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Story of the Firm

In: Other Topics

Submitted By casums12
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Story of the firm To start the story of the firm I am going to talk about how opening a new firm is like an investment. It is like an investment because you invest in assets in this case it would be a new firm, the assets or firm come with a risk that it might not pan out, but if it works you receive the revenue which leads to profits after you cover your expenses and that leads to your return, which you can return to the business in retained earnings or pay out dividends to your shareholders. But there is an opportunity cost in this because if your business doesn’t work out you lose that money and you could have invested it in another company something that could have made you money. The opportunity cost is the next best option to the one you actually chose. It would be if you invest in your own company or you could put your money in an oil company. If your company doesn’t work out the opportunity cost would be investing in the oil company that could have been very successful and you lost that opportunity to invest in that. So you are taking contributed capital, which is your money you are putting into the company and take loans from banks to start up your business along with selling you stock to investors who will pay you to buy the stock then the business will pay the stockholder interest through out the period and the whole loan back eventually, which would be a amortized loan. Compared to an interest only loan and a discount loan. Taking the loans from the banks would be considered long term debt, which is tax deductable, which can make debt more favorable to use to finance your company compared to equity which is not tax deductable. Using debt creates financial leverage because your using the debt instead of money out of your pocket. You can get a loan from the bank if your a sole proprietor or partnership that is a private company, but if the company is...

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