Understanding Business Structures and Corporate Finance, Study notes of Economics

Download Understanding Business Structures and Corporate Finance and more Study notes Economics in PDF only on Docsity! The corporation Sole proprietorship: owned and run by one person → no big revenue compared to corporations Partnership: all partners are liable, sometimes with limited partnership and limited liability (they only invest) Limited liability companies: limited partnership without a general partner (now they can run the business) Corporations: separate from its owners , legally formed (more costly), many owners, divided into shares known as stock are availability of outside funding Equity: all of the outstanding shares of a corporation Dividend payments: what the share/stock/equity holder gets from the firm S corporations: firm’s profit (and losses) are not subject to corporate taxes, so no double taxes (such as C corporations) Control corporation (decision/policy) by board of directors or chief executive officers (higher shares means higher votes) Financial manager: investment decisions, financing decisions (how to pay for these investments) and managing cash flows Agency problems: managers do not care of the shareholders → managers’ compensation contracts. All benefit → corporate charity Stock price corporation gives CEO’s feedback from their shareholders on their performance Hostile takeover: purchase large fraction of the (cheap) stock and receive votes to replace board of directors → ‘market for corporate control’, in interest of shareholders Corporate bankruptcy: change in ownership, control from equity to debt holders (no liquidation) Stock exchange → liquidity, easy selling for a fair price, always someone to trade with Primary market: corporations → investors Secondary market: investors → investors Market makers: make profit since ask prices > bid prices (bid-ask spread) → transaction cost Customers buy at the ask and sell at the bid Limit order: order to buy/sell a set amount at fixed price Limit sell order with the lowest price is the ask price Limit buy order with the highest price is the bid price Limit order book: collection of all limit orders → provide liquidity, earn bid-ask spread → move the prices to avoid a too low bid-ask → high frequency traders (HFTs) Market orders: trade at the best outstanding limit order, wait until the price falls → takers of liquidity Dark pools: no limit order books → better price, traders’ demand is not revealed → no immediacy