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Econ 1012 Week One Notes

by: Gwendolyn Cochran

Econ 1012 Week One Notes Econ 1012

Marketplace > George Washington University > Economcs > Econ 1012 > Econ 1012 Week One Notes
Gwendolyn Cochran
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Dr. John Volpe

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These notes cover the basics of financial firms, how they are categorized and financed. This is the basis of the class as Macroeconomics is about how these firms act in the market.
Dr. John Volpe
Class Notes




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This 0 page Class Notes was uploaded by Gwendolyn Cochran on Thursday January 28, 2016. The Class Notes belongs to Econ 1012 at George Washington University taught by Dr. John Volpe in Spring 2016. Since its upload, it has received 23 views. For similar materials see Macroeconomics in Economcs at George Washington University.

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Date Created: 01/28/16
Week One Firms are legally categorized in the US as one of the following 0 Sole Proprietorship a firm owned by a single individual 0 Advantages I you are in control no layers of management I not a lot of regulatory activity I you can enter and exit the market as you wish Disadvantage 0 unlimited personal liability 0 limited ability to raise funds banks will not want to invest Q Partnerships 0 Advantages l ability to share work I ability to share risks 0 Disadvantages l unlimited personal liability l limited ability to raise funds I unclear who is the actual boss one person can monopolize O Corporations 0 Advantages l greater ability to raise funds banks are more willing to lend money because there are greater assets and if a leader were to die someone else will continue the business I limited personal liability shares divided among investors take damage 0 Disadvantages l costly to organize l possible double taxation taxed once as a corporate profit and again when the profit is disbursed to investors I Regulatory oversight CEO s main job is regulation 0 there is a separation of ownership from control owners designate a board of directors who appoint a CEO to oversee daytoday operation 0 There is often times a discrepancy in incentives between the owners and the CEO 0 How do you align objectives between owners and CEO O Incentivize the CEO signs a contract wherein there is a large bonus dependent on performance As firms get large the need to obtain external funds tends to grow The economy39s financial system facilitates transfers of funds from savers to borrowers Firms can borrow money from banks who act as financial intermediaries permitting indirect finance of the firm by their savers Indirect finance a flow of funds from savers to borrowers through financial intermediaries such as banks Intermediaries raise funds from savers to lend to firms and other borrowers Banks take the risk in borrowing Direct finance 0 Bonds loans a financial security that represents a promise to repay a fixed amount 0 tax deductible so banks are leaning towards selling more bonds 0 you get an interest rate so it is possible for banks and borrowers to make a profit I however as interest rate go up bonds can become depleted in value unless you hold them until maturity l Bonds can be redeemed sooner if the cooperation foresees the interest rate falling them buying a 10 bond from you to turn around and sell it for 5 to someone else 0 You have no say in the corporation you are simply along for the ride with interest 0 In the case of liquidation you get paid before stocks 0 Stocks a financial security that represents partial ownership of a firm 0 Prefered stocks go on forever unless the company pays out the shareholders dividends I you get paid first if a company liquidates after bonds 0 Common stocks don t have mandatory dividends I you simply have to complete trust in the company investing in warren buffett and hoping he picks the right investments l Expectation of a possible dividend pushes up the value of a dividend


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