Chapter 1, Problem 1Q

a)

Summary Introduction

To determine: The definition of proprietorship, partnership, and corporation.

Explanation of Solution

A company owned by one individual is a proprietorship or sole proprietorship. When more than two persons are associated to organize the business, a partnership exists. Corporation, on the other hand, is a state-created legal entity. The organization is independent of its owners and managers.

b)

Summary Introduction

To determine: The definition of limited partnership, limited liability partnership, professional corporation.

Explanation of Solution

Under a limited partnership, the liabilities, control of limited partners and investment returns are limited, while the liability and control of general partners are unrestricted. A limited liability partnership, also referred to as a limited liability company, blends a corporation's limited liability advantage with a partnership's tax benefits. A private company known as a professional association in some countries, have more of incorporation privileges, nevertheless members are not exempted from professional liability (malpractice).

c)

Summary Introduction

To determine: The definition of stockholder wealth maximization.

Explanation of Solution

Maximizing Stockholder wealth is the right objective for management choices. To maximize the price of the common stock of the firm, the timing and risk related with cash flow and EPS are considered.

d)

Summary Introduction

To determine: The definition of production opportunities, time preferences for consumption.

Explanation of Solution

Opportunities for production are the returns arising from productive assets investment within an economy. The more the chances of growth, the higher the producers are eager to make payments for the required capital. The priorities in the consumption time apply to the desired consumption pattern. Consumer's consumption time expectations decide the amount of consumption they are ready to accept, and therefore save, at diverse interest rates.

e)

Summary Introduction

To determine: The definition of foreign trade deficit.

Explanation of Solution

When individuals and businesses in Country U experience a foreign trade deficit. S. Import more goods than they are exported from foreign countries. Trade deficits need to be funded, and debt is the main source of funding. Therefore, debt financing increases as the trade deficit rises, uplifts the rate of interest.

Interest rates of Country U must be consistent with the foreign interest rates when the Federal Reserve tries to fix the interest rates beneath the foreign rates, the investors will sell the Country U bonds, which leads to higher Country U bond prices, it leads to higher rate of country U. Therefore, when the trade deficit is high comparative to the portion of the complete economy, the ability of the Fed to battle a decline by way of lowering the interest rates may be hampered.