ch1-essay
Student: ___________________________________________________________________________
1. List and briefly describe the three basic questions addressed by a financial manager.
2. What advantages does the corporate form of organization have over sole proprietorships or
partnerships?
3. If the corporate form of business organization has so many advantages over the sole proprietorship, why
is it so common for small businesses to initially be formed as sole proprietorships?
4. What should be the goal of the financial manager of a corporation? Why?
1
,5. Do you think agency problems arise in sole proprietorships and/or partnerships?
6. When the Small Business Administration (SBA) makes a loan to a sole proprietorship, it typically
requires life insurance be carried on the business owner in an amount sufficient to cover the loan. Why
might the SBA demand such coverage?
7. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts.
If so, what impact would this have on the functioning of primary and secondary markets for common
stock?
8. Suppose you own 100 shares of IBM stock which you intend to sell today. Since you will sell it in the
secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then,
should IBM's management care about the price you get for your shares?
2
,9. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the
common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the
stock certificates can be transferred directly to the lender. Why might a lender want such an assignment?
What advantage of the corporate form of organization comes into play here?
10. Why might a corporation wish to list its shares on a national exchange such as the NYSE as opposed to a
regional exchange or NASDAQ?
3
, ch1-essay Key
1. List and briefly describe the three basic questions addressed by a financial manager.
The three areas are:
1. Capital budgeting: The financial manager ties to identify investment opportunities that are worth
more to the firm than they cost to acquire.
2. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to
finance its operations.
3. Working capital management: This refers to a firm's short-term assets and short-term liabilities.
Managing the firm's working capital is a day-to-day activity that ensures the firm has sufficient
resources to continue its operations and avoid costly interruptions.
Ross - 001 Chapter... #58
Topic: FINANCIAL MANAGEMENT
2. What advantages does the corporate form of organization have over sole proprietorships or
partnerships?
The advantages of the corporate form of organization over sole proprietorships and partnerships are
the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise
more capital, and the opportunity of an unlimited life of the business.
Ross - 001 Chapter... #59
Topic: BUSINESS ORGANIZATIONS
3. If the corporate form of business organization has so many advantages over the sole proprietorship,
why is it so common for small businesses to initially be formed as sole proprietorships?
A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole
proprietor has limited capital to start with, it may not be desirable to spend part of that capital
forming a corporation. Also, limited liability for business debts may not be a significant advantage if
the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a
typical small business, the heart and sole of the business is the person who founded it, so the life of
the business may effectively be limited to the life of the founder during its early years.
Ross - 001 Chapter... #60
Topic: BUSINESS ORGANIZATIONS
1
Student: ___________________________________________________________________________
1. List and briefly describe the three basic questions addressed by a financial manager.
2. What advantages does the corporate form of organization have over sole proprietorships or
partnerships?
3. If the corporate form of business organization has so many advantages over the sole proprietorship, why
is it so common for small businesses to initially be formed as sole proprietorships?
4. What should be the goal of the financial manager of a corporation? Why?
1
,5. Do you think agency problems arise in sole proprietorships and/or partnerships?
6. When the Small Business Administration (SBA) makes a loan to a sole proprietorship, it typically
requires life insurance be carried on the business owner in an amount sufficient to cover the loan. Why
might the SBA demand such coverage?
7. Assume for a moment that the stockholders in a corporation have unlimited liability for corporate debts.
If so, what impact would this have on the functioning of primary and secondary markets for common
stock?
8. Suppose you own 100 shares of IBM stock which you intend to sell today. Since you will sell it in the
secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then,
should IBM's management care about the price you get for your shares?
2
,9. One thing lenders sometimes require when loaning money to a small corporation is an assignment of the
common stock as collateral on the loan. Then, if the business fails to repay its loan, the ownership of the
stock certificates can be transferred directly to the lender. Why might a lender want such an assignment?
What advantage of the corporate form of organization comes into play here?
10. Why might a corporation wish to list its shares on a national exchange such as the NYSE as opposed to a
regional exchange or NASDAQ?
3
, ch1-essay Key
1. List and briefly describe the three basic questions addressed by a financial manager.
The three areas are:
1. Capital budgeting: The financial manager ties to identify investment opportunities that are worth
more to the firm than they cost to acquire.
2. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to
finance its operations.
3. Working capital management: This refers to a firm's short-term assets and short-term liabilities.
Managing the firm's working capital is a day-to-day activity that ensures the firm has sufficient
resources to continue its operations and avoid costly interruptions.
Ross - 001 Chapter... #58
Topic: FINANCIAL MANAGEMENT
2. What advantages does the corporate form of organization have over sole proprietorships or
partnerships?
The advantages of the corporate form of organization over sole proprietorships and partnerships are
the ease of transferring ownership, the owners' limited liability for business debts, the ability to raise
more capital, and the opportunity of an unlimited life of the business.
Ross - 001 Chapter... #59
Topic: BUSINESS ORGANIZATIONS
3. If the corporate form of business organization has so many advantages over the sole proprietorship,
why is it so common for small businesses to initially be formed as sole proprietorships?
A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole
proprietor has limited capital to start with, it may not be desirable to spend part of that capital
forming a corporation. Also, limited liability for business debts may not be a significant advantage if
the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a
typical small business, the heart and sole of the business is the person who founded it, so the life of
the business may effectively be limited to the life of the founder during its early years.
Ross - 001 Chapter... #60
Topic: BUSINESS ORGANIZATIONS
1
