Week 1 hw
Chapter 1
1. What is the most important difference between a corporation and all other organizational forms?
A corporation is legally separate from its owners; it is an artificial being under the law.
2. What does the phrase limited liability mean in a corporate context?
Limited liability refers to the amount of liability an owner has. The owner is only liable for the amount they invested in the corporation. 3. Which organizational forms give their owners limited liability?
LLC and limited partners in a partnership have a limited liability.
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
The main disadvantages of an organization are double taxation and separation of ownership & control.
The main advantages of an organization are protection of the owners, infinite life, and ability to sell shares.
5. Explain the difference between an S corporation and a C corporation.
In a C Corporation the company and individual are both taxed. In a S Corporation the individual is the only one taxed, the share holders must be US citizens/residents and it is limited to 100 shareholders.
6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid?
0.40 * $2 = $0.80 2-0.80 = $1.20 income after corporate tax
0.30 * 1.20 = $0.36 1.20-0.36 = $0.84 after tax income
7. Repeat Problem 6 assuming the corporation is an S corporation.
In S Corporation only the individual is liable for taxation.
0.30 * $2= 1.40
Chapter 2
8. In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total
1. What is the most important difference between a corporation and all other organizational forms?
A corporation is legally separate from its owners; it is an artificial being under the law.
2. What does the phrase limited liability mean in a corporate context?
Limited liability refers to the amount of liability an owner has. The owner is only liable for the amount they invested in the corporation. 3. Which organizational forms give their owners limited liability?
LLC and limited partners in a partnership have a limited liability.
4. What are the main advantages and disadvantages of organizing a firm as a corporation?
The main disadvantages of an organization are double taxation and separation of ownership & control.
The main advantages of an organization are protection of the owners, infinite life, and ability to sell shares.
5. Explain the difference between an S corporation and a C corporation.
In a C Corporation the company and individual are both taxed. In a S Corporation the individual is the only one taxed, the share holders must be US citizens/residents and it is limited to 100 shareholders.
6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid?
0.40 * $2 = $0.80 2-0.80 = $1.20 income after corporate tax
0.30 * 1.20 = $0.36 1.20-0.36 = $0.84 after tax income
7. Repeat Problem 6 assuming the corporation is an S corporation.
In S Corporation only the individual is liable for taxation.
0.30 * $2= 1.40
Chapter 2
8. In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total