business finance

sole proprietorship business owned by a single individual– no limited liability
general partnership 2 or more owners — each owner is fully responsible for liabilities
limited partnership partnership in which 1 or more partners has limited liability
corporation business that functions separately from its owners. ALL owners have limited liability — taxed twice
S-corporation provides limited liability, taxed like a partnership
limited liability corp LLC
securities financial assets that companies sell to rase capital
treasury bills short term debt < 1 year– not risky, free of default risk
municipal bonds local government, borrowing money
common stock most risky, high are of return, common stockholders are the owners
public offering securities are made available to all individuals — ex: meryl linch — follows SEC
private placement securities are offered and sold directly to a limited number of directors — bypass SEC — ex: company wants to do a 10 mil bond issues at 6%, calls and insurance company to sell. DISCLAIMER: insurance company can’t resell
primary market: corporation receives money by selling new securities often to an investment bank –ex: companies issuing stocks and bonds and investment banker
secondary market investors buy and sell existing securities — ex: where the investors sell their stocks and bonds for people to purchase NYSE
money market short term <1 EX: bills, CD's, commercial paper
capital market long term, EX: loans, stocks, bonds
OSE: organized security exchange formal organization for buying and selling securities: NYSE, AMEX — buys a stock on NYSE, place order, order gets transferred to exchange.
Over the counter market all security markets except organized security exchanges a network of brokers and dealers linked by a computer EX: NASDAQ
KRF nominal risk free IR
K* real IR
IRP premium interest rate
fisher effect (1+KRF)=(1+K*)(1+IRP)
Net operating losses carried back 2 years or up to 20
net capital gain selling an asset for more than originally paid on the books — taxed as ordinary income
net capital losses selling something for less than originally bought — carried back 3 or forward 5
depreciation non tax write off
short cut taxable income > 18.333 mil — use 35%
term structure of int. rates the pattern of rates of return for debt securities that differ only in length of time to maturity
unbiased theory the tern structure is determined by expectations of future rates
liquidity pref. theory investors require maturity premiums to invest in longer term securities
market segmentation theory separate markets for long & short term investments
Which of the following best describes the goal of the firm? Maximizing the value of the firm’s equity.
Dividends received by the firm: are usually 70% excluded from taxation
One term structure theory is based on the idea that some investors (such as savings banks) prefer shorter maturities, while others (such as pension funds) prefer longer maturities. This theory is: the market segmentation theory.
Capital market instruments include _________. corporate bonds.
If a new security issue is marketed to a definite and select group of investors (such as current stockholders, employees or customers) the issue is called: a privileged subscription
If Electro Corporation sells a $20 million stock issue to an investment banking firm such as Merrill Lynch, this transaction takes place in: If Electro Corporation sells a $20 million stock issue to an investment banking firm such as Merrill Lynch, this transaction takes place in:
Of the legal forms of organizations discussed in chapter 1, which form of organization has the advantage of limited liability for all owners? corporation.
If an issuing firm sells securities to the investing public without involving an investment banker, the issue is called: a direct sale
The sale of additional stock by a company whose shares are already publicly traded is called: a seasoned equity offering
If you sell 100 shares of General Electric common stock, this transaction takes place in: the secondary capital market.
Which of the term structure theories claims that investors require maturity premiums to compensate them for buying securities that expose them to the risks of fluctuating interest rates? The liquidity preference theory.
What distinguishes the money market from the capital market? The money market deals with short-term instruments, whereas the capital market deals with long-term instruments.
To raise $5 million, Southeastern Corporation decides to issue bonds. If Southeastern does not register the bonds with the SEC and then sells the entire bond issue to Metropolitan Life Insurance Company, this issue is called a(n): private placement
What distinguishes a public offering from a private placement? In a public offering, all investors have the opportunity to acquire a portion of the financial claims being sold, but not so in a private placement.
Which of the term structure theories would support the argument that the yield curve is determined by investors’ expectations of future interest rates? The unbiased expectations theory.
The yield curve is typically _______. upward sloping
Cash available from operations after the firm pays for investments (in operating working capital and fixed assets) is called: free cash flow
Which of the following are tax deductible expenses for a corporation? interest paid on debt
Which of the term structure theories claims that investors require maturity premiums to compensate them for buying securities that expose them to the risks of fluctuating interest rates? The liquidity preference theory.
Suppose your firm selects an investment banking firm to assist with your firm’s $10 million stock issue. The investment banker will act as a broker and will attempt to sell each new share of stock for a commission for each share sold. This distribution method is referred to as ________. a best efforts offer
What is underwriting? Underwriting is the process of purchasing and selling of a new security issue by an investment banker.

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