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QXP+11 - CHAPTER 11 DISCUSSION QUESTIONS 1 Debt financing...

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CHAPTER 11 DISCUSSION QUESTIONS 1. Debt financing is borrowing money and almost always involves the payment of in- terest on the amount borrowed. Debt hold- ers do not receive any ownership in the company from loaning the money. Equity financing is raising money by selling stock or ownership interests in the company. While equity (stock) holders aren’t guaranteed periodic interest payments as are debt hold- ers, they often receive dividends on their equity investments. With equity, you are buying ownership in the organization; with debt, you are loaning money. 2. Partnerships are unincorporated businesses that are easy to start and easy to terminate; they are not legally separate from their own- ers nor are they separately taxed. Corpora- tions are legal entities authorized by states; they are separately taxed and offer limited li- ability to their stockholders. 3. When a person decides to establish a pro- prietorship, he or she merely acquires the necessary cash, inventory, equipment, busi- ness license, and other assets and begins providing goods or services to customers. The same is true for a partnership, except that two or more persons are involved and so together must decide which assets will be acquired and how business will be conduc- ted. 4. Anything that terminates or changes the contract between partners (including the death of a partner) legally dissolves the part- nership. The legal dissolution does not mean that the business must cease opera- tions, however. Usually, partnership agree- ments specify how modifications in owner- ship should be handled, so there is often no outward indication that any change has taken place. 5. As long as the partners’ actions are within the scope of the normal business activity of the partnership, all partners are legally re- sponsible for each other’s actions. In fact, creditors can even seek payment for claims authorized by a departed partner from the personal assets of the remaining partners. 6. The only type of business entity in which all owners have limited liability is the corpora- tion. 7. Corporate profits are subject to double taxa- tion in that most corporations pay taxes on their profits, and then stockholders pay taxes on dividends distributed to them by corporations. 8. The major difference between common and preferred stock is in the rights granted to holders. Common stockholders have voting rights while preferred stockholders usually do not. Common stockholders also have a residual type of equity in that each stock- holder shares dividends and assets upon li- quidation, after the rights and privileges of creditors and preferred stockholders are sat- isfied. Preferred stockholders usually have dividend and liquidation privileges that are superior to those of the common stockhold- ers. Two dividend privileges associated with preferred stock are the current-dividend preference and the cumulative-dividend preference.
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