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Review Questions 1F11.pdf

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Administrative Studies
ADMS 3530
Lois King

Review Questions 1 Textbook Page Questions 25 2, 3, 4 26 11, 12 27 21 Solutions 2. A firm might cut its labour force dramatically, which could reduce immediate expenses and increase profits in the short term. Over the long term, however, the firm might not be able to serve its customers properly or it might alienate its remaining workers; if so, future profits will decrease, and the stock price will decrease in anticipation of these problems. Similarly, a firm can boost profits over the short term by using less costly materials even if this reduces the quality of the product. Once customers catch on, sales will decrease and profits will fall in the future. The stock price will fall. The moral of these examples is that, because stock prices reflect present and future profitability, the firm should not necessarily sacrifice future prospects for short-term gains. 3. The key advantage of separating ownership and management in a large corporation is that it gives the corporation permanence. The corporation continues to exist if managers are replaced or if stockholders sell their ownership interests to other investors. The corporation’s permanence is an essential characteristic in allowing corporations to obtain the large amounts of financing required by many business entities. Both public and private corporations are distinct legal entity, separate from its owners (i.e., its shareholders). The key difference between public and private corporations is the rules governing the sale of their common shares. The common shares of a public corporation are listed for trading on a stock exchange and investors can freely buy and sell the corporation’s shares at the current stock price. The common shares of private corporations are not listed for trading on a stock exchange. Shareholders of private corporations must negotiate directly with potential buyers and are subject to resale restrictions. 4. A sole proprietorship is easy to set up with a minimum of legal work. The business itself is not taxed. For tax purposes, the income of the proprietorship is treated as the income of the proprietor. The main disadvantages of a proprietorship are the proprietor’s unlimited liability for the debts of the firm, and difficulty in raising large amounts of financing as the business grows. A partnership has the same tax advantage as the proprietorship. The partnership per se does not pay taxes. The partnership files a tax return, but all of the partnership income is allocated to the partners and treated as personal income. Also, it is fairly easy to set up a partnership. Because there can be many partners, a partnership can raise capital more easily than a proprietorship. However, like sole proprietors, partners have unlimited liability for the debts of the firm. In fact, each partner has unlimited liability for all the business’s de
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