exam_1 - Terms and Concepts - Chapter 1 Goal of the firm -...

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Terms and Concepts - Chapter 1 Goal of the firm - Share holder wealth maximization. It is the job of the firm to increase stock for the share holders, this also increases the value of the firm. Sole proprietorship –Business owned by one individual. The owner retains the title to business assets and is responsible w/o limitation for liabilities incurred. Entitled to all profits & all losses. General partnership – Each partner is fully responsible for liabilities incurred in partnership. Any one partner’s faulty conduct can make other partners liable. Partnership can be oral or formal doc Limited partnership – one or more of the partners have limited liability, restricted to the amount of capital invested in the partnership. At least one partner must have unlimited liability. Name of the partners may not appear in the name of the firm, limited partners may not participate in management of business. Limited liability is for purely investors only. Corporation – “an official being, invisible, intangible and existing only in the contemplation of the law.” Entity functions legally separate and apart from its owners. Ownership is reflected in stock certificates, share holders liability is confined to the amount of investment. S-type corporation – provides limited liability while allowing the business’s owners to be taxed as if a partnership. No double taxation. Restrictions discourage this form of business: Cannot be used of joint venture b/t corporations. Form has been chosen as less favorable to limited liab. Cor Limited liability company (LLC) – a cross b/t a partnership and a corp. Retains limited liability for its owners but runs and is taxed like a partnership. More flexible than an S corp, Corporations can be owners in LLC, state law and IRS have rules to what can qualify as a LLC (it can’t look like a corporation or it can be taxed like one). Advantages: easy transfer of ownership, flexible in dividing shares, ideal for attracting new capital. Gross profit – Sales (revenue) – Cost of Goods sold= gross profit. Operating income (EBIT) - Gross profit- Operating Expenses= EBIT Taxable income – Operating Income (EBIT) - Interest Expense= Taxable income Dividend exclusion – less 70% of Dividend Income, only 30% is taxed. And is paid out of net income. Depreciation – Included in EBIT (operating income) as an expense. Is a non cash expense to allocate the cost of depreciable assets, such as plant and equipment, over the life of the asset. Ex: 17.5 million depreciated over 7 yrs is 17.5/ 7 = (2,500,000)
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exam_1 - Terms and Concepts - Chapter 1 Goal of the firm -...

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