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    TCDN

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    Thanh Thủy Khuất
    Small businesses initially form as sole proprietorships because they are cheap and easy to establish. Limited liability may not provide significant benefits for small businesses with limited capital that is tied up in the business. During early years, the business's success depends heavily on the founder. Agency problems can still arise in sole proprietorships and partnerships from the separation of ownership and management when employees are hired. Unlimited stockholder liability would severely hamper common stock markets by making it difficult for young companies to raise capital. Firms maintain liquid assets to access cash quickly during financial hardship and contribute to net worth. Interest expense is excluded from operating cash flow calculations because it represents a financing expense rather than an operational cost. Income statements do not represent cash flows well

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    TCDN

    Uploaded by

    Thanh Thủy Khuất
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    Small businesses initially form as sole proprietorships because they are cheap and easy to establish. Limited liability may not provide significant benefits for small businesses with limited capital that is tied up in the business. During early years, the business's success depends heavily on the founder. Agency problems can still arise in sole proprietorships and partnerships from the separation of ownership and management when employees are hired. Unlimited stockholder liability would severely hamper common stock markets by making it difficult for young companies to raise capital. Firms maintain liquid assets to access cash quickly during financial hardship and contribute to net worth. Interest expense is excluded from operating cash flow calculations because it represents a financing expense rather than an operational cost. Income statements do not represent cash flows well

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    Small businesses initially form as sole proprietorships because they are cheap and easy to establish. Limited liability may not provide significant benefits for small businesses with limited capital that is tied up in the business. During early years, the business's success depends heavily on the founder. Agency problems can still arise in sole proprietorships and partnerships from the separation of ownership and management when employees are hired. Unlimited stockholder liability would severely hamper common stock markets by making it difficult for young companies to raise capital. Firms maintain liquid assets to access cash quickly during financial hardship and contribute to net worth. Interest expense is excluded from operating cash flow calculations because it represents a financing expense rather than an operational cost. Income statements do not represent cash flows well

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    8 views2 pages

    TCDN

    Uploaded by

    Thanh Thủy Khuất
    Small businesses initially form as sole proprietorships because they are cheap and easy to establish. Limited liability may not provide significant benefits for small businesses with limited capital that is tied up in the business. During early years, the business's success depends heavily on the founder. Agency problems can still arise in sole proprietorships and partnerships from the separation of ownership and management when employees are hired. Unlimited stockholder liability would severely hamper common stock markets by making it difficult for young companies to raise capital. Firms maintain liquid assets to access cash quickly during financial hardship and contribute to net worth. Interest expense is excluded from operating cash flow calculations because it represents a financing expense rather than an operational cost. Income statements do not represent cash flows well

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    © All Rights Reserved
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    TCDN

    1. If the corporate form of business organization has so many advantages over the sole
    proprietorship, why is it so common for small businesses to initially be formed as
    sole proprietorships?
    A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole
    proprietor has limited capital to start with, it may not be desirable to spend part of that capital
    forming a corporation. Also, limited liability for business debts may not be a significant
    advantage if the proprietor has limited capital, most of which is tied up in the business anyway.
    Finally, for a typical small business, the heart and soul of the business is the person who founded
    it, so the life of the business may effectively be limited to the life of the founder during its early
    years.
    2. What should be the goal of the financial manager of a corporation? Why?
    The correct goal is to maximize the current value of the outstanding stock. This focuses correctly
    on enhancing the returns to shareholders, the owners of the firm. Other goals, such as
    maximizing earnings, focus too narrowly on accounting income and ignore the importance of
    market values in managerial finance.
    3. Do you think agency problems arise in sole proprietorships and/or partnerships?
    Agency conflicts typically arise when there is a separation of ownership and management of a
    business. In a sole proprietorship and a small partnership, such separation is not likely to exist to
    the degree it does in a corporation. However, there is still potential for agency conflicts. For
    example, as employees are hired to represent the firm, there is once again a separation of
    ownership and management.
    4. Assume for a moment that the stockholders in a corporation have unlimited liability
    for corporate debts. If so, what impact would this have on the functioning of
    primary and secondary markets for common stock?
    With unlimited liability, you would be very careful which stocks you invest in. In particular, you
    would not invest in companies you expected to be unable to satisfy their financial obligations.
    Both the primary and secondary markets for common stock would be severely hampered if this
    rule existed. It would be very difficult for a young, untested business to get enough capital to
    grow.
    5. What is a liquid asset and why is it necessary for a firm to maintain a reasonable
    level of liquid assets?
    A liquid asset is defined as a type of asset that can quickly and easily be converted into cash
    while retaining its market value. Liquid assets are a particularly important safeguard to have if
    you experience financial hardship and need cash fast. Your liquid assets also help contribute to
    your overall net worth
    6. Why is interest expense excluded from the operating cash flow calculation?
    Operating cash flow is equal to revenues minus costs, excluding depreciation and interest.
    Depreciation expense is excluded because it does not represent an actual cash flow; interest
    expense is excluded because it represents a financing expense.
    7. Explain why the income statement is not a good representation of cash flow.
    Most income statements contain some noncash items, so these must be accounted for when
    calculating cash flows. More importantly, however, since GAAP is used to create income
    statements, revenues and expenses are booked when they accrue, not when their corresponding
    cash flows occur.
    8. Why is it important for managers to understand the importance of both the internal
    and the sustainable rates of growth?
    The internal growth rate and sustainable growth rate are both important concepts in financial
    management. Both of these rates are important for companies to consider when planning for
    future growth and managing their financial resources effectively
    9. State the assumptions that underlie the sustainable growth rate and interpret what
    the sustainable growth rate means.
    The usual assumptions are: Costs, assets, and current accounts (excluding notes payable)
    increase proportionately with sales, the dividend payout ratio is fixed (or is given), the current
    debt-equity ratio is optimal and fixed, and no new equity sales will occur. The sustainable growth
    rate is the maximum rate at which sales can increase given the stated assumptions while
    maintaining the funding required by that growth.
    10. Suppose a firm calculates its external funding needs and finds that it is negative.
    What are the firm's options in this case?
    With a negative external financing need, the firm can expect to have a surplus of funds given the
    projected rate of growth. The firm can use those funds to reduce current liabilities, reduce long-
    term debt, buy back common stock, increase dividends, or invest in assets and resources, as
    needed, to increase its growth rate.

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