Chapter 1 Flashcards
What is Capital Budgeting?
The process of planning and managing a firm’s long-term investments where managers identify investments that are worth more than they cost to acquire
What is Capital Structure?
Specific mixture of long-term debt and equity the firm uses to finance operations.
What is “ Working “ Capital Management?
Refers to firms short term assets and long-term liabilities : Day-to-day activity to ensure firms have sufficient resources for operations.
Sole Proprietorship Pros
- Easiest to Start
- Least Regulated
- Single owner keeps all profit.
- Taxed once as personal income.
Sole Proprietorship Cons
- Limited life
- Equity capital limited to owners personal wealth
- Unlimited Liability
- Difficult to sell ownership interest.
Partnership Pros
- Easy to Start
- 2 or more owners
- More capital available
- Income taxed once as personal income.
Partnership Cons
- Unlimited liability for GPs
- Limited partners do not manage.
- Partnership dissolves with one GP dies/or sells.
- Difficult to transfer ownership for LPs
Corporation Pros
- Easier to raise capital
- Limited Liability
- Unlimited Life
- Sep. of ownership and management.
- Transfer of ownership is easy
Corporation Cons
- Sep. of ownership and management = agency problem
- Double Taxation
What is agency problem?
Principal hires another agent to represent their interests. This can create a conflict of interest.
Stakeholders: Priority
- Customers
- Employees
- Suppliers
- Government
- Creditors
- Stockholders
Primary Markets
Corporation is the seller and the transaction raises money for the corporation.
Secondary Markets
Involves and owners or creditor selling to another, thus transferring ownership of securities.
