Chapter 1: The Corporation and Financial Markets Flashcards
Finance
- how firms raise money from investors
- how firms invest money in an attempt to earn a profit
- how firms decide whether to reinvest profits in the business or distribute them back to investors
Firm
- exist because investors want access to risky investment opportunities
- main goal is to maximize shareholder wealth
Sole Proprietorship
- owned and run by one person
- unlimited personal liability
- few employees
- owner and business income is taxed at the personal level
Partnership
- similar to a sole proprietorship but it has more than one owner
- everything is split
Limited Partnership
two kinds of owners general partners and limited partners
General Partners
have same rights and privileges as partners in a (general) partnership—they are personally liable
for the firm’s debt obligations
Limited Partners
- have limited liability (their liability is limited to their investment)
- their private property cannot be seized to pay off the firm’s outstanding debts
Limited Liability Partnership (LLP)
- used in the legal and accounting professions
- similar to a general partnership in that the partners can be active in the management of the firm, and they do have a degree of unlimited liability
Corporation
- a legally defined separate entity, artificial being (a judicial person or legal entity) separate from its owner
- shareholders have limited liability; they are not liable for any obligations the corporation
enters into and vice versa - can exist into perpetuity (forever getting money)
Stock
- entire ownership stake of a corporation that is divided into shares
- aka shareholder, stockholder, or equity holder
Flow Through Entities
where all income produced by the business flowed to the investors and virtually no earnings were retained within the business
Business Income Trust
holds all the debt
Unit Holders
equity securities of a corporation (the underlying business) in trust for the trust’s owners
Energy Trust
either holds resource properties directly or holds all the debt and equity securities of a resource corporation within the trust
Real Estate Investment Trust (REIT)
either holds real estate properties directly or holds all the debt and equity securities of a corporation that owns real estate properties
Board of Directors
a group of people that has the ultimate decision-making authority in the corporation
Chief Executive Officer (CEO)
in charge of running the corporation by instituting the rules and policies set by the board of directors
Chief Financial Officer (CFO)
- reports directly to the CEO
- makes investment and financing decisions and cash management
Shareholder Wealth Maximization
one goal that generally unites shareholders because they all benefit from a higher stock price
Ethical Dilemma
each person has his or her own set of values, which forms the basis for personal judgments about what is the right thing
Principal–agent/Agency Problem
- when managers put their own self-interest ahead of the interests of shareholders
- face the ethical dilemmas to do whats best for the shareholders or themselves
Hostile Takeover
a situation in which an individual or organization, sometimes 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
Stakeholder
any person with an interest in what a corporation does
ex. employees, customers, suppliers, the community, the government, and investors
Stakeholder Satisfaction
a corporate objective that seeks to meet the interests of all stakeholders of a corporation
Corporate Social Responsibility
a corporation’s efforts to assess and be responsible for its activities, particularly in relation to their environmental and social impacts, and may also include initiatives to promote positive social and environmental change
Liquidation
closing down a business and selling off all its assets; often the result of the business declaring bankruptcy
Private Companies
companies whose shares do not trade on a public market
Public Companies
corporations whose stock is traded on a stock market or exchange, providing shareholders the ability to quickly and easily convert their investments to cash
Liquid
describes an investment that can easily be turned into cash because it can be sold immediately at a competitive market price
Primary Market
market used when a corporation itself issues new shares of stock and sells them to investors
Secondary Market
market that shares continue to trade on after the initial transaction between the corporation and investors
Bid Price
the highest price in a market for which someone is willing to purchase a security
Ask/Offer Price
the lowest price in a market for which someone is willing to sell a security
Bid-ask Spread
an implicit transaction cost investors have to pay in order to trade quickly
Transactions Costs
costs of executing a trade or transaction, normally including broker commissions or other fees
Limit Order
an order to buy or sell a security at a specified price
Limit Order Book
- the collection of all limit orders at a stock exchange is known as the limit order book
- exchanges make their limit order books public so that investors (or their brokers) can see the best bid and ask prices when deciding where to trade
Market Order
order to trade immediately at the best outstanding limit order available
Specialists
- individuals on the trading floor of the NYSE who match buyers with sellers
- aka market makers
Dark Pools
- investors have the ability to trade at a better price
- for traders who do not want to reveal their demand and who are willing to sacrifice the guarantee of immediacy for a potentially better price
