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FIN 301 Exam 2 - Types of Organizations

Terms in this set (28)

one person starts a company
sole proprietership
adv: easily formed
sole p
partnership
adv: lower taxes
sole p
partnership
disadv: unlimited personal liability
sole p
partnership
disadv: business dies with the person
sole p
disadv: hard to raise money
sole p
partnership
2 or more people
partnership
not a person, but an entity
corp
adv: individuals have limited liability
corp
adv: unlimited life
corp
adv: easier to raise money
corp, can raise through stocks and bonds
disadv: higher taxes
corp, double taxation. company pays tax on the money made, money is given to the shareholders, shareholders are taxed
cross between a partnership and a corp - no double taxation
s corp
How do corps raise money?
1.
2.
1. bonds (debt)
2. stock (equity)
what is a bond?
a contract. it must be paid each year
Pay ____ on bonds
interest
bonds are rated from ____ to ____ based on....
investment grade
junk

based on chances the company is able to pay interest
is there ownership with bonds?
No. the CEO still owns 100%
is there ownership with stocks?
yes. CEO gives up part of ownership and does not keep all of the profit. If you own a share, you own a slice of the pie
pay ____ on stocks
dividends
Interest Rates are the sum of...
1.
2.
3.
4.
1. Real Rate
2. Default Premium
3. Maturity Risk Premium
4. Inflation Premium
Real Rate

def?
general ____%
generally about 2%
rate the economy grows
Default Premium

def?
additional amount a borrower must pay to compensate the lender for assuming default risk
Default premium is based on the risk that ---
the company won't make their interest payment
Greater chance a company won't pay their interest --- ______ default premium
higher
Maturity Risk Premium

def
how long till it matures?
longer time till maturity -- higher chance something will go wrong -- _______________
higher Maturity Risk Premium
Inflation Premium

def
part of prevailing IR that results from lenders compensating for expected inflation by pushing normal IRs to higher levels
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