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1.What are the advantages and disadvantages of proprietorships, partnerships and corporations?
Proprietorship advantages: easy an unexpansive to form, they are subject to few government regulation, low income taxes. Disadvantages: Unlimited personal liability, life of the business limited to the life of the business creator. Difficult to obtain large sum of capital.
Partnership: Has the same advantages and disadvantages than proprietorship but it has more than one owner.
Corporation advantages: separate and distinct from its owner owners and managers, limit stockholder loses, easier to transfer shares of stock. Disadvantages: Corporation has double taxation. *which of the following is and adv of corporation? It is easier for investors to transfer ownership.
2.How can you reduce stockholder and manager conflicts?
*Increase the proportion of compensation that comes from shares of stock and decrease the prop paid as cash salaries. Agency problem compensation package, direct stockholder intervention, the threat of hostile takeover. Managers act in their own interest. Increase the compensation in shares and decrease the cash in salaries.
3.How can you reduce stockholder and bondholder conflicts?
Bondholders attempt to protect themselves by including covenants in the bond agreements that limit firms’ use of additional debt and constrain managers’ actions in other ways.
4.What is the goal of the firm?
*Maximize stock price per share over the long run. PROFIT MAXIMIZATION. Should be to maximize the wealth of its stockholders.
5.What is the difference between money and capital markets, spot and futures markets? Money market is a short term liquid debts securities. Less than a year.*Which of the following securities trades on money market? Treasury bills Capital markets is intermediate or long-term debt and corporation. Intermediate is 1-10 years. Long-term is over 10 years
6.What are the different types of financial institutions and what do they do? Investment banks: An organization that underwrites and distributes new investment securities and help business obtain financing. Commercial banks: The traditional department store of finance serving a variety of savers and borrowers.
Final services corporations: A firm that offers a wide range of financial services including, investment banking, brokerage operations, insurance, and commercial banking.
7.What is the difference between an auction market and a dealer market?
Inthe dealer market, dealers buy when individual investors want to sell, and they sell part of their inventory when investors want to buy, this happens in a nonphysical space, such as the internet. An example could be the NASDAQ
*The auction market happens in one physical space (physical location), where a single specialist matches buyers and sellers. An example is NYSE
8.What is the difference between the NYSE and the NASDAQ?
*NYSE occurs in one physical space. And NASDAQ occurs virtually.
9.What is the difference between a primary and secondary market transaction?
Primary markets are the markets in which corporations raise new capital. When securities are new in the market. *IBM issues 200000 shares of new stock and sells them to the public through an investment banker the. of? Primary market transaction
Secondary markets are markets in which existing, already outstanding securities are traded among investors.*You recently sold 200 shares of FB stock through your broker. This is an ex of? Secondary market transaction.
10.What is meant by stock market efficiency?Market efficiency refers to the degree to which stock prices and other securities prices reflect all available, relevant information.
Market price: The current price of a stock.
Intrinsic value: The price at which the stock would sell if all investors had all knowable information about a stock.
Equilibrium price: The price that balances buy and sell orders at any given time
Efficient market: A market in which prices are close to intrinsic values and stocks seem to be in equilibrium.
11.Why are ratios useful? Help us evaluate financial statements, improve your understanding of financial results and trends over time, and provide key indicators of organizational performance.
12.What are the limitations and problems regarding ratios?
-It can be hard to find a comparison firm. Ratio Analysis is more useful for narrowly focused firms then for multidivisional ones judgment. –Seasonal Factors can also disort ratio analysis. – ‘’window dressing’’ techniques can make ratios look better than they actually are.
What is worth more, a dollar today or tomorrow? ‘’Today’’ because of variables such as inflation and interests rates. Inflation is the general increase in prices. The value of money depreciates as time goes by as a result of a change in the general level of prices
13.Which will be higher, the future value of an ordinary annuity or an annuity due? Annuity due will be higher.
14.What will happen as a result of decreasing the firm’s days sales outstanding?
The firm frees up cash.
15.Which of the following will make a firm financially stronger?
Increase EBT
16.Which of the following statements about fixed rate mortgage is not correct?
The amount of the payments is applied to principal and interest is fixed over time.