Each question is worth 55 points 1 What are the main forms o

Each question is worth 5.5 points

1. What are the main forms of business ownership in the united states? what are the advantages and disadvantages of using each type of ownership structure?

2. when the prevailing interest rates in the economy rise, what happens to the price of bonds and why does it happen?

3. What is modern portfolio theory show and what does it describe to achieve? what\'s the name of the portfolio used to achieve this goal?

Solution

1 The four types of business ownership are

(a) Sole Proprietorship: Advantages: Simple, easy to dissolve and simple tax treatment and there is no complexity as with firms.

Disadvantages: Firm’s liabilities are treated as personal liabilities of the owner.

(b)Partnership: Advantages: Simple and not expensive to form one. All the business partners are treated as co-owners.

Disadvantages: Taxation is more complex as there are partners involved and a thin line between business income and personal income. The liability is shared equally between in partners or on the one partner managing the business in case of a limited liability partnership

(c) Limited Liability company: This is a new classification and is not allowed in all states within US
it’s a hybrid form of business between a corporation and a partnership. The advantage is the ability to limit personal liability for losses of business

(d) Corporation: It is fully fledged business entity formulated by individuals adhering to the state laws for the smooth conduct of a particular business

Advantages: It exists separately for shareholders and employees. The liabilities of the shareholders are limited to the number of shares they hold. A corporation as continuous existence until dissolved.

2. When the prevailing interest rates in the economy rise, the bond prices fall. It is because there is an inverse relationship between the bond prices and the market interest rates. Since the discount factor for the future cash flows of a bond are nothing but the interest rates, as they rise, the discount rate increases which reduces the present value which is the price

3. The modern portfolio theory shoes that the portfolio must maximize the return at any level of risk. Further it says that the overall risk can be reduced by creating a portfolio of unrelated assets. The portfolio used to achieve this goal is called “efficiency Frontier\".