Session 1 Homework Solutions

1.1 Capital: What are the two basic sources of funds for all businesses? Solution: The two basic sources of funds for all businesses are debt and equity. 1.2 Management role: What is working capital management? Solution: It is the management of current assets, such as inventory, and current liabilities, such as money owed to suppliers.

1.8 Organizational form: What are the three forms of business organization discussed in this chapter? Solution: The three forms of business organization we discussed are sole proprietorship, partnership, and corporation.

1.12 Organizational form: Explain what is meant by stockholders’ limited liability.
Solution: Limited Liability for a stockholder means that the stockholder’s legal liability extends only to the capital contributed or the amount invested. 1.13 Organizational form: What is double taxation? Solution: The owners of a corporation are subject to double taxation—first at the corporate level and then again at a personal level when they are given dividends.
1.22 Agency conflicts: What are some of the regulations pertaining to boards of directors that were put in place to reduce agency conflicts? Solution: Some of the regulations include:
a. The majority of board members must be outsiders.
b. A separation of the CEO and chairman of the board positions is recommended.
c. The CEO and CFO must certify all financial statements. 1.23 Business ethics: How could business dishonesty and low integrity cause an economic downfall? Give an example. Solution: Business dishonesty and lack of transparency lead to corruption, which in turn creates inefficiencies in an economy, inhibits the growth of capital markets, and slows the