BUS FIN Study Guide - C HAPTER ONE TER MS Goal of the fi rm...

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CHAPTER ONE TERMS Goal of the firm – The fundamental goal of a business is to create value for the company’s owners (that is, its shareholders). This goal is frequently stated as “ maximization of shareholder wealth or Maximizing firm value or Maximizing stock price .” The goal of the firm “ profit maximization ” ignores: Timing of Returns (Time of Money) and Uncertainty of Returns (Risk) Sole proprietorship – is a business owned by an individual . The owner retains the title to the business’s assets and is responsible, generally without limitation, for the liabilities incurred. The proprietor is entitled to the profits from the business but must also absorb any losses. General partnership – In a general partnership each partner is fully responsible for the liabilities incurred by the partnership . Thus, any partner’s faulty conduct, even having the appearance of relating to the firm’s business, renders the remaining partners liable as well. Limited partnership – The state statutes permit one or more of the partners to have limited liability, restricted to the amount of capital invested in the partnership . One of the general partners must have unlimited liability. The names of the limited partners may not appear in the name of the firm. The limited partners may not participate in the management of the business. Corporation – This entity legally functions separate and apart from its owners . As such, the corporation can individually sue and be sued and purchase, sell, or own property, and its personnel are subject to criminal punishment for crimes. All owners have limited liability. S-Corporation – provides limited liability while allowing the business’s owners to be taxed as if they were a partnership – that is, distributions back to the owners are not taxed twice as is the case with dividends distributed by regular corporations. S-corporations cannot be used for a joint venture between two corporations. Limited liability Company (LLC) – is also a cross between a partnership and a corporation. The LLC retains limited liability for its owners but runs and is taxed like a partnership . LLCs provide more flexibility than S-corps. Corporations can be owners in an LLC. LLCs operate under state laws; both states and the IRS have rules for what qualifies as an LLC where different states have different rules. LLC must not look too much like a corporation or it will be taxed as one. CHAPTER TWO TERMS Page 1 of 10
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Types of Securities Treasury Bills (Short-term securities under a 1 year period) Federal Government is borrowing money. Treasury Bonds (Long-term securities 1 year and longer) Federal Government is borrowing money. Municipal Bonds (Long-term securities 1 year and longer) Local Government is borrowing money.
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