FIN 3403 Exam 1 | 100% Correct Answers |
Verified | Latest 2024 Version
What are the three forms of business organization? Which one is unique as described in lectures?
Describe differences between them and good and bad points related to each. - ✔✔
Sole Proprietorship.
-Pro: easy startup, single taxation
-Con: limited life, hard to raise capital, unlimited liability
Partnership.
-same as sole proprietorship
Corporation.
-Pro: limited liability, transfer ownership, easy to raise capital
-Con: double taxation, separation of ownership and management
A Corporation is a distinct legal entity "legally a person".
What is an Agency relationship? What is an Agency cost? Which form of business organization
experiences Agency problems? - ✔✔The board and management are "agents" of the shareholders of a
company. They have the right to legally act on behalf of the shareholders in terms of the operation of the
day to day business.
Agency costs: overconsumption of perquisites by management, bonuses not tied to performance, cost of
creating and monitoring policies, and cost of sub-optimal decisions.
Would happen in a corporation, more specifically a C corporation with shareholders who do not actually
manage the company.
What should be the goal of financial management? Why is it the best goal? Why are others inferior? -
✔✔THE GOAL IS TO MAXIMIZE SHAREHOLDER WEALTH. Ultimately every decision that would be
beneficial to the long term health of the company would increase shareholder wealth. Sometimes other
goals could actually hurt the company (bigger isn't always better)
, How can management compensation be structured to align management's goals with those of the
shareholders? Does this always work well? - ✔✔Have compensation be in the form of earning shares in
the company. Management will want to increase shareholder wealth if they also benefit directly from
their own shares.
What is capital? What are the two forms of capital used to finance companies? - ✔✔Capital is the wealth
and assets that a company currently possess. The two forms of capital are debt capital, and equity
capital.
What is a capital market? - ✔✔Facilitates a flow of funds from savers to users. Functions in a way that
efficiently allocates resources.
What is a primary market? - ✔✔This is where companies raise the capital that they use. Initial public
offerings (IPO) are stocks that are being offered in the market for the first time. This is the only time that
the company actually receives cash. Aided by investment bankers who help companies find the people
who will provide them with the capital that they need.
What is a secondary market? - ✔✔A secondary market is when shares of stock are traded between
investors. The company does not receive any cash at this time.
Also called auction markets.
What is a dealer? What is a broker? What is the difference between them and in which secondary
markets does each participate? What are the types of brokers and traders who function on an organized
exchange? How does each differ? (See the sections of Chapters 7 & 8 included in Module 1.) -
✔✔Dealer: Buy shares and sell them
Broker: Finds a buyer and a seller, brings them together but never gains ownership of the share
Full Service: Help buyers and sellers to make decisions and carries out the process for them
Discount: Does not provide any services but executes the trade
On-line: You can access information and execute trades
What is a commission? What is a bid price? What is an ask price? What is the bid-ask spread? - ✔✔A
commission is what a broker charges to facilitate the trade since they never gain ownership of the
shares.
Verified | Latest 2024 Version
What are the three forms of business organization? Which one is unique as described in lectures?
Describe differences between them and good and bad points related to each. - ✔✔
Sole Proprietorship.
-Pro: easy startup, single taxation
-Con: limited life, hard to raise capital, unlimited liability
Partnership.
-same as sole proprietorship
Corporation.
-Pro: limited liability, transfer ownership, easy to raise capital
-Con: double taxation, separation of ownership and management
A Corporation is a distinct legal entity "legally a person".
What is an Agency relationship? What is an Agency cost? Which form of business organization
experiences Agency problems? - ✔✔The board and management are "agents" of the shareholders of a
company. They have the right to legally act on behalf of the shareholders in terms of the operation of the
day to day business.
Agency costs: overconsumption of perquisites by management, bonuses not tied to performance, cost of
creating and monitoring policies, and cost of sub-optimal decisions.
Would happen in a corporation, more specifically a C corporation with shareholders who do not actually
manage the company.
What should be the goal of financial management? Why is it the best goal? Why are others inferior? -
✔✔THE GOAL IS TO MAXIMIZE SHAREHOLDER WEALTH. Ultimately every decision that would be
beneficial to the long term health of the company would increase shareholder wealth. Sometimes other
goals could actually hurt the company (bigger isn't always better)
, How can management compensation be structured to align management's goals with those of the
shareholders? Does this always work well? - ✔✔Have compensation be in the form of earning shares in
the company. Management will want to increase shareholder wealth if they also benefit directly from
their own shares.
What is capital? What are the two forms of capital used to finance companies? - ✔✔Capital is the wealth
and assets that a company currently possess. The two forms of capital are debt capital, and equity
capital.
What is a capital market? - ✔✔Facilitates a flow of funds from savers to users. Functions in a way that
efficiently allocates resources.
What is a primary market? - ✔✔This is where companies raise the capital that they use. Initial public
offerings (IPO) are stocks that are being offered in the market for the first time. This is the only time that
the company actually receives cash. Aided by investment bankers who help companies find the people
who will provide them with the capital that they need.
What is a secondary market? - ✔✔A secondary market is when shares of stock are traded between
investors. The company does not receive any cash at this time.
Also called auction markets.
What is a dealer? What is a broker? What is the difference between them and in which secondary
markets does each participate? What are the types of brokers and traders who function on an organized
exchange? How does each differ? (See the sections of Chapters 7 & 8 included in Module 1.) -
✔✔Dealer: Buy shares and sell them
Broker: Finds a buyer and a seller, brings them together but never gains ownership of the share
Full Service: Help buyers and sellers to make decisions and carries out the process for them
Discount: Does not provide any services but executes the trade
On-line: You can access information and execute trades
What is a commission? What is a bid price? What is an ask price? What is the bid-ask spread? - ✔✔A
commission is what a broker charges to facilitate the trade since they never gain ownership of the
shares.
