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Economics Ch. 3: Business Organizations
Terms in this set [6]
What are the three types of business organizations? Describe each.
1] Sole proprietorship: A business owned and operated by one person
2] Partnership: A business owned and operated by two or more
people.
3] Corporation: A large business not owned by individuals, but that is owned by many stockholders. This type of business must be approved by the government.
What are the advantages and disadvantages of a sole proprietorship?
Advantages: Easy to start, easy to manage, profits are not shared, do not pay income taxes, and easy to end the business.
Disadvantages: The one owner is fully responsible for all losses, difficult to raise capital [$], the owner often has little experience, and difficult to find qualified employees.
What are the advantages and disadvantages of a partnership?
Advantages: Easy to start, easy to manage, lack of special taxes, easily attract capital, larger size makes it run more smoothly, and easier to attract qualified employees.
Disadvantages: Partners are responsible for each other, the business must be re-organized if one partner leaves, and the potential for conflict between partners.
What are the advantages and disadvantages of corporations?
Advantages: Easy to raise money, professional managers run the company, stockholders [part owners] are not responsible for losses, unlimited life, and easy to transfer ownership [stock shares]
Disadvantages: Difficult and expensive to get government approval to start, stockholders [owners] have no say in how the business is run, double taxation, and more government regulation.
What is a merger?
A merger is when two or more companies combine into one company.
How is the government like a business?
The government provides goods and services to citizens, such as electrical power, waste management, and the postal service.
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Verified questions
QUESTION
When the Bell System was broken up, the old AT&T was split into a new AT&T and seven regional telephone companies. The specific reason for forcing the breakup was to increase the degree of competition in the telephone industry. AT&T had a monopoly on local service, long distance, and the manufacture of all equipment used by telephone companies; and the breakup was expected to open most of those markets to competition. In the court order that set the terms of the breakup, the capital structures of the surviving companies were specified and much attention was given to the increased competition telephone companies could expect in the future. Do you think the optimal capital structure after the breakup was the same as the pre-breakup optimal capital structure? Explain your position.
Verified answer
QUESTION
Tannen Industries is considering an expansion. The necessary equipment would be purchased for $18 million, and the expansion would require an additional$2 million investment in net operating working capital. The tax rate is 40%. a. What is the initial investment outlay? b. The company spent and expensed $20,000 on research related to the project last year. Would this change your answer? Explain. c. The company plans to use a building that it owns to house the project. The building could be sold for$1 million after taxes and real estate commissions. How would that fact affect your answer?
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QUESTION
Precious MetalMining has $17 million in sales, its ROE is 17%, and its total assets turnover is 3.2$\times$. Common equity on the firm’s balance sheet is 50% of its total assets. What is its net income?
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QUESTION
Pasha Corporation produces motorcycle batteries. Pasha turns out 1,400 batteries a day at a cost of $7 per battery for materials and labor. It takes the firm 22 days to convert raw materials into a battery. Pasha allows its customers 40 days in which to pay for the batteries, and the firm generally pays its suppliers in 30 days. a. What is the length of Pasha’s cash conversion cycle? b. At a steady state in which Pasha produces 1,400 batteries a day, what amount of working capital must it finance? c. By what amount could Pasha reduce its working capital financing needs if it was able to stretch its payables deferral period to 33 days? d. Pasha’s management is trying to analyze the effect of a proposed new production process on its working capital investment. The new production process would allow Pasha to decrease its inventory conversion period to 17 days and to increase its daily production to 2,400 batteries. However, the new process would cause the cost of materials and labor to increase to$12. Assuming the change does not affect the average collection period [40 days] or the payables deferral period [30 days], what will be the length of its cash conversion cycle and its working capital financing requirement if the new production process is implemented?
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