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41 Cards in this Set
- Front
- Back
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What are the three legal categories of firms?
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1. Sole proprietorship
2. Partnership 3. Corporation |
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a firm owned by a single individual and not organized as a corporation
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sole proprietorship
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a firm owned jointly by two or more persons and not organized as a corporation
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partnership
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a legal form of business that provides owners with protection from losing more than their investment should the business fail
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corporation
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anything of value owned by a person or a firm
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asset
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the legal provision that shields owners of a corporation from losing more than they have invested in the firm
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limited liability
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no legal distinction between the personal assets of the owners of the firm and the assets of the firm
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unlimited liability
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Two Advantages of Sole Proprietorship?
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1. Control by owner
2. No layers of management |
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Two Disadvantages of Sole Proprietorship?
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1. Unlimited personal liability
2. Limited ability to raise funds |
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Two Advantages of Partnership?
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1. Ability to share work
2. Ability to share risks |
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Two Disadvantages of Partnership?
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1. Unlimited personal liability
2. Limited ability to raise funds |
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Two Advantages of Corporation?
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1. Limited personal liability
2. Greater ability to raise funds |
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Two Disadvantages of Corporation?
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1. Costly to organize
2. Possible double taxation of income |
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Double Taxation Issue of Corporations?
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Taxed twice - once at the corporate level and again when investors receive a share of corporate profits
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the way in which a corporation is structured and the effect a corporation's structure has on the firm's behavior
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corporate governance
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the owners of the corporation's stock
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shareholders
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Group of people who manage the firm directly
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board of directors
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members of management serving on the board of directors
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inside directors
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members on the board of directors who do not have a direct management role in the firm are referred to as?
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outside directors
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a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him
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principal-agent problem
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Why there is a principal-agent problem in corporations but not in other types of firms?
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Because in corporations, the shareholders and top management are separate
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How is this principal-agent problem related to the fact that the salaries of top managers of corporations are usually tied to firm's profits?
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Shareholders have trouble monitoring whether top managers are earning as much profit as possible
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A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers)
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indirect finance
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A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange
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direct finance
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What is the main role of financial intermediaries?
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Raise funds from savers to lend to firms
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a financial security that represents a promise to repay a fixed amount of funds
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bond
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What types of organizations can issue bonds?
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corporations
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an interest payment on a bond
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coupon payment
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terms of a bond usually lasting 30 years
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maturities
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a financial security that represents partial ownership of a firm
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stock
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What types of organizations can issue stock?
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corporations
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payments by a corporation to its shareholders
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dividends
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Investing in stocks is riskier than investing in bonds. Why?
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Price fluctuates more and they don't have a maturity date
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anything owned by a person or a firm
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liability
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a cost that involves spending money
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explicit cost
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a nonmonetary opportunity cost
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implicit cost
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a firm's revenues minus all of its implicit and explicit costs
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economic profit
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a firm's net income, measured by revenue minus operating expenses and taxes paid
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accounting profit
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requires that CEO's personally certify the accuracy of financial statements and that financial analysts and auditors disclose whether any conflicts of interest might exist that would limit their independence in evaluating a firm's financial condition
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Sarbanes-Oxley Act of 2002
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What was the objective of the Sarbanes-Oxley Act of 2002?
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Increased confidence in the U.S. corporate governance system
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Was the principal-agent problem at the heart of the 2007-2009 financial crisis? Why?
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Yes.
Because it raised questions of whether corporations were adequately disclosing information to investors |
