FI480 FINANCIAL POLICY EXAM 1 CONCEPTS
QUESTIONS AND ANSWERS A+ GRADED
Advantages of Proprietorship
1. It is easy and inexpensive to start.
2. Relatively few government regulations affect it.
3. It pays no corporate income tax on profits-instead, they are included in the
proprietor's personal taxable income.
Disadvantages of Proprietorship
1. It may be difficult for a proprietorship to obtain the funding needed for growth.
2. The proprietor has unlimited personal liability for the business's debts, which can
result in losses that exceed the money invested in the company.
3. The life of the proprietorship is limited to the life of its founder.
Advantages/Disadvantages of Partnership
similar to proprietorship except..
- Partners can lose all of their personal assets in the event of bankruptcy because each
partner is liable for the business's debts.
- To avoid this, they can establish a limited partnership, where the limited partner has no
control but is liable for only what they invested and the general partner has total control
but unlimited liability.
- Limited Liability Partnership (LLP): all partner's potential losses are limited to what they
invested.
Advantages of Corporation
1. Unlimited life- can continue after its original owner is deceased.
2. Easy transfers of ownership interests- ownership is divided into shares of stock,
which can be transferred more easily.
3. Limited liability- losses are limited to the actual funds invested.
Disadvantages of Corporation
1. Corporate earnings may be subject to double taxation- the earnings of the
corporation are taxed at the corporate level, the earnings paid out as dividends are
taxed again as income to stockholders.
2. Setting up a corporation involves preparing a charter, writing a set of bylaws, and
filing the many required state and federal reports- which is more complex and time-
consuming.
Primary objective of a Corporation
maximizing stockholder wealth
- meaning maximizing the company's fundamental value
Intrinsic value vs Market price
Intrinsic value is the value of a company or financial security that incorporated all
relevant information regarding expected future cash flows and risk. Market price is the
price of the most recent transaction observed in a financial market. They should be
QUESTIONS AND ANSWERS A+ GRADED
Advantages of Proprietorship
1. It is easy and inexpensive to start.
2. Relatively few government regulations affect it.
3. It pays no corporate income tax on profits-instead, they are included in the
proprietor's personal taxable income.
Disadvantages of Proprietorship
1. It may be difficult for a proprietorship to obtain the funding needed for growth.
2. The proprietor has unlimited personal liability for the business's debts, which can
result in losses that exceed the money invested in the company.
3. The life of the proprietorship is limited to the life of its founder.
Advantages/Disadvantages of Partnership
similar to proprietorship except..
- Partners can lose all of their personal assets in the event of bankruptcy because each
partner is liable for the business's debts.
- To avoid this, they can establish a limited partnership, where the limited partner has no
control but is liable for only what they invested and the general partner has total control
but unlimited liability.
- Limited Liability Partnership (LLP): all partner's potential losses are limited to what they
invested.
Advantages of Corporation
1. Unlimited life- can continue after its original owner is deceased.
2. Easy transfers of ownership interests- ownership is divided into shares of stock,
which can be transferred more easily.
3. Limited liability- losses are limited to the actual funds invested.
Disadvantages of Corporation
1. Corporate earnings may be subject to double taxation- the earnings of the
corporation are taxed at the corporate level, the earnings paid out as dividends are
taxed again as income to stockholders.
2. Setting up a corporation involves preparing a charter, writing a set of bylaws, and
filing the many required state and federal reports- which is more complex and time-
consuming.
Primary objective of a Corporation
maximizing stockholder wealth
- meaning maximizing the company's fundamental value
Intrinsic value vs Market price
Intrinsic value is the value of a company or financial security that incorporated all
relevant information regarding expected future cash flows and risk. Market price is the
price of the most recent transaction observed in a financial market. They should be
