Chapter 1

Question 1

Sole proprietorship

Answer 1

Business owned by one person

Question 2

Characteristics of a sole proprietorship

Answer 2

Easy to set up
No separation between firm and owner
Owner has unlimited liability –> must pay for the debts
The life of the business is limited to the life of the owner

Question 3

Partnership

Answer 3

A business owned by 2 or more people

Question 4

Characteristics of a partnership

Answer 4

Unlimited liability of the owners
The business ends on the death or withdrawal of a partner

Question 5

Limited partnership

Answer 5

Partnership with general and limited partners

Question 6

General partners

Answer 6

Carry responsibility and have decision power
Have unlimited liability

Question 7

Limited partners

Answer 7

Have limited liability

Question 8

LLC

Answer 8

Limited partnerships without a general partner

Question 9

Characteristics of LLCs

Answer 9

Shareholders are the owners of LLC
All members have limited liability
They can also run teh business

Question 10

Corporations

Answer 10

Legally defined artificial beings separate from its owners

Question 11

Characteristics of a corporation

Answer 11

Formation –> legal formation using a charter
Ownership –> no limit, they are shareholders which receive dividend payments proportional to the amount of stock they own

Question 12

S corporations

Answer 12

Pay once on individual income

Question 13

C corporations

Answer 13

Double taxation on individual income and corporation tax

Question 14

BOD

Answer 14

Group of people who have the ultimate decision making
Elected by shareholders

Question 15

CEO

Answer 15

Run the business day to day
Elected by BOD
Choose CFO and COO

Question 16

CFO

Answer 16

Manage investment decisions
Make financial decisions
Cash management

Question 17

Goal of the firm

Answer 17

Increase the value of its shares without harming society

Question 18

Agency problem

Answer 18

Managers put their own incentive above those of the shareholders

Question 19

Solutions of the agency problem

Answer 19

Incentive alignment –> tie compensation to stock performance
Board oversight
Threat of takeover

Question 20

CEO’s performance

Answer 20

Managers are encouraged to work for the interest of shareholders by discipline

Question 21

Corporate bankruptcy

Answer 21

When the firm can’t pay its debt, control passes from shareholders to debt holders

Question 22

Liquidation

Answer 22

Shutting down the business and selling its assets

Question 23

Stock market

Answer 23

Organised markets on which public companies’ shares are traded

Question 24

Liquid investment

Answer 24

Can be sold quickly for a price very close to the price at which you could buy it

Question 25

Primary market

Answer 25

When a company issues new shares and sells them to investors

Question 26

Secondary market

Answer 26

When investors trade shares between themselves

Question 27

Market makers

Answer 27

Match buyers and sellers by posting bid and ask prices for every stock

Question 28

Bid price

Answer 28

Price at which market makers are willing to buy the stock (highest value)

Question 29

Ask price

Answer 29

Price at which market makers are willing to sell the stock (lowest value)

Question 30

Bid ask spread

Answer 30

Difference between ask and bid prices Ask - Bid

Question 31

Bid price > Ask Price

Answer 31

Market makers lose money

Question 32

Bid price < Ask price

Answer 32

Market makers make money

Question 33

The closer bid and ask prices are

Answer 33

The more liquid the market is

Question 34

Limit order

Answer 34

An order to buy or sell a set amount of stocks at a fixed price

Question 35

Market order

Answer 35

Orders that trade immediately at the best outstanding limit order