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USC - FIN 333 - Study Guide - Midterm

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USC - FIN 333 - Study Guide - Midterm

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background image Exam Date: Due by February 1 at 11:00pm FINA 333 EXAM 1 - STUDY GUIDE CHAPTER 1 Finance  how money is raised and used by businesses, governments 
and individuals
Three General Concepts o More value is preferred to less
o Sooner cash is received, more valuable it is
o Less risky assets are more valuable than (preferred to) 
riskier assets Four General Areas        Financial Markets and Institutions o Success requires an understanding of factors that cause  interest rates to rise and fall o Regulations
o Financial instruments
o Ex: banks, insurance companies
Investments – focuses on the decisions made by the businesses 
and individuals as they choose securities for their investment 
portfolios
o Major functions Determining values, risks, and returns associated 
with stocks and bonds
Determining the optimal mix of securities that should
be held in a portfolio of investments
Financial Services – functions provided by organizations dealing 
with management of money
o Provide services that help individuals and companies  determine how to invest money to achieve goals (home purchase, retirement) Managerial (Business) Finance – deals with decisions all firms 
make concerning their cash flows, both in and outflows
o Important in all types of businesses Alternative Forms of Business Organization Three Major Forms of Business Organizations in the USA o Proprietorships (70-75%, 13-14% business conducted) – an  unincorporated business owned by one individual Three Advantages Easily and inexpensively formed o Licenses required by state and  municipality in which business operates Subject to few government regulations
background image Exam Date: Due by February 1 at 11:00pm Taxed like an individual, not like a corporation o Earnings are only taxed once Four Limitations Proprietor has unlimited personal liability for 
business debts – any debts of the business are 
considered obligations of the sole owner
o Can potentially lose all of his/her  personal assets not invested in the 
business
Life is limited to the time the individual who 
created it owns the business
o New owner takes over – legally the firm  becomes a new proprietorship Transferring ownership is difficult o May take weeks, months Difficult to obtain large sums of capital o The firms financial strength is based only  on the financial strength of the sole 
owner
Confined primarily to small business operations 90% have assets values at $100,000 Most start out as proprietorships, then convert 
to corporations when their growth causes 
disadvantages
o Partnerships (8-10%, 3-4% of business conducted) – has  two or more owners Can operate under different degrees of formality Informal, oral understandings to formal 
agreements filed with the secretary of the state
in which the partnership does business
Most partnerships have more sources available for 
raising funds – more owners, more relatives, more 
friends, more opportunities to raise funds through 
credit
Still struggle in attracting substantial amounts of 
funds
Each partner is liable for the debts of the business If any partner is unable to meet his/her pro rata
claim in the event the partnership goes 
bankrupt – remaining partners must make good
on the unsatisfied claims, drawing on their 
personal assets if necessary
o Corporations (15-20%, 83% of all business conducted) –  legal entity created by a state  has the legal authority to 
background image Exam Date: Due by February 1 at 11:00pm act like a person when conducting business – separate and 
distinct from its owners and managers
Four Advantages Offers its owners limited liability Easy transferability of ownership interest – can 
be divided into shares of stock 
Unlimited life – can continue after its original 
owners and managers have a relationship with 
the business
o Longevity of stock, not those who own it Can issue stocks and bonds to raise funds Two Disadvantages Periodic filings of required state and federal 
reports is more time consuming and complex
o Corporate charter – provides general  information including the name of the 
corporation, types of activities it will 
pursue, amount of stock that initially will 
be used
Must be filed with the secretary of 
the state in which the firm 
incorporates
o Bylaws – specify how the corporation will  be governed must be drawn up by the 
founder
Corporate earning are subject to double 
taxation
o The earnings of the corporation are taxed at the corporate level o Earnings paid out as dividends are again  taxed as income to stockholders Hybrid Forms of Business o Limited Liability Partnership (LLP) Permits persons to invest in partnerships without 
exposure to the personal liability that general 
partners face
General Partner – remain fully personally liable 
for all business debts
o Only ones who can participate in the  management of the business Limited Partner – only liable for the amounts 
they have invested in the business
All partners are fully liable for the general debts of 
the business
background image Exam Date: Due by February 1 at 11:00pm But an individual partner is not liable for the 
negligence, irresponsibility, or similar acts 
committed by any other partner
o Limited Liability Compliance (LLC) – combines corporation  and partnership Offers the limited personal liability associated with a 
corporation but the company can choose to be taxed 
either as a corporation or a partnership
If partnership  income is said to pass through 
to the owners – only taxed once
Structure = flexible Can divide liability, management 
responsibilities, ownership shares, and control 
of the business however they please
Owners = “members” Can be individuals or other businesses Can have one single owner Articles of Organization – legal paperwork Must be field with the state Financial reporting requirements o S Corporation – domestic corporation that has no more  than 100 stockholders and only one type of stock Income is taxed the same as income earned by 
proprietorships and partnerships
Income passes through the company to the 
owners so it’s only taxed once
Value will be maximized if… Limited liability reduces the risks borne by 
investors
o Lower the firms risk, the higher its  market value Firms current value is related to its future 
growth opportunities
o Can more easily attract funds to take  advantage of growth opportunities than 
unincorporated businesses
Ownership can be transferred more easily o Investors would be willing to pay more  for a corporation o Enhance the value of a business Value: the worth of the expected future cash flows restated in current 
dollars
Present (current) value of the future cash flows

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School: University of South Carolina
Department: Finance
Course: Finance and Markets
Term: Fall 2015
Tags: finance, financial statements, FV, and PV
Name: FINA 333: EXAM 1 STUDY GUIDE
Description: An outline of Chapters 1-4 - important definitions/terms to know - equations for solving financial problems
Uploaded: 01/31/2017
20 Pages 91 Views 72 Unlocks
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