Quiz 1 Flashcards
(41 cards)
valuation principle
shows how to make costs/benefits comparable to weigh properly
the value of a commodity/asset to the firm/investors is determined by its competitive market price
if benefits > cost, we increase the value of our firm
sole proprietorship
one person
72% of firms 3% of revenue
owner has unlimited personal liability for debts
lifetime is owner’s lifetime (difficult to transfer ownership)
partnership
business owned and run by 2+ owners
ALL partners are liable for debts
ends with death/withdrawal of any single partner
avoid liquidation if agreement provides alternatives such as buyouts
limited partnership
general and limited partners
general have personal liabilities for debts
limited have limited liabilities (death/withdrawal of limited doesn’t end partnership) (limited have no mgmt authority & cannot legally be involved in mgmt decisions)
limited liability company
like a limited partnership without a general partner
all limited partners and DO make mgmt decisions
corporation
citizen of state in which it was chartered in
separate of owners
85% of US business revenue
can enter contracts/acquire assets/incur obligations
sells stock and all outstanding shares are the equity (shareholders pay 2x taxes, unless it’s an S corps [less than 100 shareholders])
financial managers must…
make investment decisions, financial decisions to fund investments, short term cash decisions
corporate mgmt team
board of directors: ultimate decision making, decided upon via votes from shareholders
CEO: enforces stuff set by board (can be director on board)
CFO: senior financial manager, reports to CEO, oversees controller (acct/tax) and treasurer (cap budget/risk & credit mgmt)
agency problem
managers weigh self interest > shareholder interest
hostile takeover
individual/org purchases so many shares that they can oust the board/CEO
private corporation
has limited number of owners and no organized market for shares
primary market
corporation issuing new shares of stock & selling them to investors
secondary market
between investors without involvement of the corporation
market makers
match buyers and sellers
known as specialists at NYSE
bid price
market maker is willing to buy at this price
CONSUMERS SELL, limit order with highest price
ask price
market maker is willing to sell at this price
CONSUMERS BUY, limit order with lowest price
NYSE
market makers are called specialists
each stock has 1 specialist
NASDAQ
multiple market makers per stock
transaction cost
bid-ask spread & broker’s commission
consumers buy at the ASK, sell at the BID
limit order
order to buy/sell amount of security at a fixed price
limit order book
collection of all current limit orders fora given security
make public so investors/brokers can decide bid/ask
traders who post limit orders PROVIDE liquidity to the market
market orders
orders to trade immediately at the best outstanding limit order available
traders who do this TAKE liquidity
high frequency traders
take advantage of both liquidity and stale limit orders
stale limit orders
news that causes price to move
smart traders take advantage of existing limit orders by executing trades at old prices
