FIN 300 Chapter 1 Key Terms

Sarbanes-Oxley Act

This act was passed in 2002 by Congress during a time when many corporate scandals where companies like WorldCom and Enron lost billions of dollars due to false information released by those companies. This improved the accuracy and reliability of corporate financial disclosures to prevent fraud and corruption.

a.        Proprietorship; partnership; corporation

A proprietorship is a business owned by one person.

-              Easy and inexpensive to form

-              Subject to few regulations

-              Lower income tax

A partnership is a business between two or more people.

-              Easy and inexpensive

-              Avoid corporate income tax

-              Subject to unlimited personal liability

A corporation is a large entity created by a state, and it is separate and distinct from its owners and managers.

-              Unlimited lives

-              Easy to transfer stock

-              Easy to raise capital

a.        S corporation; limited liability company (LLC); limited liability partnership (LLP)

A S corporation is a corporation that is exempt from corporate income tax and has no more than 100 stockholders which limits their use to relatively small, privately owned firms.

 

A limited liability company (LLC) is a popular type of organization that is a hybrid between a partnership and a corporation.

 

A limited liability partnership (LLP) is used for professional firms in accounting, law, and architecture.

a.        Intrinsic value; market price

Intrinsic value is an estimate of the stock’s “true” value as calculated by a competent analyst who has the best available data, and a market price, which is the actual market price based on perceived but possibly incorrect information as seen by the marginal investor.

a.        Marginal investor; equilibrium

A marginal investor is an investor whose views determine the actual stock price.

 

Equilibrium is when a stock’s actual market price is equaal to its intrinsic value.

a.        Corporate governance

Corporate governance is the establishment of rules and practices by a Board of Directors to ensure that managers act in shareholders’ interests while balancing the needs of other key constituencies.

a.        Corporate raider; hostile takeover

A corporate raider is an individual who targets corporations for takeover because they are undervalued.

 

A hostile takeover is the acquisition of a company over the opposition of its management.

a.        Stockholder wealth maximization

A business goal that prioritizes increasing the value of a company’s common stock to benefit its shareholders.

a.        Business ethics

A company’s attitude and conduct toward its employees, customers, community, and stockholders. Measured by tendacy of its employees from top down, to adhere to laws, regulations, and moral standards relating to product safety and quality, fair employment practices, fair marketing and selling practices, the use of confidential information for personal gain, community involvement, and the use of illegal payments to obtain business.

a.        ESG measures

Environmental, social and governance (ESG) measures three main factors for measuring social responsibility in a firm.