W1 Problem Set Essay

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Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms?
The corporation is a legal entity separate from its owners. The corporation is solely responsible for its own obligations, which enjoys protection under most jurisdictions against the seizure of its property.
Berk, J., & DeMarzo, P. (2014). Corporate Finance, 3rd Edition. Upper Saddle River: Pearson Learning Solutions. (p. 05)

2. What does the phrase limited liability mean in a corporate context?
It means that the investors (or owners) have their liabilities restricted to the amount of the investment in the company.
Berk, J., & DeMarzo, P. (2014). Corporate Finance, 3rd Edition. Upper Saddle River: Pearson Learning Solutions. (p.05)

3. Which organizational forms give their owners limited liability?
Partnership, Limited Liability Companies (LLC) and Corporation.
Berk, J., & DeMarzo, P. (2014). Corporate Finance, 3rd Edition. Upper Saddle River: Pearson Learning Solutions. (p.05)

4. What are the main advantages and disadvantages of organizing a firm as a corporation?
The main advantages are:
- The corporation it a stand-alone entity, which means the owners are not personally liable for the assets and debts of the business. Incorporating protects your personal assets from lawsuits, debt collection and other business issues that can arise.
- The corporation has free trade to share its ownership shares, therefore, the corporation can increase its capital selling to anonymous outside investors.
- Owner is entitled to dividend payments.
The main disadvantages:
- For corporations, the corporation ends up paying taxes twice (Double Taxation). First, when the corporation turns a profit, it pays a corporate tax rate on the profit amount. The second time the corporation pays taxes is when it pays dividends to shareholders.
Berk, J., & DeMarzo, P. (2014). Corporate Finance, 3rd Edition. Upper Saddle River: Pearson Learning Solutions. (p.06 and 07)
5. Explain the difference between an S corporation and a C corporation.
C Corporations file a tax return and pay taxes on their income as a separate entity. Then, if the income or profits are split among shareholders, each of them pays personal income tax. This practice, called double taxing. S Corporations file informational tax returns, but do not pay income taxes directly. Instead, all the income goes to the shareholders, who then pay income taxes.
Berk, J., & DeMarzo, P. (2014). Corporate Finance, 3rd Edition. Upper Saddle River: Pearson Learning Solutions. (p.06 and 07)

Chapter 2
The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.
TABLE 2.5 2009–2013 Financial Statement Data and Stock Price Data for Mydeco Corp.
Mydeco Corp. 2009–2013
(All data as of fiscal year end; in $ million)
Income Statement
2009
2010
2011
2012
2013
Revenue
Cost of Goods Sold
404.3
(188.3)
363.8
(173.8)
424.6
(206.2)
510.7
(246.8)
604.1
(293.4) Gross Profit
Sales and Marketing
Administration
Depreciation and Amortization
216.0
(66.7)
(60.6)
(27.3)
190.0
(66.4)
(59.1)
(27.0)
218.4
(82.8)
(59.4)
(34.3)
263.9
(102.1)
(66.4)
(38.4)
310.7
(120.8)
(78.5)
(38.6) EBIT
Interest Income (Expense) 61.4
(33.7)
37.5
(32.9)
41.9
(32.2)
57.0
(37.4)
72.8
(39.4)
Pretax Income
Income Tax 27.7 (9.7)
4.6
(1.6)
9.7
(3.4)
19.6
(6.9)
33.4
(11.7) Net Income Shares outstanding (millions) Earnings per share 18.0 55.0 $0.33
3.0
55.0
$0.05
6.3
55.0
$0.11
12.7
55.0
$0.23
21.7
55.0
$0.39
Balance Sheet
2009
2010
2011
2012
2013
Assets
Cash
Accounts Receivable
Inventory

48.8
88.6
33.7 68.9
69.8
30.9 86.3
69.8
28.4 77.5
76.9
31.7 85.0
86.1
35.3 Total Current Assets
Net Property, Plant, and Equip.
Goodwill and Intangibles
171.1
245.3
361.7
169.6
169.6
243.3
184.5
309
361.7
186.1
345.6
361.7
206.4
347.0
361.7
Total Assets
Liabilities and Stockholders’ Equity
Accounts Payable
Accrued
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