Chapter 1 Questions Foundations of Financial Management

In: Business and Management

Submitted By fongliangjie92
Words 468
Pages 2
What advantages does a sole proprietorship offer?
Simple decision making
Low organizational and operating costs Major drawback of sole proprietorship?
Unlimited liability
Taxation is on owner as income What form of partnership allows some partners to limit their liability?
A limited partnership one or more partners is designated a general partner with unlimited liability
Other partners have limited liability (for their initial contribution)
Prohibited from active management role
Real estate agents, doctors, lawyers, accountants In a corporation which group has ultimate responsibility for protecting and managing stockholders interests?
The board of directors What are the disadvantages of a corporation
Double taxation of dividends
Subchapter S corporation can circumvent this (only up to 35 stockholders)
Complex management requirements
Costly reporting and structural requirements What is the issue for agency theory? Why is it important for public corporations but not private corporations?
Agency theory looks at relationship owners and managers.
Competing goals
In private corporations managers and owners are usually the same people. Why are institutional investors so important now?
They own a large percentage of stock
They exercise voting rights and demand board seats Why is profit maximization by itself an inappropriate goal?
The time value of money must be considered. The timing of profits can have a big effect on the benefit to the business.
Profit is subject to many different measurements which can be manipulated.
Changes in profit may represent changes in risk which may cause future problems for the business.
Problems of inflation and currency movement also complicate things.

What is meant by “Maximization of investor wealth”?
Achieving the highest value for the business
Stock prices
Options for management.…...

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