Organizational form, value, opportunity rate, capital, cash flow
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1. What are the three principal forms of business organization? What are the advantages and disadvantages of each?
2. What is the firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different than its actual market value?
3. What is an opportunity cost rate? How is this rate used in discounted cash flow analysis, and where is it shown on a time line? Is the opportunity rate a single number that is used in all situations?
4. What is the operating capital, and why is it important?
5. Explain the difference between NOPAT and net income. Which is a better measurement of the performance of a company's operations?
6. What is free cash flow? Why is the most important measure of cash flow?
7. If investors aversion to risk increased, would the risk premium on a high-beta stock increase more or less than that on a low-beta stock? Explain.
8. If a company's beta were to double, would its expected return double?
9. Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a correlation coefficient with the market of ?.25, and a beta coefficient of -0.5. Security B has an expected return of 11%, a standard deviation of returns of 10%, a correlation with the market of 0.75, and a beta coefficient of 0.5. Which security is more risky? Why?
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Solution Summary
The organizational form, value, opportunity rate, capital and cash flow for business organizations are analyzed.
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1. What are the three principal forms of business organization? What are the advantages and disadvantages of each?
The three principal forms of business organizations are:
- Sole Proprietorship
Advantages:
─ Ease of creation ("start-up")
─ Owner has total managerial control
─ Owner retains profits
Disadvantages:
─ Personal liability for all business debts/obligations
─ Funding limited to personal contributions and loans
- General Partnership
Advantages
─ Ease of creation ("start-up")
─ Partnership income is partner income
─ Business losses qualify for tax deduction
Disadvantages
─ Personal liability for all business debts/obligations, including those incurred by other partners on behalf of partnership
- Corporation
Advantages
─ Limited liability for shareholders
─ Ease of raising capital by issuing (selling) stock
Disadvantages
─ "Double-taxation"
─ Formalities required in establishing and maintaining corporate existence
2. What is the firm's fundamental, or intrinsic, value? What might cause a firm's intrinsic value to be different than its actual market value?
According to Warren Buffett, intrinsic value is the discounted value of the cash that can be taken ...
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