Financial Policy Definition

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Amartuul Turbat
Professor Fillenwarth
Financial Policy
11 March 2011
The Definitions
Question 1-2; (1-1.a.b.)
Proprietorship: is the entity owned by an individual who is only founder and manager of the company. Even though it does not pay tax for located states, proprietorship’s profits or loses reports on its owners’ annual tax reports. Despite the fact that proprietorship is easy to form and has seldom government regulations, its term of operation is directly depending on its founder life time (Ehrhardt and Brigham 5). In addition on proprietorship, a partnership is more flexible type which is a business relationship between several individuals who are similar desires to obtain the profits from the partnership’s operation. Typically, partnership classified general and limited based on its contract regulation. Despite the fact that in general partnership-general members responsible to pay company’s loss by their own assets, in limited partnership members-limited members can lose the amount of money which they invested in the partnership. Furthermore, likewise limited members responsible for limited part of the partnership, they have limited right to participate or control the company’s management. Even though at least one person should be a general member of the partnership, all members can be partner whose potential losses are limited by their amount of investment. This type of company is called Limited Liability Company (Ehrhardt and Brigham 6).

Finally, company organized as a corporation when business enlarged and it is difficult to manage it by structure of partnership or proprietorship. Corporation works under the located state law and operates independently from managers. Due to this separation, corporation has “unlimited life of existence, easy transferability of ownership interest, and limited liability losses” (Ehrhardt and Brigham 24). Question 1-1

(C) Stock holder Wealth Maximization: is the main goal of the corporation since it is the best way of successful operation in long-term business. Derivatives: is the special type of securities because its value and right are depending on prices of another assets or operation. (D; E) - Corporations can sell its stock in the private markets or the public markets. Unlike the private market in which trade is made in between two sides, in the public market, numerous people participate in the trades. In order to be an owner of the corporations, investors can buy the company’s stock from the “primary markets” in which companies sell their IPO (Initial Public offering) or from the “secondary market” in which IPO owners sell their stocks for other investors. Also, there are some other financial markets exist such as money markets and capital markets. Main difference between those two markets is “liquidation” of the securities (Ehrhardt and Brigham 23). For example, in spite the fact that short-term highly liquid debts trade in the money market and long-term stocks and debt maturing trade in the capital markets. (F) Investment Bank: is a financial institution which encourages the company to create stocks into the markets, and it is the assistant of the companies when they merging with each other (Ehrhardt and Brigham 23). Financial Service Corporations: are the organizations which involved with money management such as banks, credit card companies, and insurance companies (Ehrhardt and Brigham 24). Financial Intermediaries: are the unions which involved finding the surplus money from one side and then allocating it to deficit sides (Ehrhardt and Brigham 30). (G) Mutual Funds: are the organizations that collect money from numerous investors and then put it to buy financial instruments such as stocks, bonds, short and long-term money instruments. Money Market Fund: is the one type of mutual fund which invests in securities with short-term, low risk, and more safety conditions (Ehrhardt and Brigham 29). (H) Physical Location exchanges: is a physical...
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