Goal of the firm
maximise shareholder wealth
Sole proprietorship
business owned by a single individual
General partnership
all partners are fully liable for the indebtness incurred by the partnership
limited partnership
one or more of the partners has limited liability, restricted to the amount of capital he or she invests in the partnership
corporation
an entity that legally functions separate and apart from its owners
S corporation
corporation that because of special qualifications is taxed as though it were a partnership
Limited liability company
a cross between a partnership and a corporation under which the owners retain limited liability but the company is run and taxed like a partnership
public offering
a security offering where all investors have the opportunity to acquire a portion of the financial claims being sold
private placement
a security offering limited to a small number of potential investors
venture capitalist
an investment firm that provides money to business start ups
primary market
market in which securities are offered for the first time for sale to potential investors
secondary market
market in which currently outstanding securities are traded
Initial public offering
the first time a company issues stock to the public
seasoned equity offering
the sale of additional stock by a company whose shares are already publicly traded
money market
all institutions and procedures that facilitate transacations for short term instruments issued by borrowers with very high credit ratings
capital market
market for long term financial instruments
spot market
cash market
futures market
markets where you can buy or sell something at a future date
organized security exchange
formal organizations that facilitate the trading of securities
over the counter market
all security markets except organized exchanges
NASDAQ
computerized system that provides price quotes on over 5000 over the counter stocks and also facilitates trades by matching up buyers and sellers
investment banker
a financial specialist who underwrites and distributes new securities and advises corporate clients about raising new funds
investment banker functions
underwriting, distributing, and advising
syndicate
a group of investment bankers who contractually assist in the buying and selling of a new security issue
negotiated purchase
most prevalent method of securities distribution in the private sector, thought to be the most profitable technique as far as investment bankers are concerned
competitive bid purchase
several underwriting groups bid for the right to purchase the new issue from the corporation that is raising funds
best efforts basis
investment bankers acts as an agent rather than as a principal in the distribution process and securities are not underwritten
privileged subscription
the process of marketing a new security issue to a select group of investors
dutch auction
method of issuing securities by which investors place bids indicating how many shares they are willing to buy and at what price, the price the stock is then sold for becomes the lowest price at which the issuing company can sell all the available shares
direct sale
issuing firm sells the securities directly to the investing public without involving an investment banker
flotation costs
transaction cost incurred when a firm raises funds by issuing a particular type of security
SOX
MEEP
opportunity cost of funds
rate of return on the next best investment alternative to the save
inflation premium
premium to compensate for the anticipated inflation that is equal to the price change expected to occur over the life of the bond or investment instrument
default risk premium
the additional return required by investors to compensate them for the risk of default, calculated as the difference in rates between a US treasury bond and a corporate bond of the same maturity and marketability
maturity risk premium
the additional return required by investors in longer term securities to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes
liquidity risk premium
the additional return required by investors for securities that cannot be quickly converted into cash at a reasonably predictable price
nominal rate of interest
the interest rate paid on debt securities without an adjustment for any loss in purchasing power
real rate of interest
the nominal rate of interest less any loss in purchasing power of the dollar during the time of the investment
term structure of interest rates
relationship between interest rates and the term to maturity where the risk of default is held constant
yield to maturity
the rate of return a bondholder will receive if the bond is held to maturity
unbiased expectations theory
shape of the term structure of interest rates is determined by an investors expectations about future interest rates
liquidity preference theory
shape of the term structure of interest rates is determined bu an investors additional required interest rate in compensation for additional risks
market segmentation theory
shape of the term structure of interest rates implies that the rate of interest for a particular maturity is determined solely by demand and supply for a given maturity
Form 10k
annual report required by SEC that provides info on firms history, audited financial statements, managements analysis of the company's performance and executive compensation
income statement
basic accounting statement that measures the results of a firms operations over a specified period
cost of goods sold
the cost of producing or acquiring a product or service to be sold in the ordinary course of business
gross profit
sales or rev minus the cost of goods sold
operating expenses
marketing and selling expenses, general and administrative expenses, and depreciation expense
operating income
sales less the cost of goods less operating expenses
earnings before taxes
operating income less interest expense
net income
the earnings available to the firms common and preferred stockholders
earnings per share
net income on a per share basis
dividends per share
the amount of dividends a firm pays for each share outstanding
fixed costs
costs that remain constant regardless of any change in a firms activity
variable costs
costs that change in proportion to changes in a firms activity
accounting book value
the value of an asset as shown on a firms balance sheet
debt
liabilites consisting of such sources as credit extended by suppliers or a loan from a bank
equity
stockholders investment in the firm and the cumulative profits retained in the business up to the date of the balance sheet
preferred stockholders
stockholders who have claims on the firms income and assets after creditors but before common stockholders
common stockholders
investors who own the firms common stock, residual owners of the firm
par value
the arbitrary value a firm puts on each share of stock prior to its being offered for sale
paid in capital
the amount a company receives about par value from selling stock to investors
capital gains
gains from selling any asset that is not part of the ordinary operations
liquidity
the ability to convert an asset into cash quickly without a significant loss of its value
asset management
how efficiently management is using the firms assets to generate sales
return on equity
a firms net income divided by its common book equity
price/earnings ratio
the price the market place on $1 of a firms earnings
price/book ratio
the market value of a share of the firms stock divided by the book value per share of the firms stock divded by the book value per share of the firms reported equity in the balance sheet
economic value added
measures a companys economic profits as compared to its accounting profits by including not only interest expense as a cost but also the shareholders required rate of return on their investment