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Chapter 21: 21.4 - Learning Objectives (page 465)

Identify the main sources of corporate funds and differentiate between stocks and bonds.

Short Answer

Expert verified

Everyone has their own financial objectives. When deciding which investments to make, keep them in mind.

Step by step solution

01

Step 1;       Introduction

Stocks and bonds are two popular investing options. Stocks represent an ownership stake in a company. Bonds are debt instruments.

Companies can fund and expand their business in two ways. Let's take a look at what this means for you as an investor.

02

Step 2;          Stocks denote ownership

Stocks are basically corporate ownership shares. A firm sells a piece of itself in return for cash when it issues stock. Assume a company makes it past the startup stage and achieves success.

The proprietors want to expand their business, but they can't do it purely on the income generated by their operations. As a result, they seek more funding from the stock markets.

03

Step 3;         Bonds are debt instruments

A government, corporation, or other body in need of funds will take out a public market loan. The company will then pay interest to the investors who lent them the money.

04

Step 4;         Conclusion

To diversify their portfolios, many people invest in both stocks and bonds. Your time horizon, risk tolerance, and investment objectives all play a role in determining the best stock and bond mix for your portfolio. Stocks and bonds do not usually fluctuate at the same time.

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Most popular questions from this chapter

An individual leaves a college faculty, where she was earning \(80,000a year, to begin a new venture. She invests her savings of \)20,000, which were earning 10percent annually. She then spends \(40,000renting office equipment, hires two students at \)30,000a year each, rents office space for \(24,000, and has other variable expenses of \)80,000. At the end of the year, her revenues are $400,000. What are her accounting profit and her economic profit for the year?

Consider Figure 21-2. Explain why the figure indicates that if the normal rate of return on investment were to remain unchanged while accounting profit increased, economic profit also would increase.

In Problem 21-6, that you have now operated your consulting firm for a year. At the end of the first year, your total revenues are $77,250. Based on the information in Problem , what is the accounting profit, and what is your economic profit?

If administrators of government pension funds for public employees were to discover in a future yes that they had used a discount rate that was too high, who would end up having to ensure payment of promised pensions?

The owner of WebCity is trying to decide whether to remain a proprietorship or to incorporate. Suppose that the corporate tax rate on profits is 20percent and the personal income tax rate is localid="1653216490078" 30percent. For simplicity, assume that all corporate profits (after corporate taxes are paid) are distributed as dividends in the year they are earned and that such dividends are subject to tax at the personal income tax rate.

a. If the owner of WebCity expects to earn localid="1653216495193" \(100,000in before-tax profits this year, regardless of whether the firm is a proprietorship or a corporation, which method of organization should be chosen?

b. What is the dollar value of the after-tax advantage of the form of organization determined in part (a)?

c. Suppose that the corporate form of organization has cost advantages that will raise beforetax profits by localid="1653216505277" \)50,000. Should the owner of WebCity incorporate?

d. Based on parts (a) and (c), by how much will after-tax profits change due to incorporation?

e. Suppose that tax policy is changed to completely exempt from personal taxation the first localid="1653216517393" $40,000per year in dividends. Would this change in policy affect the decision made in part (a)?

f. How can you explain the fact that even though corporate profits are subject to double taxation, most business in the United States is conducted by corporations rather than by proprietorships or partnerships?
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