Firm Structure Flashcards
Why do firms exist?
Transactions costs (cost of getting to agreement; energy, time, resources)
Why don’t we have one big firm?
There would be no transactions cost; Would make us less efficient
Sole-Proprietorship
One person has all control, reward and risk; Pays costs/employees and keeps leftovers
Proprietor’s Income
Leftover $ after paying costs and employees
Partnership
Group of people share control, reward and risk; Each partner is fully liable for the debts of firm
Corporation (Inc./LTD)
Limits risk to one’s investment in company; If company turns sour, you lose what you put into economy
Why don’t all firms incorporate?
Double taxation
Bonds
Allows firms to borrow a little bit of money from many people; Relationship strictly financial; Once bond matures and value is paid back, relationship ends
What happens if a company folds?
The bondholders have first lein/claim
Why do people buy bonds?
Given interest because of inflation and opportunity costs
Interest Rate Formula
r = Coupon Value / Price
Discount
If people pay less for the bond when buying on a secondary market
Premium
If people pay more for the bond when buying on a secondary market
Relationship between bond price and interest rate
Inversely proportional; Higher bond price, lower IR
Stock
Provides a share of ownership, profit, and risk
