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55 Cards in this Set

  • Front
  • Back
Goal of the firm
Maximization of shareholders wealth by making decisions that will maximize the price of the existing common stock.
Sole proprietorship
A business owned by a single individual, unlimited liability
General partnership
A partnership in which all partners are fully liable for the indebtedness incurred by the partnership.
Limited partnership
A partnership in which one or more of the partners has limited liability, restricted to the amount of capital he or she invests in the partnership.
An entity that legally functions separate and apart from its owners.
S-type corporation
A corporation that, because of specific qualifications, is taxed as though it were a partnership.
Limited liability company (LLC)
A cross between a partnership and a corporation under which the owners retain limited liability but the company is run and is taxed like a partnership.
Gross profit
Sales (or revenue) minus the cost of goods sold.
Operating income
(earnings before interest and taxes) Sales minus cost of goods sold minus operating expenses.
Taxable income
gross profit from all sources, except for allowable exclusions, less than tax-deductible expenses.
Dividend exclusion
Tax exempt 70% dividends (0.30 x dividend amount)
expenses on the income statement to allocate the cost of an asset over the course of it's lifespan.
Capital gain
Gains from selling any asset that is not part of the ordinary operation.
Capital loss
Loss from selling any asset that is less than the original cost of the asset and is not part of ordinary operation
Net capital loss carry back/carry forward
may be carried back 3 years or forward up to 5 years and applied against net capital gains.
Operating loss carryback/carry forward
may be carried back 2 years or forward up to 20 years.
Public offering
A security offering where all investors have the opportunity to acquire a portion of the financial claims being sold.
Private placement
A security offering limited to a small number of potential investors.
Venture capital
An investment firm (or individual investor) that provides money to business start-ups.
Primary market
A market in which securities are offered for the first time for sale to potential investors.
Initial public offering (IPO)
The first time a company issues its stock to the public.
Seasoned equity offering (SEO)
The sale of additional stock by a company whose shares are already publicly traded.
Money market
All institutions and procedures that facilitate transactions for short-term instruments issued by borrowers is unable to repay the loan.
Capital market
All institutions and procedures that facilitate transactions for long-term instruments.
Organized security exchange
Formal organizations that facilitate the trading of securities.
Over-the-counter markets
All security markets except organized exchanges. The money market is an over-the-counter market. Most corporate bonds also are traded in OTC market.
Electronic stock exchange, a computerized system that provides price quotes on over-the-counter stocks and also facilitates trades by matching up buyers and sellers.
Investment banker
A financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds.
The purchase and subsequent resale of a new security issue. The risk of selling the new issue at a satisfactory (profitable) price is assumed (underwritten) by the investment banker.
Investment banker functions
Underwriting, Distributing, and Advising
Negotiated purchase
A process in which both the purchase price and the offering price for a new issue are negotiated between the issuer and a single underwriter.
Competitive bid purchase
Several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds.
Best efforts basis
The investment banker acts as an agent rather than as a principal in the distribution process.
Privileged Subscription
When a new issue is marketed to a definite and select group of investors.
Dutch auction
A method of issuing securities (common stock) by which investors place bids indicating how many shares they are willing to buy and at what price. The price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares.
Direct sale
The sale of securities by a corporation to the investing public without the services of an investment-banking firm.
Flotation costs
The transaction cost incurred when a firm raises funds by issuing a particular type of security.
Sarbanes-Oxley Act of 2002
Protects investors by improving accuracy and reliability of corporate disclosures made pursuant to the securities law and other purposes.
Opportunity cost of funds
The next-best rate of return available to the investor for a given level of risk.
Maturity Premium
The additional return required by investors in longer-term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes.
Liquidity Premium
The additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price.
Nominal rate of interest
The interest rate paid on debt securities without an adjustment for any loss in purchasing power.
Real rate of interest
The nominal (quoted) rate of interest less any loss in purchasing power of the dollar during the time of the investment.
Term structure of interest rates
The relationship between interest rates and the term to maturity, where the risk of default is held constant.
Unbiased expectations theory
The theory that the shape of the term structure of interest rates is determined by an investor's expectations about future interest rates.
Liquidity preference theory
The theory that the shape of the term structure of interest rates is determined by an investor's additional required interest rate in compensation for additional risks.
Market segmentation theory
The theory that the shape of the term structure of interest rates implies that the rate of interest for particular maturity is determined solely by demand and supply for a given maturity. This rate is independent of the demand and supply for securities having different maturities.
Yield to maturity
The rate of return a bond-holder will receive if the bond is held to maturity.
Income statement
A basic accounting statement that measures the results of a firm's operations over a specific period, commonly 1 year. The bottom line of the income statement, net profits (net income), shows the profit or loss for the period that is available for a company's owners (shareholders).
Balance sheet
A statement that shows a firm's assets, liabilities, and shareholder equity at a given point in time. It is a snapshot of the firm's financial position on a particular date.
Current assets
(gross working capital) - Current assets consist primarily of cash, marketable securities, accounts receivable, inventories, and other current assets.
Fixed assets
Assets such as equipment, buildings, and land .
Liabilities consisting of such sources as credit extended by suppliers or a loan from a bank.
Stockholder' investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet.
Working capital
Defined as a firm's investment in current assets.