Finance 341 Final Exam Theory Facts

Finance 341 Final Exam Theory Facts - Finance 341 Final...

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Finance 341 Final Exam Theory Facts 1. Overview of Financial Mgmt Corporations o Legal entity created by a state o Separate and distinct from owners (limited liability) o Unlimited life o Easier to transfer ownership o Double taxation o Can attract capital more easily than unincorporated businesses => easier to take advantage of growth opportunities o An investment in the stock of a corporation is more liquid than an investment in a sole proprietorship or partnership => corporations have higher value Partnerships o Two or more owners (unincorporated) o Easy and inexpensive to form o Lower taxes o Difficult to raise capital o Limited life o All partners are held liable for the actions of their fellow partners, regardless of who is at fault (unlimited liability) o It is difficult to transfer the ownership of partnerships Sole proprietorship o Personal liability for business debts (unlimited liability) o Unincorporated o One owner o Fewer govt regulations o Easy and inexpensive to form o Lower taxes o Difficult to obtain capital o Limited life S-Corporation o Regularly taxes o Limited liability o Small- no more than 75 stockholders Limited liability => reduced investor risk => higher value The primary goal for management decisions is to maximize the firm’s stock price. 2. Time Value of Money You would be more interested in investing in an account with a greater number of compounding periods In an amortized loan, all payments are equal
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The normal, periodic and effective rates can all be equal, but they do not have to be 3. Financial Statements, Cash Flow, and Taxes The corporate tax rate on long term and short term capital gains is the same as ordinary income If a corporation owns 80% or more of another corporation’s stock, it can combine profits and losses and file a consolidated tax return If an individual receives dividend income, it is taxed with a lower rate o < 20% ownership pay on 30% o 20-80% ownership pay on 20% o > 80% don’t pay A capital asset must be owned for 1 year or more to have a gain off the sale to be classified as a long term capital gain for an individual A concern with MVA is that values from different years are added together as if they were equivalent dollar values EVA is better to use than net income when predicting a company’s stock price EVA is a better measurement of a company’s annual performance because it takes out the cost of equity, unlike NI EVA is preferred over MVA to evaluate managerial performance for the
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Finance 341 Final Exam Theory Facts - Finance 341 Final...

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