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CPCU 540
Chapter 1
47
Other
Not Applicable
09/14/2006

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Term
1. Finance
Definition
1. A discipline concerned with determining value and making decisions about money, banking, credit, investments, and other assets.
Term
2. Corporate Finance
Definition
2. The area withing the discipline of finance that concerns a corporation's investing and financing decisions
Term
3. Sole Proprietorship
Definition
3. An unincorporated business owned by one person
Term
4. Unlimited Liability
Definition
4. The financial exposure created by a creditor's ability to seize a business owner's personal as well as business assets in order to satisfy a claim
Term
5. Partnership
Definition
5. An unincorporated business owned by two or more entities, each of which has a financial interest in the business.
Term
6. General Partnership
Definition
6. A partnership in which each partner assumes unlimited joint liability for all the partnership debts
Term
7. Limited Partnership
Definition
7. A partnership made up of one or more general partners, who have unlimited liability, and one or more limited partners, whose liability is limited to the amount of capital they have contributed to the partnership.
Term
8. Corporation
Definition
8. A legal entity that is separate from its owners and is created, or incorporated, under state laws.
Term
9. Board of Directors
Definition
9. A group of individuals elected by a corporation's shareholders to establish corporate management policies and make decisions on major corporate issues.
Term
10. Professional corporation
Definition
10. A Corporation owned and managed by one or more professionals to provide professional services (architects, physicians, accountants)
Term
11. Limited Liability Company (LLC)
Definition
11. A form of business organization that combines the tax advantage of partnerships with the limited liability of corporation.
Term
12. Stakeholder
Definition
12. Anyone with a financial interest in the corporation
Term
13. Working Capital
Definition
13. A corporation's current assets minus its current liabilities.
Term
14. Capital Structure
Definition
14. A corporation's mix of long-term debt and equity
Term
15. Capital Budgeting
Definition
15. The planning and managing of a corporation's long-term investments
Term
16. Financial Market
Definition
16. A mechanism used for trading securities
Term
17. Securities
Definition
17. Pieces of paper or electronic records that provide evidence of equity or debt instruments
Term
18. Money Market
Definition
18. A financial market in which short-term securities are traded
Term
19. Capital Market
Definition
19. A financial market in which long-term securities are traded
Term
20. Primary Market
Definition
20. A mechanism used to sell new securities, with the proceeds going directly to the issuer.
Term
21. Bid Price
Definition
21. The price a dealer is willing to pay for a security.
Term
22. Asked Price
Definition
22. The price at which a dealer is willing to sell a security
Term
23. Bid-asked spread
Definition
23. The difference between the bid price and the asked price of a security.
Term
24. Secondary Markets
Definition
24. A mechanism for investors to buy and sell previously issued securities.
Term
25. Market Depth
Definition
25. The ability of the market to handle a large number of securities transactions without a significant effect on prices
Term
26. Market Breadth
Definition
26. The percentage of the overall market that is participating in the market's up or down move
Term
1. Describe how the following insurance professionals use finance and corporate finance concepts:
a. Risk Management Professionals
b. Agents and Brokers
c. Underwriters
d. Actuaries
e. Claims Representatives
Definition
1.
(a). Risk Mgmt Prof: To determine the most appropriate method of controlling and financing loss exposures
(b) Agents and Brokers: To determine whether the organization meets an insurer's overall financial underwriting guidelines and to prepare the insurance application.
(c) Underwriters: To decide whether to offer coverage
(d) Actuaries: To develop premium rates
(e) Claim Reps: For claim investigations into the cause of loss.
Term
2. List three general forms of business organization.
Definition
2. 3 forms of biz org:

(1). Sole Proprietorship
(2). Partnership
(3). Corporation
Term
3. Identify the primary advantages of the following types of biz org:
a. Sole Proprietorships
b. Partnerships
c. Corporations
Definition
3. Advantages:
(a). Sole Proprietorship:
**Owners has full control of the biz
**Profits are taxed once
**easy to establish
**limited capital requirements
**min state and fed control
(b). Partnerships:
**Each parnters share of profites is taxed as personal income
**easy to establish
**access to several partner's skill sets
**shared mgmt responsibilities
**access to capital through the combined wealth of partners
**partners' liability is limited to their investment in the partnership
(c) Corporations
**shareholders have limited liability for the corps debts
**ownership interests can be acquired and transferred easily
**unlimited life since they exist independently of their owners
**greater ability to raise capital
Term
4. Identitfy disadvantages fo the following types of business organization:
a. Sole Proprietorship
b. Partnerships
c. Corporations
Definition
4. Disadvantages:
(a) Sole Proprietorship:
**unlimited liability
**difficult to raise additional capital
**life of business is limited to owner's lifetime
(b) Partnerships:
**each individual partner has unlmited liability for all partnership debts
**limited existence
**shared mgmt can lead to conflict
**can be difficult to raise capital
(c) Corporations:
**complex and expensive to establish and maintain
**corporate income can be subject to double taxation
Term
5. Distinguish between the business operations of a general partnership and the business operations of a limited partnership
Definition
5. Partners in a general partnership are active in the mgmt and operation of the biz and each partner assumes unlimited laibility for all partnership debts. Partners in a limited partnership are legally prohibited from participating actively in the mgmt of the biz and each partner's liability is limited to the amt of capital he or she contributed.
Term
6. Identify the main goals of corporate finance
Definition
6. The main goals of corporate finance are to **maximize shareholder wealth **to provide for transparency in financial reporting, and **to conduct financial operations in an ethical manner.
Term
7. Identify problems that can result from focusing on an overall financial goal of maximizing profits
Definition
7. Problems:
**focusing on current profits to the detriment of long-term profitability and growth
**not accounting for the levels of risk associated with different profit scenarios
**electing accounting treatments that make financial sttements less useful to potential investors
Term
8. Explain why a board of directors needs financial transparency to insure shareholders that mgmt is acting in the company's best interests
Definition
8. A board of directors needs financial transparency to ensure shareholders that mgmt is acting in the co's best interests. To perform this duty, the board needs access to timely, understandable, informative and accurate financial reporting that contains full disclosure of key events and accounting methods.
Term
9. Describe the purpose and the main provisions of the Sarbanes-Oxley Act of 2002 regarding financial reporting of U.S. corporations
Definition
9. The purpose of this act is to protect investors by improving the accuracy and reliability of corporate disclosures. The major provisions include:
**creation of an oversight board to regulate public accounting firms that audit publicly traded corporations
**enhanced financial disclosure requirements
**increases in penalties for corporate fraud
**new requirements for certifying the accuracy of financial information
Term
10. List several questions that help determine whether a biz decision or action is ethical
Definition
10. The following questions help determine whether a biz decision or action is ethical:
**does my decison fall within the guidance of the corp's code of ethics
**am i willing to have my decision and reasoning reported on the front page of the newspaper?
**will the people with whom I have significant personal relationships approve of my decision?
Term
11. ID the typical responsibilities of each:
(a). Chief financial officer (CFO)
(b). Treasurer
(c). Controller
(d). Chief information office (CIO)
Definition
11. Duties:
(a) CFO: Setting the overall corporate financial strategy
(b). Treasurer: Working capital mgmt, capital structure mgmt, and capital budgeting
(c). Controller: Accounting functions, taxes and financial reporting
(d). Chief information officer (CIO) - The corporations information technology
Term
12. Describe the key activities performed by a corporate finance department.
Definition
12. key activities:
**working capital mgmt; focuses on a corporations short-term needs for cash and other resources
**Capital Structure: focuses on what resources the corporation needs to meet its long term goals and how the resources should be obtained
**Capital Budgeting: Planning and managing a corp's long-term investments
**Accounting: Accumulating and reporting financial data for both internal and external use
Term
13. Describe working capital and its components
Definition
13.Working capital of a corporation is is current assets minus its current liabilities. Current assets include cash, accounts receivable, marketable securities, and inventory. Current liabilities include amounts owed to suppliers and employees, and the current portion of any loans payable.
Term
14. Identify two questions that help a financial manager make decisions regarding resources needed to meet the corporation's long term goals
Definition
14. The following two questions help a financial manager make decisions regarding resources needed to meet the corporations long term goals.
**How much capital will be financed by borrowing and how much raised through the sale of stock?
**What specific financial vehicles will be used to raise capital?
Term
15. Describe the components of financial markets.
Definition
15. Components of financial markets:
**Money Markets: Markets in which short term securities are traded
**Capital Markets: Markets in which long term securities are traded
Term
16.ID the goals of the typical providers and users of capital in financial markets
Definition
16. The providers of capital in fianancial markets, as investors, want to find a way to use their money to generate income. The goal of typical users of capital is to find the additional capital needed to finance their biz operations.
Term
17. ID the typical forms of demand for capital in financial markets.
Definition
17. The typical forms of demand include mortgages; corporate and foreign bonds; common and preferred stock; short-term business borrowing; consumer credit; bank loans, other loans and advances; federal, foreign, state and local govt debt.
Term
18. ID the primary sources of the supply of capital in financial markets
Definition
18. The primary sources of capital in financial markets are individual investors, insurers, pension funds, thrift institutions, investment companies, commercial banks, and business corporations.
Term
19. Distinguish between primary and secondary markets
Definition
19. Primary markets are used to sell new securities, with the proceeds going straight to the issuer. Secondary markets provide a mechanism for investors to buy and sell previously issued securities.
Term
20. ID four types of primary-market structures
Definition
20. Primary markets include:
(a). Direct search- Buyers and sellers rely on word of mouth communication of their trading interest to attract trading partners
(b) Broker - Finds trading partners and negotiates transaction prices for clients in return for a fee
(c) Dealer- Dealers buy for, and sell for, their oown accounts at quoted prices.
(d) Auction - Investors participate in a single price-setting process
Term
21. Describe how trading on an organized exchange differs from trading in over-the-counter (OTC) dealer markets
Definition
21. Trading on an organized exchange differs from trading in over-the-counter (OTC) dealer markets in the following ways:
(a). All trading in a given stock occurs at a single price on an exchange floor
(b) Transaction prices are broadcast to the public
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