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HMGT 3311 Chapter 2 Homeworks

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HMGT 3311 HW #2
Q 2.1: A: From a financial perspective, briefly describe the concept of a business.
A business is considered to be an entity and its legal form does not matter. It involves obtaining financing or capital. Where then using the financing funds to buy land, buildings, etc. and having them as assets. Those assets are then used to create goods and services. After, those goods or services are sold to create revenue.
B: What is the difference between a business and a pure charity?
Business and a pure charity are completely different. A business finances itself by selling goods and services. Whereas pure charities do not sell goods or services, they receive funds by soliciting contributions and use those funds to supple charitable free services.
Q 2.2:
What are the three legal forms of business organization? What are their advantages and disadvantages?
The three legal forms of a business organization are proprietorship/partnership, corporation, and hybrid form.

Advantages
Proprietorship: Easily and inexpensively formed; subject to few governmental regulations; pays no corporate income tax; pays lower taxes than a comparable taxable corporation

Partnership: Low cost; easy to form; earnings are allocated to partners and taxed as personal income

Corporation: Unlimited life, easy to transfer ownership; owners have limited liability

Hybrid form: Offer each ownership type without the disadvantages of those corporations
Disadvantages
Proprietorship: Selling interest is difficult for the owners; unlimited personal liability for debts of the business; life of the business is limited to the life of the owners; difficulty in making large amounts of capital

Partnership: Selling interest is difficult for owners; unlimited personal liability for debts of the business; life of the business is limited to the life of the owners; difficulty in making large amounts of capital.

Corporation: Corporate earnings of taxable entities are subject to double taxation at the corporate level and the personal level; more costly and time consuming to set up
Hybrid form: Restrictions or lack of control rests on the general partners

Q 2.3:
What are the primary differences between investor-owned and not-for-profit corporations?
Investor owned corporation business has the option to be organized as a corporation. Whereas not-for-profit corporations must be organized as a corporation. Owners of investor-owned corporations make decisions by voting for directors, earnings of the business belong to stockholders, and they are subject to taxation at the local, state, and federal level; not-for-profit businesses are tax-exempt.
Q 2.4:
What is the difference between a standard corporation (C Corporation) and a benefit corporation (B Corporations)?
Standard for-profit corporations can elect to pay taxes as if the business were a proprietorship or partnership, allowing them to avoid double taxation.
Q 2.5:
A: What is the primary goal of investor-owned corporations?
The primary goal of investor-owned corporations is shareholder wealth maximization, or maximization of owners’ wealth.

B: What is the primary goal of most not-for-profit healthcare corporations?
The primary goals of most not-for-profit healthcare corporations is to give discounts to uninsured patients of limited means, establish a common definition of community benefits, and improving transparency.

C: Are substantial differences found between the finance goals of investor-owned and not-for-profit corporations? Explain your answer.
Not-for profit corporations generally are exempt from all levels of property, income, and sales taxes. They can use tax-exempt debt financing, meaning that lenders do not pay taxes on interest earned. Also, contributions made can be deducted from the donor’s taxable income.
For-profit corporations pay corporate income taxes to federal and state levels. Corporations pay taxes on dividend and capital gains income, corporate income typically is subjected to double taxation.
D: What is an agency problem?
The problem that arises when the managers of for-profit corporation are separate from the owners. Managers are motivated to act in their own interests as opposed to the interests of stockholders.

Homework Problems:
P 2.1: Assume that Provident Health System, a for-profit hospital, has $1 million in taxable income for 2012, and its tax rate is 30 percent.
A: Given this information, what is the firm’s net income? (Net income is what remains after taxes have been paid.)
1,000,000 (1- .3)= 700,000

B: Suppose the hospital pays out $300,000 in dividends. A stockholder, Carl Johnson, receives $10,000. If Carl’s tax rate on dividends is 15 percent, what is his after-tax dividend?
10,000 (1- .15)= 8,500

P 2.3: Kim Davis is in the 40 percent personal tax bracket. She is considering investing in HCA (taxable) bonds that carry a 12 percent interest rate.
A: What is her after-tax yield (interest rate) on the bonds?
.12 (1- .4)= 7.2%

B: Suppose Twin Cities Memorial Hospital has issued tax-exempt bonds that have an interest rate of 6 percent. With all else the same, should Kim buy the HCA or the Twin Cities Bonds?
She should get the HCA because it is still a higher return on her investment.

C: With all else the same, what interest rate on the tax-exempt Twin Cities bonds would make Kim indifferent between these bonds and the HCA bonds?
She would need at least a 7.2% return on the tax exempt bonds to make them indifferent.

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