Key Terms in Finance I: Business Structures, Taxation, and Stock Valuation - Prof. Lakshmi, Study notes of Finance

Download Key Terms in Finance I: Business Structures, Taxation, and Stock Valuation - Prof. Lakshmi and more Study notes Finance in PDF only on Docsity! Finance I: Chapter 1 Key Terms 1. Sarbanes-Oxley Act: A law passed by Congress that requires the CEO and CFO to certify that their firm’s financial statements are accurate. 2. Proprietorship: An unincorporated business owned by one individual. Three advantages: 1. Easily and inexpensively formed, 2. Subject to few government regulations, 3. Subject to lower income taxes than corporations. Three limitations: 1. Unlimited personal liability for business debts, 2. Life of the business is limited to the life of owner/creator, 3. Difficulty obtaining large sums of capital. Proprietorships are used primarily for small businesses. 3. Partnership: An unincorporated business owned by two or more persons. Can be established relatively easy and inexpensively. Income is allocated on a pro rata basis to partners and taxed on an individual basis (avoiding corporate income tax). Partners subject to unlimited personal liability, have trouble raising large amounts of capital. 4. Corporation: A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability. Corporation can lose all its money but owners can lose only what they invested. Unlimited lives, easy to raise necessary capital. 5. S Capital: A special designation that allows small businesses that meet qualifications to be taxes as if they were a proprietorship or a partnership rather than a corporation. 6. Limited Liability Corporation (LLC): A relatively new type of organization that is a hybrid between a partnership and a corporation. 7. Limited Liability Partnership (LLP): Similar to an LLC but used for professional firms in the fields of accounting, law, and architecture. It has limited liability like corporations but is taxed like partnerships. 8. Shareholder Wealth Maximization: The primary goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm’s common stock. 9. Intrinsic Value: An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely. 10. Market Price: The stock value based on perceived but possibly incorrect information as seen by the marginal investor. 11. Marginal Investor: An investor whose views determine the actual stock price.