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Financial Management

Chapter 1

What are proprietorships? unincorporated business owned by one individual
Advantages of a proprietorship: easily/inexpensive to form; few government regulations; subject to lower income taxes.
Limitations of a proprietorship: unlimited personal liability; life of the business is limited to the life of the individual; difficulty in obtaining capital.
What is a partnership? a legal arrangement between 2 or more people.
Advantages of a partnership? Established easy & inexpensive; income rated on a pro rata basis & taxed on an individual basis (avoids corporate tax situation)
Limitations of a partnership? Unlimited personal liability; unlimited liability makes it difficult to raise capital.
What is a corporation? a legal entity created by a state; separate and distinct from its owners and managers.
What are the advantages of a corporation? Limits SH losses to the amount invested in the firm. Unlimited life; easy to transfer shares of stock; more success in raising capital.
Waht are the disadvantages of a corporation? corporate taxes. Double taxation-corporate earnings are taxed and after-tax earnings on dividends are taxed.
What is a limited liability company a hybrid between a partnership and a corporation.
What are the advantages of an LLC? Both LLCs and LLPs have limited liability like corporations but are taxed like partnerships
What is an S corporation? : taxed if it were a partnership, exempt from corporate tax. To qualify as an S, no more than 75 shareholders
What is management’s primary goal? Decisions should be made to maximize the long-run value of the firm’s common stock.
What is market price? stock value based on perceived but possibly incorrect information as seen by the marginal investor.
What is the definition of perceived? what investors expect, given the limited information they actually have.
What is intrinsic value? An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely.
How do you define true value? returns and risk that investors would expect if they had all of the information that existed about the company.
Define equilibrium? The situation in which the actual market price equals the intrinsic value so investors are indifferent between buying or selling a stock.
What four trends affect business management in general and financial management in particular? 1. Sarbanes Oxley Bill which requires the CEO and CFO of a firm to certify that the firm’s financial statements are accurate.
Increased globalization of business.
Improving information technology (IT)
Corporate governance.
How would you define “business ethics”? standards of conduct or moral behavior.
What are three techniques stockholders can use to motivate managers to maximize their stock’s long-run price? (1) Reasonable compensation packagews (2) Firing managers who are not performing well (3) The threat of hostile takeovers.
Created by: stamberger