Question

For each of the following scenarios, discuss whether profit opportunities exist from trading in the stock of the firm under the conditions that (1) the market is not weak form efficient, (2) the market is weak form but not semistrong form efficient, (3) the market is semistrong form but not strong form efficient, and (4) the market is strong form efficient. a.The stock price has risen steadily each day for the past 30 days. bThe financial statements for a company were released three days ago, and you believe you’ve uncovered some anomalies in the company’s inventory and cost control reporting techniques that are causing the firm’s true liquidity strength to be understated. cYou observe that the senior management of a company has been buying a lot of the company’s stock on the open market over the past week. List the three assumptions that lie behind the Modigliani–Miller theory in a world without taxes. Are these assumptions reasonable in the real world? Explain. Respond to the following

Explain the differences in taxing of four different types of organizations.

if you were going into business and had a choice of business structures to select from that would minimize your taxes, while yielding the highest profits, which would you choose and why?

Answer 1

Assumptions of Modigliani Miller theory in a world without taxes:1) the borrowing rate of individuals and firms is the same.This assumption holds while applying the theory in the real world . The firm's value would increase if the firm could borrow at a rate which is less than individual by corporate leverage.This however is not the case in the world with no taxes.2) Firms pay taxes but there is no taxes in the real world. When corporate tax is present , the firm's value has a positive relation to debt level. When there is increase in debt taxes are reduced and the value of the firm increases.3)Financial problem has no cost.But in the real world cost of financial problem is more.The cost is borne by stock holders and as such the firms try to lower the debt.

The 4 different types of organization are Sole Proprietorship, Partnership, Corporations and Limited Liability companies.Each organization has different tax structure.Sole Proprietorship are one person firm and they keep their own record and pay the IRS self employment taxes.Two or more people join to form partnership . Each partner pay self employment tax to IRS.Limited Liability companies can be formed as partnership or as corporations. The taxation process depends on the structure of LLC. Corporations are taxed as separate entity at corporate tax rate.

I would choose sole proprietorship as the best option. There is only one individual who owns the business. The tax aspect also appeals to all because income and expenses of the business are included in the personal account of the person .Unlike other business structures the earnings of the business is taxed only once . The individual is in full control of the business.