Which of the following statements are correct: 1. Owners of incorporated businesses have unlimited liability 2. The maximum amount that equity holders can lose is their original investment 3. Equity value can be negative 4. Lenders may not get loans back in whole 1, 3, and 4 1, 2, 3, and 4 1 and 3 2 and 4

Which of the following statements are correct: 1. Owners of incorporated businesses have unlimited liability 2. The maximum amount that equity holders can lose is their original investment 3. Equity value can be negative 4. Lenders may not get loans back in whole 1, 3, and 4 1, 2, 3, and 4 1 and 3 2 and 4

SWFT Individual Income Taxes

43rd Edition

ISBN:9780357391365

Author:YOUNG

Publisher:YOUNG

Chapter7: Deductions And Losses: Certain Business Expenses And Losses

Section: Chapter Questions

Problem 4DQ

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(oll option information and correct and incorrect option explain) Which of the following statements are correct: 1. Owners of incorporated businesses have unlimited liability 2. The maximum amount that equity holders can lose is their original investment 3. Equity value can be negative 4. Lenders may not get loans back in whole 1, 3, and 4 1, 2, 3, and 4 1 and 3 2 and 4
Unlimited liability meansa. there is no limit on the amount an owner canborrow.b. creditors will absorb any loss from nonpayment of debt.c. the business can borrow money for any typeof purchase.d. the owner is responsible for all businessdebts.e. stockholders can borrow money from thebusiness.
. _______ Unlimited liability meansa. there is no limit on the amount an owner can borrow.b. creditors will absorb any loss from nonpayment of debt.c. the business can borrow money for any type of purchase.d. the owner is responsible for all business debts.e. stockholders can borrow money from the business
which of the following is/are true regarding debt and equity? 1. debt is a liability of the firm, whereas equity is not 2. debt and equity both provide voting rights to the holders 3. excess debt might cause financial distress 4. equity holders can sue the company if they are not paid any dividends. a. 1 and 3 only b. 3 only c. 2 and 3 d., 3 and 4 e. 1 only
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Who is responsible for the liabilities of a company and the risk of its value dropping to zero? a. Banks and Financial Institutions O b. None of these c. Suppliers O d. Creditors
B3. Debt policy (Answer all parts of this question.) (a) (4P) Assume that we have perfect and efficient capital markets, no taxes, and no asymmetric information. What are the two main theorems for i. capital structure and ii. cost of equity capital according to Modigilani-Miller? Give a brief answer. (b) Companies A and B differ only in their capital structure. Company A is financed 30 percent debt and 70 percent equity; Company B is financed 10 percent debt and 90 percent equity. The debt of both companies is risk free. Mr Miller owns 1 percent of the common stock of company A, (EA). Show that an investment in 1% of the common stock of company B (EB) and borrowing an amount equal to 1% of the difference in total debt of both companies, DA - DB i. (5P) costs the same, and ii. (5P) yields identical returns to his investment in 1% of the common stock of company A, (EA). Assume that the theorems of Modigilani-Miller hold. (c) (6P) In real life, firms are subject to corporate taxes. What…