Question 1-2
Sole proprietorship, partnership, and corporation are the three main forms of business organization. The advantages of sole proprietorship and partnership is that it is simple to start and low cost to create. The advantages of the corporation is limited liability, unlimited life and ease of ownership transfer. The disadvantages of a sole proprietorship is that it may be difficult to raise a large amount of funds and sole proprietorships have unlimited personal liability for business debts and limited life. The disadvantages of a partnership are unlimited liability, limited life, difficulty of transferring ownership, and difficulty of raising large amounts of funds. The disadvantages of a corporation are double taxation of earnings and they have to file state and federal reports for registration which is time consuming and can be difficult.
Question 1-3
If the market price reflects all relevant information, then the observed price is the intrinsic or fundamental value. A firm’s intrinsic value may be different than actual market value because some managers deliberately mislead investors by taking actions to make their companies appear more valuable than they truly are. Sometimes these actions are illegal.
Question 1-4
1) any financial asset, including a company’s stock, is valuable only to the extent that it generates cash flows; (2) the timing of cash flows matters—cash received sooner is better; and (3) investors are averse to risk, so they will pay more
