3 general concepts of finance - Answer-(1) more value is preferred to less
(2) the sooner cash is received, the more valuable it is
(3) less risky assets are more valuable than riskier assets
The study of finance consists of four interrelated areas: - Answer-1. Financial institutions and marke...
FIN 301 - Midterm 1 Exam Questions and
Answers 2023-2024
3 general concepts of finance - Answer-(1) more value is preferred to less
(2) the sooner cash is received, the more valuable it is
(3) less risky assets are more valuable than riskier assets
The study of finance consists of four interrelated areas: - Answer-1. Financial
institutions and markets
2. Investments
3. Financial services
4. Managerial (business) finance
3 major forms of business organization in the U.S. - Answer-Proprietorship
Partnership
Corporation
Proprietorship - Answer-An unincorporated business owned by on e individual
-easily + inexpensively formed
-subject to few government regulations
-taxed like an individual, not a corporation
-has unlimited personal liability
-its life is limited to the time the individual who created it owns the business
-transferring ownership is difficult
-difficult to obtain large sums of money bc the firm's financial strength is generally based
solely on the financial strength of the only owner
TYPICALLY A SMALL BUSINESS
Partnership - Answer-An unincorporated business owned by two or more persons!!!!
-Advantages and limitations are very similar to those of proprietorships
-Still have difficulty in attracting a substantial amount of funds, but can typically raise
more capital because there are more owners
-Each person liable for debts of business
Corporations - Answer-A legal entity created by the state, which means that a
corporation has the legal authority to act like a person when conducting business; it is
separate and distinct from the owners and managers
Advantages:
-limited liability
-ownership (can be divided into shares of stock) can be easily transferred
, -unlimited life (life of a corporation based on the longevity of its stock)
-generally not liable for the debts
-ease of raising capital through stocks and bonds
Disadvantages:
-Creating a corporation is complex and time-consuming
-Can be high cost
-Double taxation (personal tax and corporation tax)
Limited liability company (LLC) - Answer-offers the limited personal liability associated
with a corporation; however the company's income is taxed like that of a partnership
(can be taxed as a corporation or as a partnership)
-can have a single owner
S-corporation - Answer-a corporation with no more than 100 stockholders that elects to
be taxed in the same manner as proprietorships and partnerships so that the business
income is only taxed once
-generally exempt from federal income tax
The value of any business will probably be maximized if organized as a corporation!!!! -
Answer-!!!!!
-Limited liability reduces risk, which increases market value
-Ease of raising capital allows corporations to take advantage of growth opportunities
-Since ownership is easily transferred, investors are willing to pay more to invest in a
corporation
Management's primary goal..? - Answer-Stockholder wealth maximization (!!!)
-Maximizing the value of the firm as measured by the price of its common stock
S&P 500 Index - Answer-Stock market index that measures the stock performance of
500 large U.S. companies
-acts as a representation of the US stock market
Value - Answer-The worth of the present (current) values of future cash flows
EPS = NI/Shares - Answer-EPS = earnings per share
NI = net income
Shares = shares of common stock
-many investors use EPS to gauge the value of a stock
A firm's value is determined by... - Answer-the cash flows it is expected to generate in
the future!!!
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