[FINA 365] - Midterm Exam Guide - Everything you need to know! (30 pages long)

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USC
FINA 365
MIDTERM EXAM
STUDY GUIDE
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1/10/17
Chapter 1
-straightforward
-no separation between firm and owner
-one owner
Sole proprietorship
All partners liable for firm's debt
General partners
Limited liability
Limited partners
Partnership
No general partner
All owners have limited liability but can also run business
Limited Liability Companies (LLC)
Legally defined artificial being, separate from its owners
Has many legal powers and rights that people have
Responsible for its own obligations
Owners are not liable for corporation obligations
Corporation not liable for owner obligations
No limit on number of owners
Entire ownership is divided into shares
Outstanding shares = equity
Corporations
Corporate profits subject to taxes separate from owner's tax obligations
(corp pays tax) (shareholders pay income tax)
Shareholders pay taxes twice
Tax implications for corporate entities
Profits are not subject to taxation at corporate level
Profits/losses allocated directly to shareholders
Shareholders include these profits as income on their tax returns even if
no money is distributed to them
S Corporation
Four types of firms
Week 1
Tuesday, January 10, 2017
12:15 PM
Week 1 Page 1
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no money is distributed to them
Only taxed once
Must pay corporate taxes on its profits
Individuals pay more tax on dividend
C Corporations
Projects, acquisitions
Weight costs and benefits of projects
Using NPV
Make investment decisions
Make financing decisions
Has enough cash on hand to meet its obligations from day to day
"managing working capital"
Manage short term cash needs
Make decisions to maximize profit
Financial Manager
Managers put self-interest ahead of the interests of shareholders
Agency problems
When stock performs poorly or targets are not met: board might
replace CEO or lower bonus
Corporate raider: break up a company or hostile takeover
CEO Performance
Ethics and Incentives in Corporations
Private corporation has limited number of owners and there is no
organized market for its shares
Public corporation has many owners and its shares trade on the stock
market
Corporations can be public or private
Stock Market
Primary vs secondary markets
Auction market: NYSE
Designated market makers (DMM): specialists
Bid: buy
Ask: sell
Bid-Ask Spread
Physical stock markets
Dealer markets: NASDAQ
Over the counter stock markets
Week 1 Page 2
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