers were cutting back on Faced with mounting competition and a tough financial environment, Sirius CEO Mel Karmazin began exploring ways to join forces with discretionary purchases such as entertainment. rival satellite radio service XM Radio. If you were Mel Karmazin, CEO of Sirius, how would you address this challenge? Keeping costs under control as much as www.siriusxm.com possible and aggressive marketing are obvious options, but is it From the beginning, business had been up in the air—literally time to rethink things from the ground up? Can the relatively small and figuratively—for Sirius and XM. Both companies used satellite radio market even support two independent providers, satellites to broadcast multiple radio channels, and both both of which struggle with high costs? Would it make more sense companies struggled financially. Satellites are about the most to join forces with XM? If so, what would be the best approach— expensive pieces of business equipment imaginable, costing merge the two firms? Attempt to buy XM outright? Cooperate as more than $300 million each to build and launch. At one point, two independent companies?1 INTRODUCTION One of the most fundamental decisions you must make when starting a business is selecting a form of business ownership. This decision can be complex and can have far-reaching consequences for owners, employees, and customers. Picking the right ownership structure Copyright © 2014. Pearson Education Custom Books. All rights reserved. involves knowing your long-term goals and how you plan to achieve them. Your choice also depends on your desire for control and your tolerance for risk. Then as your busi- ness evolves over time, you may need to modify the original structure, a decision Sirius and XM faced in the chapter-opening Behind the Scenes. And even if you have no plans to start a business, knowing the legal structure of the companies where you might work is vital information to have. The three most common forms of business ownership are sole trader, partnership, and corporation. Each form has its own characteristic internal structure, legal status, size, and fields to which it is best suited. Each also has key advantages and disad- vantages for the owners (see Table 1.1). © Blend Images/Alamy 1.1 Sole Traders A sole trader is a business owned by one person (although it may have many employees). Many farms, retail establishments, and Sole trader can entail significant risks and a lot of work, but the poten- small service businesses are sole traders, as are many home-based tial rewards entice millions of people to consider it every year. businesses, such as those operated by caterers, consultants, and Titman. Financing Enterprises 200910 CB VS, Pearson Education Custom Books, 2014. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/wsudt/detail.action?docID=4741502. Created from wsudt on 2020-09-08 00:47:40. Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2016 – 9781488613692 - Titman/Financing Enterprises  CHAPTER 1 Forms of Ownership 3 TABLE 1.1 Forms of Business Ownership Each of the major forms of business ownership has distinct advantages and disadvantages. Structure Control Profits and Taxation Liability Exposure Ease of Establishment Sole trader One owner has complete control Profits and losses flow directly Owner has unlimited personal Easy to set up; typically to the owners and are taxed at liability for the business’s requires few legal and tax individual rates financial obligations formalities General Two or more owners; each partner Profits and losses flow directly All partners have unlimited Easy to set up; partnership is entitled to equal control unless to the partners and are taxed at liability, meaning their personal partnership agreement agreement specifies otherwise individual rates; partners share assets are at risk to mistakes not required but strongly income and losses equally made by others partners recommended unless the partnership agreement specifies otherwise Limited Two or more owners; one or more Same as for general Limited partners have limited Same as for general partnership general partners manage the partnership liability (making them liable partnership business; limited partners don’t only for the amount of their participate in the management investment); general partners have unlimited liability Corporation Unlimited number of shareholders; Profits are taxed at corporate Investor’s liability is limited More complicated and no limits on stock classes or vot- rates; profits are taxed again at to the amount of his or her expensive to establish ing arrangements; ownership and individual rates when (or if) they investment than a sole trader management of the business are are distributed to investors as separate (shareholders in public dividends