Forms of Business Organization:

1he Individual or Sole Proprietorship: managed by a single person with and responsibility oI unlimited
liability.
2 1he Partnership: represents a joining oI interests by two or more individuals in a common project &
the acts oI a single partner bind the group and each is liable without limit Ior all the debts oI the
partnership.
3 1he 1oint-Stock Company: unlimited liability characteristic oI the shares makes it a quasi-partnership;
on the other hand, its capacity to continue regardless oI speciIic ownership interests makes it akin to a
corporation.
4. 1he Corporation: separate and distinct legal personality Irom its shareholders & it is the most eligible
Iorm to have Iinance & it oIIers the Iollowing beneIits:
(1) Recognized legal entity.
(2) Continuity oI existence.
(3) Limited liability to owners.
(4) Facilitation oI large-scale production.
(5) May grow Iast.

Financial System:
Financial markets (money and securities markets) and Iinancial intermediaries (banks, insurance
companies, pension Iunds, etc., ) have the basic Iunction oI getting people (savers and producers/users)
together in order to move Iunds Irom those who have surplus oI Iunds (savers/investors) to those who have
a shortage oI Iunds (users).
Function
Financial Markets
Money Market Capital Market
Banking system
For short term instruments with
zero risk
Securities
1. Savings ttraction Tool: Interest Rate Tool: Rate of return
2. Recourses llocation By: Measuring credit worthiness By: Measuring eIIiciency

- nother way oI distinguishing between markets is on the basis oI the maturity oI the securities traded in
each market. The money market is a Iinancial market in which only short-term debt instruments (maturity
oI less than one year) are traded; the capital market is the market in which longer-term debt (maturity oI
one year or greater) and equity instruments are traded. Money market securities are usually more widely
traded than longer-term securities and so tend to be more liquid. In addition, short-term securities have
smaller fluctuations in prices than long-term securities, making them safer investments

- ebt and Equity Markets: The main disadvantage oI owning a corporation's equities rather than its
debt is that an equity holder is a residual claimant; that is, the corporation must pay all its debt holders
beIore it pays its equity holders. 1he advantage of holding equities is that equity holders benefit directly
from any increases in the corporation's profitability or asset value because equities confer ownership
rights on the equity holders Debt holders do not share in this benefit because their dollar payments are
fixed


Cost of Money
In a Iree economy, Iunds are allocated through the price system. The interest rate is the price paid to
borrow Iunds, whereas in the case oI equity capital, investors expect to receive dividends and capital
gains. The Iour most Iundamental Iactors that aIIect the supply oI and demand Ior investment capital and
hence the cost oI money are:
(1) Production opportunities
(2) Time preIerences Ior consumption
(3) Risk
(4) InIlation.
%e iger te perceived risk, te iger te required by investors of rate of return. Further, people
use money as a medium oI exchange. When money is used, its value in the Iuture, which is aIIected by
inIlation, comes into play: %e iger te expected rate of inflation, te larger te required return.
Thus, we see that the interest rate paid to savers depends in a basic way (1) on the rate oI return producers
expect to earn on invested capital. (2) on savers' time preIerences Ior current versus Iuture consumption,
(3) on the riskiness oI the loan, and (4) on the expected Iuture rate oI inIlation. The returns borrowers
expect to earn by investing the Iunds they borrow set an upper limit on how much they can pay Ior
savings, while consumers' time preIerences Ior consumption establish how much consumption they are
willing to deIer, hence how much they will save at diIIerent levels oI interest oIIered by borrowers,
Higer risk and iger inflation also lead to iger interest rates.
Corporation VS Investor:
Corporation (Management) Investor (Sareolder or Lender)
- eeds Money finance) - as Money Save or Invest)
- as to pay to have money Cost) - as to gain to give Money Return)
- as 2 options to be Iinanced:
Borrowing : pay interest rate
Issuing equity : pay dividends
- as 2 options to invest in:
Lending: gain Interest rate (sure: 0 risk)
Invest: gain return (uncertainty: risk)
Main Concern - What to Iinance:
Movable assets (short-term)
Movable assets (long-term)
Fixed assets

- Risk/Return Relationship
Using (Capital sset Pricing Model,
portIolio theory & TVM)
Inflation: is deIined as an increase in the average level oI prices in the economy & could be managed
using :
1. Monetary policy: managing money supply (via: Interest rate, level oI reserves, treasury bills . etc.)
2. Fiscal policy: involves decisions about government spending and taxation.

#isk - #ate of #eturn #elationsip & CAPM:

O Risk measurement: risk is the variability oI returns & we can measure risk by examining the tightness
oI the probability distribution associated with the possible outcomes.
The measure we probably use most oIten is the standard deviation, the symbol Ior which is 'sigma", the
smaller the standard deviation, the tighter the probability distribution, and, accordingly, the lower the
riskiness oI the investment.
O Risk Aversion and Required Returns: the higher a security's risk, the higher the return investors
demand, thus the less they are willing to pay Ior the investment.
O Portfolio Risk: holding a stock as part oI a portIolio generally is less risky than holding the same stock
all by itselI. sset risk consists oI:
Aonsystematic Risk irm-Specific Risk): is caused by events that are unique to this particular Iirm.
Because the actual outcomes oI these events essentially are random, their eIIects on a portIolio can be
eliminated by diversiIication (could be eliminated- controllable).
Systematic Risk arket Risk): stems Irom Iactors that systematically aIIect most Iirms & cannot be
eliminated by diversiIication (couldn`t be eliminated- uncontrollable).
It is measured by a concept called Beta (), a measure oI the sensitivity oI an asset's return to changes in
the value oI the entire market oI assets.
O Risk premium: equals Market return risk Iree return.
O xpected Return of portfolio risk Iree return (Market return risk Iree return).
1he best Portfolio: 1his gives ax Return at given Risk or given Return at in Risk

%eory of asset demand:
States that, holding all oI the other Iactors constant:
1. The quantity demanded oI an asset is usually positively related to wealth, with the response being greater
iI the asset is a luxury rather than a necessity.
2. The quantity demanded oI an asset is positively related to its expected return relative to alternative
assets.
3. The quantity demanded oI an asset is negatively related to the risk oI its returns relative to alternative
assets.
4. The quantity demanded oI an asset is positively related to its liquidity relative to alternative assets.

%ime Value of Money and Bond and Stock Valuation:
Time value oI money techniques are used to explain how investors establish the values oI stocks and
bonds.
Financial decisions oIten involve situations in which someone pays money at one point in time and
receives money at some later time. Dollars that are paid or received at two diIIerent points in time are
diIIerent, and this diIIerence is recognized and accounted Ior by time value oI money (TVM) analysis.
O onds: The value oI a bond is Iound as the present value oI an annuity (the interests` payments paid
annually in equal amounts) plus the present value oI a lump sum (the principal). The bond is evaluated
at the appropriate periodic interest rate over the number oI periods Ior which interest payments are
made.
The return earned on a bond held to maturity is termed the bond's yield to maturity (YTM). The longer
the maturity oI a bond, the more its price will change in response to a given change in interest rates;
this is called interest rate price risk.

O Stocks: The value oI a share oI stock is calculated as the present value oI the stream oI dividends it is
expected to provide in the Iuture.
The expected total rate oI return Irom a stock consists oI an expected dividend yield plus an expected
capital gains yield. For a constant growth Iirm both the expected dividend yield and the expected
capital gains yield are constant.