Part 3 Ch 01 - CHAPTER 1 ANSWERS 1-1 Proprietorship,...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 1 ANSWERS 1-1 Proprietorship, partnership, and corporation are the three principal forms of business organization. The advantages of the first two include the ease and low cost of formation. The advantages of the corporation include limited liability, indefinite life, ease of ownership transfer, and access to capital markets. The disadvantages of a proprietorship are (1) difficulty in obtaining large sums of capital; (2) unlimited personal liability for business debts; (3) limited life; and (4) difficulty of transferring ownership. The disadvantages of a partnership are the same as they are for a proprietorship. The disadvantages of a corporation are (1) double taxation of earnings and (2) setting up a corporation and filing required state and federal reports are complex and time- consuming. 1-2 No. The normal rate of return on investment would vary among industries, principally due to varying risk. The normal rate of return would be expected to change over time due to (1) underlying changes in the industry and (2) business cycles (economic factors). 1-3 An increase in the rate of inflation would most likely increase the relative importance of the financial manager. Virtually all of the manager’s functions, from obtaining funds for the firm to internal cost accounting, become more demanding in periods of high inflation. Usually, uncertainty is also increased by inflation, and, hence, the effects of a poor decision are magnified. 1-4 Stockholder wealth maximization is a long-run goal. Companies, and consequently the stockholders, prosper by management making decisions that will produce long-term increases in earnings and thus wealth. Actions that are continually short-sighted often “catch up” with a firm and, as a result, it might find itself unable to compete effectively against its competitors. There has been much criticism in recent years that U.S. firms are too short-run profit oriented. A prime example was when the U.S. auto industry was accused of building large “gas guzzler”
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 06/19/2009 for the course FIN 5FMA taught by Professor Dusa during the Three '09 term at La Trobe University.

Page1 / 3

Part 3 Ch 01 - CHAPTER 1 ANSWERS 1-1 Proprietorship,...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online