2024 Corporate Finance exam due 2024 with correct analysed answers

2024 Corporate Finance exam due 2024 with correct analysed answers What is the most important difference between a corporation and all other organization forms? - A corporation is a legal entity separate from its owners. What does the phrase limited liability mean in a corporate context? - Owners' liability is limited to the amount they invested in the firm. Stockholders are not responsible for any encumbrances of the firm; in particular, they cannot be required to pay back any debts incurred by the firm. Which organization forms give their owners limited liability? - Corporations and limited liability companies give owners limited liability. Limited partnerships provide limited liability for the limited partners, but not for the general partners. What are the main advantages and disadvantages of organizing a firm as a corporation? - Advantages: Limited liability, liquidity, infinite life Disadvantages: Double taxation, separation of ownership and control Explain the difference between an S corporation and a C corporation. - C corporations much pay corporate income taxes; S corporations do not pay corporate taxes but must pass through the income to shareholders to whom it is taxable. S corporations are also limited to 75 shareholders and cannot have corporate or foreign stockholders. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid? - First the corporation pays the taxes. After taxes, is left to pay dividends. Once the dividend is paid, personal tax on this must be paid, which leaves . So after all the taxes are paid, you are left with 84¢. Repeat Problem 6 assuming the corporation is an S corporation. - An S corporation does not pay corporate income tax. So it distributes $2 to its stockholders. These stockholders must then pay personal income tax on the distribution. So they are left with . You have decided to form a new start-up company developing applications for the iPhone. Give examples of the three distinct types of financial decisions you will need to make. - As the manager of an iPhone applications developer, you will make three types of financial decisions. i. You will make investment decisions such as determining which type of iPhone application projects will offer your company a positive NPV and therefore your company should develop. ii. You will make the decision on how to fund your iPhone application investments and what mix of debt and equity your company will have. iii. You will be responsible for the cash management of your company, ensuring that your company has the necessary funds to make investments, pay interest on loans, and pay your employees. Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act this way? - Shareholders can do the following. i. Ensure that employees are paid with company stock and/or stock options. ii. Ensure that underperforming managers are fired.