question

capital structure theory

answer

the study of the relative importance of debt and equity

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inflation

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increase of prices

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disinflation

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a slowing down of price increases

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credit default swaps

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securities that were created by financial institutions as insurance against borrowers defaulting on their loans

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Dodd-Frank Act

answer

AKA Wall Street Reform and Consumer Protection Act of 2010. It purports to promote financial stability by improving accountability and transparency in the overall financial system, protecting taxpayers by improving the stability of large, diversified financial institutions, and protection consumers from abusive practices in the financial services industry

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sole proprietorship

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single person ownership

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advantages of sole proprietorship

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simplicity of decision making and low organizational and operating costs

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disadvantages of sole proprietorship

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-unlimited liability to the owners -in settlement of the firm's debts, the owner can lose the capital invested in the business and personal assets -few lenders willing to fund small business without personal liability commitment -profits/losses are taxed as though they belong to individual owner

question

partnership

answer

two or more owners

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advantages of partnership

answer

-possible to raise more capital -share ownership responsibilities -no double taxation -sharing possible losses

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disadvantages of partnership

answer

-profits or losses are allocated directly to the partners -carries unlimited liability for the owners -owners with unequal wealth having to absorb losses

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articles of partnership

answer

specifies the ownership interest, the methods for distributing profits, and the means for withdrawing from the partnership

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limited liability partnership

answer

one or more partners are designated general partners and have unlimited liability for the debts of the firm; other partners are designated limited partners and are liable only for the initial contribution.

question

disadvantages of limited liability partnership

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limited partners are normally prohibited from being active in the management of the firm -not all financial institutions will extend funds to the type of partnership

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corporation

answer

most important type of economic unit. It is a legal entity unto itself. Can be sued or sue, engage in contracts, and acquire property.

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articles of incorporation

answer

specify rights and limitations of the entity

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advantages of corporation

answer

-owned by shareholders who enjoy the privilege of limited liability, meaning their liability exposure is generally no greater than their initial investment -has continual life and is not dependent of any one shareholder for maintaining its legal existence -easy divisibility of ownership interest by issuing shares of stock -because it is a separate legal entity, it reports and pays taxes on its own income; rest of income is paid to shareholders as dividends

question

disadvantages of corporation

answer

-remaining income that is paid to the shareholders in the form of dividends will require the payment of a second tax by the shareholders -potential double taxation of earnings

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S corporation

answer

income is taxed as direct income to the stockholders and thus is axed only once as normal income, similar to a partnership.

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advantages of S corporation

answer

-shareholders receive all the organizational benefits of a corporation, including limited liability

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limited liability company (LLC)

answer

-highly flexible structure -provides limited liability for owners -can be taxed as sole proprietorship, partnership, corporation or S corporation

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advantages of LLC

answer

-highly flexible structure -like a corporation, it provides limited liability for the owners -can be taxed as sole proprietors, partnerships, corporations or S corporation, depending on election made by owners

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agency theory

answer

relationship between the owners and the managers of the firm. Ex: managers operate firm to satisfy own goals instead of best interest of the shareholders

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institutional investors

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such as in pension funds and mutual funds, have more to say about the way publicly owned corporations are managed

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Sarbanes-Oxley Act

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set up a five-member Public Company Accounting Oversight Board with the responsibility for establishing auditing standards within companies, controlling the quality of audits, and setting rules and standards for the independence of the auditors. It makes sure companies accurately present their financial statements.

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shareholder wealth maximization

answer

maximizing the wealth of the firm's shareholders through achieving the highest possible value for the firm in the marketplace. It is the overriding objective of the firm and should influence all decisions.

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insider trading

answer

occurs when someone has information that is not available to the public and then uses this information to profit from trading in a company's publicly traded securities. It is illegal and protected by the SEC. Can destroy confidence in securities exchange market and can have negative economic impact

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financial markets

answer

meeting place for people, corporations, and institutions that either need money or have money to lend or invest. They exists as a vast global network of individuals and financial institutions that may be lenders, borrowers, or owners of public companies worldwide

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public financial markets

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include national, state, and local governments that are primarily borrowers of funds for highways, education, welfare, and other public activities

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corporate financial markets

answer

corporations such as Coca-Cola, Nike, and Ford, on the other hand, raise funds in

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money markets

answer

markets dealing with short-term securities that have a life of one year or less. Securities in these markets can include commercial paper sold by corporations to finance their daily operations, or certificates off deposit with maturities of less than one year sold by banks.

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capital markets

answer

markets where securities have a life of more than one year. Includes intermediate markets ( 1 to 10 years) and long-term markets (greater than 10 years). Includes securities such as common stock, preferred stock, and corporate and government bonds.

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primary market

answer

when a corporation uses the financial markets to raise new funds, called an initial public offering or IPO, the sale of securities is said to be made in the

question

secondary market

answer

after the securities are sold to the public (institutions and individuals), they are traded in the

question

restructuring

answer

process that can take many forms in a corporation, such as changes in the capital structure (liability and equity on the balance sheet). it can also result in the selling of low-profit-margin divisions the proceeds reinvested in better investment opportunities. Sometimes restructuring results in the removal of the current management team or large reductions in the workforce. It has also included mergers and acquisitions.

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As finance emerged as a new field, much emphasis was placed on mergers and acquisitions

answer

t

question

During the 1930s, financial practice revolved around such topics as the preservation of capital, maintenance of liquidity, reorganization of financially troubled corporations and bankruptcy

answer

t

question

In the mid 1950s, finance began to change to a more analytical, decision-oriented approach

answer

t

question

The first Nobel Prizes given to finance professors were for their contributions to capital structure theory and portfolio theories of risk and return

answer

t

question

The most common partnership arrangement carries limited liability to the partners

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f

question

In terms of revenues and profits, the corporation is by far the most important form of business organization in the United States

answer

t

question

A corporation must have more than 75 stockholders to qualify for Subchapter S designation

answer

f

question

Profits of a Subchapter S corporation are taxed at corporate tax rates

answer

f

question

The Sarbanes Oxley Act reduced agency conflicts by giving corporate managers greater flexibility to select their preferred candidates to the Board of Directors

answer

f

question

Social responsibility and profit maximization are synonymous

answer

f

question

In the United States, stocks sold on either the New York Stock Exchange or NASDAQ are considered sold in the primary market

answer

f

question

Many companies have cross-listed their stock on multiple international stock exchanges and more than several hundred foreign companies have listed their shares on the New York Stock Exchange

answer

t

question

Higher return always induces stockholders to invest in a company

answer

f

question

In the past, the study of finance has included

answer

-mergers and acquisitions. -raising capital. -bankruptcy

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Professor Merton Miller received the Nobel prize in economics for his work on

answer

capital structure theory

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Professors Harry Markowitz and William Sharpe received their Nobel prize in economics for their contributions to the

answer

theories of risk-return and portfolio theory

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The major difficulty in most insider-trading cases has been

answer

that inside trades have not been legally well defined

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The financial markets allocate capital to corporations by

answer

reflecting expectations of the market participants in the prices of the corporations

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A corporate buy-back, or the repurchasing of shares, is

answer

an example of balance sheet restructuring

question

Increased productivity due to technology has

answer

helped to keep corporate costs in check

question

Dividends paid to corporate stockholders have already been taxed once as corporate income

answer

t

question

The higher the profit of a firm, the higher the value the firm is assured of receiving in the market

answer

f

question

Real Capital is composed of long-term plant and equipment

answer

t

question

One of the primary disadvantages of maximizing shareholder value is that it only provides a short-term perspective

answer

f

question

Capital markets do not include which of the following securities

answer

Commercial paper

question

Which of the following is not a true statement about the goal of maximizing shareholder wealth?

answer

It is a short-run point of view which takes risk into account

question

Stakeholders

answer

creditors, directors, employees, government (and its agencies), owners (shareholders), suppliers, unions, and the community from which the business draws its resources

question

Risk/Reward trade off

answer

with risk comes bigger reward

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