Forms of Business Organization
oSole proprietorship- simply refers to a person who owns
the business and is personally responsible for its debts.
oPartnership
General partner
A general partnership is an
arrangement by which two or more
persons agree to share in all assets,
profits and financial and legal liabilities
of a business. Such partners have
unlimited liability, which means their
personal assets are liable to the
partnership's obligations.
Limited liability partners
A limited liability partnership is a
partnership in which some or all
partners have limited liabilities.
oCorporation
S corp
C corp
oLLP
oLLC
Capital Budgeting vs Financial Decisions
FIN 300 (Sacks) – Midterm #1 Study Guide Chapter 1-5
10 questions!
Cheat/Formula Sheet!!! (one side)
All topics: Study what it is and how it works. If topics contain equations –
be sure to be able to apply them. If topics include graphs – be sure you
understand them and can reproduce them.
Chapter 1 and 2
oCapital Budgeting- what types of productive assets to
purchase
oFinancing decisions- ways to raise cash and pay for
investments
Primary vs. Secondary Markets
oPrimary Market- additional shares sold by established,
publicly owned companies
oSecondary Markets- trading in the outstanding shares of
established, publicly owned companies.
Efficient Market Hypothesis – a theory concerning the extent to
which information is reflected I security prices and how
information gets incorporated into security prices (3 forms)
oStrong-form- a theory that security prices reflect all
information
oSemistrong form- the theory that security prices reflect all
public information but not all private information
oWeak form- the theory that security prices reflect all
information in past prices but do not reflect all private or
all public information
Physical Stock Markets vs. OTC Stock Markets
oPhysical Stock Markets- uses designated markers that are
required to commit their own capital to maintain liquidity
in their stocks, tangible physical entities consisting of a
limited number of members. (EX. New York Stock
Exchange)
oOTC Stock Markets- if a stock is traded infrequently, then
the auction system of exchanges does not work. Brokerage
firms act as “dealers” that make inventories of such stocks.
Markets for such stocks are called dealer markets.
Determinants of Interest Rates
or = r* + IP + DRP + LP + MRP
or = required return on a debt security
or*= real risk-free rate of interest
oIP= inflation premium
oDRP= default risk premium
oLP= liquidity premium
oMRP= maturity risk premium
Yield Curve
oThe yield curve is a graph of the term structure. Term
structure is relationship between interest rates (or yields)
and maturities.
0
1
2
3
4
5
6
0 . 2 5 0 . 5 2 5 1 0 3 0
M a t u r i t y ( y e a r s )
Y i e l d
( % )
oShape of the Yield Curve
Yield curve changes both in positions and in shape
over time. It can be upward sloping (normal),
humped (2000), or downward sloping (inverted-
early 1980s). expected inflation has an important
effect on the yield curve’s shape. r* varies
somewhat over time due to changes in the
economy and demographics. However, these
changes are random rather than predictable. The
best forecast for the future value is the current
value.
Chapter 3
Components of a:
oBalance sheet – a snapshot of the firm’s financial position
at a specific point in time.
Assets= liabilities and equity
Assets (current and fixed)
Liabilities (current and long-term)
Equity
oIncome statement (calculation/conceptional)
A report summarizing a firm’s revenues and
expenses during an accounting period (a quarter).
Revenues versus Expenses
oStatement of Cash Flow
Shows impact of a firm’s operating, investing, and
financing activities on cash flows during an
accounting period.
Market Value vs. Book Value
oCompanies use GAAP (IFRS) to determine “book values”
reported on their balance sheet. These differ from the
market equity/debt values
oMarket value- shareholders are often willing to pay more
than the book value because
1. These values of its FA have increased due to
inflation, or
2. They expect the company’s future earnings to
grow.
Operating activities, investing activities, and
financing activities.
Income Tax – Average & Marginal
oAverage tax rate- total taxes paid divided by taxable
income
oMarginal tax rate- tax rate paid of the last dollar of income
Chapter 4
Financial Ratios
oFinancial Ratios
oProfitability
oLiquidity
oEfficiency
oLeverage
oMarket Value
oROA/ROE
oDuPont Identity
Ratio Trend Analysis
oA ratio analysis is a quantitative analysis of
information contained in a company's financial
statements. Ratio analysis is used to evaluate various
aspects of a company's operating and financial
performance such as its efficiency, liquidity,
profitability and solvency.
Chapter 5
APR vs. EAR
oAPR is based on simple interest
oEAR takes compound interest into account.
oAPR (car loans and mortgage) EAR (credit cards)
Future Value, Present Value
oPV = FVN / (1 + I)N
oFVN =PV* (1 + I)N
Compounding, Discounting
o
Rule of 72
oThe rule of 72 is a rule proposing that the time required to
double the money (DTM) approximately equals to 72/i.
The denominator (i) is the rate of return (i.e. interest rate)
expressed as a percentage
CAGR
o
