Finance Terms Explaination

Chapter 1 Questions

(1-1) Define each of the following terms:

a. Limited Partnership (LP)- exists when two or more partners unite to jointly conduct a business in which one or more of the partners is liable only to the extent of the amount of money that partner has invested.

• Limited Liability Partnership - A limited liability partnership (LLP), sometimes called a limited liability company (LLC), combines the limited liability advantage of a corporation with the tax advantages of a partnership

b. Stockholder Wealth Maximization – The management’s objective to maximize the fundamental price off the firm’s common stock in order to maximize stockholder wealth.

c. Money Market – A market where financial instruments with high liquidity and very short maturities are traded.

• Capital Market - A market where buyers and sellers engage in the trade of financial securities like bonds, stocks, etc.

• Primary Market - The part of the capital market that deals with issuing of new security finance securities. Companies, governments, and public sector institutions can obtain funds through the sale of a new stock or bond issues through primary market

• Secondary Market - The market wherein the trading of securities done. The secondary market consists of both equities as well as debt markets

e. Private Markets - Business sectors where transactions are worked out straightforwardly between two parties

• Public Markets - The term public is most commonly used to describe a company's shares or any other type of financial instrument that trades in the secondary markets. In other words, any securities that trade on an exchange and can be bought or sold by anyone in the general population are referred to as publicly traded securities.

g. Mutual Fund - The pool of money from various investors who wish to spare or profit simply like you

• Money Market Fund – A specific type of mutual fund which invests in short term debt securities. It goes further than a mutual fund as it allows the investor to write checks against the account

h. Physical Location Exchanges - Physical locations are places where the traders actually meet at a tangible address to conduct their trades

• Computer/Telephone Networks Electronic Network alternatively is a network of computers and or telephones which help the traders conduct trades electronically without having to meet the other traders to conduct the trade

(1-2) What are the three principal forms of business organization? What are the advantages and disadvantages of each?

1. Sole Proprietorship: is the most common form of business organization. It's easy to form and offers complete managerial control to the owner. However, the owner is also personally liable for all financial obligations of the business

Advantages of a sole proprietorship:

• It is easily and inexpensively former

• Subject to few government regulations

• Sole proprietor have complete control and free to take any decision

• Ownership of all profit

Disadvantages of sole proprietorship:

• Unlimited liability

• Limited life, if an owner dies, business dies itself.

• Difficult to obtain large sum of funds

2. Partnership: involves two or more people who agree to share in the profits or losses of a business. A primary advantage is that the partnership does not bear the tax burden of profits or the benefit of losses-profits or losses are "passed through" to partners to report on their individual income tax returns. A primary disadvantage is liability-each partner is personally liable for the financial obligations of the business.

Advantages of Partnership:

• Partnerships have more potential to access capital than proprietorship.

• Fewer government regulating than corporations

• Easy to form

• No corporate income taxes

Disadvantages to Partnership:

• Profit must be shared

• Ownership problem

• Limited life, a partnership may end upon withdrawal or death of a partner

3. Corporation: is a legal entity that is created to conduct business. The corporation becomes an entity-separate from those who founded it-that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. The corporation can also make a profit. The key benefit of corporate status is the avoidance of personal liability. The primary disadvantage is the cost to form a corporation and the extensive record-keeping that's required. While double taxation is sometimes mentioned as a drawback to incorporation, the S corporation (or Subchapter Corporation, a popular variation of the regular C Corporation) avoids this situation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.

Advantages of Corporation:

• Unlimited commercial life, not dissolve with ownership changes

• Great flexibility to raise capital

• Ease to transfer ownership by selling shares.

• Limited liability

Disadvantages of corporation:

• Regulatory restrictions

• Higher organizational and operational cost

• More Taxes

(1-3) What is a firm’s fundamental, or intrinsic, value? What might cause a firm’s intrinsic

value to be different from its actual market value?

Intrinsic value refers to the value of a company or stock determined through fundamental analysis without reference to its market value. Generally, it is calculating the discounted future income

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