Answer Key 1. The corporation is the most common form of business ownership

Answer Key 1. The corporation is the most common form of business ownership 05 Key 1. (p. 114) The corporation is the most common form of business ownership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #1 Topic: Basic Forms of Business Ownership 2. (p. 114) The three major forms of business ownership in the U.S. are sole proprietorships, partnerships, and corporations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #2 Topic: Basic Forms of Business Ownership 3. (p. 114) Few people today start their own business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #3 Topic: Basic Forms of Business Ownership 1 4. (p. 115) Once a business is established, it's almost impossible to change from one form of business ownership to another. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #4 Topic: Basic Forms of Business Ownership 5. (p. 114) When two or more people legally agree to become co-owners of a business, the form of business is called a partnership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #5 Topic: Basic Forms of Business Ownership 6. (p. 114) A legal entity with authority to act and have liability separate from its owners is called a partnership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #6 Topic: Basic Forms of Business Ownership 7. (p. 114) Corporations represent 20 percent of all the businesses in the U.S. and earn 81 percent of the total U.S. business receipts. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #7 Topic: Basic Forms of Business Ownership 2 8. (p. 114) A comparison of the three major forms of business ownership shows that sole proprietorships are usually the most difficult type of business to establish. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #8 Topic: Basic Forms of Business Ownership 9. (p. 115) The first step in starting a sole proprietorship is to fill out a proprietorship charter application form and file it with the state government. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #9 Topic: Sole Proprietorship 10. (p. 115) It is usually easy to start and end a sole proprietorship. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #10 Topic: Sole Proprietorship 11. (p. 115) The profits of a sole proprietorship are taxed as the personal income of the owner. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #11 Topic: Sole Proprietorship 3 12. (p. 115) The sole proprietorship form of ownership tends to be attractive to people who want to invest in a company without taking an active role in management. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #12 Topic: Sole Proprietorship 13. (p. 115) A major advantage of sole proprietorships is that an owner has limited liability for the debts of his or her business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #13 Topic: Sole Proprietorship 14. (p. 115) One of the strengths of the sole proprietorship is its ability to sustain rapid growth by raising large amounts of financial resources. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #14 Topic: Sole Proprietorship 15. (p. 116) The debts of a business operated as a sole proprietorship are considered to be the personal debts of the owner of the business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #15 Topic: Sole Proprietorship 4 16. (p. 116) A drawback of sole proprietorships is that they usually have limited access to additional financial resources. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #16 Topic: Sole Proprietorship 17. (p. 116) An advantage of forming a sole proprietorship is that it allows the owner to have more time for leisure activities. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #17 Topic: Sole Proprietorship 18. (p. 116) If a sole proprietorship fails, the owner may lose whatever was invested in the business, however, the owner's personal assets are not at risk. Sole proprietors have unlimited liability for the debts of their business. This means that if their business gets into financial trouble they can lose their personal assets. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #18 Topic: Sole Proprietorship 5 19. (p. 115) If the business is designated a sole proprietorship, profits are passed along to the owner. For tax purposes, these profits are accounted for with any other personal income the owner may have accumulated and taxed at the owner's personal income tax rate. The profits of a sole proprietorship are passed through to the owner, and taxed at the owner's personal tax rate. However, owners do have to pay self employment tax (Social Security and Medicare). By law, sole proprietors are required to estimate their taxes and make quarterly payments to the government or suffer penalties for nonpayment. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #19 Topic: Sole Proprietorship 20. (p. 116) A difficulty that sole proprietors try to overcome is the fact that they have trouble competing with large firms for expert talent. Large firms can usually pay better and offer fringe benefits that are unaffordable to the sole proprietor. Sole proprietors often find it difficult to attract qualified employees to help run the business because often they cannot compete with the salary and benefits offered by larger companies. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #20 Topic: Sole Proprietorship 21. (p. 116) Unlike partnerships, if sole proprietorships find themselves in bankruptcy, they need not worry about a court of law requiring them to sell-off personal assets to pay for the debts of the firm. Sole proprietorships have unlimited liability. This means that the proprietor is financially responsible for all debts incurred by the company. In a court of law, a judge could require the owner/proprietor to liquidate personal assets to pay the debts of the business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-1 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #21 Topic: Sole Proprietorship 6 22. (p. 115) Eric wants to start a business. He is attracted to the idea of being his own boss, and wants to get started with a minimum of expense and hassle. He is confident in his abilities, and the market he can draw from, so he is not particularly worried about financial risks. All of these factors suggest that Eric may favor starting his business as a sole proprietorship. People who want to be their own boss often prefer to operate their business, at least initially, as a sole proprietorship. An advantage of the sole proprietorship is that it is a relatively easy and inexpensive form of business to set up. One drawback of a sole proprietorship is that the owner has unlimited liability. However, at this time, Eric is not worried about risk. The unlimited liability factor does not appear to be a problem for him. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-1 Level of Learning 3: Application of principles Nickels - Chapter 05 #22 Topic: Sole Proprietorship 23. (p. 115-116) Sandy Beech, a talented fashion designer who wants to start her own women's swimwear and beach towel line is trying to decide which form of business ownership is right for her. As a young mother who aspires to send her children to college some day, she does not want to jeopardize her savings account in any way. In order to overcome these risks, Sandy should start her business as a sole proprietorship. Sandy is concerned about the risk of losing personal assets if her business does not succeed. Although the sole proprietorship is easy to set-up, it may not be the best form of business ownership for Sandy due to her need to protect personal assets. She may want to consider a form of ownership that provides limited liability. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-1 Level of Learning 3: Application of principles Nickels - Chapter 05 #23 Topic: Sole Proprietorship 7 24. (p. 116) Rocky Rhodes is convinced that he has a great idea for a new business. Unfortunately, the type of business he wants to start would require a fairly high initial investment and Rocky has a poor credit rating and very little personal wealth. Rocky would be unlikely to find success if he organized his business as a sole proprietorship. Funds available to sole proprietorships are often limited to the amount the owner can raise. Thus, Rocky's business would probably have a hard time raising enough money if he organized it as a sole proprietorship. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-1 Level of Learning 3: Application of principles Nickels - Chapter 05 #24 Topic: Sole Proprietorship 25. (p. 117) A general partner takes an active role in the management of the business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #25 Topic: Partnerships 26. (p. 117) All partners in a general partnership have limited liability for the debts of their firm. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #26 Topic: Partnerships 27. (p. 117) In a general partnership, all partners share in management of the business and in the liability for the firm's debts. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #27 Topic: Partnerships 8 28. (p. 117) In a general partnership, all partners are entitled to an equal share of the firm's profits. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #28 Topic: Partnerships 29. (p. 117) Limited partnerships are just like general partnerships, except that they are partners for a limited time period. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #29 Topic: Partnerships 30. (p. 117) A limited partner is an owner who assumes no management responsibility and has no liability for losses beyond the amount invested. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #30 Topic: Partnerships 31. (p. 117) A limited partnership consists of one or more general partners and one or more limited partners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #31 Topic: Partnerships 9 32. (p. 117) Although shares of master limited partnerships can be purchased on one of the national stock exchanges, these companies are taxed like partnerships. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #32 Topic: Partnerships 33. (p. 118) The Uniform Partnership Act is law in every state except Louisiana. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #33 Topic: Partnerships 34. (p. 118) According to the Uniform Partnership Act, the three key elements of any general partnership are (1) shares of stock to represent ownership, (2) limited liability, and (3) ease of ownership transfer. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #34 Topic: Partnerships 35. (p. 118) According to the Uniform Partnership Act, the three key elements of any general partnership are (1) common ownership, (2) shared profits and losses, and (3) the right to participate in managing the operations of the business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #35 Topic: Partnerships 10 36. (p. 118) A recent study showed that partnerships are more likely to fail than sole proprietorships. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #36 Topic: Partnerships 37. (p. 117) A major objective of limited liability partnerships (LLPs) is to limit each partner's personal liability to the consequences of their own acts and those of people under their supervision. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #37 Topic: Partnerships 38. (p. 119) One of the major disadvantages of a partnership is that profits must be divided equally. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #38 Topic: Partnerships 39. (p. 117) A general partner has unlimited liability for the debts of the partnership only if he or she personally approved the decisions that resulted in those debts. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #39 Topic: Partnerships 11 40. (p. 119) In order to protect all parties and minimize misunderstandings among partners, all terms of the partnership should be spelled out in writing. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #40 Topic: Partnerships 41. (p. 118) One advantage of a partnership is that there is a simple process for partners to terminate their business. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #41 Topic: Partnerships 42. (p. 118) Compared to sole proprietorships, an advantage of partnerships is their ability to obtain more financial resources. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #42 Topic: Partnerships 43. (p. 119) Setting up a partnership under the terms of a written agreement is a bad idea, because written agreements tend to be too inflexible and impersonal. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #43 Topic: Partnerships 12 44. (p. 118) Compared to sole proprietorships, partnerships offer the advantage of shared management and pooled knowledge. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #44 Topic: Partnerships 45. (p. 117) A limited partnership refers to a partnership set up for a temporary purpose, such as a real estate development project. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-2 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #45 Topic: Partnerships 46. (p. 117) In a limited partnership, the general partners should encourage the limited partners to take a more active role in the operations of the business. After all, the limited partner has comparable liability in the business, even though he/she may not be a partner for as long a period of time as the general partners. By definition, a limited partnership will consist of one or more general partners and one or more limited partners. The limited partners are passive investors. By law, they do not take an active role in the management of the business, yet they may share in the profits of the business and remain a partner for as long as the partnership exists. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #46 Topic: Partnerships 13 47. (p. 119) If a partner in a limited partnership dies, the partnership ceases to exist. If a partner in any partnership dies, the partnership agreement automatically ceases to exist. Good partnership agreements usually have provisions for these situations. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #47 Topic: Partnerships 48. (p. 119) In the Spotlight on Small Business box, titled, "Pick Your Partners Wisely", the writer suggests that potential partners discuss the types of skills that each brings to the business. Partners with complimentary skills may enhance the business. It is suggested that you ask yourself what types of skills you and your potential partners bring to the business, and whether those skills compliment each other. Successful partners often come with varying backgrounds. Sometimes one partner will have the technical skills to get the job done, while others might have the business or accounting knowledge. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #48 Topic: Spotlight on Small Business box 49. (p. 119) One method to avoid conflicts between partners is to solicit the services of a lawyer to create a wellwritten partnership agreement. One of the most important tasks to achieve before forming a partnership is to create a partnership agreement. The partnership agreement addresses a number of rules that will govern the activities of the partnership including but not limited to: the duties of each partner; the rules for adding partners; contributions by each partner; and, how profits will be distributed. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #49 Topic: Partnerships; Figure 5.2 14 50. (p. 119) According to the Spotlight on Small Business box, titled, "Pick Your Partners Wisely", attributes such as trust and integrity are not something you should get overly concerned about when selecting partners, due to the fact that this is a business decision, not a friendly game of golf. Prospective partners should concern themselves with several aspects of the business relationship, including the values shared by partners who are entering into business together. Others things that you should ask yourself is whether the partners share the same goals and whether each partner's skills compliments the others. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #50 Topic: Spotlight on Small Business box 51. (p. 118-119) The fairest way to handle profits in any partnership arrangement is to divide things evenly. If there are two owners in the business, each gets 50%. If there are three owners (even if one is a limited partner), each gets 33.333% of any accumulated profits. The partnership agreement should stipulate the way the business plans to share the profits. The partnership may not necessarily divide the profits equally among members. Several criteria may enter into the decision of how to share profits, including the expertise of each partner, the investment amount of each partner, and the amount of time each partner spends in the business. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #51 Topic: Partnerships; Figure 5.2 52. (p. 117) Ted and Mark are partners in a dry cleaning business. They would like their brother Todd to join them. Unfortunately, partnership law states that only two partners can participate in a partnership. A partnership consists of two or more owners. Unless explicitly written in the original partnership agreement, the partnership can add partners. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #52 Topic: Partnerships 15 53. (p. 117) Connie is a general partner in a retail cookie store. Her personal assets are legally protected from the debts of the business. As a general partner, Connie assumes unlimited liability for the debts of her business. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #53 Topic: Partnerships 54. (p. 117) Two of Diana's friends have approached her about starting a new business. Diana is willing to invest money in the business and share in its profits, but she has no desire to be involved in the day-to-day management of the company, nor is she willing to risk any amount beyond her initial investment. Diana's preferences suggest that she prefers a general partnership form of business ownership. In a general partnership, all partners share in the management of the business, and have unlimited liability for the firm's debts. Since Diana has no interest in managing a company and wants to limit her risk, she is more suited for a Limited Partnership, where her friends would serve as general partners and she would serve as a limited partner. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #54 Topic: Partnerships 16 55. (p. 117) Emma Pebble and Chase Stone formed a partnership in a landscape business. Under their arrangement. Emma actively manages the company and assumes unlimited liability for the firm's debts. Chase has invested several thousand dollars of his money with plans to share in the profits, but does not actively make management decisions, nor will he assume liability beyond his initial investment. Emma and Chase participate in a limited partnership. A limited partnership consists of at least one general partner, who has unlimited liability, and at least one limited partner, who risks only what he or she has invested. By law, the limited partner cannot actively manage the partnership. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #55 Topic: Partnerships 56. (p. 118-119) Sergio has agreed to become a partner in his brother's horse breeding business. Since he provided 30 percent of the money to start the firm and build an air-conditioned barn, he is entitled to 30 percent of any profits the firm earns during its first year of operation. The division of profits in a partnership is negotiable and is not necessarily tied to the amount of the initial investment. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-2 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #56 Topic: Partnerships; Figure 5.2 17 57. (p. 119) After spending a summer down-under, two Oregon friends, Rick and Mick created a general partnership to import emu from Australia to the U.S. After a year, Rick found himself at the mercy of Mick who seemed to keep the books and seldom share the financial results, even though Rick was out selling the emu idea to farmers and ecologically conscious consumers; and, shipments were increasing. As their consultant, one of the first things that you inquire about is whether they are familiar with the UPA (Uniform Partnership Act), specifically the right to participate in managing the operations of the business. The Uniform Partnership Act (adopted in every state except Louisiana) stipulates: 1) common ownership; 2) shared profits and losses; and, 3) the right to participate in managing the operations of the business. Rick has the right to know and be provided with regular financial statements that pertain to his business. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #57 Topic: Partnerships 58. (p. 118) Marco is a limited partner in an e-commerce company. As a limited partner, Marco can be involved with the company for a maximum of five years. A limited partner has limited liability and cannot actively manage the firm, but his involvement is not restricted as to length of time. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #58 Topic: Partnerships 18 59. (p. 118) According to the Spotlight on Small Business box, "Pick Your Partners Wisely", it is really not necessary to interview your prospective partner carefully, especially if they are an old friend. The Spotlight on Small Business box suggests doing three things before starting a partnership: (1) talk to people who have been in successful and unsuccessful partnerships; (2) interview your prospective partner(s) very carefully; and (3) evaluate the decision skills of your prospective partner(s). AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #59 Topic: Spotlight on Small Business box 60. (p. 117-118) Last night as you scrolled through the TV channels to find an action flick, you came across an old movie with tough guy, James Cagney, called "Yankee Doodle Dandy". Although not particularly your kind of movie, you stayed on that channel for a few minutes because Cagney and another guy were in partnership together. They were arguing over who was the senior partner and who was the junior partner, even though, clearly, they started the business at the same time. If you were brought on board as their present-day business advisor, you would explain to them that all partnerships have at least one general partner (known as the senior partner) and one limited partner (known as the junior partner). According to the Uniform Partnership Act adopted in every state except Louisiana, partners have the right to 1) common ownership; 2) shared profits and losses; and, 3) the right to participate in managing the operations of the business. In some cases, partners may have differing skills and skill levels (or level of experience) of the other partners, but as partners they are on equal-footing. A good partnership agreement will spell-out the details of the partnership. Further, partnerships can be 1) general partnerships or 2) limited partnerships, but these variations do not hold the senior/junior designation. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-2 Level of Learning 3: Application of principles Nickels - Chapter 05 #60 Topic: Partnerships 19 61. (p. 121) A conventional corporation is a state-chartered legal entity, with authority to act and have liability separate from its owners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #61 Topic: Corporations 62. (p. 121) In today's economy, only large business enterprises should operate as corporations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #62 Topic: Corporations 63. (p. 121) The owners of a corporation are known as general corporate partners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #63 Topic: Corporations; Figure 5.4 64. (p. 122) A corporation can raise financial capital by selling shares of stock to interested investors. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #64 Topic: Corporations 20 65. (p. 121) Stockholders in a corporation accept unlimited liability for the corporation's debts. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #65 Topic: Corporations 66. (p. 122) A disadvantage of corporations is that their charters are only valid for 99 years, so corporations are less permanent than other types of businesses. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #66 Topic: Corporations 67. (p. 122) When one of the owners of a corporation dies, the corporation legally ceases to exist. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #67 Topic: Corporations 68. (p. 124) Corporations are easy to start and easy to terminate. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #68 Topic: Corporations 21 69. (p. 124) A disadvantage of corporations is that they generally require extensive paperwork. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #69 Topic: Corporations 70. (p. 124) A disadvantage of corporations is that an owner must get the approval of all other owners before selling his or her interest in the firm to another investor. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #70 Topic: Corporations 71. (p. 124) Stockholders in a corporation normally exert a significant degree of control over the company's daily operations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #71 Topic: Corporations 72. (p. 123) The stockholders in a corporation elect a board of directors to oversee the company's major policy issues. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #72 Topic: Corporations 22 73. (p. 124) Stockholders in a corporation exert a significant degree of control over the company's daily operations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #73 Topic: Corporations; Figure 5.4 74. (p. 123) Stockholders in a corporation have limited liability. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #74 Topic: Corporations 75. (p. 123-124) Stockholders in a corporation entrust control over the company's daily operations to managers selected by the board of directors to run the company. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #75 Topic: Corporations 76. (p. 124) One advantage of corporations is that the initial cost of organization is usually lower than for other forms of business ownership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #76 Topic: Corporations 23 77. (p. 124) States may levy special taxes on corporations that are not imposed on other businesses. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #77 Topic: Corporations 78. (p. 123) Most states have legal restrictions that prevent individuals from incorporating. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #78 Topic: Corporations 79. (p. 123) One reason Individuals incorporate is to obtain the advantage of limited liability. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #79 Topic: Corporations 80. (p. 122) An alien corporation does business abroad but is chartered in the U.S. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #80 Topic: Corporations; Figure 5.3 24 81. (p. 122) A domestic corporation does business in the state in which it's chartered. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #81 Topic: Corporations; Figure 5.3 82. (p. 122) A foreign corporation is chartered in a country outside the U.S. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #82 Topic: Corporations; Figure 5.3 83. (p. 122: 124) Delaware is a popular state to seek incorporation due to its reduced costs and other perks. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #83 Topic: Corporations; Figure 5.3 84. (p. 122) A closed corporation is one whose stock is held by a few people and is not available to the general public. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #84 Topic: Corporations; Figure 5.3 25 85. (p. 122) A non-profit corporation does not seek personal profit for its owners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #85 Topic: Corporations 86. (p. 122) A quasi-public corporation is a corporation chartered by the government as an approved monopoly to perform services to the general public. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #86 Topic: Corporations; Figure 5.3 87. (p. 122) A multinational corporation is a firm that operates in several countries. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #87 Topic: Corporations; Figure 5.3 88. (p. 123) To change ownership in a corporation you simply sell your stock to someone else. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #88 Topic: Corporations 26 89. (p. 123) Stock options are the right to purchase shares of the corporation for a fixed price. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #89 Topic: Corporations 90. (p. 123) An advantage of corporations is their ability to attract good talent by offering stock options and other employee benefits. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #90 Topic: Corporations 91. (p. 123) It is said that corporations have perpetual life. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #91 Topic: Corporations 92. (p. 125) One advantage of an S Corporation is that the profits of the business are distributed to the owners and taxed as each owner's personal income, thus avoiding the problem of double taxation. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #92 Topic: Corporations 27 93. (p. 125) By filling out the correct paperwork annually, any corporation can qualify to be classified as an S corporation. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #93 Topic: Corporations 94. (p. 125) A company that loses its status as an S corporation may not reelect this status for at least 5 years. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #94 Topic: Corporations 95. (p. 126) By law, providers of personal services such as doctors and lawyers cannot set-up their businesses as limited liability companies. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #95 Topic: Corporations 96. (p. 125) An S corporation has fewer ownership rules than a limited liability company. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #96 Topic: Corporations 28 97. (p. 125) The S corporation form of business would be particularly attractive to fast growing companies that want to attract thousands of new stockholders. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #97 Topic: Corporations 98. (p. 126) A limited liability company is similar to an S corporation, but without the special eligibility requirements. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #98 Topic: Corporations 99. (p. 126) Limited liability companies have both flexibility in tax treatment of earnings and limited liability protection for owners. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #99 Topic: Corporations 100. (p. 126) One of the drawbacks of a limited liability company is that most states do not yet recognize this form of ownership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #100 Topic: Corporations 29 101. (p. 126) Like stockholders of a C corporation, owners of a limited liability company (LLC) are free to sell their ownership without the approval of other members. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #101 Topic: Corporations 102. (p. 126) The limited liability company requires a minimum of 10 members. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #102 Topic: Corporations 103. (p. 123) The organization structure of a corporation allows for stockholders to exert a significant degree of control over the company's daily operations. Stockholders elect the Board of Directors of a corporation. The Board of Directors appoints the Management. The management operates separately from stockholders. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #103 Topic: Corporations 104. (p. 122) Public utilities are examples of quasi-public corporations. Quasi-public corporations are corporations authorized by the government to serve as regional monopolies. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #104 Topic: Corporations; Figure 5.3 30 105. (p. 122) The purpose of corporate by-laws is to maintain a legal structure and also to stipulate how the firm will be managed. By-laws describe how a firm will operate from both a legal standpoint and a management perspective. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #105 Topic: Corporations; Figure 5.5 106. (p. 121-123) In order to establish a C-Corporation, it is a requirement that investors run the company, whereas in an S-Corporation, this is not the case. In a C-Corporation, the investors elect the Board of Directors. The Board of Directors appoints the officers and management team. It is not a requirement that investors run the company. S-Corporations also have stockholders, directors, and employees, but S-Corporations are taxed differently from C-Corporations. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #106 Topic: Corporations 107. (p. 123) If you want to sell your ownership in a publicly traded corporation, you find someone willing to buy your shares. There is ease of ownership in a corporation. If you no longer want to be an owner/stockholder, you sell your shares to another party. The corporation has perpetual life, but your ownership does not need to be for life. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #107 Topic: Corporations 31 108. (p. 123) The stockholders of large, publicly traded corporations have a daily pulse on the operation of the business. The owners/stockholders elect a board of directors, who hires the officers of the corporation and oversees major policy issues. The owners/stockholders thus have some say in who runs the corporation but have little to no control over the daily operations. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #108 Topic: Corporations 109. (p. 123) If a corporation distributes after-tax profits to its stockholders in the form of dividends, the government considers these distributions as part of each stockholder's personal income. Stockholders pay taxes on these distributions. A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute aftertax profits to stockholders, these individuals are required to pay taxes on this income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #109 Topic: Corporations 110. (p. 123) If a corporation has after-tax profits of $360,000, and elects to distribute this amount in the form of dividends to its stockholders, these distributions are free and clear of taxes because the corporation paid taxes on this amount prior to distribution. A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute aftertax profits to stockholders, these individuals are required to pay taxes on dividend income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them, hence the term, double taxation. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #110 Topic: Corporations 32 111. (p. 123) Double taxation means that a corporation pays twice the amount of taxes as a sole proprietorship or partnership. A disadvantage of the corporate form of business ownership is double taxation. If corporations distribute aftertax profits to stockholders, these individuals are required to pay taxes on dividend income. Unfortunately, these amounts were already taxed once, when the corporation paid taxes on them, hence the term, double taxation. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #111 Topic: Corporations 112. (p. 125-126) The major differences between an S-Corporation and a Limited Liability Company are limits on the number of owners, and, the citizenship status of individuals who are owners. A limited liability company (LLC) is similar to an S corporation but without the special eligibility requirements. S-Corporations require its owners to be U.S. citizens or the estates of U.S. citizens. The LLC does not have these requirements. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #112 Topic: Corporations 113. (p. 126) The owners of a limited liability company (LLC) must pay self-employment taxes on any profits they earn, even if they did not obtain a salary from the company. Although the LLC allows for profits to be distributed to owners and taxed at each owner's personal tax rate, the owners must also pay self-employment taxes on those earnings. Self-employment taxes include Medicare and Social Security taxes. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-3 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #113 Topic: Corporations 33 114. (p. 121) A group of medical doctors are interested in incorporating their business. There is no advantage due to the costs involved. Many individuals choose to incorporate to obtain limited liability. In some cases, they may also receive tax savings by doing so. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #114 Topic: Corporations 115. (p. 121) Nutty Dough is a small chain of donut shops currently owned and operated by a group of seven partners. The owners think that their chain has the potential for rapid growth, but several of the partners are concerned about the growing financial risks that will accompany this growth. One way the partners could deal with this problem would be to incorporate their business. An advantage of corporations is that they provide their owners (stockholders) with the protection of limited liability. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #115 Topic: Corporations 116. (p. 123) Chad recently invented Wave-Aerobics, a next generation watercraft that can safely perform water stunts similar to an amusement park ride. As the founder of a fast growing business, you think his goal of incorporating, "to remain in steadfast control of the firm's operations for an indefinite number of years" is good strategy. One potential drawback of incorporation is the possibility of conflict between the entrepreneurs who originally start a business and the stockholders and board of directors who may eventually gain control. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #116 Topic: Corporations 34 117. (p. 125) Mojo Motors is a small conventional corporation with only 212 stockholders. Eleven of the stockholders are citizens of Mexico, and eight others are citizens of Canada. Due to its size and diversity in ownership, you would recommend that Mojo Motors change to an S-Corporation. Mojo Motors does not satisfy the requirements for an S corporation—it has more than 100 stockholders, some of whom are not U.S. citizens or permanent residents of the United States. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #117 Topic: Corporations 118. (p. 125-126) The owners of Idle Time Gaming Company would like to switch to an S corporation. Unfortunately, their lawyer advised them that they do not meet some of the requirements necessary to qualify as an S corporation. An alternative form of business that would give them similar advantages is a limited liability company. Limited liability companies offer many of the same advantages as S corporations, including limited liability and the possibility of taxation like a partnership, without the special eligibility requirements required to qualify for S corporation status. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #118 Topic: Corporations 35 119. (p. 126) The owners of California Canines, a firm that designs and manufactures coats, sweaters, jackets, and rainwear for dogs want to organize as an LLC. Two members are college students and two others are thirty something couples with young children. This is good strategy because each member can choose to commit to limited or unlimited liability. All members of an LLC have limited liability. There is no choice in that matter. The purpose of organizing as an LLC is to eliminate the risk of losing personal assets in an unprofitable venture. In terms of taxes, a limited liability company offers the best of both worlds, allowing the owners to choose to be taxed as a partnership or a corporation depending on which tax rates would benefit them the most. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #119 Topic: Corporations 120. (p. 127) A few years back, your friends who are horse fanatics inherited several acres of land that they turned into a retirement haven for race horses. Peaceful Pastures was recently incorporated as a limited liability company. The members are re-evaluating this form of ownership. Unlike an S-corporation, they now pay selfemployment taxes on all company profits - not just on the salaries they pay themselves. While S-Corporations have several restrictions, one advantage they have compared to the Limited Liability Company is the self-employment tax requirements. Any profits earned by the LLC are considered part of the owner's wages/salary/income. These wages are subject to self-employment taxes. The S-Corporation only pays self-employment taxes on those dollars designated as salary or wage expenses by the business. They do not pay self-employment taxes on the profits of the business. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #120 Topic: Corporations 36 121. (p. 127) According to the Legal Briefcase box, "Vermont wants to be the Home of Your New Virtual Company", a Vermont virtual LLC's profits are distributed to members according to their contribution of time, expertise, and money. A virtual LLC is the newest form of business ownership in the state of Vermont. Vermont hopes to attract companies who operate virtually. The company does not hire and train employees in the traditional sense. Members of the LLC contribute their expertise and time, virtually, and are paid according to the value and amount of their contribution(s). AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #121 Topic: Legal Briefcase box 122. (p. 122) After a successful five years, Peaceful Pastures, LLC (a retirement ranch for race horses) thinks it may be able to attract donations from animal activist groups and even the federal government if it becomes a non-profit corporation. As its business advisor, you explain that as a non-profit corporation, the owner(s) may earn a salary but the business should not seek after-tax profits. If Peaceful Pastures decides to change its form of business ownership to a non-profit corporation, it will not seek personal profits for its owners. If the owner(s) works in the business, he/she can expect a salary. By law, the firm cannot distribute any additional income to owners. It must put all revenues and/or contributions back into the business. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #122 Topic: Corporate Types; Figure 5.3 37 123. (p. 124) Chipper's Golf Resort has the opportunity to buy 1000 acres of property adjacent to its 18-hole golf course. After talking with her banker, the owner is encouraged to begin the paperwork to change from a Limited Liability Company form of business ownership to a corporation. You applaud this strategy because she will eliminate the problem of double taxation. C-corporations (not LLCs) face the disadvantage of double taxation. A C-corporation's income is taxed twice. First the corporation pays tax on all income before it can distribute any, as dividends, to stockholders. The stockholders pay income tax on the dividends they receive. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-3 Level of Learning 3: Application of principles Nickels - Chapter 05 #123 Topic: Corporations 124. (p. 129) When two firms join together to form one company, it is called a merger. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #124 Topic: Corporate Expansion: Mergers and Acquisitions 125. (p. 129) The three major types of mergers are acquisitional, joint, and connective. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #125 Topic: Corporate Expansion: Mergers and Acquisitions 126. (p. 129) An acquisition is when one company buys the property and obligations of another company. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #126 Topic: Corporate Expansion: Mergers and Acquisitions 38 127. (p. 129) One of the major reasons for the wave of mergers in the late 1990s and early 2000s was the desire of firms to expand within their own markets. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #127 Topic: Corporate Expansion: Mergers and Acquisitions 128. (p. 129) Taking a firm private involves converting a firm from a corporation to a general partnership. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #128 Topic: Corporate Expansion: Mergers and Acquisitions 129. (p. 129) If firms wish to gain market share in their current market, they would consider a conglomerate merger. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #129 Topic: Corporate Expansion: Mergers and Acquisitions 130. (p. 129) The purpose of a conglomerate merger is to diversify operations and investments. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #130 Topic: Corporate Expansion: Mergers and Acquisitions 39 131. (p. 129) A merger between two businesses in different stages of related businesses is known as a vertical merger. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #131 Topic: Corporate Expansion: Mergers and Acquisitions 132. (p. 129) A horizontal merger refers to a merger between two companies that serve entirely different markets. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #132 Topic: Corporate Expansion: Mergers and Acquisitions 133. (p. 129) A horizontal merger refers to a merger between two companies in the same industry, and serving the same markets. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #133 Topic: Corporate Expansion: Mergers and Acquisitions 134. (p. 130) A leveraged buyout is an attempt by top management to gain control of a company by issuing a large amount of new stock. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #134 Topic: Corporate Expansion: Mergers and Acquisitions 40 135. (p. 130) When a group of investors take a firm private, they purchase all the company's outstanding stock. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #135 Topic: Corporate Expansion: Mergers and Acquisitions 136. (p. 130) In recent years, foreign firms were reluctant to merge with or acquire American corporations. AACSB: Reflective Thinking Blooms: Knowledge Learning Goal: 05-4 Level of Learning 1: Knowledge of key terms Nickels - Chapter 05 #136 Topic: Corporate Expansion: Mergers and Acquisitions 137. (p. 129) A merger is a mutual agreement where a firm joins together with another firm, whereas an acquisition is when one firm purchases the assets and obligations of another firm. When companies merge, there is a mutual agreement to join forces. Although the assets and obligations are combined, there is no offering of funds or stock by one company, for the other, as in an acquisition. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #137 Topic: Corporate Expansion: Mergers and Acquisitions 41 138. (p. 129) One reason that a firm would choose to merge or acquire another company would be to gain market share. Firms know that the fastest way, but not always the least expensive way to acquire market share or expand their market is to merge with or buy-out a competitor. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #138 Topic: Corporate Expansion: Mergers and Acquisitions 139. (p. 129) One reason that a firm may choose to merge or acquire another company would be diversity with diversify of products or services. When firms participate in conglomerate mergers, they purchase companies whose products and services are different or unrelated to what they currently offer. They choose to diversify the portfolio of business units and even the industries where they operate. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #139 Topic: Corporate Expansion: Mergers and Acquisitions 140. (p. 130) The strategy of a leveraged buyout is used when employee talent is at a minimum. If employees and/or management believe they can improve performance by running the company themselves, they will seek financial backing (borrow funds) and take ownership, by buying all available stock from the current stockholders. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #140 Topic: Corporate Expansion: Mergers and Acquisitions 42 141. (p. 129) Taking a firm private means turning a profit-seeking corporation into a nonprofit corporation in order to avoid a hostile takeover. Taking a firm private involves an effort by a group of stockholders or managers to gain control of all of a corporation's outstanding stock. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #141 Topic: Corporate Expansion: Mergers and Acquisitions 142. (p. 130) A major objective of a leveraged buyout is to enable investors to gain control of a company by issuing new shares of ownership, thus minimizing the use of debt. Leveraged buyouts involve financing the acquisition of an organization through the use of debt financing. AACSB: Reflective Thinking Blooms: Comprehension Learning Goal: 05-4 Level of Learning 2: Understanding of concepts and principles Nickels - Chapter 05 #142 Topic: Corporate Expansion: Mergers and Acquisitions 143. (p. 129) Hole in One Golf Company announced plans to purchase the property and assume the obligations of Champion Golf, Inc., one of its major competitors. Hole In One Golf Company's plans are an example of a merger. Hole In One Golf Company's actions are an acquisition rather than a merger. An acquisition refers to one firm's purchase of the assets and obligations of another firm. Since the firms are competing in the same market rather than at different stages, this is a horizontal move. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-4 Level of Learning 3: Application of principles Nickels - Chapter 05 #143 Topic: Corporate Expansion: Mergers and Acquisitions 43 144. (p. 129) Two competitors: Stanley's Food Mart and Bluejay Groceries recently issued a joint announcement stating their decision to merge. The announcement claimed that the new firm would have more financial resources, which would enable it to expand services and broaden offerings to consumers. This proposed merger is an example of a horizontal merger. A merger between two firms in the same industry, such as two grocery stores, is a horizontal merger. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-4 Level of Learning 3: Application of principles Nickels - Chapter 05 #144 Topic: Corporate Expansion: Mergers and Acquisitions 145. (p. 129) Tech Solutions, Inc., a manufacturer of laptops, is considering a merger with Outtel, a leading producer of microprocessors and other computer chips. Tech Solutions believes such a merger would give them a guaranteed source of needed components, and enable them to have better control over quality. If this merger occurs, it would be an example of a horizontal merger. A merger between two companies at different stages of related business is known as a vertical merger. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-4 Level of Learning 3: Application of principles Nickels - Chapter 05 #145 Topic: Corporate Expansion: Mergers and Acquisitions 146. (p. 129) Cory Raider is leading a group of stockholders who wants to take the Bigbux Corporation private. If Cory's group succeeds, Bigbux's stock will no longer be available to investors on the open market. Taking a firm private involves gaining control of a firm's stock so that it is no longer available to investors on the open market. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-4 Level of Learning 3: Application of principles Nickels - Chapter 05 #146 Topic: Corporate Expansion: Mergers and Acquisitions 44 147. (p. 130) Due to several years of poor performance, Scrappy's Metal Fabrication, Inc., is closing. Through the use of debt financing, workers plan to purchase the company's stock from current shareholders, in order to buy the firm, improve company performance, and save jobs. A leveraged buyout involves the use of debt financing to buy the stock of a company. Skilled workers want to save their jobs and make their company profitable again. AACSB: Reflective Thinking Blooms: Application Learning Goal: 05-4 Level of Learning 3: Application of principles Nickels - Chapter 05 #147 Topic: Corporate Expansion: Mergers and Acquisitions 148. (p. 13