Chapter 1 Flashcards
What is capital structure?
mixture of debt and equity maintained by the firm
What is working capital?
a firm’s short-term assets and liabilities
What are the three major forms of business organizations in the United States?
- Sole proprietorship
- Partnership
- Corporation
What are the advantages of having a sole proprietorship?
- Easiest to start
- Least regulated
- Single owner keeps all profits
- Taxed once as personal income
What are the disadvantages of having a sole proprietorship?
- Limited life to owner
- Equity capital limited to owner’s personal wealth
- Unlimited liability
- Difficult to sell ownership interest
What are the advantages of having a partnership?
- Two or more owners
- More capital available
- Relatively easy to start
- Income taxed once as personal income
What are the disadvantages of having a partnership?
- Unlimited liability
- Partnership dissolves when one partner dies or wishes to sell
- Difficult to transfer ownership
What are the advantages of having a corporation?
- Limited liability
- Unlimited life
- Separation of ownership and management
- Transfer of ownership is easy
- Easier to raise capital
What are the disadvantages of having a corporation?
- Separation of ownership and management
- Double taxation (income taxed at the corporate rate and then dividends taxed at a personal rate)
What is the goal of financial management?
to maximize the current value per share of the existing stock
What is the agency relationship?
Stockholders (principals) hires managers (agents) to run the company
What is the agency problem?
Conflict of interests between principal and agent (i.e. management goals and agency costs)
What is are agency costs?
costs of the conflict of interest between stockholders and management
- Direct (i.e. corporate expenditure or expense to monitor management)
- Indirect (i.e. lost opportunity)
What is a stakeholder?
Someone other than a stockholder or creditor who potentially has a claim on the cash flows of the firm
What is the difference between a primary market vs a secondary market?
In a primary market, corporations are the sellers, and the transactions raises money for the corporation. In a secondary market, one owner or creditor sells to another.
