Summary Fundamentals of corporate finance by Berk & Demarzo (2nd global edition)

Chapter A – Introduction


Finance is about financial decisions; this book focuses on how people in corporations make financial decisions. The financial decisions, in your personal life and inside a business, are tied together in the Valuation Principle. This principle shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

The four types of firms

There are four major types of firms that financial managers run:

1. Sole proprietorships
A sole proprietorship is a business owned and run by one person. This type of firm is usually very small with few of none employees and is the most common type in the world.
Key features:

  1. Easy to set up;

  2. No separation between the firm and the owner (one owner who runs the business);

  3. Owner has got unlimited personal liability for any of the firm’s debts;

  4. Life of the firm is limited to the life of the owner.

2. Partnerships
A business owned and run by more than one owner is called a partnership.
Key features:

  1. All partners are liable for the firm’s debt;

  2. Death or withdrawal of any single partner means the end of the partnership;

  3. If the partnership agreement provides for alternatives (e.g. buyout) partners can avoid liquidation.

When the partnership has got two kinds of owners, general partners and limited partners, the partnership is called a limited partnership. The general partners have the same rights and privileges as partners in any general partnership (personal liability). The liability of limited partners is limited to their investment, they have limited

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