1. CORPORATION AND FINANCIAL MARKETS Flashcards
what is the difference between equity and debt?
they are 2 main forms of financing that companies use to raise capital.
equity:
-ownership acquired when investors buy shares + voting rights
-no term and no repayment
-return to owners as dividends (residual claim that depends on earnings)
-riskier –> more power
debt (bank loans and bonds):
-no ownership and voting rights
-short, medium, long term
-repayment –> fixed claim (interest rates)
-debt holders take over in case of insolvency
what is the difference between external and internal financing?
internal financing:
-self-financing or internal capital
-generated through the company’s operations and existing resources
external financing:
-obtaining funds from sources outside the company
-obtaining loans, issuing bonds, selling equity (stocks)
What is a limited liability company? how does it differ from a limited partnership?
-limited liability company is a corporation
-it implies that the shareholders don’t risk their capital, but just the one of the company.
a limited partnership, on the other hand, doesn’t assure that the owners/partners won’t have losses that affect their own capital
what are the advantages of organizing a business as a corporation?
-limited personal liability
-perpetual existence
-ownership easy to transfer (through stocks)
-access to capital
-ownership vs management
what are the 3 main tasks of a financial manager?
- investment decisions
- financing decisions
- cash management
what is a principal-agent problem that may exist in a corporation?
common issue that can arise due to the separation of ownership (principals) and management (agents):
-divergence of interests
-information asymmetry
what is the main difference between the primary and secondary market?
- primary market = trade of newly issued shares of a company.
initial public offering, second po typically organized by investment banks - secondary market = trade of shares between investors without company’s involvement.
place an order at a stock exchange, then you buy shares from person/ institution who already holds shares
what is a market index? name methods of calculation
-report the value and performance of a particular selection of securities
-goal = track dynamics of a group of assets in a standardized way
what is meant by FinTech?
use of new technologies in finance
how can investors typically exercise control in a stock company?
indirectly, by electing supervisory board at the general assembly
what are the two major types of firms?
why do equity holders usually have voting rights while holders of debt instruments do not?
what are some of the advantages of splitting up the equity capital of an AG into many stocks?
what is the functional relationship between shareholders, supervisory board and management board?
outline the shareholder- and stakeholder value approach
