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?
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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 rate of economic growth. For example, until the mid-1990s the Russian market had a difficult time attracting investors as there was no reliable financial information on any of the companies. Only after the Russians made a conscious decision to make their records and motives transparent were they able to draw foreign investments.