FINC 300 1st Edition Lecture 7 Outline of Last Lecture I. Chapter 4 Continued: Practice ProblemsOutline of Current Lecture Exam 1 In Class ReviewChapter 1I. Types of Firms, Characteristics A. AdvantagesII. Board of DirectorsA. CEOIII. Financial MarketsA. CharacteristicsIV. Bid price, Ask priceA. Bid-ask spreadV. Financial cycleA. How do financial institutions aid with the cycle?Chapter 2VI. Accounting RegulationsA. What do accounting regulations require of public companies?VII. Purpose of each of the four financial statements we covered.A. Why are the left and right sides of a balance sheet equal? Chapter 3These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.VIII. What is the Law of One Price?IX. What is the Rule of 72?Chapter 4X. AnnuityXI. PerpetuityCurrent LectureChapter 1 (8 questions – 75% conceptual, 25% application)Types of Firms & Characteristics:Which types of firms have unlimited liability? - Sole Proprietorship: Owned by one person- Partnership: Owned by more than one, has at least one unlimited ownerLimited liability? - Limited Partnership: special partnership in which both general partners and limited partners.- Limited Liability Company: Similar to a limited partnership, but all members have limited liability.- Corporations: legally separate from owners, all members have limited liability.What are their key characteristics?  Unlimited: Easy to manage, move  Limited: Similar rights as an individual, legally separate from ownersWhat are the advantages and disadvantages to incorporating?Advantages: Separate legal entity from owners, rights to contracts, assets and obligations.Disadvantages: Requires state consent to set up, Double taxationWhat is the role of the Board of Directors?The BOD is elected by shareholders and has the ultimate decision marking power. They decide how top executives get paid; they monitor company performance, and answer to shareholders.What is the role of the CEO?The BOD hires the Chief Executive Officer. The CEO institutes policies created by the BOD on a day-to-day basis.What types of financial markets are there? What are their characteristics?Primary Market- A Corporation issues new shares of stock and sells them to investors.Secondary Market- Existing shares are sold between investors without involvement of the corporation.What are the bid price, the ask price, and the bid-ask spread?o Bid Price- Price at which stock can be soldo Ask-Price- Price stock can be boughto Bid-Ask Spread- Ask Price minus Bid PriceWhat is the financial cycle? How do financial institutions aid with the cycle? Financial Cycle- Savers and Investors give money to Borrowers and Firms who then give money to Savers and investors. Financial institutions help the cycle by:o Moving funds from those who have extra funds (Savers & Investors) to those whoneed funds (Borrowers and Firms)o Moving funds through timeo Spreading risk across large investor basesChapter 2 (8 questions – 25% conceptual, 75% application)Accounting Regulations:Generally Accepted Accounting Principles (GAAP)o Regulations require firms to provide a common set of rules and a standard format for public companies’ financial reports.Purpose of each of the four financial statements we covered:1) The Balance Sheet- provides a snapshot of a firm’s financial position (assets and liabilities) at a given point in time. 2) Income Statement- (Profit-Loss Statement) provides details about a firm’s revenues and expenses over a period of time, generated by the assets and liabilities covered in the balance statement. 3) Statement of Cash Flows- provides details about how a firm has used the cash it earned during a set period.4) Statement of Stockholders Equity- Provides a detailed break-down of the stockholders’ equity from the Balance sheet into the amounts that arise from issuing new shares and from retaining earnings. Why are the left and right sides of a balance sheet equal? The assets must equal the liabilities plus stockholders’ equity because stockholder’s equity is the difference between assets and liabilities.Chapter 3 (8 questions – 37.5% conceptual, 62.5% application) What is the Valuation Principle?Valuation Principle states: o The value of an asset is determined by its competitive market priceo The benefits and costs of a decision should be evaluated using those market priceso When the value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm. What is the Law of One Price?The Law of One Price states:o In competitive markets, securities with the same cash flows must have the same priceWhat is the Rule of 72? The Rule of 72 answers how long it will take to double your money.o 72 divided by the interest rate as a whole number = money doubled.Chapter 4 (8 Questions, 100% Application)What is Annuity?Annuity- a stream of equal cash flows, at equal intervals that end at a specified time.What is Perpetuity?Perpetuity- a stream of equal cash flows at equal intervals that last