Chapter two
1: What is the sole Sole Proprietorship?
A business form for which there is one owner.
• Advantages Disadvantages
2:
Simplicity
Low setup cost Unlimited liability
Quick setup Hard to raise additional capital
Single tax filing on Transfer of ownership difficulties
individual form
3: What is the Partnership?
A business form in which two or more individuals act as owners.
4: Types of Partnerships:
General Partnership: all partners have unlimited liability and are liable for all
obligations of the partnership.
Limited Partnership: limited partners have liability limited to their capital contribution
(investors only)
Disadvantages
5: Advantages
Unlimited liability for the
Can be simple general partner
Difficult to raise additional
Low setup cost, higher than sole proprietorship capital, but easier than sole
proprietorship
Relatively quick setup Transfer of ownership
difficulties
Limited liability for limited partners
6: what is the Corporation?
A business form legally separate from its owners.
7: Advantages Disadvantages
• Limited liability
• Double taxation
• Easy transfer of ownership
• Unlimited life • More difficult to establish
• Easier to raise large quantities of capital • More expensive to set up and
maintain
8: what is the Limited Liability Companies?
is a company that acts in many ways as a limited partnership.
9: Advantages
Limited liability
Eliminates double taxation
No restriction on number or type of owners
Easier to raise additional capital
Disadvantages
Limited life (generally)
Transfer of ownership difficulties (generally)
10: Corporate Income Taxes:
is found by deducting all allowable expenses, including depreciation and interest, from
revenues.
11: Financial Environment:
Businesses interact continually with the financial markets.
12: Financial Markets:
are composed of all institutions and procedures for bringing buyers and sellers of
financial instruments together.
13: Financial markets can be broken into two classes:
Money market is concerned with the buying and selling of short-term (less than one-
year original maturity) government and corporate debt securities.
Capital market, on the other hand, deals with relatively long-term (greater than one-year
original maturity) debt and equity instruments (e.g., bonds and stocks).
14: Capital market two types:
Primary market: A market where new securities are bought and sold for the first time (a
“new issues” market).
Secondary market: A market for existing (used) securities rather than new issues.
15: Financial intermediaries:
Is an institution or person that act as link b/w two parties of financial transaction.
16: types of financial intermediaries:
Commercial bank
Mutual funds
Pension funds
17: Financial Brokers:
Certain financial institutions perform a necessary brokerage function.
18: types of financial brokers:
Investment banker A financial institution that underwrites (purchases at a fixed price on
a fixed date) new security for resale.
Mortgage banker A financial institution that originates (buys) mortgages primarily for
resale.
19: What Influences Security Expected Returns?
Default Risk is the failure to meet the terms of a contract.
Taxability considers the expected tax consequences of the security.
A yield curve is a graph of the relationship between yields and term to maturity for
particular securities.
Embedded Options provide the opportunity to change specific attributes of the security.
Inflation is a rise in the average level of prices of goods and services