FIN 221 Module 1 Key Terms

investment decision

choosing which real assets (factories, equipment, projects) the firm should invest in

capital structure

the mix of debt and equity financing a company uses

financial assets

claims on real assets or income they use to generate stocks, bonds, or bank deposits

equity financing

raising money by selling ownership stakes; shareholders are residual claimants

capital budgeting

the process of planning and evaluating long-term investment decisions; deciding which real assets to acquire

financing decision

deciding how to raise money to pay for investments through debt or equity

real assets

tangible assets used to produce goods/services: factories, equipment, patents, technology

debt financing

borrowing money that must be repaid with interest; lenders have priority but limited upside

limited liability

shareholders can only lose what they invested; personal assets are protected

double taxation

corporate profits taxed at corporate level, then again as personal income when paid as dividends

partnership

business with two or more owners sharing profits/losses; typically, unlimited liability

S Corporation

corporation with pass-through taxation; limited to 100 shareholders, one stock class

corporation

a legal entity separate from owners with limited liability, transferable shares, and perpetual life

perpetual life

a corporation continues to exist regardless of ownership changes or shareholder deaths

sole proprietorship

business owned by one person; unlimited liability, single taxation, simplest form

LLC

Limited Liability Corporation; hybrid form with limited liability and flexible tax treatment

treasurer

manages cash, raises capital, oversees banking relationships

shareholder wealth maximizations

the primary goal of the corporation: maximize the market value of the shareholders’ investment

book value

accounting value based on historical cost minus depreciation; what you paid, not what it’s worth

retained earnings

profits kept by the company for reinvestment rather than paid as dividends

CFO

Chief Financial Officer: top executive overseeing all financial activities and strategy

Controller

handles accounting, financial statements, budgets, taxes

market value

the price an asset trades for in the market; reflects future cash flows, timing, and risk

dividends

cash payments from corporation to shareholders out of profits

principal

the party who hires another to act on their behalf; shareholders are principals

board of directors

group elected by shareholders to oversee management and protect shareholder interests

stock options

compensation giving managers the right to buy shares at a fixed price; aligns interests

fiduciary duty

legal obligations to act in the best interest of another party

agency problem

conflict when managers (agents) may not act in the best interest of shareholders (principals)

agent

the party hired to act for another; managers are agents of shareholders

corporate governance

system of rules and processes controlling and directing a company

stakeholders

all parties with interest in the company; employees, customers, suppliers, communities