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Financial Management (FIN 6301) Chapter 1 Solution File

Sandra Watson
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which organizational forms give their owners limited​ liability?

The University of Texas at Dallas

Financial Management (FIN 6301)

Chapter 1
The Corporation
1-1. What is the most important difference between a corporation and all other organizational

1-2. What does the phrase limited liability mean in a corporate context?

1-3. Which organizational forms give their owners limited liability?

1-4. What are the main advantages and disadvantages of organizing a firm as a corporation?

1-5. Explain the difference between an S corporation and a C corporation.

1-6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once
it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax
rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How
much is left for you after all taxes are paid?

1-7. Repeat Problem 6 assuming the corporation is an S corporation.

1-8. You have decided to form a new start-up company developing applications for the iPhone. Give
examples of the three distinct types of financial decisions you will need to make.

1-9. When a pharmaceutical company develops a new drug, it often receives patent protection for
that medication, allowing it to charge a higher price. Explain how this public policy of providing
patent protection might help align the corporation’s interests with society’s interests.

1-10. Corporate managers work for the owners of the corporation. Consequently, they should make
decisions that are in the interests of the owners, rather than their own. What strategies are
available to shareholders to help ensure that managers are motivated to act this way?



Financial Management (FIN 6301) Chapter 1 Solution File

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