Fin 515 Week 1 Homework

Week 1 Problem SetAnswer the following questions and solve the following problems in the space provided.When you are done, save the file in the format flastname_Week_1_Problem_Set.docx,where flastname is your first initial and you last name, and submit it to the appropriatedropbox.Chapter 1 (page 19)1. What is the most important difference between a corporation and allotherorganizational forms?Ans: Corporation is a legal entity separate and distinct from its owners, it is solely responsiblefor its own obligations. The owners of a corporation are not liable for any obligations thecorporation enters into. Similarly, the corporation is not liable for any personal obligations of itsowners. It can enter into contracts, acquire assets, incur obligations, and it enjoys protectionunder the U.S. Constitution against the seizure of its property. Its earnings are accounted for atthe corporate level but are taxed only at the shareholder level. Shareholders generally cannotwithdraw money or property from the corporation without recognizing income. A corporation isless hands-on than owning a business since ownership claim is figured through the purchase ofstock shares. Selling stocks transfers ownership and stock holders are not liable for the debts ofthe business as in the case of a proprietorship or partnership. The drawback to a corporation isthat stockholders pay higher taxes. 2. What does the phrase limited liability mean in a corporate context?Ans: Limited liability is the situation when the firm's liability is limited to their investment.Firms with limited liability include limited partnerships, limited liability companies, andcorporations. A limited liability company (LLC) is a limited partnership without a generalpartner. That is, all the owners have limited liability, but unlike limited partners, they can alsorun the business.3. Which organizational forms give their owners limited liability?Firms with limited liability include limited partnerships, limited liability companies, andcorporations. A limited partnership is a partnership with two kinds of owners, general partnersand limited partners. General partners have the same rights and privileges as partners in ageneral. They are personally liable for the firm’s debt obligations. Limited partners, however,have limited liability and their liability is limited to their investment. Their private propertycannot be seized to pay off the firm’s outstanding debts. A limited partner has no managementauthority and cannot legally be involved in the managerial decision making for the business.

 

DeVry FIN 515 Midterm Exam

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1. Question : (TCO A) Which of the following statements is CORRECT? Student Answer: One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. Sole proprietorships are subject to more regulations than corporations. In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones. Corporations of all types are subject to the corporate income tax. 2. Question : (TCO G) Which of the following statements is CORRECT? Student Answer: The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.

The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all

banks and brokerage houses where cash is on deposit. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. The

statement of cash flows shows how much the firm’s cash—

the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)

increased or decreased during a given year. 3. Question : (TCO G) LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant? Student Answer: 7.57% 7.95% 8.35%

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