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Business Management > Chapter 1: The Firm > Flashcards

Chapter 1: The Firm Flashcards

1
Q

Bond Market

A

A marketplace where investors buy bonds from government entities or corporations

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2
Q

Types of Bonds

A
  • Corporate Bond
  • Government Bond
  • Municipal Bonds (Muni Bonds)
  • Mortgage-Backed Bonds (MBS)
  • Emerging Market Bonds
  • Junk Bonds
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3
Q

Corporate Bonds

A
  • Used for financing current operations or opening new facilities
  • Maturity of at least one year
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4
Q

Government Bonds

A
  • Used to finance infrastructural improvements and pay down debts
  • Issued by national governments
  • Pay out face value on the agreed maturity date with periodic interest payments
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5
Q

Municipal Bonds (Muni Bonds)

A
  • Issued by states, cities and other local government entities
  • Fund various local projects
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6
Q

Mortgage-backed Bonds (MBS)

A
  • Consist of pooled mortgages on real estate properties
  • Investors lend money to home buyers through their lenders
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7
Q

Emerging Market Bonds

A
  • Issued by governments and companies in emerging market economies
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8
Q

Junk Bonds

A
  • Offer the highest return but also present the greatest risks of fault
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9
Q

Primary Bond Market

A

Where bonds are initially issued and sold to investors

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10
Q

Secondary Bond Market

A

Where bonds are traded among investors after they have been issued in the primary market

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11
Q

Advantages of the Bond Market

A
  • Wide variety of issuers and bond types
  • Bondholders have preference over shareholders in the event of bankruptcy
  • Corporate and government bond markets are highly liquid and active
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12
Q

Disadvantages of the Bond Market

A
  • Less accessible for ordinary investors
  • Exposure to credit and interest rate risk
  • Lower expected rate of return compared to stocks, despite being less volatile and more conservative
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13
Q

Types of Financing

A
  • Debt Financing
  • Equity Financing
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14
Q

Debt Financing

A

Taking a loan and promising to repay it over time with interest

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15
Q

Equity Financing

A

Raising money by selling ownership shares in the business
- Used by startups to raise initial capital
- Highly regulated in the US at both state and federal levels

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16
Q

What is a reason to choose Equity Financing for Entrepeneurs?

A

It is often the only option as startups have a high failure rate, making banks reluctant to offer loans

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17
Q

What is a reason to choose Equity Financing for Large Corporations?

A

Chosen when it is less expensive to sell stock than to pay interest on debt

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18
Q

Equity options for investors in Equity Financing

A
  • Convertible Preferred Shares
  • Common Stock with Warrants
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19
Q

Commercial Paper

A

A short-term debt security issued by financial companies and large corporations, promising the buyer ** a return typically stated as an interest rate

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20
Q

Purpose and Usage of Commercial Paper

A

Companies use commercial paper for short-term loans to cover expenses such as accounts payable and inventories

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21
Q

Maturity of Commercial Paper

A

Most commercial papers mature within 1-6 months, but some can mature up to 9 months

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22
Q

C-Corporation (C-Corp)

A

A legal structure for a corporation in which the owners, or shareholders are taxed separately from the entity

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23
Q

C-Corporation (C-Corp): Taxation

A

Double Taxation
- Corporate profits are taxed
- Shareholder dividends are taxed

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24
Q

C-Corporation (C-Corp): Liability

A

Limited liability for shareholders
- Shareholders’ personal assets are protected from business liabilities

25
Q

C-Corporation (C-Corp): Regulation

A

More regulatory requirements and formalities

26
Q

C-Corporation (C-Corp): Capital Raising

A

Can issues unlimited shares and multiple classes of stock, making it easier to attract a wide range of investors, including venture capitalists and institutional investors; can also issue bonds

27
Q

S-Corporation (S-Corp)

A

A special type of corporation that allows income to be passed through directly to the owners or shareholders, thereby avoiding double taxation that typically affects C-corporations

28
Q

S-Corporation (S-Corp): Taxation

A

Pass-through taxation
- Income is only taxed at the shareholder level

29
Q

S-Corporation (S-Corp): Liability

A

Limited liability for shareholders

30
Q

S-Corporation (S-Corp): Regulation

A

Limited to 100 shareholders, all must be U.S. citizens or residents and only once class of stock allowed

31
Q

S-Corporation (S-Corp): Capital Raising

A

Limited by the restrictions on the number and type of shareholders; primarily raises capital through selling shares and taking out loans

32
Q

Partnership

A

A business owned by more than one person and of which one or more of them are financially responsible for the actions and obligations of the business

33
Q

Partnership: Taxation

A

Pass-through taxation
- Profits and losses are reported on partners’ personal tax returns

34
Q

Partnership: Liability

A

General partners have unlimited liability; limited partners have liability up to their investment

35
Q

Partnership: Regulation

A

Fewer regulatory requirements and formalities

36
Q

Partnership: ** Capital Raising**

A

Primarily through contributions from partners; limited partnerships can attract investors as limited partners who have limited liability to their investment can also take out loans

37
Q

Limited Liability Company (LLC)

A

A flexible business structure that combines a limited partnership and a corporation

38
Q

Limited Liability Company (LLC): Taxation

A

Flexible
- Can opt for either pass-through or double-taxation

39
Q

Limited Liability Company (LLC): Liability

A

Limited Liability for members

40
Q

Limited Liability Company (LLC): Regulation

A

Fewer formalities than a corporation, with flexible management structures

41
Q

Limited Liability Company (LLC): Capital Raising

A
  • Members can contribute capital
  • Possibility to bring in additional investors through flexible membership interests
  • Loans
42
Q

What type of company must be owned by a single person?

A

Sole Proprietorship

43
Q

What type of business is the least expensive to start?

A

Sole Proprietorship

44
Q

What type of business can have unlimited number of stockholders?

A

C-Corporations

45
Q

What are the Three Fundamental Decisions in Financial Management?

A
  • Capital Budgeting
  • Financing
  • Working Capital
46
Q

Financial Management: Capital Budgeting

A

Deciding on which long-term assets to acquire to maximise net benefits for the firm

47
Q

Financial Management: Financing

A

Deciding on how to pay for short term and long-term assets by finding the best combination of short-term debt, long-term debt, and equity

48
Q

Financial Management: Working Capital

A

Decide on how to manage short-term resources and obligations by adjusting current assets and current liabilities to promote growth in cash flow

49
Q

The value of a stock is a benchmark for:

A
  • SIZE: future cash flows of the firm are considered
  • TIMING: When the future cash flows will come are considered
  • RISK: Risks associated with wait for cash flow are considered
50
Q

Why should a business not solely focus on maximising market share?

A

Giving away goods or services for free is a short-term solution, the firm will not be able to pay its bills and stay in business

51
Q

Why should a business not solely focus on maximising profits?

A
  • Accounting profit does not equal economic profit
  • Profit earned may not equal cash received
  • Depreciation
52
Q

What should the goal of a firm be?

A

The larger the positive residual cash flow, the greater the value of a firm

53
Q

Formula Residual Cash Flow

A

Income - (Expenses + Debts + Investments)

54
Q

Main reasons for Businesses failing

A
  • Lack of acceptance of the products by customers
  • Poor strategy
  • Poor management skills to properly execute a good strategy
  • Underestimating how much money it will take to get their business up and running
55
Q

What is used to estimate how much financing a new business will require?

A
  • Cash flow (EBITDA) break-even
  • Cash budget
56
Q

Key Elements of a Financial Plan

A
  • Income Statement
  • Cash Flow Statement
  • Balance Sheet
  • Sales Forecast
  • Business Ratios
  • Break Even Analysis
  • Pricing Strategies
  • Budgeting
57
Q

Key Elements of a Business Plan

A
  • Executive Summary
  • Company Overview
  • Description of product(s) and services the company will sell
  • Market Analysis
  • Marketing and Sales activities
  • Management team and ownership
58
Q

Venture Capitalist

A

Professional investor in privately held startup companies

59
Q

Angel Investor

A

Very wealthy investor (1 mill+) that predominantly invests in startup businesses

Business Management (2 decks)

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