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Finance 302 final exam outline

Finance 302 final exam outline - Finance 302 Final Exam...

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Finance 302 Final Exam Outline Chapter 1 I. Alternative Forms of Business Organizations: 1. Sole Proprietorship : an unincorporated business owned by one individual Advantages Disadvantages Easy, cheap to start (inexpensively formed) Hard to raise capital (outside funds) Easy to manage Limited life (limited to the life of the individual who created it) Few regulations (government) Unlimited liability Business pays no taxes 2. Partnership : an unincorporated business owned by two or more persons Advantages Disadvantages Easy, cheap to form Hard to raise capital Few regulations Limited life Business pays no taxes Unlimited liability Hard to transfer ownership from one person to another More people making decisions so decision making process become difficult Partnership can be general or limited. A general partnership income is more open. In a limited partnership, the limited partner’s amount of income is affected. In limited partnerships, certain partners are limited (their liability and decision making is also limited—“say so”. A company can have a limited partnership as long as there is one general partner (who has no limitations—unlimited liability and “say so”—more control). 3. Corporations : a legal entity that is created by a state and is separate and distinct from its owners Advantages Disadvantages Unlimited life Difficult and expensive to organize Easy to transfer ownership (because it is done by stock) Many regulations Offers owner limited liability (the most an owner can lose is what they paid for their shares of stock) Double taxation of earnings (corporation pays taxes on its earnings and stockholders pay taxes on dividends) Most corporations are subject to double taxation—the corporation’s earnings are taxed; and then when its after- tax earnings are paid out as dividends, those earnings are taxed again as personal income to stockholders. 4. Subchapter S corporation : 75 shareholders or less 5. LLC (limited liability company) : opens number of owners to beyond 75 6. LLP (limited liability partnership) : used by professional firms II. #1 Goal of Corporation – Maximize Shareholder Wealth (in the long run): By maximizing firms stock prices o Cash flow affects stock price o Cash flow considers risk, timing and level of cash flow. Most firms that maximize stock prices are maximizing profits but just because firms are maximizing profits, it doesn’t mean they are maximizing stock prices. Management’s goal should be to make decisions designed to maximize the stock’s price.
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Shareholder Wealth Maximization – the primary goal of publicly traded companies implies that decisions should be made to maximize the long-run value of the firm’s common stock. III. Agency Problem, Solutions to Agency Problem:
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Finance 302 final exam outline - Finance 302 Final Exam...

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