FINC 500 week_1_HW.doc

FINC 500 week_1_HW.doc - FINC 5000 ACKER P T(ANSWERS IN...

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FINC 5000 ACKER, P. T. (ANSWERS IN BLUE) Homework Assignment for Week 1: Chapter 1: 1. Describe three major advantages and two disadvantages of the corporate business form? Three advantages of corporation: 1. Unlimited life – able to continue after original owners/managers are gone; 2. Easy transferability of ownership interest – ownership interests divided into shares of stock; 3. Limited liability – losses are limited to funds invested. Two disadvantages: 1. Double taxation of corporate earnings – earnings taxed once at corporate level and then taxed again as income when paid out as dividends to stockholders; 2. Complex and time-consuming creation, e.g. charter, bylaws, filing reports (state and federal). 2. According to the textbook, what is the primary objective of a corporation and what is the ultimate benchmark for measuring this objective? From pg. 11: The primary objective of a corporation is maximizing stockholder wealth, unless the company’s charter states differently. The ultimate benchmark for measuring maximization of stockholder wealth lies in maximization of intrinsic stock value. When intrinsic stock value increases, stockholder wealth increases and society is also benefited. When investors have all relevant information, market price should be equal to intrinsic value. 3. What are the three elements that affect the corporate’s value? (i.e. the stock price?) A corporation’s value is determined by three properties of its cash flows: 1. Size of expected future cash flows, i.e. bigger is better; 2. Timing of cash flows, i.e. the sooner received the better; 3. Risk of cash flows, i.e. the safer the better.
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  • Summer '09
  • Finance, Balance Sheet, Net Income, Generally Accepted Accounting Principles, net operating profit

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