Download Business Structures and Finance: Pros, Cons, and Comparisons and more Quizzes Business Finance in PDF only on Docsity! TERM 1 Pros and cons of a sole proprietorship DEFINITION 1 Advantages: Ease and low cost of formationSubject to few regulationsNo corporate income taxes Disadvantages: Limited lifeUnlimited liabilityDifficult to raise large sums of capital to support growthDifficult to transfer ownership TERM 2 Describe pros and cons of a corporation DEFINITION 2 Advantages: Unlimited lifeEasy transfer of ownershipLimited liability (limited to the amount invested)Ease of raising capital Disadvantages: Double taxationRequired to file charters, bylaws, and state and federal reports for registration, which are expensive, complex and timeconsuming.Agency problems TERM 3 Charter vs. Bylaw DEFINITION 3 Charter(to launch company) includes: Name of the company Type of activities it will pursue Amount of capital stock Amount of directors (their names and addresses) Bylaws (set of rules) includes: How directors are elected Rights of shareholders (to buy stock etc) Procedures for changing the bylaw TERM 4 What four "economic" conditions affect the cost of money? DEFINITION 4 Federal Reserve policies Federal budget deficits/surpluses Level of business activity (recession or boom) International factors (trade deficits/surpluses) TERM 5 What four "fundamental" factors affect the cost of money? DEFINITION 5 Production opportunities Time preferences for consumption Risk Inflation TERM 6 What are the five uses of FCF? DEFINITION 6 Pay interest on debt. Pay back principal on debt. Pay dividends. Buy back stock. Buy non-operating assets (e.g., marketable securities, investments in other companies, etc.) TERM 7 Ratios are used by: DEFINITION 7 Lenders to determine creditworthiness Stockholders to estimate future cash flows and risk Managers to identify areas of weakness and strength TERM 8 Ratios facilitate comparison of: DEFINITION 8 One company over time One company versus other companies TERM 9 4 Potential Problems and Limitations of Ratio Analysis DEFINITION 9 Comparison with industry averages is difficult if the firm operates many different divisions. Seasonal factors can distort ratios. Window dressing techniques can make statements and ratios look better. Different accounting and operating practices can distort comparisons. TERM 10 Diff b/w intrinsic and market value DEFINITION 10 Intrinsic (or fundamental) Value The present value of its free cash flows when discounted at the weighted average cost of capital. If MV reflects all info it's equal to the intrinsic value, but investors rarely have all info Market Value Current stock price
