Finance 450 - Kansas State University.Final Test 2024\2025.
What are the forms of business organization?
1. Sole proprietorship
2. Partnership (General, Limited)
3. Corporation (S-Corp, Limited Liability Company)
What are the advantages and disadvantages in a Sole Proprietorship?
Advantages:
1. Easiest to start
2. Least regulated
3. Single owner keeps all of the profits
4. Taxed once as personal income
Disadvantages:
1. Limited to life of owner
2. Equity capital limited to owner's personal wealth
3. Unlimited liability
4. Difficult to sell ownership interest
What are the advantages and disadvantages in a Partnership?
Advantages:
1. Two or more owners
2. More capital available
3. Relatively easy to start
4. Income taxed once as personal income
Disadvantages:
1. Unlimited liability
2. Partnership dissolves when one partner dies or wishes to sell
3. Difficult to transfer ownership
What are the advantages and disadvantages of a Corporation?
Advantages:
1. Limited liability
2. Unlimited life
3. Separation of ownership and management
4. Transfer of ownership is easy
, Finance 450 - Kansas State University.Final Test 2024\2025.
5. Easier to raise capital
Disadvantages:
1. Separation of ownership and management (agency problem)
2. Double taxation
What is the goal of a financial manager?
Maximize shareholder wealth
What is the Sarbanes-Oxley Act?
Driven by corporation scandals. Intended to strengthen protection against accounting fraud
and financial malpractice
What is the agency problem?
Conflict of interest between principal and agent
What is an annuity?
Finite series of equal payments that occur at regular intervals
What is a perpetuity?
Infinite series of equal payments
What is the Effective Annual Rate (EAR)?
The interest rate expressed as if it were compounded once per year. Used to compare two
alternative investments with different compounding periods
What is the Annual Percentage Rate (APR)?
The annual rate quoted by law
What are the characteristics of Debt?
- Not an ownership interest
- No voting rights
- Interest is tax-deductible
- Creditors have legal recourse if interest or principal payments are missed
- Excess debt can lead to financial distress and bankruptcy
What are the characteristics of Equity?
- Ownership interest
- Common stockholders vote to elect the board of directors and on other issues
- Dividends are not tax deductible
- Dividends are not a liability of the firm until declared
- An all-equity firm cannot go bankrupt
What are the forms of business organization?
1. Sole proprietorship
2. Partnership (General, Limited)
3. Corporation (S-Corp, Limited Liability Company)
What are the advantages and disadvantages in a Sole Proprietorship?
Advantages:
1. Easiest to start
2. Least regulated
3. Single owner keeps all of the profits
4. Taxed once as personal income
Disadvantages:
1. Limited to life of owner
2. Equity capital limited to owner's personal wealth
3. Unlimited liability
4. Difficult to sell ownership interest
What are the advantages and disadvantages in a Partnership?
Advantages:
1. Two or more owners
2. More capital available
3. Relatively easy to start
4. Income taxed once as personal income
Disadvantages:
1. Unlimited liability
2. Partnership dissolves when one partner dies or wishes to sell
3. Difficult to transfer ownership
What are the advantages and disadvantages of a Corporation?
Advantages:
1. Limited liability
2. Unlimited life
3. Separation of ownership and management
4. Transfer of ownership is easy
, Finance 450 - Kansas State University.Final Test 2024\2025.
5. Easier to raise capital
Disadvantages:
1. Separation of ownership and management (agency problem)
2. Double taxation
What is the goal of a financial manager?
Maximize shareholder wealth
What is the Sarbanes-Oxley Act?
Driven by corporation scandals. Intended to strengthen protection against accounting fraud
and financial malpractice
What is the agency problem?
Conflict of interest between principal and agent
What is an annuity?
Finite series of equal payments that occur at regular intervals
What is a perpetuity?
Infinite series of equal payments
What is the Effective Annual Rate (EAR)?
The interest rate expressed as if it were compounded once per year. Used to compare two
alternative investments with different compounding periods
What is the Annual Percentage Rate (APR)?
The annual rate quoted by law
What are the characteristics of Debt?
- Not an ownership interest
- No voting rights
- Interest is tax-deductible
- Creditors have legal recourse if interest or principal payments are missed
- Excess debt can lead to financial distress and bankruptcy
What are the characteristics of Equity?
- Ownership interest
- Common stockholders vote to elect the board of directors and on other issues
- Dividends are not tax deductible
- Dividends are not a liability of the firm until declared
- An all-equity firm cannot go bankrupt
