Ch 1 - Corporate Finance and the Financial Manager

Question 1

sole proprietorship

Answer 1

business owned and run by one person

Question 2

partnership

Answer 2

business owned and run by more than one owner

Question 3

limited partnership

Answer 3

a partnership with two kinds of owners, general partners and limited partners

Question 4

limited liability

Answer 4

when an investor’s liability is limited to her investment

Question 5

limited liability company (LLC)

Answer 5

a limited partnership without a general partner

Question 6

corporation

Answer 6

legally defined, artificial being, separate from its owners

Question 7

stock

Answer 7

ownership or equity of a corporation divided into shares

Question 8

equity

Answer 8

collection of all the outstanding shares of a corporation

Question 9

shareholder/stockholder/equity holder

Answer 9

owner of a share of stock or equity in a corporation

Question 10

dividend payments

Answer 10

payments made at the discretion of the corporation to its equity holders

Question 11

S corporations

Answer 11

corporations that elect subchapter S tax treat- ment and are exempted by the U.S.Internal Revenue Service’s tax code from double taxation

Question 12

C corporations

Answer 12

Corporations that have no restrictions on who owns their shares or the number of shareholders; they can- not qualify for subchapter S treatment and are sub- ject to direct taxation.

Question 13

board of directors

Answer 13

group of people elected by shareholders who have the ultimate decision- making authority in the corporation

Question 14

chief executive officer

Answer 14

The person charged with running the corporation by instituting the rules and policies set by the board of directors.

Question 15

agency problem

Answer 15

When managers,despite being hired as the agents of shareholders,put their own self-interest ahead of the interests of those shareholders.

Question 16

hostile takeover

Answer 16

A situation in which an individual or organization,some- times referred to as a corporate raider, purchases a large fraction of a target corporation’s stock and in doing so gets enough votes to replace the target’s board of directors and its CEO.

Question 17

stock markets/stock exchanges/bourses

Answer 17

Organized markets on which the shares of many corporations are traded.

Question 18

primary market

Answer 18

when corporation issues new shares or stock and sells them to investors

Question 19

secondary market

Answer 19

Markets,such as NYSE or NASDAQ,where shares of a corporation are traded between investors without the involvement of the corporation

Question 20

market makers

Answer 20

individuals on a stock exchange who match buyers with sellers

Question 21

specialists

Answer 21

Individuals on the trading floor of the NYSE who match buyers with sellers; also called market makers.

Question 22

bid price

Answer 22

The price at which a market maker or specialist is willing to buy a security.

Question 23

ask price

Answer 23

The price at which a market maker or specialist is willing to sell a security.

Question 24

auction market

Answer 24

A market where share prices are set through direct interaction of buyers and sellers.

Question 25

bid-ask spread

Answer 25

The amount by which the ask price exceeds the bid price.

Question 26

transaction cost

Answer 26

In most markets,an expense such as a broker commission and the bid-ask spread investors must pay in order to trade securities

Question 27

over the counter market (OTC)

Answer 27

A market without a physical location,in which dealers are connected by computers and telephones.

Question 28

dealer market

Answer 28

a market where dealers buy and sell for their own accounts

Question 29

listing standards

Answer 29

Outlines of the requirements a company must meet to be traded on the exchange

Question 30

financial institutions

Answer 30

Entities that provide financial services,such as taking deposits,managing investments,brokering financial transactions,or making loans