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Flashcards in Chapter 1 Deck (19)
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0
Q

What is capital structure?

A

mixture of debt and equity maintained by the firm

1
Q

What is capital budgeting?

A

Process of planning/managing a firm’s long-term investments

2
Q

What is working capital?

A

a firm’s short-term assets and liabilities

3
Q

What are the three major forms of business organizations in the United States?

A
  1. Sole proprietorship
  2. Partnership
  3. Corporation
4
Q

What are the advantages of having a sole proprietorship?

A
  • Easiest to start
  • Least regulated
  • Single owner keeps all profits
  • Taxed once as personal income
5
Q

What are the disadvantages of having a sole proprietorship?

A
  • Limited life to owner
  • Equity capital limited to owner’s personal wealth
  • Unlimited liability
  • Difficult to sell ownership interest
6
Q

What are the advantages of having a partnership?

A
  • Two or more owners
  • More capital available
  • Relatively easy to start
  • Income taxed once as personal income
7
Q

What are the disadvantages of having a partnership?

A
  • Unlimited liability
  • Partnership dissolves when one partner dies or wishes to sell
  • Difficult to transfer ownership
8
Q

What are the advantages of having a corporation?

A
  • Limited liability
  • Unlimited life
  • Separation of ownership and management
  • Transfer of ownership is easy
  • Easier to raise capital
9
Q

What are the disadvantages of having a corporation?

A
  • Separation of ownership and management

- Double taxation (income taxed at the corporate rate and then dividends taxed at a personal rate)

10
Q

What is the goal of financial management?

A

to maximize the current value per share of the existing stock

11
Q

What is the agency relationship?

A

Stockholders (principals) hires managers (agents) to run the company

12
Q

What is the agency problem?

A

Conflict of interests between principal and agent (i.e. management goals and agency costs)

13
Q

What is are agency costs?

A

costs of the conflict of interest between stockholders and management

  • Direct (i.e. corporate expenditure or expense to monitor management)
  • Indirect (i.e. lost opportunity)
14
Q

What is a stakeholder?

A

Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm

15
Q

What is the difference between a primary market vs a secondary market?

A

In a primary market, corporations are the sellers, and the transactions raises money for the corporation. In a secondary market, one owner or creditor sells to another.

16
Q

What is the difference between dealer markets vs auction markets?

A

In a dealer market, the dealer buys and sells for themselves at their own risk (aka over-the-counter markets). In an auction market, the dealer matches those who wish to sell with those who wish to buy.

17
Q

Stocks that trade an organized exchange are said to be _______.

A

listed

18
Q

What is the largest over-the-counter market?

A

NYSE (New York Stock Exchange)