Mang 6480 - Study Guide

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REVIEW QUESTIONS FOR TEST 1
(MULTIPLE CHOICE, SHORT ESSAY, FILL-IN-THE-BLANK ETC.)

LECTURE 1

A. List the three basic forms of business organizations.

PROPRIETORSHIP (about 75% of all businesses) - Ownership is by one person, who operates for his/her own profit. a)Strengths
(1)Owner receives all profits and/losses
(2)Low organizational costs
(3)Single tax—individual
(4)Independence
(5)Secrecy
b)Weaknesses:
(1)Unlimited Liability
(2)Limited fund-raising power
(3)Lacks continuity

PARTNERSHIP (about 10% of all businesses) - A partnership consists of two or more owners doing business together for profit.

a)Strengths
(1)Can raise more funds than sole proprietorship
(2)More management skill
(3)Individual tax rate
b)Weaknesses
(1)Unlimited Liability
(2)Discontinuity
(3)Difficulty in Transferring

CORPORATION - A corporation is a legal entity, which can sue and be sued, make and be party to contracts, and acquire property in its own name

a)Strengths
(1)Limited liability
(2)Transferability of ownership
(3)Continuity
(4)Greater fund-raising capability
b)Weaknesses
(1)Double Taxation
(2)More expensive to organize
(3)Subject to greater regulation
(4)Lacks secrecy

1. What is the most important problem with corporations in comparison with the other two business forms?

B. Discuss how a company goes public.

1. What is the difference between best effort and underwriting?
In a best efforts sale, the bank does not guarantee that the securities will be sold or that the company will get the cash it needs, only that it will put forth its “best efforts” to sell the issue. On an underwritten issue, in contrast, the company does get a guarantee: the bank agrees to buy the entire issue and then resell the stock to its customers. Therefore, the bank bears significant risks in underwritten offerings.

2. Describe the registration statement and prospectus.

Registration Statement – A legal document filed with the SEC that provides financial, legal & technical information about the new company. (Form S-1)Prospectus – Summarizes the information given in the registration statement for investors.

3.What role do the investment bankers and Selling Group play in an IPO?

Initial Public Offering -
Investment bankers - A firm that assists in the design of an issuing firm’s corporate securities and in the sale of the new securities to investors in the primary market.
Selling Group - handles the distribution of securities to individual investors.

C. Markets

1. What is the difference between a money market (with a maturity of less than a year) and a capital market (with a maturity of one year or more)?

Money Market – A financial market for debt securities with maturities of less than 1 year (short-term). The New York money market is the world’s largest. The money market is an intangible market. The money market is primarily a telephone and computer market.

Capital Market - Capital markets are the financial markets for (long-term) debt and corporate stocks. The New York Stock Exchange is an example of a capital market.

2. What is the difference between Primary Markets and Secondary Markets?

Primary Markets – Markets in which newly issued securities are sold for the first time.
Secondary Markets - Markets in which securities are resold after initial issue in the primary market. The New York Stock Exchange is an example.

3. Explain what OTC and Organized Exchanges are.

OTC – (Over The Counter) No central market place; Dealers are linked with the purchasers and sellers Quotation (NASDAQ) system. Price determined by competitive bids and negotiation.
Organized Exchanges – Public markets - Central market place (floor); Specialists; Auction-determined price.

D. The...
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