The Role of Investors

This set of flashcards covers key vocabulary and concepts related to the role of investors in businesses, their expectations, and the dynamics of capital investment.

Investors

Individuals or entities that provide capital to businesses in exchange for a return.

Capital

The funds needed to start up, grow, and maintain firms.

Equity

Investment in the form of shares of stock representing ownership in a company.

Debt

Investment in the form of loans, bonds, or notes that must be repaid with interest.

Principal-Agent Problem

The issue that arises when the interests of investors (principals) do not align with those of managers (agents).

Information Asymmetry

The situation where one party has more or better information than the other in a transaction.

Market Value

The value of a firm based on what investors are willing to pay, reflecting anticipated future performance.

Book Value

The value of a firm derived from its accounting records, based on historical costs.

Covenants

Conditions included in debt agreements that impose certain operational restrictions on firms.

Corporate Governance

The system by which companies are directed and controlled, focusing on the relationship between management and shareholders.

Retained Earnings

Profits that a firm reinvests in itself rather than distributing to shareholders as dividends.

Bond Ratings

Assessments made by rating agencies regarding a firm's ability to meet debt obligations.

Dividends

Payments made to shareholders from a corporation's profits.

Interest Payments

Payments made to debt holders as a return for their investment.

ESG Movement

Investment approach that considers environmental, social, and governance factors.

Risk-Return Tradeoff

The principle that potential return rises with an increase in risk.

Going Concern

A business that is financially viable and expected to operate indefinitely.

Control Rights

The rights of investors to influence major company decisions typically through voting.

Stock Price Appreciation

An increase in the market price of a company's stock, leading to capital gains for investors.

C-Corporation (C-Corp)

A legal entity that is separate from its owners, offering limited liability to shareholders and subject to corporate income tax (double taxation).

S-Corporation (S-Corp)

A legal entity similar to a C-Corp but passes income, losses, deductions, and credits directly to its shareholders' personal incomes without being subject to corporate taxes (pass-through taxation).

Limited Liability Company (LLC)

A business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.

Partnership

A business owned by two or more individuals who agree to share in its profits or losses. Partners typically have unlimited liability.

Sole Proprietorship

A business owned and run by one individual, where there is no legal distinction between the owner and the business. The owner has unlimited personal liability.

B-Corporation(B-Corps)

Are for-profit businesses that meet the highest verified standards of social and environmental performance, accountability, and transparency while also considering the impact on all stakeholders.