FMGT 2371 - CH 12

did not add 12.4 ** NEED TO REREAD BECAUSE I DONT UNDERSTAND

vocab: call option

the right, but not the obligation, to buy an underlying asset at a fixed price for a specified time

vocab: exercise price or strike price

the price at which an investor can buy the underlying asset

vocab: payoff

the proceeds that would be generated from the option if today was the expiration date

in, out, and at the money

• in the money the option would generate a positive payoff if exercised today

• out of the money the option would generate a negative payoff if exercised today

vocab: option writer

the person who sells an option

→ short position: the position taken by the option writer

option writer and call holder’s payoffs with underlying value $50

types of corportations

• proprietorship

  • limited life

  • limited liability

  • own responsibility

• corporation

  • unlimited life

  • unlimited liability

  • private/public

types of wealth

• real assets → tangible and physical goods

• financial assets → liquid assets/ stock and bonds

vocab: goal congruency

aligning the objectives of decision-makers with the objectives of the organization

→ e.g. when managers and employees make decisions that serve their own interest and the organizations (stock price goes up!)

user orientation needs

• economic entity - seperate from its owner

• control - 50% or more

• revenue recognition - delivery is done/ performed obligations/ cash collection

• matching - revenue with expenses

• periodicity

• monetary unit - transactions with monetary value

• growing concern - business will operate in the foreseeable future

• historical cost - assets recorded at their original price

• fair value - assets/revenues recorded at their current market price

• full disclosure - must include all relevant information