2024 Corporate Finance exam due
2024 with correct analysed answers
What is the most important difference between a corporation and all other
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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 wor [Show Less]