Ross and Westerfield graduated from UC in 2012 with a masters degree in marketing and public health.

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Question:

Ross and Westerfield graduated from UC in 2012 with a master’s degree in marketing and public health. They established a healthcare business in 2013. The business sourced and distributed pharmaceutical products in the United States. Ross and Westerfield have been partners for several years sharing profits and losses equally. Their partnership business has been very successful, as they agree on most business-related issues. One disagreement, however, is about the legal form of their business organization. Ross wants Westerfield to agree to changing the business from a partnership to a corporation. Ross believes that there is no major problem with corporations and incorporating the business would attract investors to help them raise large capital to expand the business internationally. Westerfield thinks otherwise and believes that the business should remain a partnership to avoid any agency problems. Ross & Westerfield want you to help them address the following questions:

1. What are the advantages and disadvantages of changing the business organization from a partnership to a corporation?

2. Ross and Westerfield know that limited partnerships, limited liability companies, and corporations enjoy limited liability, but they are not very sure what that means. Explain the concept of limited liability to Ross and Westerfield.

3. Assuming Ross and Westerfield have invested $5.0 million in the business. If the company happens to declare bankrupt and has $6 million in unpaid debts. Explain the nature of payments, if any, by Ross and Westerfield in each of the following situations.

i. The company continues as a partnership

ii. The company changes to a corporation

4. If Ross and Westerfield decides to go for a corporation they would like to consider alternative methods of issuing new securities (i.e., raising long-term funds) and the costs of issuing securities in the market.

i. Distinguish between a public issue and a private issue of raising long-term funds and give two examples of each.

ii. Identify five examples of flotation costs associated with issuing securities in financial markets that Ross and Westerfield must consider if they decide to go public.