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Foundations of Financial Management, Edition 15; Chapter 1

Financial Capital
Common stock, preferred stock, bonds, and retained earnings. It appears on the corporate balance sheet under long-term liabilities and equity.
Real Capital
Long-term productive assets (plant and equipment)
Capital Structure Theory
A theory that addresses the relative importance of debt and equity in the overall financing of the firm.
Inflation
The phenomenon of prices increasing with the passage of time.
Disinflation
A leveling off or slowdown of price increases.
Credit Default Swaps (CDS)
Securities that were created by financial institutions as insurance against borrowers defaulting on their loans.
Dodd-Frank Act
The Wall Street Reform and Consumer Protection Act of 2010, passed by Congress in response to the financial crisis of 2007-2009
Sole Proprietorship
A form of organization that represents single-person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs.
Partnership
A form of ownership in which two or more partners are involved. Like the sole proprietorship, a partnership arrangement carries unlimited liability for the owners. However, there is only single taxation for the partners, an advantage over the corporate form of ownership.
Articles of Partnership
An agreement between the partners in a business that specifies the ownership interest of each, the methods of distributing profits, and the means for withdrawing from the partnership.
Limited Liability Partnership
A special form of partnership to limit liability for most of the partners. Under this arrangement, one or more partners are designated as general partners and have unlimited liability for the debts of the firm, while the other partners are designated as limited partners and are only liable for their initial contribution.
Corporation
A form of ownership in which a separate legal entity is created. A corporation may sue or be sued, engage in contracts, and acquire property. It has a continual life and is not dependent on any one stockholder for maintaining its legal existence. A corporation is owned by stockholders who enjoy the privilege of limited liability. There is, however, the potential for double taxation in the corporate form of organization: the first time, at the corporate level in the form of profits; and again, at the stockholder level in the form of dividends.
Articles of Incorporation
A document that establishes a corporation and specifies the rights and limitations of the business entity.
S Corporation
A special corporate form of ownership, in which profit is taxed as direct income to the stockholders, and thus is only taxed once, as would be true of a partnership. The stockholders still receive all the organizational benefits of a corporation, including limited liability. The Sub-chapter S designation can apply only to corporations with up to 75 stockholders.
Limited Liability Company
Not a corporation but like a corporation it provides limited liability for the owners. Can be taxed as sole proprietorships, partnerships, corporations or S corporations, depending upon elections made by the owners.
Agency Theory
This theory examines the relationship between the owners of the firm and the managers of the firm. While management has the responsibility for acting as the agent for the stockholders in pursuing their best interests, the key question considered is: How well does management perform this role?
Institutional Investors
Large investors such as pension funds or mutual funds.
Sarbanes-Oxley Act of 2002
An act that was intended to restore confidence in the financial markets by demanding accuracy in financial reporting.
Shareholder Wealth Maximization
Maximizing the wealth of the firm’s shareholders through achieving the highest possible value for the firm in the marketplace. It is the overriding objective of the firm and should influence all decisions.
Insider Trading
This occurs when someone has information that is not available to the public and then uses this information to profit from trading in a company’s common stock.
Financial Markets
The place of interaction for people, corporations, and institutions that either need money or have money to lend or invest.
Public Finance Markets
Markets in which national, state, and local governments raise money for highways, education, welfare, and other public activities.
Corporate Financial Markets
Markets in which corporations, in contrast to governmental units, raise funds.
Money Markets
Competitive markets for securities with maturities of one year or less. the best examples of money market instruments would be Treasury Bills, commercial paper, and negotiable certificates of deposit
Capital Markets
Competitive Markets for equity securities or debt securities with maturities of more than one year. The best examples of capital market securities are common stock, bonds, and preferred stock.
Primary Market
The market for the raising of new funds as opposed to the trading of securities already in existence.
Secondary Market
The market for securities that have already been issued. It is a market in which investors trade back and forth with each other.
Restructuring
Process that can take many forms in a corporation, such as changes in the capital structure (liability and equity on the balance sheet). It can also result in the selling of low-profit-margin divisions with the proceeds reinvested in better investment opportunities. Sometimes, restructuring results in the removal of the current management team or large reductions in the workforce. restructuring has also included mergers and acquisitions.

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