Chapter 30 provides knowledge of financial management in not-for-profit businesses. This chapter presents the following content: For-profit (investor-owned) vs. not-for-profit businesses, goals of the firm. | Chapter 30 Financial Management in Not-for-Profit Businesses Topics in Chapter For-profit (investor-owned) vs. not-for-profit businesses Goals of the firm What are the key features of investor-owned firms? Owners (shareholders) are well defined, and they exercise control by voting for the firm’s board of directors. Firm’s residual earnings belong to the owners, so management is responsible to the owners for the firm’s profitability. Firm is subject to taxation at the federal, state, and local levels. What is a not-for-profit corporation? One that is organized and operated solely for religious, charitable, scientific, public safety, literary, or educational purposes. Generally, qualify for tax-exempt status. Investor-Owned vs. Not-for-Profit Businesses Not-for-profit corporations have no shareholders, so all residual earnings are retained within the firm. Control of not-for-profit firms rests with a board of trustees composed mainly of community leaders who have no economic interests . | Chapter 30 Financial Management in Not-for-Profit Businesses Topics in Chapter For-profit (investor-owned) vs. not-for-profit businesses Goals of the firm What are the key features of investor-owned firms? Owners (shareholders) are well defined, and they exercise control by voting for the firm’s board of directors. Firm’s residual earnings belong to the owners, so management is responsible to the owners for the firm’s profitability. Firm is subject to taxation at the federal, state, and local levels. What is a not-for-profit corporation? One that is organized and operated solely for religious, charitable, scientific, public safety, literary, or educational purposes. Generally, qualify for tax-exempt status. Investor-Owned vs. Not-for-Profit Businesses Not-for-profit corporations have no shareholders, so all residual earnings are retained within the firm. Control of not-for-profit firms rests with a board of trustees composed mainly of community leaders who have no economic interests in the firm. Goals for Investor-Owned and Not-for-Profit Businesses Because not-for-profit firms have no shareholders, they are not concerned with the goal of maximizing shareholder wealth. Goals of not-for-profit firms are outlined in the firm’s mission statement. They generally relate to providing some socially valuable service in a financially sound manner. Is the WACC relevant to not-for-profit businesses? Yes. The WACC estimation for not-for-profit firms parallels that for investor-owned firms. WACC for Investor-Owned and Not-for-Profit Businesses Because not-for-profit firms pay no taxes, there are no tax effects associated with debt financing. A not-for-profit firm’s cost of equity, or cost of fund capital, is much more controversial than for an investor-owned firm. What is fund capital? Not-for-profit firms raise the equivalent of equity capital, called fund capital, by retaining profits, receiving government grants, and receiving private contributions. The firm’s opportunity .
