FIN 302 QUIZ 1 QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

FIN 302 QUIZ 1 QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 Four Types of Firms - Answers Sole proprietorship, partnership, limited liability company, corporation Sole Proprietorship - Answers - a business owned by one person - straightforward to set up - no separation between the firm and the owner - the life of a sole proprietorship is limited to the life of the owner Partnership - Answers - a partnership is identical to a sole proprietorship except it has more than one owner - ALL partners are liable for the firm's debt - examples of partnerships include law firms, groups of doctors, and accounting firms - a limited partnership is a partnership with two kinds of owners, general partners, and limited partners General Partners - Answers - have the same rights and privileges as partners in a (general) partnership - they are personally liable for the firm's debt obligations Limited Partners - Answers - have limited liability (their liability is limited to their investment) - a limited partner's interest is transferable - a limited partner has no management authority and cannot legally be involved in the managerial decision-making for the business Limited Liability Companies (LLC) - Answers - a limited liability company (LLC) is a limited partnership without a general partner. That is, all owners have limited liability, but unlike limited partners, they can also run the business - the LLC is a relatively new phenomenon in the US Corporations - Answers - the distinguishing feature of a corporation is that it is a legally defined, artificial being (a judicial person or legal entity), separate from its owners - because a corporation is a legal entity separate and distinct from its owners, it is solely responsible for its own obligations Formation of Corporation - Answers corporations must be legally formed, which means that the state in which it is incorporated must formally give consent to the incorporation by chartering it Ownership of a Corporation - Answers - there is no limit on the number of owners a corporation can have - because most corporations have many owners, each owner owns only a small fraction of the corporation - the entire ownership stake of a corporation is divided into shares known as stock - the collection of all the outstanding shares of a corporation is known as the equity of a corporation - an owner of a share of stock in the corporation is known as a shareholder, stockholder, or equity holder and is entitled to dividend payments, that is, payments made at the discretion of the corporation to its equity holders - a unique feature of a corporation is that there is no limitation on who can own its stock Double Taxation - Answers first the corporation pays taxes on its profits, and then when the remaining profits are distributed to the shareholders, the shareholders pay their own personal income tax on this income S Corporation - Answers - the corporation organizational structure is the only organizational structure that allows for double taxation, however, the US Internal Revenue code allows an exemption from double taxation for S-Corporations, which are corporations that elect subchapter S tax treatment - under these tax regulations, the firm's profits (and losses) are not subject to corporate taxes, but instead are allocated directly to shareholders based on their ownership share - the government places strict limitations on the qualifications for subchapter S tax treatment - because most corporations have no restrictions on who owns their shares or the number of shareholders, they cannot qualify for subchapter S treatment C Corporation - Answers corporations subject to corporate taxes Board of Directors - Answers - a group elected by shareholders that has the ultimate decision-making authority in the corporation - the board of directors makes rules on how the corporation should be run (including how the top managers in the corporation are compensated), sets policy, and monitors the performance of the company Chief Executive Officer (CEO) - Answers charged with running the corporation by instituting the rules and policies set by the board of the directors Chief Fiancial Officer (CFO) - Answers - the most senior financial manager - often reports directly to the CEO Financial Manager - Answers financial managers are responsible for three main tasks: 1. making investment decisions 2. making financial decisions 3. managing the firm's cash flows Investment Decisions (Financial Manager) - Answers the financial manager must weigh the costs and benefits of all investments and projects and decide which of them qualify as good uses of the money stockholders have invested in the firm Financing Decisions (Financial Manager) - Answers - once the financial manager has decided which investments to make, he or she also decides how to pay for them - the financial manager must decide whether to raise more money from new and existing owners by selling more shares of stock (equity) or to borrow the money (debt) Cash Management (Financial Manager) - Answers the financial manager must ensure that the firm has enough cash on hand to meet its day-to-day obligations The Goal of the Firm - Answers - in theory, the goal of a firm should be determined by the firm's owners - but in organizational forms with multiple owners, the appropriate goal of the firm - and thus of its managers - is not as clear The Firm and Society - Answers - even if the corporation only makes its shareholders better off, as long as nobody else is made worse off by its decisions, increasing the value of equity is good for society - when the actions of the corporation impose harm on others in the economy, appropriate public policy and regulation is required to assure that corporate interests and societal interests remain aligned Agency Problems - Answers - when managers, despite being hired as the agents of shareholders, put their own self-interest ahead of the interests of shareholders - this agency problem is commonly addressed in practice by minimizing the number of decisions managers must make for which their own self-interest substantially differs from the interests of the shareholders