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Risk and Return, Business Structures

Risk and Return, Business Structures. By R. S. Miolla. Risk and Return. Return Cash inflows Profits (net income) Satisfaction Risk How wide a range of outcomes Standard deviation Only relevant if good and bad outcomes. Risk and Return - Example. A) $10,000 to invest

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Risk and Return, Business Structures

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  1. Risk and Return, Business Structures By R. S. Miolla

  2. Risk and Return • Return • Cash inflows • Profits (net income) • Satisfaction • Risk • How wide a range of outcomes • Standard deviation • Only relevant if good and bad outcomes

  3. Risk and Return - Example • A) $10,000 to invest • At the bank in a cd paying 5% • In the stock market: will pay between -50% and +50 %. Mean of all possibilities is +5%. Which investment would you choose? Why?

  4. Risk and Return - Example • Still $10,000 to invest. • Still a bank cd paying 5%. • Invest in the stock market: return will be between -50% and +75%. The mean of the outcomes (expected value) is +25%. • Which investment would you invest in? Why?

  5. Finance Terms • Financial Capital: Cash or “money” • Real Capital: Long term plant and equipment • Capital Structure: The mix (%) of debt and equity used to finance the business. What your sources of capital are. • Inflation: Increase of prices over time. • The goal of finance is to maximize shareholder wealth.

  6. The Flow of Business • 1) obtain financing • 2) receive cash • 3) buy real assets • 4) produce net income in the period • 5) collect cash flows • 6) reinvest (retained earnings) or pay dividends

  7. Forms of Ownership • 1) Sole Proprietorship: • Single owner • Unlimited liability • Taxed as owner’s income • 2) Partnership: • Two or more owners, Unlimited liability • Articles of partnership: profits, withdrawal terms, ownership % • Limited Liability Partnership (LLP): General partner and limited partners

  8. Forms of Ownership, con’t • 3) Limited Liability Company (LLC): • Low reporting costs, taxed as partnership or Corp., limits liability • 4) Corporation: • A legal entity, limited liability • Many owners (shareholders) • Board of Directors • Profits taxed twice: corporate and dividends • Subchapter S Corp. – Income taxed once to shareholders, maximum of 75 shareholders

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