Book 1 - Chapter 28

4,	continued
	Examples of failing to meet ethical social responsibility:

		Dangerous working conditions
		Exploitive (very low) wages
		Environmental damage and habitat destruction
		Racial and sexual discrimination
		Bribery and kickbacks

5.	Because a corporation is a separate legal entity, it must file its own tax return and pay the tax on its own income. However, when corporate cash (or other assets) is distributed to stockholders in the form of dividends, the stockholders also pay tax on the distributions they receive.
6.	Corporations potentially have the ability to obtain large amounts of investment capital because a corporation can divide its ownership into millions of shares of stock and sell the shares to the public. Another reason that makes it possible to raise large sums is limited liability—investors know that their maximum loss is limited to the amount that they invest. This makes the investment more attractive because the risk is clear. Finally, the fact that ownership of stock is freely transferable also makes a stock investment attractive because no permission is needed from other owners to buy or sell the stock. This helps create a large and active market of buyers and sellers of the stock. This is known as a secondary market.
7.	A company can sell its stock directly to the public. However, this is generally not practical because of the difficulty in marketing the stock to potential investors and recording all the transactions and transfers of money. Generally, a corporation will use the services of an investment bank to analyze the market and set an initial selling price for the stock. The investment bank frequently acts as an underwriter or joins with brokerage firms to jointly underwrite the sale. The usual procedure is that an underwriter purchases the stock from the corporation at an agreed initial market price, less a commission to the underwriter. The underwriter then assumes the risk of selling all the stock to the public. If the underwriter believes that the stock may become more valuable, it will keep some shares for itself.
8.	The amount of cash a corporation receives from issuing stock in an IPO is whatever the company receives from its agreement with the underwriter. The subsequent market price of the stock as it is traded by investors does not affect the amount received from issuing the stock. However, the price of the stock will affect what the corporation will receive if it decides to issue more stock in the future—in a secondary offering.
9.	No. The number of shares that a corporation is authorized to sell is determined by the charter. If a corporation wants to issue more shares, it must apply to the state for approval for a revised charter authorizing more shares. (And usually the stockholders must also approve.) Authorized shares means the number of shares approved by the charter. Issued shares means the number of shares actually issued.
10.	An initial public offering (IPO) is the first time a company’s stock is offered to the public. Any public sale by the corporation after the IPO is a secondary offering. Secondary offering can also refer to the sale of stock by a small group of large investors who are liquidating their investments.

Learning Goal 28, continued

SOLUTIONS

Learning Goal 28: Describe the Corporate Entity

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