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Finance Chapter 1 Homework

Chapter 1 Discussion Questions 1.

What advantages does a sole proprietorship offer? What is a major drawback of this type of organization? A major drawback is that there is unlimited liability to the owner. The advantage is simplicity of decision making and low organizational and operating costs. 2. What form of partnership allows some of the investors to limit their liability? Explain briefly. It allows some of the partners to limit their liability. With this arrangement, the partners are designated general partners and have unlimited liability for the debts of the firm.

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The other partners are designated limited partners and are liable only for their initial contribution.

However, the limited partners are normally prohibited from being active in the management of the firm. 3. In a corporation, what group has the ultimate responsibility for protecting and managing the stockholders’ interests? Board of directors 4. What document is necessary to form a corporation? Articles of incorporation 5. What issue does agency theory examine? Why is it important in a public corporation rather than in a private corporation? It examines the relationship between the owners of the firm and the managers of the firm.Management in privately owned firms, the owners are usually the same people. Management operates the firm to satisfy its own goals, needs, financial requirements and the like.

As a company moves from private to public ownership, management now represents all owners. This places management in the agency position of making decisions in the best interest of all shareholders. 6. Why are institutional investors important in today’s business world? Because institutional investors such as pension funds and mutual funds own a large percentage of major U. S. ompanies, they are having more to say about the way publicly owned companies are managed. As a group they have the ability to vote large blocks of shares for the election of a board of directors, which is suppose to run the company in an efficient, competitive manner.

The threat of being able to replace poor performing boards of directors makes institutional investors quite influential. Since these institutions, like pension funds and mutual funds, represent individual workers and investors, they have a responsibility to see that the firm is managed in an efficient and ethical way. 7.Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth? The problem with a profit maximization goal is that it fails to take account of risk, the timing of the benefits is not considered, and profit measurement is a very inexact process. The goal of shareholders wealth maximization implies that the firm will attempt to achieve the highest possible total valuation in the marketplace. It is the one overriding objective of the firm and should influence every decision. 8.

Name two areas that finance is aligned with and field of study. Accounting and economics

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