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Gen Bus 310 > Mod 4 > Flashcards

Mod 4 Flashcards

1
Q

Nexus of Contracts

A

The view that a firm creates a web of contracts with its owners, lenders, customers, employees, suppliers, and other counterparties as it pursues value creation

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2
Q

Residual Claimant

A

Owner who has the lowest priority claim on the cash flow of the firm

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3
Q

Sole Proprietorship

A

A business owned by a single individual

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4
Q

Sole Proprietorship Advantages

A

Easy to start

Little reguation

Owner makes all of the decisions

Owner gets all the profit

Business income taxed as personal income

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5
Q

Sole Proprietorship Disadvantages

A

Unlimited liability

Don’t benefit from specialization

Difficult to transfer ownership

Mortality of owner

Limited access to capital

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6
Q

Unlimited Liability

A

Creditors can look beyond the business assets to the proprietor’s personal assets for payment

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7
Q

Illiquidity

A

Inability to sell an asset quickly at its fair market value

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8
Q

Problem of Asymmetric Information

A

Transaction where the buyer and seller have different information sets.

When one party has superior info and the other inferior, it can be difficult and costly to arrive at mutually agreeable terms

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9
Q

Coincidence of Skills

A

Must find someone who has the necessary skills to operate the business

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10
Q

Partnership

A

A business formed by 2 or more individuals or entities

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11
Q

General Partnership

A

All partners share in the gains and losses

All have unlimited liability for all partnership debts

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12
Q

Limited Partnership

A

A special type of partnership with 2 types of partners

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13
Q

General Partner

A

General partners contribute money and make business decisions. They face unlimited liability

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14
Q

Limited Partner

A

Limited partners provide capital to the business but don’t participate in day-to-day decisions. They have limited liability

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15
Q

Partnership Agreement

A

A contract that outlines the rules under which a partnership operates.

Includes provisions for the distribution of profits, obligations of partners, procedures for selling ownership interest, and mechanisms for conflict resolution

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16
Q

Partnership Advantages

A

Profits taxed at personal rate

Gains from specialization

Increased access to capital

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17
Q

Partnership Disadvantages

A

Unlimited liability

Difficult to transfer ownership

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18
Q

Bylaws

A

Rules and procedures that govern the operation of the business

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19
Q

Board of Directors

A

The elected representatives of the shareholders who have a fiduciary obligation to act in the interest of the stockholders

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20
Q

Stockholders

A

Owners of a corporation

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21
Q

Limited Liability

A

When the maximum loss an owner can realize is their investment in the business

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22
Q

Liquidity

A

Increased liquidity

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23
Q

Corporation Advantages

A

Limited liability
Ability to raise lots of capital
Unlimited life
Increased liquidity
Specialization

24
Q

Double Taxation

A

Profits pay corporate income tax and dividends to shareholders are taxed at the personal level

25
Q

Agency Relationship

A

The principal hires an agent to act in their best interest

26
Q

Public Company

A

Company whose shares trade on at least 1 stock exchange

27
Q

S Corporation

A

Corporation with 100 or fewer owners

Taxed at the personal rate

28
Q

C Corporation

A

Corporation with more than 100 owners

Pay corporate income tax and dividend distributions are taxed at the personal level

29
Q

Corporation Disadvantages

A

Double taxation
Increased regulation
Agency costs

30
Q

Goal of the firm

A

Maximize value for the firm

31
Q

Value

A

What a business is worth

32
Q

How to Create Value

A

Make good long term investments

Finance investments in an optimal way

Well run day-to-day operations

33
Q

Agent

A

Party in an agency relationship hired to act in the principals best interest

34
Q

Principal

A

The party in an agency relationship who hires an agent to act in their best interest

35
Q

Agent Principal Problem

A

Possibility of a conflict of interest between the principal and the agent

36
Q

Mitigate Agent Principal Problem

A

Executive compensation

Take over threat and market for executive talent

Regulation

37
Q

Sarbanes Oxley Act (SOX)

A

US law designed to improve the reliability of financial statements of public companies and increase the penalties to company executives for fraudulent financials

38
Q

Stakeholder

A

Someone other than a stockholder who potentially has a claim on the cash flows of the firm

39
Q

Debt

A

Funding of a business enterprise that comes from lenders

40
Q

Dividend

A

When a corporation disgorges its profits to stockholders

41
Q

Buyback

A

When a corporation uses profits to buy its shares in secondary markets

42
Q

Capital Budgeting

A

Process of planning and managing a firm’s long term investments

43
Q

Capital Structure

A

Mixture of debt and equity maintained by a firm

44
Q

Equity

A

Funding of a business enterprise that comes from owners

45
Q

Primary Market

A

Capital market where an economic agent issues new securities in return for cash

Original sale of securities by governments and corporations

46
Q

Secondary Market

A

Capital market where existing securities trade between parties but the cash does not flow back to the issuer of the security

47
Q

Contract

A

A binding written or oral agreement between 2 or more parties

48
Q

Corporation

A

A business created as a distinct legal entity from the owners, stockholders, or shareholders.

The corporation is liable for the claims of creditors, not owners, providing the shareholders limited liability

49
Q

Initial Public Offering

A

When shares of a corporation become available to the public at large for the first time

50
Q

Market Capitalization

A

Market value of a corporation

Price per share x # of shares outstanding

51
Q

Monitoring

A

Principals spend time, money, and effort to watch the activities of their agents in order to alleviate agency problems

52
Q

Securities and Exchange Commission

A

A federal gov body whose mandate is to protect investors and promote fair well-functioning markets

53
Q

Shares of Stock

A

Standardized ownership claims on a corporation which convey certain rights to the shareholders, such as voting on the board of directors and sharing in dividends

54
Q

Volume

A

Number of secondary market trades take place over a period of time

55
Q
A

Gen Bus 310 (15 decks)

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