Sole Proprietorship
Business owned by one individual
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| Term | Definition |
|---|---|
| Sole Proprietorship | Business owned by one individual |
| Sole Proprietorship Pros | - Sole Decision Maker - Fewer Regulations - Single Taxation - Easy to Form |
| Sole Proprietorship Cons | - Unlimited Personal Liability - Difficult to Raise Capital - Ends with life of the owner |
| Guiding Principles of Finance | 1. Maximization of Wealth 2. Time Value of Money 3. Risk and Return 4. Leverage 5. Diversification |
| Areas of Finance | 1. Financial Intermediation 2. Investments 3. Corporate Finance |
| Partnership | Business owned by two or more people |
| Partnership Pros | - Limited Decision Makers - Fewer Negotiations - Single Taxation - Easy to Form |
| Partnership Cons | - Unlimited Personal Liability - Difficult to Raise Capital - Ends with the life of the owner - Partnership issues |
| Corporation | Legal entity created by a state, separate and distinct from its owners (shareholders) |
| Corporation Pros | - Limited Liability - Easy to raise capital - Easy to transfer ownership - Unlimited Life |
| Corporation Cons | - Many decision makers - More regulations - Double taxation - Can be complicated to form |
| Public Corporation | Have shares owned by the general public. Firms sell shares to the public with help from investment banks |
| Private Corporation | Raise money through private equity and venture capital. Typically, more expensive, but less regulated |
| Capital | An asset used to generate future value. In finance, typically referred to as the cash used to purchase these assets |
| Primary Market | Firm transacts directly with investors |
| Secondary Market | Investors transact with themselves |
| Types of Capital: Debt | - Legally binding contract between borrower and lender - Lender loans principal, Borrower promises repay principal with interest - In general: no voting rights, highest priority in bankruptcy, "fixed income" |
| Types of Capital: Equity | - Represents ownership claim on firm - Investor only earns return if firm succeeds - In general: voting rights, ownership position, "residual claim" |
| Balance Sheet | Provides a snapshot of firm's position at end of fiscal period |
| Income Statement | Summarize firm's revenues and expenses during fiscal period |
| Statement of Cash Flows | Summarizes firm's cash transactions during fiscal period and is divided into 3 sections 1) Operating Activities 2) Investing Activities 3) Financing Activities |
| Book Value | Value shown in the financial statements; Only reflect past transactions |
| Market Value | Current value investors are willing to pay for an asset; Reflects past transactions but also future expectations |
| Liquidity Ratios | Help us understand if firm has sufficient case, liquid assets to pay its bills |
| Efficiency Ratios | Help us understand how well a firm manage various assets |
| Leverage | Firm's use of debt |
| Leverage Ratios | Help us understand how the firm financed its assets, whether firm has sufficient funds to cover interest expenses |
| Profitability Ratios | Help us understand how effective firm is at generating profits |
| Market Value Ratios | Help us understand how the market values firm's earnings and assets |
| Return Ratios | Help us understand return earned by shareholders |
| Time Value of Money | A dollar today is worth more than a dollar tomorrow |
| Simple Interest | Earn interest only on your principal investment |
| Compound Interest | Interest on your principal and prior interest |
| Effective Annual Rate | Annual rate that incorporates effects of compounding |
| Annuity | Cash flow stream where equal cash flow occurs every period for N periods |
| Perpetuity | Cash flow stream that goes on forever |
| Ordinary Annuity | Payments occur at the end of each period |
| Annuity Due | Payments occur at the beginning of each period |
| Growing Perpetuity | Stream of cash flows received forever, where every cash flow is g% larger/smaller than the last |
| Amortized Loan | Loan repaid in equal payments over the loan's life |
| Paying Down Principal | Making extra payments on an amortized loan |