(1-2) What are the three principal forms of business organization? What are the advantages and disadvantages of each?

A proprietorship, a partnership, and a corporation are the three principal forms of business organization.

Advantages of a Proprietorship: 1. easily and inexpensively formed; 2. it is subject to few government regulations; 3. its income is not subject to corporate taxation but is taxed as part of the proprietor’s personal income.

Disadvantages of a Proprietorship: 1. It may be difficult for a proprietorship to obtain the capital needed for growth; 2. the proprietor has unlimited personal liability for the business’s debts; 3. the life of a proprietorship is limited to the life of its founder.

Advantages and Disadvantages of a Partnership: A partnership’s advantages and disadvantages are generally similar to those of proprietorship. Advantages of Corporation: 1. Unlimited life; 2. Easy transferability of ownership interest; 3. Limited liability.

Disadvantages of Corporation: 1. Corporate earnings may be subject to double taxation; 2. Setting up a corporation involves preparing a charter, writing a set of bylaws, and filling the many required state and federal reports, which is more complex and time.

(1-3) What is a firm’s fundamental, or intrinsic, value? What might cause a firm’s intrinsic value to be different from its actual market value?

If the market price reflects all relevant information, then the observed price is the intrinsic price, also called the fundamental price.
Investors rarely have all relevant information. Companies report most major decisions, but they may withhold selected information to prevent competitors from gaining strategic advantages. In addition, managers may take actions that boost bonuses linked to higher current earnings yet actually decrease future cash flows, such as reducing scheduled