Ch.1 Question Solutions

Ch.1 Question Solutions - 1-1THREE FORMS OF BUSINESS: 1....

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Unformatted text preview: 1-1THREE FORMS OF BUSINESS: 1. SOLE PROPRIETORSHIP 2. PARTNERSHIP 3. CORPORATIONThe ADVANTAGES of the SOLE PROPRIETORSHIP AND THE PARTNERSHIPinclude 1.the ease/simplicity of forming the business 2.low cost of business formation and3.fewer overall regulations as compared to the corporation. The ADVANTAGES of the CORPORATIONinclude 1. limited liability2. indefinite life3. ease of ownership transfer and 4.access to capital markets.The DISADVANTAGES of a SOLE PROPRIETORSHIP/PARTNERSHIP are 1.difficulty in obtaining large sums of capital2.unlimited personal liability for business debts3. difficulty of transferring ownership4.the life of the business is limited to the life/lives of the individual/partners who created it.The DISADVANTAGES of a CORPORATION are 1. double taxation2.setting up a corporation and filling required state and federal reports (complex and time consuming) and3.corporations are generally subject to more scrutiny and regulation1-2No. The normal rate of returnon investment varies among industries, principally due to varying risk. Example: The public utilities industry, which provides a necessary, predictable product and service (natural gas, electricity, water) that consumers and businesses must purchase despite the state of the general economy has less inherent risk as compared to the high tech industry which depends upon ongoing innovation & experimentation. Not surprisingly, this industry faces a much more uncertain market demand for its products & services. The normal rate of return would be expected to change over time due to the following: 1. underlying changes in the industry2. business cycles (recession, depression, expansion, etc.)1-3An increase in the inflation rate would most likely increase the relative importance of the financial manager in comparison to other executives. Virtually all of the financial managers functions (obtaining and investing funds for the firm to internal cost accounting) become more demanding in periods of high inflation. In addition, uncertainty typically increases as inflation heats up. Hence, the effects of a poor financial decision are magnified in this kind of environment....
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Ch.1 Question Solutions - 1-1THREE FORMS OF BUSINESS: 1....

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