FIN 5213 - Ch 1 - The Corporation

Corporate Management Team

- Board of Directors - Chief Executive Officer (CEO)

NASDAQ

A nationwide electronic system that links dealers across the nation so that they can buy and sell securities electronically. They do not meet in a physical location. They have many market makers for a single stock. National Association of Securities Dealers Automated Quotations

Seasoned security offering (SEO)

A new public stock issued after the company's stock has been previously issued publicly. Also called a seasoned new issue.

Security

A security is an ownership or debt that has value and may be bought and sold. There are many types of securities that can be broadly categorized into equity, debt and derivatives. A stock is a type of security that gives the holder ownership, or equity, of a publicly-traded company.

US Treasury Bill (T-Bill)

A short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. These securities are widely regarded as low-risk and secure investments.

S Corporation

A unique government creation that looks like a corporation but is taxed like sole proprietorships and partnerships where a firm's profits are not subject to corporate income tax

What are the advantages and disadvantages of organizing a business as a corporation?

Advantages: personal liability protection, business security and continuity, easy access to capital, Disadvantages: C-corps are double taxed; S-corps are not but they are more difficult to quality for; more protocols or red-tape.

The Firm and Society Relationship

As long as nobody else is made worse off by a corporation's decisions, increasing the value of the firm's equity is good for society. It only becomes a problem when increasing the value of the firm's equity comes at the expense of others.

Bid vs Ask Price

Bid Price is the max price a buyer is willing to pay for a security Ask Price is the minimum price a seller is willing to receive for a security

Sole Proprietorship

Business owned/run by one person. Has few employees, if any. No separation/protection between firm and owner, unlimited personal liability and limited life.

Describe the taxation consequences for C and S corporate forms.

C - a shareholder of a C corporation is subject to double taxation; they pay corporate tax and personal tax S - a shareholder of a S corporation only has to pay their personal tax, there is no corporate tax

What are the three main tasks of a financial manager?

Financial Managers have three main tasks: making investment decisions (most important), financing decisions and managing the firm's cash flows (for day-to-day obligations).

Financial Manager

a manager who is primarily responsible for an organization's financial resources and cash management

Foreign Exchange Market

a market in which currencies of different countries are traded and exchange rates are set

Limit Order

a request to buy or sell a stock at a specified price

Blockchain

a technology that allows a transaction to be recorded in a publicly verifiable way without the need for a trusted third party to certify the authenticity of the transaction. By enabling a public ledger of transactions, blockchain technology allows for the digital transfer of assets without the backing of a government or a central clearinghouse.

Derivative Security Market

an agreement to exchange a standard quantity of assets at a set price on a specific date in the future. The main purpose is to transfer risk between market participants. Exchange listed derivatives (options and futures) and OTC derivatives (Forward contracts, forward rate agreements, Swaps, securitized loans, etc.)

Investment Banks (IBs)

an organization that underwrites and distributes new investment securities and helps businesses obtain financing; help corporations and governments raise capital through debt and equity security issues in the primary market

shareholder, stockholder, equity holder

an owner of a share of stock or equity in a corporation

Banker's Acceptance

have traditionally been used to finance international trade where a bank is asked to guarantee payment on a commercial contract in case the buyer of the goods does not or cannot pay.

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange

Forward FX

the exchange of currencies in the future on a specific date and at a pre-specified exchange rate.

Primary Market

the financial market in which new securities are originally sold to investors

Secondary Market

the financial market in which previously issued securities are traded among investors

Stock Market

the financial market where stocks are traded. Companies initially sell stock to raise money and after that the stock is traded among investors. Companies and individuals watch the stock market. The success of SEOs is dependent on the company's stock.

Initial Public Offering (IPO)

the first time a company issues stock that may be bought by the general public

Spot FX

the immediate exchange of currencies at current exchange rates

stock

the ownership or equity of a corporation divided into shares

Public Company

a company whose shares are traded freely on a stock exchange.

List and define the four major types of firms in the United States; describe major characteristics of each type, including the means for distributing income to owners.

1. Sole Proprietorship - a business with only one owner with unlimited personal liability 2. Partnership - a business with more than one owner. There can be General Partners & Limited Partners, general partners who do the day-to-day and have unlimited personal liability and limited partners, who provide the capital, aren't directly involved in the business and are protected with limited liability - they cannot owe for than they invested. 3. LLC - Limited Liability Company - a business where owners all have limited liability and can run the business. 4. Corporation - a legal entity who has the same legal powers as people. It can enter into contracts, acquire assets, incur obligations and is protected from seizure of property by the constitution. It is owned by shareholders, who elect a board of directors and CEO to run the company. C corporation must pay taxes twice: personal tax (dividends paid are income) and corporate income tax on distributed funds. S corporations are exempt from corporate income tax

New York Stock Exchange (NYSE)

A New York City-based stock exchange, which is considered the largest equities-based exchange in the world based on total market capitalization. Each stock has only one market maker

Corporation

A business owned by stockholders who share in its profits but are not personally responsible for its debts

Negotiable CDs (NCD)

A certificate of deposit (CD) with a minimum face value of $100,000—though they are typically $1 million or more. They are guaranteed by the bank and can usually be sold in a highly liquid secondary market, but they cannot be cashed in before maturity. Because of their large denominations, they are bought most often by large institutional investors that typically use them as a way to invest in a low-risk, low-interest security.

Private Company

A company that only trades their stock privately.

Market Maker

A dealer who stands ready to buy or sell a specific security or securities at all times

Debt Market

A financial market that allows governments, corporations, and individuals to borrow. Borrowers issue a security (a bond) offering interest and principle over time. The interest rate is the cost of borrowing. Many types of market interest rates: mortgage rates, car loan rates, credit card rates, etc.

Describe key components of the U.S. financial market system and the financing of business

Financial markets facilitate the raising of funds or the investment of assets. Types of financial markets include the stock market, debt market, foreign exchange and derivatives market. Stock market - a company sells stock to raise money, then the stock is traded among investors. Debt market - allows governments, corporations and individuals to borrow. Borrowers issue a security (a bond) offering interest and principle over time. The interest rate is the cost of borrowing. Examples: mortgage rates, car loan rates, credit card rates, etc. Foreign exchange - where international currencies trade and exchange rates are set. Example: dollar for yen. Derivatives market - a financial security whose value is based off another security/commodity. Transfers risk between market participants.

Describe the major changes that stock markets have gone through in the last decade.

In 2005, NYSE & Nasdaq accounted for 75% of all US stock trades. Since then, electric exchanges and alternative trading systems have caused their market share to decline to handle 50% of all trades. The need for a Market Maker has almost all but disappeared.

Financial Markets

Include the stock market, debt market, foreign exchange, derivative markets and other markets

Compare and contrast the characteristics of shares that are publicly traded and those that are not.

Public company - stock is traded by the public on a stock exchange. These markets provide liquidity and determine a market price for the company's shares. Private company - have a limited set of shareholders and their shares are traded privately. The value of their shares can be difficult to determine.

Explain the role of the investment-banking business in the context of raising corporate capital

Investment bankers are agents who act on behalf of investors in the stock market. As agents, investment bankers have multiple roles. They conduct market research in the form of legal and market analysis before the investment takes off. When a company wants to raise money through the stock market, it approaches an investment bank for the two analyses to gauge the viability of the company decision. Investment bankers then determine whether the company should raise money through debt issuance or equity. Underwriting involves assuming a risk on behalf of an investor selling securities in the stock market. The company wants an assurance that money is raised for the stock issued even when some shares have not been sold. Investment bankers place their capital risk by buying all the securities from the company at a discounted price. Bankers then mark up the securities to market retail price and sell them to the investing public. If the sale of securities does not reach the target capital requirement, bankers are forced to borrow from commercial banks or sell the shares at a loss. Alternatively, they also invite other investment banks to take part in the underwriting process to share the risk of loss in form of an underwriting syndicate. In addition to underwriting and selling securities, investment bankers have both advisory and financial functions in an Initial Public Offering. They determine the offer price of each share in the stock being issued through the IPO and the amount to be raised. Most importantly, they determine the best timing of the IPO, because timing of the offering influences profitability and movement of shares. They also take care of selling debt of the companies to investors.

What is a limited liability company (LLC)? How does it differ from a limited partnership?

LLC - Limited Liability Company - a business where owners all have limited liability and can run the business. In a Limited Partnership, the owners have limited liability but are not involved in the business itself.

In what ways has the finance industry been on the cutting edge of technology in the past?

Like the advent of the ATM and online banking

Limited Liability

One type of owner in a Limited Partnership that have limited liability. Their liability is limited to their investment. Their private property cannot be seized to pay off the firm's outstanding debts. Examples: private equity funds and venture capital funds.

General partners

One type of owner in a Limited Partnership that have the same rights, privileges and liability as partners in a "regular" partnership and typically run the firm on a day-to-day basis.

Describe the impact of various types of Fintech, such as telecommunications, security, automation, and big data on the field of finance

Telecommunications: finance professionals have always been amongst the first adopters of improved communication technologies. Example: telegraph (stock ticker) Security & Verification: Blockchain technology allows a transaction to be recorded in a publically verifiable way without the need for a trusted third party to certify the authenticity of the transaction. This is how cryptocurrency creation and ownership is determined Automation of Banking Services: Robo-Advisors (computer programs/algorithms) will be replacing financial advisors. Other automated examples: ATMs, Venmo, opening/closing accounts, transferring money, applying for loans, etc all without a human. Big Data & Machine Learning: Financial organizations have long recognized the importance of collecting data and using it in decision making. The availability of data has enabled companies throughout the economy to better target their products to customers, and financial service companies are no exception, especially in lending and insurance.

Cryptocurrency

The first cryptocurrency was Bitcoin, where all bitcoin transactions are recorded in a public ledger using blockchain technology allowing individuals to create and trade bitcoins and to verify those transactions digitally.

Differentiate between trading on an exchange and trading in a dark pool.

Trading on an exchange offers the opportunity to trade immediately with the current ask and bid prices, with transactions visible to all traders in real time. Trading on dark pools (which don't make their limit order books visible) offers the opportunity to get a better price (by removing the bid/ask spread), the trade-off being that the order might not be filled in case of an excess in either buy or sell orders. So you trade immediately of a deal against a potentially better price.

Limited Liability Company

Type of business where all owners have limited liability, but they can also run the business. Relatively new business form in the US.

Limited partnership

Type of partnership with two kinds of owners; general and limited partners.

Distinguish between limited and unlimited liability, and list firm types that are subject to each type of liability.

Unlimited liability: the business owner is personally responsible for any loss the business makes. This is the case for sole proprietorships and general partnerships. Limited Liability: the business owner(s) liability for debts is restricted to the amount they put into the business.

Discuss the division of corporate ownership into shares of stock; evaluate the implications of that division for corporate decision making.

When a company becomes a corporation, there is no limit to the amount of owners it can have. And each owner owns a portion of the company though shares, or stocks. Each share of stock is a vote on whom should be on the board of directors. The more stock one owns, the more votes (or weight) they have on who is in charge. They can also use their stocks to express their satisfaction or dissatisfaction with management (CEO). They may sell their shares when they are unhappy, which decreases the value of the company stock or vice versa, increase stock value by purchasing more.

What is a principal-agent problem that may exist in a corporation?

When a manager's goals do not line up with that of the shareholders.

Partnership

a business organization owned by two or more persons who agree on a specific division of responsibilities and profits

High Frequency Traders (HFTs)

a class of traders who, with the aid of computers, will place, update, cancel, and execute trades many times per second in response to new information as well as other orders, profiting both by providing liquidity and by taking advantage of stale limit orders.

commercial paper

a common form of unsecured, short-term debt issued by a corporation that is typically issued for the financing of payroll, accounts payable, inventories, and meeting other short-term liabilities. Maturities range from a few weeks to months.

Underwriting

assisting in issuing new securities. Assumes risk. Since money for securities is paid to the issuing firm before the securities are sold, there is a risk to the investment bank(s). Includes IPOs and SEOs Distributing: once the securities are purchased from an issuing firm, they are distributed to ultimate investors Advising: on timing of the sale, type of security, etc.

Why are people who post limit orders termed "providers" of liquidity?

because they provide an avenue for transforming a particular security into cash within a short period of time.

Limit Order Book

collection of all current limit orders for a given security

Robo-Advisor

computer programs that are intended to replace the work of financial advisors by providing detailed and customized investment recommendations.

A business created as a distinct legal entity is called a: unlimited liability company. limited partnership. corporation. sole proprietorship. general partnership.

corporation.

Financial Markets

financial institutions through which savers can directly provide funds to borrowers.

How may a corporate bankruptcy filing affect the ownership of a corporation?

if a firm fails to repay its debts, the end result is a change in ownership of the firm, with control passing from equity holders to debt holders. It is in the best interest of the debt holders to run the firm in the most profitable way possible. Doing so often means keeping the business operating. As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders.

Capital Market

market that trades debt and equity instruments with maturities of more than a year. There is substantial risk of capital loss but a higher promised return.

Money Market

market that trades debt securities with maturities of one year or less (CDs and US Treasury bills). There is little to no risk of capital loss, but a low return.

Market Orders

orders to trade immediately at the best outstanding limit order available

dividend payments

payments made at the discretion of the corporation to its equity holders. Shareholders usually receive a share of the dividend payments that is proportional to the amount of stock they own.