Finance Chapter 1

Secondary Market

The market for securities that have already been issued. It is a market in which investors trade back and forth with each other.

Primary Markets

The market for the raising of new funds as opposed to the trading of securities already in existence.

Inflation

The phenomenon of prices increasing with the passage of time.

Financial Markets

The place of interaction for people, corporations, and institutions that either need money or have money to lend or invest.

Disinflation

A leveling off or slowdown of price increases.

Capital Structure Theory

A theory that addresses the relative importance of debt and equity in the overall financing of the firm.

Financial Capital

Common stock, preferred stock, bonds, and retained earnings. Financial capital appears on the corporate balance sheet under long-term liabilities and equity.

Institutional Investors

Large investors such as pension funds or mutual funds.

Corporate Financial Markets

Markets in which corporations, in contrast to governmental units, raise funds.

Public Finance Markets

Markets in which national, state and local governments raise money for highways, education, welfare and other public activities.

Articles of Incorporation

A document that establishes a corporation and specifies the rights and limitations of the business entity.

Sole Proprietorship

A form of organization that represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.

Corporation

A form of ownership in which a separate legal entity is created. A corporation may sue or be sued, engage in contracts, and acquire property. It has a continual life and is not dependent on any one stockholder for maintaining its legal existence. A corporation is owned by stockholders who enjoy the privilege of limited liability. There is, however, the potential for double taxation in the corporate level in the form of profits and again at the stockholder level in the form of dividends.

Partnership

A form of ownership in which two or more partners are involved. Like the sole proprietorship, a partnership agreement carries unlimited liability for the owners. however, there is only single taxation for the partners, an advantage over the corporate form of ownership.

Articles of Partnership

An agreement between the partners in a business that specifies the ownership interest of each, the methods of distributing profits, and the means for withdrawing from the partnership.

Capital Markets

Competitive markets for equity securities or debt securities with maturities of more than one year. The best examples of capital market securities are common stock, bonds and preferred stocks.

Sub-Chapter S Corporation

A special corporate for of ownership, in which profit is taxed as direct income to the stockholders and thus is only taxed once, as would be true of a partnership. The stockholders still receive all the organizational benefits of a corporation, including limited liability. The Subchapter S designation can apply only to corporations with up to 75 stockholders.

Limited Liability Partnership

A special form of partnership to limit liability for most of the partners. Under this arrangement, one or more partners are designated as general partners and have unlimited liability for the debts of the firm, while the other partners are designated as limited liability partners and are only liable for their initial contribution.

Money Markets

Competitive markets for securities with maturities of one year or less. The best examples of money market instruments would be Treasury bills, commercial paper, and negotiable certificates of deposit.

Real Capital

Long-term productive assets (plant and equipment)

Shareholder Wealth Maximization

Maximizing the wealth of the firm's shareholders through achieving the highest possible value for the firm in the marketplace. it is the overriding objective of the firm and should influence all decisions.

Restructuring

Process that can take many forms in a corporation, such as changes in the capital structure (liability and equity on the balance sheet). It can also result in the selling of low-profit-margin divisions with the proceeds reinvested in better investment opportunities. Sometimes restructuring results in the removal of the current management team or large reductions in the workforce. Restructuring has also included mergers and acquisitions.

Insider Trading

This occurs when someone has information that is not available to the public and then uses this information to profit from trading in a company's common stock.

Agency Theory

This theory examines the relationship between the owners of the firm and the managers of the firm. While management has the responsibility for acting as the agent for the stockholders in pursuing their best interests, the key question considered is: How well does management perform this role?