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The Financial Environment

a. A proprietorship, or sole proprietorship, is a business owned by one individual. A partnership exists when two or more persons associate to conduct a business. In contrast, a corporation is a legal entity created by a state. The corporation is separate and distinct from its owners and managers. b. In a limited partnership, limited partners’ liabilities, investment returns and control are limited, while general partners have unlimited liability and control. A limited liability partnership (LLP), sometimes called a limited liability company (LLC), combines the limited liability advantage of a corporation with the tax advantages of a partnership. A professional. | Chapter 1 An Overview of Corporate Finance and The Financial Environment ANSWERS TO END-OF-CHAPTER QUESTIONS 1-1 a. A proprietorship or sole proprietorship is a business owned by one individual. A partnership exists when two or more persons associate to conduct a business. In contrast a corporation is a legal entity created by a state. The corporation is separate and distinct from its owners and managers. b. In a limited partnership limited partners liabilities investment returns and control are limited while general partners have unlimited liability and control. A limited liability partnership LLP sometimes called a limited liability company LLC combines the limited liability advantage of a corporation with the tax advantages of a partnership. A professional corporation PC known in some states as a professional association PA has most of the benefits of incorporation but the participants are not relieved of professional malpractice liability. c. Stockholder wealth maximization is the appropriate goal for management decisions. The risk and timing associated with expected earnings per share and cash flows are considered in order to maximize the price of the firm s common stock. d. A money market is a financial market for debt securities with maturities of less than one year short-term . The New York money market is the world s largest. Capital markets are the financial markets for long-term debt and corporate stocks. The New York Stock Exchange is an example of a capital market. Primary markets are the markets in which newly issued securities are sold for the first time. Secondary markets are where securities are resold after initial issue in the primary market. The New York Stock Exchange is a secondary market. Answers and Solutions 1- 1 e. In private markets transactions are worked out directly between two parties and structured in any manner that appeals to them. Bank loans and private placements of debt with insurance companies are examples of private market .