Question

Which of the following statements is CORRECT? a. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. b. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. c. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. d. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock. e. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.

Answer 1

One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating double taxation.

Step-by-step explanation:

The correct statement is: a. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.

When a business is operated as a corporation, the profits are taxed at the corporate level and then distributed to the shareholders as dividends, which are also taxed at the individual level. However, stockholders can deduct their pro rata share of the taxes paid by the corporation, effectively eliminating the double taxation.

For example, if a corporation earns $1,000,000 in profits and the corporate tax rate is 20%, the corporation would pay $200,000 in taxes. If there are 10 stockholders, each stockholder can deduct $20,000 from their individual tax liability. This helps to avoid double taxation and can be a significant advantage for stockholders.

Answer 2

E. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.

Step-by-step explanation: