1.What advantages does a sole proprietorship offer? What is a major drawback of
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Question
1.What advantages does a sole proprietorship offer? What is a major drawback of this type of organization?2.What form of partnership allows some investors to limit their liability? Briefly explain.
3.Why is profit maximization, by itself, an inappropriate goal in business? What is meant by the goal of maximization of shareholder wealth?
4.In terms of the life of the securities offered, what is the difference between money and capital markets?
Chapter 2
5.Identify the three basic types of financial statements and explain how the measurements of each are interrelated.
6.What is the price-earnings (P/E) ratio? Identify and explain three factors that affect the P/E ratio.
Chapter 3
7.Financial ratios show us how successful a firm is and how well it is operating. List the four main categories of ratio analysis and describe what each category measures. Then put each of the 13
Explanation / Answer
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 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. In terms of the life of the security, what is the difference between money and capital markets? Money markets are short term Treasury bills Commercial paper to finance daily operations of corporations Certificates of deposit (less than 1 year) Capital markets have life of more than one year Common stock Preferred stock Corporate and government bonds What is the difference between a primary and a secondary market? Raising new funds IPO etc is in the primary market new issue When the public start trading them this is the secondary market Secondary market has constantly changing prices.
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