FI480 EXAM 1 QUESTIONS AND ANSWERS A+
GRADED
What is a proprietorship?
a business owned by one individual
What are the advantages of a proprietorship?
easy and inexpensive to start, few government regulations, and pays no corporate
income tax on profits (included in personal taxable income)
What are the disadvantage of a proprietorship?
difficult to obtain the funding needed for growth, unlimited personal liability for the
business's debts, and the life of the business is limited to the life of the founder
What is a partnership?
whenever two or more persons/entities open a business for profit
What is a disadvantage of a partnership?
potentially can lose all of their personal assets in the event of bankruptcy
What is a limited partnership?
a partner who joins a partnership, but can only lose the amount of money they invested
into the business and has less control over the business
What is a corporation?
a legal entity created under state laws and is separate from its owners and managers
What are the advantages of a corporation?
unlimited life, easy transfers or ownership interests, and limited liability
What are the disadvantages of a corporation?
Corporate earnings can be double taxed and you must prepare a charter (bylaws) and
file multiple state/federal reports
What is the primary objective of a corporation?
maximizing stockholder wealth
Why is a rising intrinsic value good?
maximizing the intrinsic stock value benefit society because it increases wealth and
quality of life for those who own stock
Why is a rising intrinsic value bad?
households don't directly benefit from higher stock prices
What is a bond rating?
reflects the probability that a bond will go into default
What are the safest bonds?
AAA and AA
What are the junk bonds?
BB and lower
What is the criteria for a bond rating?
financial ratios, contract terms, qualitative factors (sensitivity, inflation, etc)
GRADED
What is a proprietorship?
a business owned by one individual
What are the advantages of a proprietorship?
easy and inexpensive to start, few government regulations, and pays no corporate
income tax on profits (included in personal taxable income)
What are the disadvantage of a proprietorship?
difficult to obtain the funding needed for growth, unlimited personal liability for the
business's debts, and the life of the business is limited to the life of the founder
What is a partnership?
whenever two or more persons/entities open a business for profit
What is a disadvantage of a partnership?
potentially can lose all of their personal assets in the event of bankruptcy
What is a limited partnership?
a partner who joins a partnership, but can only lose the amount of money they invested
into the business and has less control over the business
What is a corporation?
a legal entity created under state laws and is separate from its owners and managers
What are the advantages of a corporation?
unlimited life, easy transfers or ownership interests, and limited liability
What are the disadvantages of a corporation?
Corporate earnings can be double taxed and you must prepare a charter (bylaws) and
file multiple state/federal reports
What is the primary objective of a corporation?
maximizing stockholder wealth
Why is a rising intrinsic value good?
maximizing the intrinsic stock value benefit society because it increases wealth and
quality of life for those who own stock
Why is a rising intrinsic value bad?
households don't directly benefit from higher stock prices
What is a bond rating?
reflects the probability that a bond will go into default
What are the safest bonds?
AAA and AA
What are the junk bonds?
BB and lower
What is the criteria for a bond rating?
financial ratios, contract terms, qualitative factors (sensitivity, inflation, etc)
