REVIEW QUESTIONS FOR TEST 1
(MULTIPLE CHOICE, SHORT ESSAY, FILL-IN-THE-BLANK ETC.)
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.
Owner receives all profits and/losses
Low organizational costs
Limited fund-raising power
PARTNERSHIP (about 10% of all businesses) - A partnership consists of two or more owners doing business together for profit.
Can raise more funds than sole proprietorship
More management skill
Individual tax rate
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
Transferability of ownership
Greater fund-raising capability
More expensive to organize
Subject to greater regulation
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
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.
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.
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.
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;
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