Brainscape's Knowledge GenomeTM


Top Flashcards (Certified)
All Flashcards

FM > THEORY > Flashcards

THEORY Flashcards

(52 cards)

Start Studying
1
Q

Proprietorship and partnership MEANING

A

Unincorporated business owned by one individual
Unincorporated business owned by two or more individuals

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Proprietorship and partnership ADVANTAGES

A
  • easily and inexpensively formed
  • subject to few govt regulations
  • subject to lower income taxes than corporations
  • no corporate income taxes
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Proprietorship and partnership DISADVANTAGES

A
  • unlimited personal liability
  • limited life of business
  • difficult to raise capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Corporation ADVANTAGES

A
  • Easy transfer ship of owner
  • unlimited life
  • limited liability (only lose what they invest)
  • ease of raising capital
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Corporation DISADVANTAGES

A
  • cost of setup and report filling
  • double taxation (corporation earnings taxed + dividend earnings taxed as personal income)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

LLP/PARTNERSHIP (hybrid) ADVANTAGES

A
  • Limited liability like corporations
  • Taxed like partnerships
  • votes in proportion of their ownership interest
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

LLP/PARTNERSHIP (hybrid) DISADVANTAGES

A
  • Still evolving; requires hiring of a good lawyer when establishing
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Financial management (goal)

A

How companies conduct their business in order to maximize its value; shareholder wealth maximization (maximize long run value of firms common stock (cash flow)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Proprietor’s goal

A

Maximize his own interest
Not inconsistent with being socially responsible

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Intrinsic value

A

An estimate of the “true” value based on the best available information
- can be estimated, but not measured precisely
- changed when there’s new info

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Stock prices

A

Set by marginal’s investor based on perceived value of the stock
Information may be inaccurate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Market equilibrium

A

Instrinsic price = stock price
Investors indifferent about selling or buying
Effective comms needed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Agency problem

A

Managers vs stockholders
- managers inclined to act in their own best interests eg pay themselves excessive salaries

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Solving agency problems

A

@ Reasonable compensation packages
- reward managers based on long run intrinsic value of company stock not the stock price on an option exercise data
Compensation based on stock market price
Some managers paid by stocks but not the best solution
@ direct intervention by shareholders
@ threat of hostile takeovers : corporate raiders may see it as a bargain and attempt to capture the firm becoming managers = losing jobs
@ firing managers who suck

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Bond holder vs stockholders

A

B: generally receives fixed payments regardless of how well company does
S: do better when company doing better

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Bond holder vs stockholders problems

A

Taking on risky projects may result in bankruptcy
Usage of additional debt; more debt = riskier

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Time value of money

A

Money available today worth more than same amount in future because we can invest

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Fv formula

A

FV = PV ( 1 + I)^n

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Pv formula

A

Fv /(1+n)^N

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Annuities vs perpetuities

A

A: series of equal cash flow for fixed intervals for a specific number of periods
P: annuity that lasts forever

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Ordinary annuity vs annuity due

Study These Flashcards
A

OA: cash flows at the end of periods

AD: cash flow occur at beginning of period

22
Q

Balance sheet

Study These Flashcards
A

Statement of firm’s financial position at one point of time
Shows what assets the company owns and who has claims on the assets as of a date

23
Q

Income statement

Study These Flashcards
A

Summarizes a firm’s revenues and expenses over a given period of time

24
Q

Statement of cash flows

Study These Flashcards
A

How much cash the firm began with, how much it ended with and what it did to increase/ decrease its cash

25
Statement of stockholders’ equity
Shows that amount of equity the stockholders’ had at the start of the year, that items that increase of decrease equity, and equity at the end of the year
26
Double taxation
Interest paid by corporations: tax deductible Dividends paid by corporations: out of after tax income Dividends received by investors: taxed in the us
27
Default risk premium
Compensation for possible default that issuer will not pay principal and interests on time and at stated amounts Diff btw us treasury bond and corporate bond of equal maturity and marketability
28
Inflation premium
Average expected inflation over life of debt security
29
r*
Real risk free rate of interest Interest rate of borrowing when there is zero expected inflation
30
Liquidity premium
Compensate for the possibility of difficulty of selling debt security quickly at market value
31
Maturity risk premium
Compensation for possible loss in value due to increase in interest rates over maturity of debt security Affects longer term security more than shorter Higher maturity higher mrp
32
Normal yield curves
Upward sloping due to increase in ip and mrp
33
Inverted yield curve
Downward sloping when ip is expected to decrease and decrease more than increase in mrp
34
Treasury bonds
Issued by govt therefore no drp But bond prices to decline when ir increases
35
Corporate bonds
Exposed to default risk Issued by corporates
36
Municipal bonds
Issued by state Exposed to some default risk
37
Foreign bonds
Exposed to default risk
38
Sinking funds
Provision in the bond contract that requires the issuer to retire a portion of the bond issue each year
39
Call provisions (bonds)
Provision that gives issuers the right to redeem the bonds under specified terms prior to the normal maturity date Mainly corporate and municipal Usually bond issuers pay bond holders an amount greater than par value if called Companies not likely to call bonds unless I/r decline significantly since bonds issuing
40
Convertible bond
Bond that is exchangeable into shares of common stock at fixed price Take advantage potential stock upside
41
Warrant
Long term option to buy a stated number of shares of common stock at a specified price Capital gain if stock price rises
42
Putable bonds
Bond with provision that allows investors to sell it back to the company prior to maturity at a prearranged price
43
Income bond
Bond that pays interest only if issuer earned enough money to pay that interest
44
Indexed bond
Bond that has interest payments based on inflation index to protect holder from inflation
45
Par bond vs premium bond vs discount bond
No gain nor loss / YTM = coupon rate -> bond price = par value Capital loss because bond value decrease over time (compensated by high cy) YTM < coupon rate -> bond price > par value Opposite
46
Steps to do bond with semiannual coupon bond
Multiply year by 2 Divide coupon by 2 Divide nominal rate by 2
47
48
Interest rate risk (bond)
Risk of a decline in bond’s price due to an increase in I/r Bonds with longer maturity have higher I/r risk High for long term bonds with low coupon rates
49
Reinvestment risk
Risk that a decline in I/r will lead to a decline in income from a bond portfolio I/r falls, future CFs reinvested at lower rates High for short term bonds and high coupon rates
50
Bond ratings Criteria’s
Triple-B and above; investment grade bond Financial ratios, bond contract terms, miscellaneous quantitative factors
51
52

FM (1 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2025 Bold Learning Solutions. Terms and Conditions