Strayer FIN534 Week 1 Homework Assignment Chapter 1

FIN 534 Week 1 Homework Assignment
Chapter 1
1. One drawback of switching from a partnership to the corporate
form of organization is the following:
a. It subjects the firm to additional regulations.
b. It cannot affect the amount of the firm’s operating income that
goes to taxes.
c. It makes it more difficult for the firm to raise additional
capital.
d. It makes the firm’s investors subject to greater potential
personal liabilities.
e. It makes it more difficult for the firm’s investors to transfer
their ownership interests
2. Which of the following statements is CORRECT?
a. The main method of transferring ownership interest in a
corporation is by means of a hostile takeover.
b. Two key advantages of the corporate form over other forms of
business organization are unlimited liability and limited life.
c. A corporation is a legal entity that is generally created by a
state; its life and existence is separate from the lives of its individual
owners and managers.
d. Limited liability of its stockholders is an advantage of the
corporate form of organization, but corporations have more trouble raising
money in financial markets because of the complexity of this form of
organization.
e. Although its stockholders are insulated by limited legal
liability, the corporation’s legal status does not protect the firm’s managers
in the same way; i.e., bondholders can sue its managers if the firm defaults on
its debt, even if the default is the result of poor economic conditions
3. Which of the following statements is CORRECT?
a. In a regular partnership, liability for other partners’
misdeeds is limited to the amount of a particular partner’s investment in the
business.
b. Attracting large amounts of capital is more difficult for
partnerships than for corporations because of such factors as unlimited
liability, the need to reorganize when a partner dies, and the illiquidity
(difficulty buying and selling) of partnership interests.
c. A slow – growth company, with little need for new capital,
would be more likely to organize as a corporation than would a faster growing
company.
d. The limited partners in a limited partnership have voting
control, while the general partner has operating control over the business.
Also, the limited partners are individually responsible, on a pro rata basis,
for the firm’s debts in the event of bankruptcy.
e. A major disadvantage of all partnerships compared to all
corporations is the fact that federal income taxes must be paid by the partners
rather than by the firm itself
4. Which of the following statements is CORRECT?
a. Corporations are at a disadvantage relative to partnerships
because they have to file more reports to state and federal agencies, including
the Securities and Exchange Administration, even if they are not publicly
owned.
b. In a regular partnership, liability for the firm’s debts is
limited to the amount a particular partner has invested in the business.
c. A fast-growth company would be more likely to set up as a
partnership for its business organization than would a slow-growth company.
d. Partnerships have difficulty attracting capital in part because
of their unlimited liability, the lack of permanence of the organization, and
difficulty in transferring ownership.
e. A major disadvantage of a partnership relative to a corporation
as a form of business organization is the high cost and practical difficulty of
its formation
5. Which of the following statements is CORRECT?
a. Most businesses (by number and total dollar sales) are organized
as partnerships or proprietorships because it is easier to set up and operate
in one of these forms rather than as a corporation. However, if the business
gets very large, it becomes advantageous to convert to a corporation, mainly
because corporations have important tax advantages over proprietorships and
partnerships.
b. Due to limited liability, unlimited lives, and ease of
ownership transfer, the vast majority of U.S. businesses (in terms of number of
businesses) are organized as corporations.
c. Most business (measured by dollar sales) is conducted by
corporations in spite of large corporations’ often less favorable tax
treatment, due to legal considerations related to ownership transfers and
limited liability.
d. Large corporations are taxed more favorably than sole
proprietorships.
e. Corporate stockholders are exposed to unlimited liability