Chapter 1
Quiz yourself by thinking what should be in
each of the black spaces below before clicking
on it to display the answer.
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| What are proprietorships? | unincorporated business owned by one individual
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| Advantages of a proprietorship: | easily/inexpensive to form; few government regulations; subject to lower income taxes.
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| Limitations of a proprietorship: | unlimited personal liability; life of the business is limited to the life of the individual; difficulty in obtaining capital.
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| What is a partnership? | a legal arrangement between 2 or more people.
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| Advantages of a partnership? | Established easy & inexpensive; income rated on a pro rata basis & taxed on an individual basis (avoids corporate tax situation)
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| Limitations of a partnership? | Unlimited personal liability; unlimited liability makes it difficult to raise capital.
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| What is a corporation? | a legal entity created by a state; separate and distinct from its owners and managers.
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| What are the advantages of a corporation? | Limits SH losses to the amount invested in the firm. Unlimited life; easy to transfer shares of stock; more success in raising capital.
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| Waht are the disadvantages of a corporation? | corporate taxes. Double taxation-corporate earnings are taxed and after-tax earnings on dividends are taxed.
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| What is a limited liability company | a hybrid between a partnership and a corporation.
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| What are the advantages of an LLC? | Both LLCs and LLPs have limited liability like corporations but are taxed like partnerships
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| What is an S corporation? | : taxed if it were a partnership, exempt from corporate tax. To qualify as an S, no more than 75 shareholders
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| What is management’s primary goal? | Decisions should be made to maximize the long-run value of the firm’s common stock.
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| What is market price? | stock value based on perceived but possibly incorrect information as seen by the marginal investor.
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| What is the definition of perceived? | what investors expect, given the limited information they actually have.
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| What is intrinsic value? | An estimate of a stock’s “true” value based on accurate risk and return data. The intrinsic value can be estimated but not measured precisely.
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| How do you define true value? | returns and risk that investors would expect if they had all of the information that existed about the company.
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| Define equilibrium? | The situation in which the actual market price equals the intrinsic value so investors are indifferent between buying or selling a stock.
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| What four trends affect business management in general and financial management in particular? | 1. Sarbanes Oxley Bill which requires the CEO and CFO of a firm to certify that the firm’s financial statements are accurate.
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| Increased globalization of business.
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| Improving information technology (IT)
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| Corporate governance.
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| How would you define “business ethics”? | standards of conduct or moral behavior.
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| What are three techniques stockholders can use to motivate managers to maximize their stock’s long-run price? | (1) Reasonable compensation packagews
(2) Firing managers who are not performing well
(3) The threat of hostile takeovers.
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