Businesses

Question 1

What is a functional institution?

Answer 1

any organization that connects the consumer and producer of a product. Businesses connect because of profit

Question 2

Why are small jobs valuable to our economy?

Answer 2

because of the jobs they create and innovation of ideas

Question 3

What percentage of businesses in the US are small? Survival rate?

Answer 3

80 percent of all businesses in the US are small and 8 out of 10 will close before the end of the first year

Question 4

What is the Small Business Administration (SBA)?

Answer 4

offer low interest loans,help small businesses, free advice

Question 5

What is a sole proprietorship?

Answer 5

1 owner

Question 6

What are the advantages of a sole proprietorship?

Answer 6

freedom to try new things, fulfilling a dream, flexible operation

Question 7

What are the disadvantages of a sole proprietorship?

Answer 7

Very little operating capital, personal sacrifice,unlimited liability (owner is 100% liable for the companies debts) limited life

Question 8

What is a partnership?

Answer 8

more than 1 owner, but not incorporated

Question 9

What are the advantages of a partnership?

Answer 9

more operating capital, specialization

Question 10

What are the disadvantages of a partnership?

Answer 10

incompatibility and unlimited liability, limited life

Question 11

What is a corporation?

Answer 11

form of business that is authorized by law to act like a legal entity

Question 12

What are the advantages of a corporation?

Answer 12

1. limited liability: owner cannot lose more than what they have invested
2. capital accumulation: securities
3. efficient production of product: they do not waste resources
4. business continuity: day to day operation is not affected by changes in ownership (board of directors)

Question 13

What are the disadvantages of a corporation?

Answer 13

1. higher tax rate
2. inefficient decision making: they have to go through small businesses and VP’s
3. Too much government regulation.

Question 14

What are the 3 steps to forming a corporation?

Answer 14

1. get a charter
2. get money to get started
3. elect a board of directors

Question 15

Where will you get your charter from?

Answer 15

The state government in which you will operate, ideally look for lower state corporation taxes: delaware, sc (coastline, ports)

Question 16

What is on the application for a charter?

Answer 16

1.Name of Company
2.Address of corporation (becomes legal entity)
3.Description of product (make sure its safe)
Public or Private Corporation

Question 17

What is a public corporation?

Answer 17

competition to buy shares of stock goes up which helps raise more money, but not much capital

Question 18

What is a private corporation?

Answer 18

1. shares of ownership can only be traded with a select group of people, therefore you know your share holders, potentially, you won’t bring in much money
2. pay a fee to state government to make sure you don’t set up fake corporation

Question 19

What is the Board of Directors and what do they do?

Answer 19

1. elected by common stock holders
2. vote one time for every share of common stock they own
3. Major stock holders want to be on board of directors to help company do well

Question 20

What are the responsibilities of the Board of Directors?

Answer 20

Responsibilities:

1. hold annual share holders meeting
2. give annual report
3. select CEO to make day to day decisions for corporation
4. select a CFO (chief financial officer) to be in charge of money, monitor trading of their stock, and to outbid whoever is trying to have too much stock

Question 21

What is the SEC?

Answer 21

Securities Exchange Commission, stocks and bonds are regulated by the SEC. They try to prevent fraud

Question 22

What is a bond holder?

Answer 22

they loan money to the corporation and expect to get it all back with interest

Question 23

What are the 2 categories of bonds?

Answer 23

secured and debentured

Question 24

What is a secured bond?

Answer 24

the SEC will not allow the company to release secure bonds unless they have sufficient collatoral (wealth that can be liquidated to repay a loan)

Question 25

What is a debentured bond?

Answer 25

not backed with collatoral (junk bond)

EX: the SEC will not back a long history, stable company

Question 26

What are the 2 types of secured bonds?

Answer 26

zero-coupon and convertible

Question 27

What is a zero-coupon bond?

Answer 27

1. Long term high yield bond
2. Win win situation
3. Legal tax shelter (you aren’t paying taxes)

Question 28

What is a convertible bond?

Answer 28

have the option of turning the bond into stock

Question 29

What are the 2 kinds of stock?

Answer 29

preferred and common

Question 30

What is preferred stock?

Answer 30

if there is any money left over after bankruptcy/liquidation, the money will go to the preferred stock holders. They are promised a specific percentage return based on total preferred investment if a dividend is paid

Question 31

What is a dividend?

Answer 31

portion of net profit that is returned to stockholders by the BOARD OF DIRECTORS as a gesture of good faith.

Question 32

Why might a company not issue a dividend?

Answer 32

use it for research to better their company so more people will invest

Question 33

What are the disadvantages to preferred stock?

Answer 33

they cost more and you don’t get to vote

Question 34

What is common stock?

Answer 34

less expensive and allows your to vote

Question 35

Who is allowed to trade securities?

Answer 35

only those who are licensed by the SEC

Question 36

What is an under writers license?

Answer 36

1. usually a company because it takes a lot of money to own
2. will buy large quantities of new securities for resale
3. corporation only gets money from stock the first time its sold

Question 37

What is a securities dealers license?

Answer 37

tend to be companies that buy large quantities of used securities

Question 38

What is a corporate raider?

Answer 38

their goal is to liquidate the company…completely legal
they look for companies whose common stock isn’t expensive, high break up value and board of directors isn’t paying attention

Question 39

What is a broker?

Answer 39

will trade small quantities of used securities

Question 40

Where are securities traded?

Answer 40

in the US and must be a licensed stock exchange

Three Exchanges: regional, NYSE and NASDAQ

Question 41

What is a horizontal combination?

Answer 41

when a business acquires another similar to itself (pizza hut buying papa johns)

Question 42

What is vertical combination?

Answer 42

when a company acquires another company that enhances or improves its production. (adds step in production process) this is legal as long as it doesn’t result in a monopoly

Question 43

What is a conglomeration?

Answer 43

when a business acquires another business that is unrelated to itself

1. if they diversify, they are buying companies unlike themself, when they start to lose money, they divest, sell unrelated company stock
2. conglomerates in tabacco industry, when people stop smoking, they eat

Question 44

How do these 3 combinations occur?

Answer 44

merger, consolidation, holding (parent)

Question 45

What is a merger?

Answer 45

when one company totally absorbs another company, one company completely disappears

Question 46

What is a consolidation?

Answer 46

when 2 or more companies voluntarily blend together to form a new company

Question 47

What is a holding/parent company?

Answer 47

when a company owns a majority of another company’s common stock. the company can always buy itself back

Question 48

What is an inter-locking directorate?

Answer 48

a person who is serving on the board of directors of different companies as long as a monopoly doesn’t form