FNBU 3441 Chapter Notes - Chapter 1: Sole Proprietorship, Corporate Finance, General Partnership
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| Title: Business Structure, Liability, and Partnership Agreement Develop a hypothetical business you would consider starting with a friend or relative.Imagine that the friend or relative has sufficient funds to start the business and that you will be doing most of the work (for example, if you were starting a mobile car wash business, you would be procuring the customers and washing the cars). Imagine also that you will be performing all the bookkeeping functions for the business. In a written report, prepare the following:A report to your partner, containing a detailed description of the differences regarding liability with respect to a sole proprietorship, a general partnership, a limited partnership, and a corporation. A completed partnership agreement, including the following elements ready for signatures using the partnership agreement included. |
Example of Partnership Agreement
| Detailed description of the business Names of the partners Address of the partnership and the partners Roles of each of the partners as limited partners, being as complete and detailed as possible (you can also be as imaginative as you need to be with titles and responsibilities ) List of assets provided by each partner Division of income Division of partnership liabilities (debts) Method by which the partnership may be dissolved, including what happens in the event of filing for bankruptcy |
(NAME), and (NAME), the below signed hereby enter into this Partnership Agreement on behalf of themselves, their heirs, successors and assigns, and set forth following terms and conditions as constituting the Partnership Agreement in its entirety:
1. The partnership shall go by the following name: (NAME).
2. The partnership's principle place of business shall be (DESCRIBE).
3. The first day that the partnership shall begin business is: (DATE) and it will continue until the partners agree to terminate it or until forced to cease its operations by law.
4. The partnership's operations shall be primarily in the following field or area: (DESCRIBE)
5. The partnership shall be capitalized as follows: For each $ (AMOUNT) (dollars) each partner shall receive (#) shares with contribution being made as follows:
Partner A contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. Partner B contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. 6. Losses and gains on contributed capital and other property shall be assigned as follows: (DESCRIBE)
The IRS's general allocation rule shall apply, and gains and losses shall be allocated according to the % of total capital contributed by each partner as set out in paragraph 5 above.
7. Profits and losses shall be allocated according to the same percentage allocation set forth in paragraph #6 above. 8. Salary, if any, for the services rendered shall be determined by unanimous approval of the partners.
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Project Partnership Agreement
PARTNERSHIP AGREEMENT
10. Each partner shall maintain both an individual drawing account and an individual capital account. Into the capital account shall be placed that partner's initial capitalization and any increases thereto. The drawing accounts shall be used for withdrawal of amounts, the size of which is limited to $(AMOUNT) on any one day.
11. Adequate accounting records shall be made and maintained. Any partner or his/her agent may review any and all accounting or other records at anytime.
12. The partners designate the following as the Partnership's business and checking accounts into which all the funds of the Partnership shall be placed and maintained: (DESCRIBE)
13. Accounting records and books shall be kept on a (select one) 1. cash basis 2. accrual basis and the fiscal year shall begin on the (#) day of (MONTH) and shall end (#) day of (MONTH).
14. At the close of the fiscal year, there shall be an annual audit conducted by the following accounting firm: (DESCRIBE)
15. The partnership shall dissolve upon the retirement, death, or incapacity of any partner unless the remaining partner elects the option of buying out that partner's share. (DESCRIBE THE DETAILS)
16. Upon termination or dissolution of the Partnership, the Partnership will be promptly liquidated, with all debts being paid first, prior to any distribution of the remaining funds. Distribution shall be made according to the percentage of ownership as set out in paragraph #5 above.
17. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
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Project Partnership Agreement
9. Control and management of the partnership shall be split equally amongst the partners.
So agreed, this (#) day of (MONTH), 20 .
________________________ (NAME) ________________________ (NAME)
Review - make sure the following items are included in this agreement!
Detailed description of the business
Names of the partners
Address of the partnership and the partners
Roles of each of the partnersâbe as complete and detailed as possible
List of assets provided by each partner
Division of income
Division of partnership liabilities (debts)
Method by which the partnership may be dissolved
Intermediate Financial Management 11th Edition
Chapter 15: Capital Structure Decisions Part 1 Mini Case
Assume you have just been hired as a business manager of PizzaPalace, a regional pizze restaurant chain. The company EBIT was $50 million last year and is not expected to grow. The firm is currently financed with all equity, and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures:
| PERCENT FINANCED WITH DEBT, Wd | rd |
|---|---|
| 0% | - |
| 20 | 8.0% |
| 30 | 8.5 |
| 40 | 10.0 |
| 50 | 12.0 |
If the company were to recapitalize, then debt would be issued and the funds received would be used to repurchase stock. PizzaPalace is in the 40% state-plus-federal corprate tax bracket, its beta is 1.0, the risk free rate is 6%, and the market risk premium is 6%.
Please answer All Parts:
Part A: Provide a brief overview of capital structure effects. Be sure to identify the ways in which capital structure can affect the WACC and free cash flows.
Part B: 1) What is business risk? What factors influence a firm's business risk? 2) What is operating leverage, and how does it affect a firm's business risk? Show the operating breakeven point if a company has fixed costs of $200, a sales price of $15, and variable costs of $10.
Part C: Now, to develop an example that can be presented to PizzaPalace's management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $10,000 of 12% debt. Both firms have $20,000 in assets, a 40% tax rate, and an expected EBIT of $3,000. 1) Construct partial income statements, which start with EBIT, for the two firms. 2) Now calculate ROE for both firms. 3) What does this example illustrate about the impact of financial leverage on ROE?
Part D: Explain the difference between financial risk and business risk.
Part E: What happens to ROE for Firms U and L if EBIT falls to $2,000? What does this imply about the impact of leverage on risk and return?
Part F: What does capital structure theory attempt to do? What lessons can be learned from capital structure theory? Be sure to address the MM models.
Part G: What does the empirical evidence say about capital structure theory? What are the implications for managers?
Part H: With the preceding points in mind, now consider the optimal capital structure for PizzaPalace. 1) For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC. 2) Now calculate the corporate value for each capital structure.
Part I: Describe the recapitalization process and apply it to PizzaPalace. Calculate the resulting value of the debt that will be issued, the resulting market value of equity, the price per share, the number of shares repurchased, and the remaining shares. Considering only the capital structures under analysis, what is PizzaPalace's optimal capital structure?
