Question

True/False

Indicate whether the statement is true or false.

____​1.​The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

____​2.​The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

____​3.​There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

____​4.​Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

____​5.​One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

____​6.​If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

____​7.​If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

____​8.​If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

____​9.​Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

____​10.​One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance.

____​11.​The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.

____​12.​The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensivel

Answer 1

1.​ The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

False. The form of organization has an impact on income and wealth of the owners. The income they will earn is affected by whether the form of organization restricts the income of the organization to itself (it being a separate entity) or otherwise. It affects he liability of the owners and thereby their wealth: it may be a limited or unlimited liability for the owners. It also affects the life of the organization since organization with limited liability tend to have an artificial juridical existence with a life span that is independent of the owners.

2. ​The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

False. Regular partnerships do not offer owners (or partners) limited liability and partner's liability is unlimited like sole proprietorships but if it had to be a limited partnership then the statement would be correct

3.​There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

True. Liability of partners is not limited and any obligation of partnership ultimately has to be met even from their own private assets which may not be part of the partnership business. Life of the organization is limited since partnership gets dissolved on the death of a partner and the partnership has to be reconstituted. Ownership transfer is difficult since shares are not transferred but the ownership of the assets is transferred, likewise liabilities are transferred through a reconstitution of partnership & amendment of the partnership deed.

4.​Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

True. Sole proprietorships tend to be small businesses that attract little public interest from the investment point of view. Also they lack the investment regulation found in the larger capital market. The owner is personally liable for the business debts.