FIN 380 Ch 1

Financial markets

primary function is to transfer savings from households that have accumulated funds that they wish to invest to businesses that need financing institutions and procedures that facilitate transactions in all types of financial claims Households are the net savers and businesses are the net demanders of those savings

Limited Liability Companies (LLC)

similar to a corporation in that it is a separate legal entity and its owners have limited liability, but the owners choose whether it will be taxed like a partnership or a corporation. The overall benefit of each depends on the tax brackets of the firm and the owners.

CIO (Chief Information Officer)

-IT management -reports directly to the CEO

CEO

-reports directly to the Board of Directors (and often is a member of the Board) and is responsible for carrying out the objectives set by the Board -typically names the other senior corporate officials such as the CFO, COO, and others

Advantages of the sole proprietorship

>it is virtually costless to form >taxation is simple (the owner reports business income on their personal tax return - the company does not pay taxes itself) >the owner retains the profits while making all decisions.

disadvantage taxable taxed dividends not deduct

Double taxation is a _____ to the corporate form of business enterprise. Traditional "c" corporations are separate _____ entities (they file their own tax return, thereby paying taxes), and then stockholders are _____ on _____ they receive, while the corporation paying those dividends does _____ _____ the dividends for tax purposes. Dividends are paid out of after-tax dollars, meaning that taxes are calculated without respect to whether dividends are paid.

corporations

Double taxation may exist in:

True: they work for the shareholders so they want to do what will benefit them -- maximizing stock price will increase stockholders wealth

For the financial manager's purposes, maximizing stockholders' wealth is synonymous with maximizing the firm's stock price. (T/F)

Limited Partnership (general partners face Unlimited liability) (investors/silent partners face limited liability)

In addition to corporation (both c and sub-S) and LLC, name one other organization form of business enterprise that may provide at least some of it's owners with limited liability.

Listed

In order for a particular security to be traded on a particular exchange, the security must be _________________ on the exchange. Blessed Archived Located Approved Listed

Diversifying

Investing in a variety of different securities is referred to as: Diversifying Dementing Desecrating Deforesting Decriminalizing

Limited partners and shareholders

Limited liability exists for: Shareholders and general partners Limited partners and proprietors Limited partners and shareholders All partners and shareholders All partners and proprietors

Primary market

Newly-created securities are issued to their initial investors in the: Primary market Secondary market Over the Counter market Dealer market

King

One of the underlying principles of finance is that cash is: Ace King Queen Jack Ten

An efficient market refers to:

Security prices quickly reflect new information

Both of the above

The Chief Financial Officer of a corporation typically supervises the: Treasury Department Accounting Department Both of the above None of the above

Maximize shareholders' wealth

The goal of the financial manager of a corporation is to: Maximize shareholders' wealth Maximize the firm's stock price Both of the above None of the above

stockholder wealth

The goal of the financial manager of the firm should be to maximize _____ _____ (stock price).

transfer households businesses

The primary function of a financial market is to _____ the supply of savings from _____ to the demanders of those savings, who are primarily _____.

limited investment personally stockholders limited limited liability

The stockholders of a firm are said to have _____ liability, meaning that their losses are limited to the amount of their ______ in the firm. They are not _____ liable for the debts of the business enterprise. Limited liability exists for _____ of corporations, _____ partners in limited partnerships, and owners of _____ _____ companies.

Stockholders

Ultimate control of a corporation is held by the: Stockholders Chief Financial Officer Chief Executive Officer Board of Directors

Ease of transfer and limited liability

Which of the following are advantages of corporations: Ease of transfer and double taxation Limited liability and double taxation Limited life and limited liability Ease of transfer and limited liability

A. Corporation

Which of the following files its own tax return (is a separate tax-paying entity): A. Corporation B. Proprietorship C. Partnership D. All of the above

ownership capital

While most firms are proprietorships, most large firms are corporations. One possible reason is the separation of _____ and control (management), and the ease with which corporations may thereby raise _____ by issuing stock.

Stockholders Limited partners

Who does Limited Liability exist for?

Corporations (other than S-Corps) and their stockholders

Who is subject to double taxation?

Dealer

You purchase securities directly from an entity. That entity is a securities: Broker Dealer Prognosticator Analyst CFO

partnership

a business organization where two or more persons organize a business for profit

Board of Directors

choose the senior management of the firm and CEO

Dealer markets

dealer is involved in one side or the other of every trade, most of which are made electronically dealer earns compensation by purchasing the securities at a low price and selling them at a higher price thereby earning a "Spread" aka over-the-counter (OTC) markets

limited partnership

limits the liability of the limited partners to their investment, but there must be at least one general partner who faces unlimited liability partners are not to be involved in the daily management of the firm if they are to maintain their limited liability status

Secondary markets

markets where previously issued securities are traded between investors

Primary markets

markets where securities (stocks and bonds) are issued by firms to their first/primary investors

Unlimited liability

the owner may lose more than just their investment in the business - their personal assets are at risk since any claim against the business is also a personal claim against the proprietor

Organized exchanges

where brokers match buy and sell orders without actually owning the securities involved brokers earn their compensation by charging fees or commissions for facilitating trades. occupy a physical location

False

When a corporation pays dividends, the corporation deducts those dividends from its taxable income. (T/F)

Time Value of Money

-A dollar today is worth more than a dollar tomorrow because you can invest it sooner -you would prefer to receive the same sum of money earlier rather than later

controller

-controls the accounting department -typical functions: >preparation of financial statements >managing the firm's tax situation >cost accounting >managing the accounting information and information technology systems

Treasurer

-controls the treasury department -typical functions include: >short-term cash/liquidity/credit >management >capital budgeting >financial planning >issuing securities (raising capital) >managing the investment portfolio >managing risks

CFO

-supervises two functional areas or departments within the firm: treasury dept, and accounting dept -goal is to maximize stockholders' well-being, maximize shareholders wealth or maximize the stock price of the firm

The Agency Problem

-to make decisions that are in one's own self-interest -a manager or other employees may make decisions that they believe will be good for them, even if bad for the stockholders -The corporate environment is one where the stockholders/owners are the principal, and the employees are the agents, making decisions on behalf of the principal

stockholders

-ultimate control of a corporation is in the hands of these people -exercise their control by electing members of the Board of Directors -Directors, officers, managers, and all employees ultimately work for the them and should make decisions that are in their best interests

Advantages of corporations

>Separation of ownership (stockholders) and control (firm management) is possible >Those wishing to invest in a company need to only purchase its stock; they don't have to take an active role in the company's management >Specialization of management is possible >Transfer of ownership is relatively easy (just sell your stock in a publicly traded corporation; for nonpublicly traded corporations, this is more difficult) >the corporation may survive its owners >owners face limited liability: they may only lose their investment in the stock and nothing more since they are not personally liable for the debts of the corporation

Advantages of the partnership

>it is relatively easy to form (However, anyone entering a partnership is advised to have a written partnership agreement) >Taxation of a partnership is simple (each partner receives a K-1 form showing their share of income on which they are taxed by reporting the income on their individual tax return - the partnership does not pay taxes itself) >there is some limited ability to share responsibilities.

Disadvantages of the sole proprietorship

>no specialization of management is possible (the owner makes all decisions) >the business officially dies with the proprietor >transfer of the proprietorship is difficult >capital is limited to what the owner can contribute or borrow in their own name >the owner faces unlimited liability

Disadvantages to the partnership

>partnership ownership interests may not be easily transferred (the partnership agreement governs this - new partners may have to be approved by all or a majority of existing partners) >it is difficult to raise capital >unlimited liability extends to all partners: each partner is jointly and severally liable for the entire debts of the partnership.

Disadvantages of corporations

>some legal red tape is necessary to organize and maintain the corporation (e.g., receiving a charter from the state of incorporation) >the stockholders face double taxation on the corporation's earnings >Small corporations may avoid this if they are able to be an "S-Corp." This maintains the limited liability benefits of a corporation while also allowing the corporation to be taxed as a partnership (each owner receives a form k-1 and is taxed on their share of income via their personal tax return - the "S-Corp" does not pay taxes itself)

tax proprietorship partnership s-corp personal

A corporation is a separate legal entity, so it files its own _____ return, while the owners of a _____, _____ or _____ include taxable income from their businesses on their _____ tax return.

True: way for a corporation to avoid double taxation they are taxed only once at the shareholder level

An S-Corp is taxed like a partnership (each owner pays taxes personally on their share of the corporations profits). (T/F)

proprietorship

a business owned by an individual in order to earn a profit and make the owner better off

corporation

a legal entity separate from its owners. Ownership interest is evidenced by shares of stock in the firm