chapter 13

Question 1

5 key factors influencing legal structure

Answer 1

1ease of set up/operation
2degree of control owner wants
3amount of risk people are willing to take on
4amount of individuals to provide financial need required
5anticipated skill needed for success

Question 2

sole proprietorship

Answer 2

owned by one person without a separate legal entity

Question 3

partnership

Answer 3

formed by two people

Question 4

partnership agreement

Answer 4

written agreement that outlines expectations of the partnership

Question 5

joint and several liability

Answer 5

obligation of partners through contract. partners held personally liable for paying out debt

Question 6

buy-sell agreement

Answer 6

written among partners - details the sale by one partner and the purchase by another

Question 7

limited liability partnership

Answer 7

made up of general partners (at least ones) and limited partners (passive)

Question 8

corporation

Answer 8

business separate from owners

Question 9

incorporation

Answer 9

legal process of setting up a corporation

Question 10

board of directors

Answer 10

appointed/elected body of a corporation that tells/watches management on challenging issues on behalf of share/stake holders

Question 11

private corporation

Answer 11

stock not publicly traded

Question 12

public corporation

Answer 12

shares traded at at least one stock exchange OR in over-the-counter market

Question 13

initial public offering (IPO)

Answer 13

initial sale of stock by a corporation publicly

Question 14

exchange

Answer 14

makes it possible for stock to be bought and sold to public at large

Question 15

over-the-counter

Answer 15

stock publicly traded through dealer instead of exchange

Question 16

capital structure

Answer 16

organizations mix of debt, internal cash, and external equity-based investments in operation

Question 17

three sources of funds

Answer 17

1 operations
2 credit facilities (long term and short term)
3 equity financing (IPO, APO, investors)

Question 18

operating profits

Answer 18

total revenue - total owners equity

Question 19

retained earnings

Answer 19

net profit collected over time

Question 20

credit facilitators

Answer 20

debt taken on to support business activities

Question 21

short-term credit facilities

Answer 21

less than one year

Question 22

long-term credit facilities

Answer 22

greater than a year

Question 23

line of credit

Answer 23

deal/arrangement with lending facilities that gives a pre made maximum borrowing amount at any time

Question 24

collateral

Answer 24

when assets are used to secure credit facility (would be used to pay off debt if cash doesn’t come)

Question 25

cost of borrowing

Answer 25

total sum over time above principal paid (interest)

Question 26

bond

Answer 26

credit facility where a company borrows money for a period of time and agrees to pay back with interest at regular intervals

Question 27

rating agencies

Answer 27

offer opinion of companies credit worthiness by assessing solvency, liquidity, long term health

Question 28

junk bonds

Answer 28

speculative bonds - likely to not be payed back

Question 29

mortgage

Answer 29

credit facilities backed by real estate

Question 30

principal

Answer 30

amount borrowed OR amount remaining on loan (separate from cost of borrowing)

Question 31

amortization

Answer 31

length of line of time which credit facilitator will be payed off

Question 32

prime lending rate

Answer 32

base lending rate used by banks (also rate banks lend to most preferred customers)

Question 33

debt leverage

Answer 33

use of debt to finance capital asset base

Question 34

private equity

Answer 34

equity capital gotten from private sources/not public exchange

Question 35

stock

Answer 35

get a % of the company and pro rata claim on earnings when received

Question 36

public equity

Answer 36

equity by investors through publicly traded shares (stock)

Question 37

secondary offerings

Answer 37

additional public offerings for purpose of raising new capital

Question 38

price dilution

Answer 38

decreasing price of existing shares because of increase in number of shares

Question 39

market capitalization

Answer 39

current market value of an organization (number of shares x value of shares)

Question 40

prospectus

Answer 40

legal document filed that has jurisdiction for the share issuance (tells risk of share being purchased)

Question 41

philanthropy

Answer 41

receipt of funds when used to enhance well-being of others