Chapter 1 Homework

sole proprietorship advantages

-easiest to start -least regulated -single owner keeps all profit -taxed once

corporation advantages

-limited liability -unlimited life -separation of ownership and management -transfer of ownership is easy -easier to raise capital

sole proprietorship disadvantages

-limited to life of owner -equity capital limited to owners personal wealth -unlimited liability -difficult to sell ownership interest

corporation disadvantages

-separation of ownership and management (agency problem) -double taxation (income taxed at the corporate rate and then dividends taxed at personal rate while dividends paid are not tax deductible)

partnership advantages

-two or more owners -more capital available -relatively easy to start -income taxed only once as personal income

partnership disadvantages

-unlimited liability -partnership dissolves when one partner dies or wishes to sell -difficult to transfer ownership

-sole proprietorship -partnership (general or limited) -corporation (s-corp or limited liability company)

3 major forms of business organization in the US

ability to raise larger sums of equity capital than other organizational forms.

One advantage of the corporate form of organization is the:

sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

One example of a primary market transaction would be the

agency

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

the market value of existing stock.

The primary goal of financial management is to maximize:

working capital management

Theo's BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts as referred to as:

capital structure

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as the firm's:

cost management

Which one of the following functions should be assigned to the corporate treasurer rather than to the controller?

goal of financial mangement

maximize value of equity maximize the current value per share of the company's existing stock maximize the market value of the existing owners equity

agency problem

conflict of interest between principal and agent

Sarbanes-oxley act (sarbox 2002)

intended to strengthen protection against accounting fraud and financial malpractice -firms driven to go public outside the U.S. and go private (dark)

capital budgeting - what long-term investments or projects should the business take on?

the investment that gets the best return

more return and less risk

what do you want with investments