Module 1 LO 1-3 Flashcards
The advantages of a sole proprietorship is:
- easy to raise a lot of capital
- complete control
- limited liability
- you are liable for debts and lawsuits
Complete Control
the primary reason for starting a corporation is:
- to limit your taxes
- to raise a lot of capital
- to gain more control over the business
- all of the above
to raise a lot of capital
a corporation is its own separate entity:
true or false
true
in a corporation, the owner is also the manager
true or false
false
if you are an investor in a corporation, Limited Liability means:
- personally liable
- only liable for your investment
- you can be personally sued
- none of the above
you are only liable for your investment in the company
what are disadvantages of a corporate entity?
all that apply:
- limited liability
- double taxation
- increased regulation
- less control
- double taxation
- increased regulation
- less control
If a corporation had earnings of $40k and paid all of this out as a dividend to the owners, how much tax would the federal government collect? Assume a 20% tax rate and a 15% dividend tax rate:
$12,800
$14,000
$27,000
$8,000
$12,800
· Corporate level income taxes = 40,000 x 20% = 8,000
· Shareholders level dividend taxes = (40,000 -8,000) x 15% = 4,800. Note that dividends are after income tax earnings.
In total, the government collects 8,000+4,800 = $12,800 taxes.
If a corporation had earnings of $40k and paid all of this out as a dividend to the owners, how much tax would the corporate entity pay the federal government? Assume a 20% tax rate and a 15% dividend tax rate:
$12,800
$14,000
$4,800
$14,000
Corporate level income taxes = 40,000 x 20% = 8,000
simplest form of business form
sole proprietorship
Sole Proprietorship
owner = manager
complete control
personally liable
partnership
owners = managers
raise more capital
complete control
still personally liable
corporation advantages
most access to capital
limited liability - only responsible and liable for your investment
easy ownership transfer - continuity
corporation is now a legal entity separate from owners
corporation disadvantages
owner no longer manages - agency problem
regulations
double taxations
less control
raise public funds you…
sell bonds
stocks and bonds are
securities
stock and bonds involve
transactions
investor - buyer
seller - corporation or issuer
when a person invests in a stock you are entitled to
earnings as dividends or reinvestments
voting rights
Person investing in stocks =
buying ownership
advantages to person investing in stocks
unlimited upside
disadvantage of to person investing in stock
payout amount is unknown
payout timing is unknown (market takes a long time to recognize the value)
depends on how the company goes, some corps do not pay dividends.
alternative to purchasing a stock is purchasing a
bond
purchasing or investing in a bond
lending company money
you will get your money back and with interest payments - you know by contract what you will get and when
bond advantages for investors
fixed payout
interest payment
payout time is defined
bond certificate for investors includes
price, time, and rate of interest
order of bond payment for investors
pay stockholder before they pay dividends
bond disadvantages to person investing in bonds
limited upside - payout is fixed of face value of the bond
no voting privilege - now ownership, you only lend
advantages of companies issuing stocks
financial flexibility - you don’t have to return the capital
you can re-invest into company and no interest payments
disadvantages of companies issuing stocks
unlimited upside - you give ownership away in your company- specially if its successful
Key for corporations is to
issue stocks and then bonds as it grows
advantages of companies issuing bonds
limited upside - not a lot of owners
financial leverage - increased returns. when price goes up it appreciates and you have a higher return on equity
it can be magnified as a loss as well
disadvantages of companies issuing bonds
decreased financial flexibility - you must make interest payments and you can be forced to file for bankruptcy
is a stock better than a bond?
depends on the risk.
if you need the money quickly, bonds > stocks
if you have a long time then stock > bond
corps usually invest on
stock because its a better deal for the company but worst deal for investor
corps make more money in _____ than ____
bonds
stocks
primary advantages of investing in stock are:
all that apply:
- less risk than a bond
- unlimited upside
- uncertain future payout
- voting rights
- priority over bondholders in bankruptcy
- unlimited upside
- voting rights
primary advantages of investing in bonds are:
all that apply:
- easier to value than stock
- known payment amount
- know when you are going to get paid
- less risk than investing in stock
- priority over stockholders in bankruptcy
- more upside potential than stock
- easier to value than stock
- known payment amount
- know when you are going to get paid
- less risk than investing in stock
- priority over stockholders in bankruptcy
when companies issue stock they give up:
- ownership and the right to future earnings
- financial flexibility
- control
- ownership and the right to future earnings
- control
advantages of issuing bonds are:
- limited upside
- financial leverage
- financial flexibility
- limited upside
- financial leverage
is it riskier for a company to issue stocks or bonds?
bonds
Companies issuing bonds are actually borrowing from public investors. So bonds are liabilities to the issuing companies. As long as you borrow, you have the potential risk of not being able to pay back (e.g. principal and/or interests).
Investing in stock means
getting ownership in a particular business
evidenced by certificate that you own a part
when you invest in a stock, what do you own??
the earnings of a company.
entitled to the company’s earnings
expenses are the
costs to provide goods or services
-employees or inventory
if Revenues are higher than expenses
you have profit or earnings or net income
revenues are
money received
if you retain net income
you hire more employees or better goods
when you give back to the owner you
distribute dividends
dividends and reinvesting earnings depends on
the lifecycle of the company
a share of stock entitles you to:
- percentage of the company’s assets
- the rights to the goods the company sells
- a percentage of the earnings of the company
- both A and C
-a percentage of the earnings of the company
the cost of providing goods and services to customers is called:
- expenses
- revenues
- earnings
- losses
-expenses
benefits (money) that a company receives from customers are called:
- revenues
- earnings
- profit
- revenue or profit
-revenues
revenues - expenses =
- earnings
- profit
- net income
- all of the above
-all of the above
a company must pay our the profits it earns to stockholders:
true or false
false
an ordinary dividend is:
- a distribution of earnings to stockholders
- a return of the investor’s original investment
- an expense of the company
- none of these
-a distribution of earnings to stockholders
companies that are growing quickly usually issue dividends
true or false
false
you can make money investing in stocks by:
- collecting dividends
- taking assets form the company
- stock price appreciation
- collecting interest payments
- collecting dividends
- stock price appreciation
