Chapter 1 Flashcards
An overview of corporate finance
Sole Proprietorship
unincorporated business with one owner
Partnership
Unincorporated business with 2 or more owners
Corporation
Legal entity separate and distinct from its owners; can conduct businesses for its owners
General Areas of Study in Finance
-financial markets and institutions
-investments
-financial services
-managerial finance
Sole Proprietorship (Advantages)
Ease of formation, subject to few government regulations, no double taxation
Sole Proprietorship (limitations)
Unlimited personal liability, limited life, transferring ownership is difficult, difficult to raise large amounts of capital
Partnership
Like a proprietorship, except there are 2 or more owners, roughly has the same advantages and limitations as a proprietorship, can raise more capital than a proprietorship, because there are more owners with more credit.
Corporation (a legal entity)
Advantages: Unlimited life, easy transfer of ownership, limited liability, ease of raising capital, can issue stocks and bonds.
Disadvantages: Cost of creating and report filing, double taxation
Limited Liability
reduces risk which increases market value
Primary goal of corporation
Stockholder wealth maximization, which is the same as maximizing the firm’s stock price
Factors influenced by managers that affect stock price
Projected cash flows, timing of cash flow steams, risk of projected cash flows, use of debt, dividend policy.
Agency Relationships
Exists whenever a principal hires an agent to act on his or her behalf
Agency Problem
Results when the agent makes decisions that are not in the best interests of principals
Mechanisms to motivate managers
-Managerial compensation (incentives)
-shareholder intervention
-threat of takeover
Business Ethics (dictionary definition)
A standard of conduct and moral behavior
Business Ethics
A company’s attitude and conduct toward its employees, customers, community, and stockholders
Employees
Employees are owed fair treatment, timely payment of wages, and tolerable work enviromnent
Customers
Customers are owed honorable treatment and quality products or services
Suppliers
Creditors are owed time payment of amount agreed and fair treatment
Creditors/Debtholders
Creditors are owed timely payment of amounts agreed
Community
The community is owed the responsible treatment of the environment
Stockholders
The residual claimant/owner of the firm. They are due their share of the profit after all other claimants are paid what they are due
