Chapter 1 Solutions(RWJJ)

Chapter 1 Solutions(RWJJ) - CHAPTER 1 INTRODUCTION TO...

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CHAPTER 1 INTRODUCTION TO CORPORATE FINANCE Answers to Concept Questions 1. The three basic forms are sole proprietorships, partnerships, and corporations. The advantages and disadvantages of sole proprietorships and partnerships are: Disadvantages: unlimited liability, limited life, difficulty in transferring ownership, hard to raise capital funds. Some advantages: simpler, less regulation, the owners are also the managers, sometimes personal tax rates are better than corporate tax rates. The primary disadvantage of the corporate form is the double taxation to shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of transferability, ability to raise capital, and unlimited life. When a business is started, most take the form of a sole proprietorship or partnership. 2. To maximize the current market value (share price) of the equity of the firm (whether it’s publicly traded or not). 3. In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the directors of the corporation, who in turn appoint the firm’s management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the
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Chapter 1 Solutions(RWJJ) - CHAPTER 1 INTRODUCTION TO...

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