Question

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Concepts Review and Critical Thinking Questions section

1- Corporations What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.

2- Goal of the Firm Evaluate the following statement: Managers should not focus on the current stock value because doing so will lead to an overemphasis on short-term profits at the expense of long-term profits.

Answer 1

Advantages of corporate form of business organization

1-Corporate stock has the benefit of transferability of ownership. It is easily transferable from one person to another. it provides liquidity to stockholders as it enables them to quickly enter or exit an ownership in a corporattion.

2-Another benefit of a corporation is perpetual existence. A corporate entity is typically of unlimited life .Changes in stock ownership do not cause operations to cease.

Disadvanatge of corporate form of business organization

1- a corporation is a legal person, it must pay taxes. Moreover, money paid out to stockholders in the form of dividends is taxed again as income to those stockholders. This is double taxation

2-. A corporation is a relatively complex and expensive business organization compared to other business forms.

2- Yes it is true to say that manager should not focus on short term objective of profit maximization as the main objective of formation of any organization is to maximize the shareholders wealth,and this objective of wealth maximization can be obtained by increasing the intrinsic value of stock by following the long term objective of wealth maximization.The concept of wealth maximization requires a company's management to continually search for the best possible returns on funds invested in the business, while mitigating any associated risk of loss. This requires a detailed analysis of cash flow of the propective investment and calls for a attention to the strategic direction of the organization.