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习题答案

Answers to Concept Questions

1.     The three basic forms are sole proprietorships, partnerships,and corporations. Some disadvantages of sole proprietorships and partnershipsare: unlimited liability, limited life, difficulty in transferring ownership, andhard to raise capital funds. Some advantages are: simpler, less regulation, theowners are also the managers, and sometimes personal tax rates are better thancorporate tax rates. The primary disadvantage of the corporate form is thedouble taxation to shareholders on distributed earnings and dividends. Someadvantages include: limited liability, ease of transferability, ability toraise capital, and unlimited life. When a business is started, most take theform of a sole proprietorship or partnership because of the relative simplicityof starting these forms of businesses.

2.     To maximize the current market value (share price) of the equityof the firm (whether it’s publicly traded or not).

3.     In the corporate form of ownership,the shareholders are the owners of the firm. The shareholders elect thedirectors of the corporation, who in turn appoint the firm’s management. Thisseparation of ownership from control in the corporate form of organization iswhat causes agency problems to exist. Management may act in its own or someoneelse’s best interests, rather than those of the shareholders. If such eventsoccur, they may contradict the goal of maximizing the share price of the equityof the firm.

4.     Such organizations frequently pursue social or politicalmissions, so many different goals are conceivable. One goal that is often citedis revenue minimization; i.e., provide whatever goods and services are offeredat the lowest possible cost to society. A better approach might be to observethat even a not-for-profit business has equity. Thus, one answer is that theappropriate goal is to maximize the value of the equity.

5.     Presumably, the current stock value reflects the risk, timing,and magnitude of all future cash flows, both short-term and long-term. If this is correct, then the statement is false.

6.     An argument can be made either way. At the one extreme, we couldargue that in a market economy, all of these things are priced. There is thusan optimal level of, for example, unethical and/or illegal behavior, and theframework of stock valuation explicitly includes these. At the other extreme,we could argue that these are non-economic phenomena and are best handledthrough the political process. A classic (and highly relevant) thought questionthat illustrates this debate goes something like this: “A firm has estimatedthat the cost of improving the safety of one of its products is $30 million.However, the firm believes that improving the safety of the product will onlysave $20 million in product liability claims. What should the firm do?”

7.     Thegoal will be the same, but the best course of action toward that goal may bedifferent because of differing social, political, and economic institutions.