FIN6406-Exam 1 Review Notes

FIN6406-Exam 1 Review Notes - Sole proprietors are easily...

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Sole proprietors are easily formed, but often have difficulty raising capital, they subject proprietors to unlimited liability, and they have a limited life. Partnership profits are taxed as personal income in proportion to each partner’s proportionate ownership. A partnership is dissolved upon the withdrawal or death of any one of the partners. In addition, the difficulty in transferring ownership is a major disadvantage of the partnership form of business organization. A corporation is a legal entity created by a state, and it is separate from its owners and managers. The concept of limited liability means that a firm’s stockholders are not personally liable for the debts of the business. Modern financial theory operates on the assumption that the objective of management is the maximization of shareholder wealth. This objective is accomplished if the firm’s stock price is maximized. Although the three basic types of organization dominate the business scene, several hybrid forms are gaining popularity. Markets for short-term debt securities are called money markets, while markets for long-term debt and equity are called capital markets. Firms raise capital by selling newly issued securities in the primary markets, while existing, already outstanding securities are traded in the secondary markets. An institution which issues its own securities in exchange for funds and then uses these funds to purchase other securities is called a financial intermediary. An investment banking firm facilitates the transfer of capital between savers and borrowers by acting as a middleman. The two basic types of stock markets are the physical location exchanges, such as the NYSE, and computer/telephone networks, such as NASDAQ. Financial markets bring together people and organizations wanting to borrow money with those having surplus funds. Direct transfers of money and securities occur when a business sells its stock or bonds directly to savers, without going through any type of financial institution. A derivative is any security whose value is derived from the price of some other “underlying” asset. The result of the ongoing regulatory changes has been a blurring of the distinctions btwn the different types of financial institutions. As a result, in the U.S. the trend has been toward huge financial service corporations, which own any number of financial intermediaries with national and even global operations. The stock market is one of the most important markets to financial managers because it is here that the value of all publicly-owned firms is established. The interest rate is the price paid to borrow debt capital.
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This note was uploaded on 09/23/2011 for the course FIN 6406 taught by Professor Sturm,r during the Spring '08 term at University of Central Florida.

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FIN6406-Exam 1 Review Notes - Sole proprietors are easily...

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