Which Of The Following Could Explain Why A Business Might Ch

Which Of The Following Could Explain Why A Business Might Choose To Op

Which of the following could explain why a business might choose to operate as a partnership rather than as a corporation? The options include: Partnerships generally find it easier to raise large amounts of capital; Partnerships are exposed to unlimited liability; Less of a partnership’s income is generally subject to federal taxes; None of these are a valid reason why a business would choose to be structured as a partnership.

Additionally, the assignment encompasses various financial calculations and theoretical questions, including investment growth with compounded interest, weighted average cost of capital (WACC), yield curve implications, current ratio determinants, present value calculations, expected return estimates, and bond price sensitivity to interest rate changes.

Paper For Above instruction

The decision of a business to operate as a partnership rather than as a corporation hinges on several strategic, financial, and liability considerations. A partnership offers advantages such as operational simplicity and direct control, but it also entails disadvantages like unlimited liability for partners (Schmidt & Schneller, 2022). From a tax perspective, partnerships typically experience pass-through taxation, which can be beneficial since less of their income is subject to federal taxes compared to corporations (Marten & Williams, 2021). However, the claim that partnerships find it easier to raise large amounts of capital is generally inaccurate, as corporations, especially those issuing stock, are better positioned to attract significant funding due to their ability to sell shares publicly (Brealey et al., 2020). Therefore, the primary reasons a business might choose a partnership include tax advantages and manageable liability, rather than capital-raising ease.

Financial calculations within the scope of this assignment delve into core investment principles. For instance, Sue’s investment of $10,000 at an annual rate of 12%, compounded monthly, results in a future value that can be computed using the formula for compound interest: FV = PV (1 + r/n)^(nt). Substituting the given values leads to a future value of approximately $11,268 (using FV = 10,000 (1 + 0.12/12)^(12*1)).

The Weighted Average Cost of Capital (WACC) is crucial for corporate valuation and investment decisions. Given the target capital structure of 60% debt and 40% equity, with an after-tax debt cost of 5.0% and a cost of retained earnings at 12.0%, WACC is calculated as:

WACC = (Weight of debt After-tax cost of debt) + (Weight of equity Cost of equity)

WACC = (0.60 0.05) + (0.40 0.12) = 0.03 + 0.048 = 0.078 or 7.8%. This rate reflects the firm’s average cost of capital considering its debt and equity composition (Ross, Westerfield, Jaffe, 2019).

The yield curve's shape has significant implications for bond yields. A downward-sloping treasury yield curve indicates that longer-term bonds typically have lower yields than short-term bonds, often reflecting investor expectations of declining interest rates (Hurley, 2020). Consequently, the yield on a 15-year corporate bond would tend to be less than that on a 1-year bond, assuming similar credit quality, as investors accept lower yields for longer-term securities in such environments.

The current ratio, defined as current assets divided by current liabilities, can be altered by specific changes in the components of current assets and liabilities. An increase in net fixed assets generally does not impact the current ratio directly unless it involves current assets, but more significantly, an increase in long-term notes payable would decrease the current ratio because it raises current liabilities, reducing the ratio (Brigham & Ehrhardt, 2019). A decrease in inventories or accrued liabilities also affects the ratio, but an increase in long-term notes payable would definitively lower the current ratio.

To estimate the present value of $1,000 due in 10 years with an annual discount rate of 8.5%, the present value formula PV = FV / (1 + r)^n is used, leading to PV ≈ $1,000 / (1.085)^10 ≈ $447.6. This calculation illustrates how increasing the discount rate diminishes present value, emphasizing the time value of money (Shapiro, 2017).

The expected rate of return for Dutton Inc. can be calculated as the weighted sum of possible returns, based on their probabilities:

Expected return = (Probability of 15%) (15%) + (Probability of 10%) (10%) + (Probability of -20%) * (-20%)

= 0.40 0.15 + 0.25 0.10 + 0.15 * (-0.20) = 0.06 + 0.025 - 0.03 = 0.055 or 5.5%.

Regarding bond valuation sensitivity to interest rate changes, the longer the maturity and the lower the coupon rate, the greater the percentage change in bond price for a given change in yield. A 30-year zero-coupon bond, with no periodic interest payments, is more sensitive to yield changes than a shorter-term bond with coupons, because it is entirely discounted at maturity. Subsequently, if the yield to maturity increases by 1%, the 30-year zero-coupon bond would experience the largest percentage decrease in value due to its high duration and zero-coupon structure (Fabozzi & Mann, 2020).

References

• Brigham, E. F., & Ehrhardt, M. C. (2019). Financial Management: Theory & Practice. Cengage Learning.
• Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. K. (2020). Principles of Corporate Finance. McGraw-Hill Education.
• Fabozzi, F. J., & Mann, S. V. (2020). Bond Markets, Analysis, and Strategies. Pearson.
• Hurley, T. (2020). The Shape of the Yield Curve and Its Significance. Journal of Financial Markets, 45, 132-147.
• Marten, B., & Williams, S. (2021). Taxation of Business Entities. Journal of Taxation, 54(2), 78-85.
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance. McGraw-Hill Education.
• Schmidt, E., & Schneller, A. (2022). Business Structures and Their Effect on Liability. Business Law Review, 33(2), 89-102.
• Shapiro, A. C. (2017). Modern Financial Management. Wiley.