Module 1 LO 1-3

Question 1

The advantages of a sole proprietorship is:

• easy to raise a lot of capital
• complete control
• limited liability
• you are liable for debts and lawsuits

Answer 1

Complete Control

Question 2

the primary reason for starting a corporation is:

• to limit your taxes
• to raise a lot of capital
• to gain more control over the business
• all of the above

Answer 2

to raise a lot of capital

Question 3

a corporation is its own separate entity:

true or false

Answer 3

true

Question 4

in a corporation, the owner is also the manager

true or false

Answer 4

false

Question 5

if you are an investor in a corporation, Limited Liability means:

• personally liable
• only liable for your investment
• you can be personally sued
• none of the above

Answer 5

you are only liable for your investment in the company

Question 6

what are disadvantages of a corporate entity?

all that apply:

• limited liability
• double taxation
• increased regulation
• less control

Answer 6

• double taxation
• increased regulation
• less control

Question 7

If a corporation had earnings of $40k and paid all of this out as a dividend to the owners, how much tax would the federal government collect? Assume a 20% tax rate and a 15% dividend tax rate:

$12,800
$14,000
$27,000
$8,000

Answer 7

$12,800

· Corporate level income taxes = 40,000 x 20% = 8,000

· Shareholders level dividend taxes = (40,000 -8,000) x 15% = 4,800. Note that dividends are after income tax earnings.

In total, the government collects 8,000+4,800 = $12,800 taxes.

Question 8

If a corporation had earnings of $40k and paid all of this out as a dividend to the owners, how much tax would the corporate entity pay the federal government? Assume a 20% tax rate and a 15% dividend tax rate:

$12,800
$14,000
$4,800
$14,000

Answer 8

Corporate level income taxes = 40,000 x 20% = 8,000

Question 9

simplest form of business form

Answer 9

sole proprietorship

Question 10

Sole Proprietorship

Answer 10

owner = manager
complete control
personally liable

Question 11

partnership

Answer 11

owners = managers
raise more capital
complete control
still personally liable

Question 12

corporation advantages

Answer 12

most access to capital

limited liability - only responsible and liable for your investment

easy ownership transfer - continuity

corporation is now a legal entity separate from owners

Question 13

corporation disadvantages

Answer 13

owner no longer manages - agency problem

regulations

double taxations

less control

Question 14

raise public funds you…

Answer 14

sell bonds

Question 15

stocks and bonds are

Answer 15

securities

Question 16

stock and bonds involve

Answer 16

transactions
investor - buyer
seller - corporation or issuer

Question 17

when a person invests in a stock you are entitled to

Answer 17

earnings as dividends or reinvestments

voting rights

Question 18

Person investing in stocks =

Answer 18

buying ownership

Question 19

advantages to person investing in stocks

Answer 19

unlimited upside

Question 20

disadvantage of to person investing in stock

Answer 20

payout amount is unknown
payout timing is unknown (market takes a long time to recognize the value)

depends on how the company goes, some corps do not pay dividends.

Question 21

alternative to purchasing a stock is purchasing a

Answer 21

bond

Question 22

purchasing or investing in a bond

Answer 22

lending company money

you will get your money back and with interest payments - you know by contract what you will get and when

Question 23

bond advantages for investors

Answer 23

fixed payout
interest payment
payout time is defined

Question 24

bond certificate for investors includes

Answer 24

price, time, and rate of interest

Question 25

order of bond payment for investors

Answer 25

pay stockholder before they pay dividends

Question 26

bond disadvantages to person investing in bonds

Answer 26

limited upside - payout is fixed of face value of the bond no voting privilege - now ownership, you only lend

Question 27

advantages of companies issuing stocks

Answer 27

financial flexibility - you don't have to return the capital you can re-invest into company and no interest payments

Question 28

disadvantages of companies issuing stocks

Answer 28

unlimited upside - you give ownership away in your company- specially if its successful

Question 29

Key for corporations is to

Answer 29

issue stocks and then bonds as it grows

Question 30

advantages of companies issuing bonds

Answer 30

limited upside - not a lot of owners financial leverage - increased returns. when price goes up it appreciates and you have a higher return on equity it can be magnified as a loss as well

Question 31

disadvantages of companies issuing bonds

Answer 31

decreased financial flexibility - you must make interest payments and you can be forced to file for bankruptcy

Question 32

is a stock better than a bond?

Answer 32

depends on the risk. if you need the money quickly, bonds > stocks if you have a long time then stock > bond

Question 33

corps usually invest on

Answer 33

stock because its a better deal for the company but worst deal for investor

Question 34

corps make more money in _____ than ____

Answer 34

bonds stocks

Question 35

primary advantages of investing in stock are: all that apply: - less risk than a bond - unlimited upside - uncertain future payout - voting rights - priority over bondholders in bankruptcy

Answer 35

- unlimited upside | - voting rights

Question 36

primary advantages of investing in bonds are: all that apply: - easier to value than stock - known payment amount - know when you are going to get paid - less risk than investing in stock - priority over stockholders in bankruptcy - more upside potential than stock

Answer 36

- easier to value than stock - known payment amount - know when you are going to get paid - less risk than investing in stock - priority over stockholders in bankruptcy

Question 37

when companies issue stock they give up: - ownership and the right to future earnings - financial flexibility - control

Answer 37

- ownership and the right to future earnings | - control

Question 38

advantages of issuing bonds are: - limited upside - financial leverage - financial flexibility

Answer 38

- limited upside | - financial leverage

Question 39

is it riskier for a company to issue stocks or bonds?

Answer 39

bonds Companies issuing bonds are actually borrowing from public investors. So bonds are liabilities to the issuing companies. As long as you borrow, you have the potential risk of not being able to pay back (e.g. principal and/or interests).

Question 40

Investing in stock means

Answer 40

getting ownership in a particular business evidenced by certificate that you own a part

Question 41

when you invest in a stock, what do you own??

Answer 41

the earnings of a company. entitled to the company's earnings

Question 42

expenses are the

Answer 42

costs to provide goods or services -employees or inventory

Question 43

if Revenues are higher than expenses

Answer 43

you have profit or earnings or net income

Question 44

revenues are

Answer 44

money received

Question 45

if you retain net income

Answer 45

you hire more employees or better goods

Question 46

when you give back to the owner you

Answer 46

distribute dividends

Question 47

dividends and reinvesting earnings depends on

Answer 47

the lifecycle of the company

Question 48

a share of stock entitles you to: - percentage of the company's assets - the rights to the goods the company sells - a percentage of the earnings of the company - both A and C

Answer 48

-a percentage of the earnings of the company

Question 49

the cost of providing goods and services to customers is called: - expenses - revenues - earnings - losses

Answer 49

-expenses

Question 50

benefits (money) that a company receives from customers are called: - revenues - earnings - profit - revenue or profit

Answer 50

-revenues

Question 51

revenues - expenses = - earnings - profit - net income - all of the above

Answer 51

-all of the above

Question 52

a company must pay our the profits it earns to stockholders: true or false

Answer 52

false

Question 53

an ordinary dividend is: - a distribution of earnings to stockholders - a return of the investor's original investment - an expense of the company - none of these

Answer 53

-a distribution of earnings to stockholders

Question 54

companies that are growing quickly usually issue dividends true or false

Answer 54

false

Question 55

you can make money investing in stocks by: - collecting dividends - taking assets form the company - stock price appreciation - collecting interest payments

Answer 55

- collecting dividends | - stock price appreciation