University of Phoenix
Puerto Rican Business Law – LAW/531PR
Israel Camacho Alicea June 4, 2013
Financing decisions determine how a firm will raise capital. Examples of financing
decisions include securing a bank loan or selling debt in the public capital markets.
Capital budgeting involves deciding which productive assets the firm invests in, such
as buying a new plant or investing in the renovation of an existing facility.
Financial managers should select a capital project only if the value of the projects
expected future cash flows exceeds the cost of the project. In other words, firms
should only make investments that will increase their value, and thus increase the
stockholders’ wealth. Working capital management is the day-to-day management
of a firm’s short-term assets and liabilities. Working capital can be managed by
maintaining the optimal level of inventory, managing receivables and payables,
deciding to whom the firm should extend credit, and making appropriate investments
with excess cash. The answer that does not pertain to corporations is: c. Are the
easiest type of business to form. The three main components of an executive
compensation package are: base salary, bonus based on accounting performance
and compensation tied to the form’s stock price.
Financial managers are concern with three fundamental decisions when running a
Business. The first one is the Capital budgeting decisions which identifies the
productive assets the firm should buy. Secondly the Financial decisions which
determine how the firm should finance and pay for assets and the last one Working
Capital Management decision that works to determine how day to day financial
matters should be managed so that the firm can pay its bills and how surplus cash
should be invested.
Double taxation occurs when earnings are taxed twice.
The owners of a corporation are subject to double taxation first at the corporate
level when the firm’s earning are taxed and then again at personal level when the
dividends they receive are taxable.
Two business structures are often preferred for small businesses, since they avoid this double taxation burden: the LLC (limited liability company) and S Corporation. With these business structures, the company is taxed more like a sole proprietor or a partnership than as a separate entity, like the C Corporation.
Recent regulatory changes that are designed to reduce agency costs. The most
important changes resulted from the Sarbanes-Oxley Act, passed by Congress in
2002. The act was aimed at reducing agency costs, promoting ethical conduct and
improving the integrity of accounting reporting system.
Th e two basic sources of funds for all businesses are debt and equity.
Net working capital is a measure of a fi rm’s ability to meet its short-term obligations as they come due. One way that fi rms maintain their liquidity is by holding more current assets.
Th e mix of debt and equity on the balance sheet is known as a fi rm’s capital structure.
Th e term capital structure is used because long-term funds are considered capital, and these funds are raised in capital markets—fi nancial markets where equity and debt instruments with maturities greater than one year are traded.
A partnership consists of two or more owners who have joined together legally to manage a business. About 10 percent of all businesses in the United States are organized in this manner. To form a partnership, the owners enter into an agreement that details how much capital each partner will contribute to the partnership, what their management roles will be, how key management decisions will be made, how the profi ts will be divided, and how ownership will be transferred in case of specifi ed events, such