Chapter 1

Question 1

capital (2)

Answer 1

financial: money
real: long-term plant and equipment

Question 2

capital structure theory

Answer 2

importance of debt and equity in firm

Question 3

sole proprietorship positives (3)

Answer 3

1. simplicity of decision making
2. low organisational and operational costs
   - tax as belonging to individual owner

Question 4

sole proprietorship negatives (1)

Answer 4

1. unlimited liability to owner

Question 5

partnership formed through

Answer 5

articles of partnership

Question 6

partnership positives (2)

Answer 6

1. raise more capital

2. share ownership responsibilities

Question 7

partnership negatives (1)

Answer 7

1. unlimited liability

Question 8

limited liability partnership

Answer 8

general partners - unlimited liability

limited partners - liable for initial investment

Question 9

corporation

Answer 9

1. legal entire unto itself
2. formed through articles of incorporation
3. owned by shareholders who have limited liability
4. (negative) double taxation

Question 10

subchapter s corporation

Answer 10

income is taxed as direct income to stockholders and thus only taxed as normal income

Question 11

agency theory

Answer 11

relationship between owners and managers

ex. management acted in own interest

Question 12

valuation approach

Answer 12

how earnings are valued by investor

Question 13

insider trading

Answer 13

using information not available to the public to trade in securities

Question 14

financial markets (4)

Answer 14

1. public financial markets
2. corporate financial markets
3. money markets: short term securities
4. capital markets: securities have life of more than 1 year