Finance 1 Essay

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Q: what form of partnership allows some of the investors to limit their liability? Explain by giving examples.

Answer:   There are two types of partnership such as the general partnership and limited partnership.   The form of partnership that allows some of the investors to limit their liability is the limited partnership.   This is when the general partners become limited partners by limiting each only to the extent of the capital contribution. For instance, if partner A and B contribute and of the capital respectively, limited partnership dictates that partner A is liable only for their initial contribution.


Q: When does insider trading occur? What government agency is responsible for protecting against the unethical practice of insider trading? Explain by giving examples.

Answer:   Insider trading occurs when someone has information that is not available to the public and then uses this information to profit from trading in company‚Äôs publicly traded securities.   This practice is illegal and protected by the government agency called as Securities and Exchange Commission (SEC). For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead passed the information on to his brother-in-law who traded on it, illegal insider trading would still have occurred.


Q: Explain how the tax code allows depreciation to contribute to cash flow.

Answer: While depreciation is a non-cash expense, it has an impact on net cash flow because of its impact on taxes.   Every dollar of depreciation expense reduces taxable income by one dollar, and thus reduces taxes owed by $1 times the firm's marginal tax rate.   Accelerated depreciation moves the tax benefits forward in time, and thus increases the present value of the tax shield, thereby increasing the value of the project


Q: Explain why inflation may restrict the usefulness of the balance sheet as normally presented

Answer: A balance sheet is typically prepared using historical costs...

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