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Businesses can be classified into the following forms: a proprietorship, a partnership, a corpora9on, a limited liability company (LLC), and a limited liability partnership (LLP). Different forms of businesses have different characteris9cs. Which of the following characteris9cs would apply to a corpora9on? Check all that apply. Chartered by a state and is its own en9ty separate from its owners Owners have limited liability Has unlimited life Easier to transfer ownership in the form of stock Businesses can be classified into the following forms: a proprietorship, a partnership, a corpora9on, a limited liability company (LLC), and a limited liability partnership (LLP). Different forms of businesses have different characteris9cs. Which of the following characteris9cs would apply to a limited liability company and a limited liability partnership? Check all that apply. Have corporate ownership structure Owners have limited liability and right to vote Limited financial liability Taxed as a partnership
WSU MBA 5300 WSU MBA 5300
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Ryan started a tutoring website. ANer a few months, a publishing company filed a lawsuit against his company for copyright infringement. Ryan had to shut down his business and lost all his personal assets in the process. What type of business is this? Proprietorship Richard founded and operated a wedding planning agency, which specialized in celebrity weddings. When he died, his business was dissolved because there was no plan for control aNer his death. Proprietorship Purple consul9ng has 5 consultants in the firm. The company's annual revenue is around 500k. Income is distributed among all consultants and each is personally liable for claims if the company goes under. What type of business is this? Partnership Brandon and his friend Shirley run a carpet cleaning business. They distribute the profits propor9onately and file their individual taxes. Partnership Caesar, the CEO of a beverage company, is required to cer9fy the accuracy of informa9on provided in the company's quarterly reports. Corpora9on Rock Inc. Is a mineral mining company. The CEO of Rock Inc. Recently died. The news led to a short-term decline in the company's stock price, but it bounced back aNer the company announced its quarterly earnings. Corpora9on Paradigm Media is a company run by a group of new media professionals. The owners of the company do not have any personal liability and file taxes based on individual income. Limited liability partnership/corpora9on Chris, Brandon, and Jose own an accoun9ng firm in San Francisco. All share in the profits of the firm propor9onately and file taxes at an individual level. According to their agreement, none of the owners will be held personally liable for the accoun9ng firm's debt. Limited liability partnership/corpora9on A filing document, which includes rules made by the founders of a corpora9on like the directors elec9on process, terms of the posi9ons, stockholder rules, & procedures to amend the bylaws, etc. What is this document called? Corporate Bylaws Businesses in the form of corpora9ons offer their owners several advantages, but the benefits come at a price. For instance, corpora9ons are required to create a charter, set bylaws, and file mandatory reports with state and federal
The primary objec9ve of the corporate management team is to maximize shareholder wealth. The company's board of directors and the shareholders evaluate and review managerial ac9ons based on the growth in the value of the firm. Based on your understanding of what determines a firm's value, review the following: What does the value of a firm depend on? Op9on A: The firm's ability to generate posi9ve cash flows now and in the future Op9on B: The firm's past ability to generate posi9ve cash flows Op9on A: The firm's ability to generate posi9ve cash flows now and in the future When determining the value of a firm, which of the following statements is true? The 9ming of cash flows a firm can generate is irrelevant in determining the value of a firm. The 9ming of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received later is beler. The 9ming of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received sooner is beler. The 9ming of cash flows a firm can generate is very important in determining the value of a firm. All else being equal, cash received sooner is beler. Managers strive to increase the value of a firm. An increase in the intrinsic value of the firm's stocks is a good measure of the increase in the value of the firm. Intrinsic value of a firm's stock price is determined by calcula9ng the present values of its free cash flows (FCF) discounted at a rate called the weighted average cost of capital (WACC). Tyler is a team member in Corporate Finance at a digital-content produc9on company. He is required to forecast the free cash flows that the company will be able to generate in the next three years. Tyler takes into account only the following equa9on in his calcula9on: FCF=Sales Revenues - Opera9ng Costs - Opera9ng Taxes Will his calcula9on be an appropriate es9mate of the FCF?
Why or why not? Check all that apply. No. Because his calcula9on fails to include the value of the debt that the firm carries on its balance sheet Because his calcula9on fails to include the costs of the firm's interest and dividend payments Because his calcula9on fails to include both the working capital and capital expenditures necessary to sustain the company's opera9ons When determining the value of a firm, which of the following statements is true? Investors are risk averse. Other things being equal, they prefer to pay more for stocks that are less risky and that have rela9vely more certain cash flows than other stocks The ___ involves the transfer of capital among different en99es that include individuals, small businesses, banks, financial intermediaries, companies, mutual funds, and other market par9cipants. In a developed market economy, capital flows freely between en99es that want to supply capital to those who want it. This flow of capital can be classified in three ways. Capital alloca9on process Iden9fy the capital transfer given in the scenario with its appropriate classifica9on: ...... California Public Employees' Re9rement System (calpers) manages pension and health benefits of California public employees and re9rees. Calpers collects money from its par9cipants and creates a pool of assets. It manages these assets by making investments across domes9c and interna9onal markets. Indirect Transfers through Financial Intermediaries Shylock, a moneylender in Shakespeare's play The Merchant of Venice, lends his own money to Antonio, who needs 3,000 ducats to help his friend. W2 Corp. Needs capital to finance a new product line. It borrows money in the form of long-term bonds underwrilen by an investment bank. Indirect Transfers through Investment Banks Entrepreneurs oNen start businesses by seeking financial help from family and friends. Direct Transfers
Bankers' acceptances These financial instruments are investment pools that buy such short-term debt instruments as Treasury bills (T-bills), cer9ficates of deposit (cds), and commercial paper. They can be easily liquidated. Money market mutual funds Issued by corpora9ons, these financial instruments give their holders a class ownership in a company. They are riskier than bonds but less risky than the general class of ownership. Preferred stocks Which of the following instruments are traded in the capital markets? Check all that apply. Preferred stocks Common stocks Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario: Due to recent poli9cal and economic events, general prices of goods and services are expected to increase significantly over the next five years. You were about to purchase a five-year bond. You now require a higher return on the bond than you did before you found out about these expected price increases. Determine which of these fundamental factors is affec9ng the cost of money in the scenario described: Infla9on Roberto recently started a new business with money that he collected from his friends and family. All other factors being equal, which of the following financing op9ons has a higher cost for someone who needs capital to start a business? Sheila expects to earn a return of 10% on her investment in Roberto's business for the next two years, but restricts Roberto to not finance his business with debt beyond 40% of the total capital needed. An increase in debt financing leads to an increase in the riskiness of the firm. In this case, Sheila is expec9ng a higher return if Roberto uses 60% debt to finance his business. As the amount of debt increases, risk increases. An investor seeks a higher rate of return when the riskiness of an investment increases.
Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario: Your accountant has convinced you that you should invest your bonus from this year into your re9rement accountāinstead of buying a new sports carā because of the high expected return on the investment. Determine which of these fundamental factors is affec9ng the cost of money in the scenario described: Time preferences for consump9on Based on your understanding of the factors that affect the cost of money, iden9fy which of the following statements is true: Interest is the price paid to borrow funds. Everyone uses money, and it is important to understand what factors affect the cost of money. Consider the following scenario: A friend comes to you and asks you to invest in his business instead of inves9ng in Treasury bonds. You think he has a good business model, so you tell him you are willing to invest as long as the expected return on the investment is at least four 9mes the return you would have received on the Treasury bonds. Determine which of these fundamental factors is affec9ng the cost of money in the scenario described: Risk Based on your understanding of the factors that affect the cost of money, iden9fy which of the following statements is true: Interest is the price paid to borrow funds. Apart from risk components, several macroeconomic factorsāsuch as Federal Reserve (the Fed) policy, federal budget deficit or surplus, interna9onal factors, and levels of business ac9vityāinfluence interest rates. Based on your understanding of the impact of macroeconomic factors, iden9fy which of the following statements are true or false: Countries with strong balance sheets and declining budget deficits tend to have lower interest rates. True When the economy is weakening, the Fed is likely to increase short-term interest rates. False The changes in the value of a foreign currency affect business opera9ons and the value of investment assets in that currency. If the value of the foreign currency increases rela9ve to the home currency, invested assets would lose value.
They are established by an employer to facilitate and organize employee re9rement funds. They are asset pools that invest in securi9es that have a poten9al to give stable returns. Pension funds Financial markets across economies involve various kinds of par9cipants and trade various types of assets and securi9es. It is important to understand the kinds of markets in which financial transac9ons take place. You are preparing to take an exam in your finance class, and you've been making flash cards on different markets and transac9ons. Indicate the markets in which each of the following transac9ons will be traded: ___, also called "tangible" or "real" asset markets, are those for such products as wheat, autos, real estate, computers, and machinery. Physical Asset Markets ___ deal with stocks, bonds, notes, mortgages, deriva9ves, and other financial instruments. Financial asset markets You go to an auto dealer and buy a new car. You drive the car home immediately aNer making the payment. Physical asset markets ___ are markets where assets are being bought or sold for "on-the-spot" delivery (literally, within a few days). Spot markets ___ are markets where assets are being bought or for delivery at some future date, such as 6 months or a year into the future. Futures markets Spot markets, also called cash markets, handle transac9ons that come into effect immediately and when contractual fulfillments are executed completely. The investor agrees to buy gold at a certain price today (called the spot price), so this is a spot market transac9on. Transac9ons in the futures markets involve contracts in which the par9cipants agree to buy or sell assets at a certain price at a future date. Spot vs Future Markets An investor buys $10,000 worth of gold at a certain price today. Spot markets All financial transac9ons that are highly liquid and have a short-term (less than one year) maturity are traded in money markets. Examples include U.S. Treasury bills and short-term securi9es sold by the U.S. Treasury to finance federal expenditures.
All financial transac9ons with maturi9es of more than one year are traded in the capital markets. These include stocks, bonds, insurance, leases, and mortgages. Capital vs Money Markets Abbey allocates 80% of his porqolio for investments in short-term U.S. Treasury bills. Money market Transac9ons between the first buyer of securi9es and the issuer of securi9es take place in the primary markets. Because securi9es are being traded between two investors without involving the issuer, the trade occurs in the secondary market. Primary vs. Secondary Markets An investor holding 3,000 shares of stock of Strata Corp. Sells them to another investor. Secondary Market Randall and Arts Inc. Recently raised capital through an ini9al public offering (IPO). Its stock can now be purchased on the NYSE. This company is referred to as: A publicly owned corpora9on. To raise external funding, many publicly owned corpora9ons decide to sell addi9onal shares of the company's stock in the primary markets. Such an offering is referred to as ___. A seasoned equity offering Company A issued its first public offering this year. The demand for the ini9al public offering (IPO) of the securi9es was less than the number of securi9es issued. Was this IPO oversubscribed? No When the demand for an ini9al public offering (IPO) of securi9es exceeds the number of securi9es issued, the offering is deemed to be: Oversubscribed Companies and investors access interna9onal markets to generate external funding as well as to tap investment opportuni9es overseas. Your porqolio has a total interna9onal exposure of $1,000,000, but you also face certain risks. Keeping other factors constant, which of the following statements describes the risk involved with inves9ng in the interna9onal market? The value of your investment will increase if the foreign stocks increase in their local markets.
were securi9zing. This encouraged originators to issue more mortgages and increase the total value of the mortgages. The total amount of risk embedded in the securi9es created by bundling mortgages did not change. The securi9za9on and resecuri9za9on processes led to a distribu9on of total risk among different types of collateralized securi9es. Investors across the globe were buying mortgage-backed securi9es for the rate of return that these securi9es were genera9ng. Most of these investors chose to be ignorant of the risks involved in such investments. Mortgage payments based on short-term interest ratesācalled adjustable-rate mortgages (arms)āwere preferred by subprime borrowers. From a borrower's perspec9ve, adjustable-rate mortgages (arms) are considered riskier than tradi9onal fixed-rate mortgages, because mortgage payments might increase without an increase in income. Analysts and theorists have debated over the different factors that caused the subprime mortgage meltdown. According to your understanding of the crisis, which of the following factors led to the financial crisis? Check all that apply. Credit default swaps claimed to insure cdos (collateralized debt obliga9ons) Mortages brokers did not verify borrowers carefully The Fed kept interest rates low to encourage home ownership Regula9ons were relaxed, leading to nonqualifying mortgages gewng approved for loans. Real estate appraisers and ra9ng agencies were lax. Mortgages were accessible for borrowers who did not meet income and minimum down payment requirements. Moreover, the Fed kept interest rates really low to prevent a recession. This led to a decrease in the demand for homes and a further decline in housing prices.
