Question 1

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

Accepted Answer

A) True 
 B)False

Question 2

If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

Accepted Answer

A) True 
 B)False

Question 3

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers. 
C)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. 
D)  Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt. 
A)  A hostile takeover is the main method of transferring ownership interest in a corporation. 
B)  A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers. 
C)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. 
D)  Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization. 
E)  Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. 
B)  Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. 
C)  One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. 
D)  One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor. 
E)  Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock. 
A)  Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. 
B)  Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. 
C)  One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. 
D)  One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor. 
E)  Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

Question 6

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Accepted Answer

A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval. 
A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability. 
B)  Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers. 
C)  Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started. 
D)  The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers. 
E)  The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. 
A)  One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability. 
B)  Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers. 
C)  Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started. 
D)  The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers. 
E)  The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.

Question 8

A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.

Accepted Answer

A) True 
 B)False

Question 9

The Chairman of the Board must also be the CEO.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  In most corporations, the CFO ranks above the CEO. 
B)  By law in most states, the chairman of the board must also be the CEO. 
C)  The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. 
D)  The CFO generally reports to the firm's chief accounting officer, who is normally the controller. 
E)  The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. 
A)  In most corporations, the CFO ranks above the CEO. 
B)  By law in most states, the chairman of the board must also be the CEO. 
C)  The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. 
D)  The CFO generally reports to the firm's chief accounting officer, who is normally the controller. 
E)  The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

Question 11

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Accepted Answer

A)  Maximize its expected total corporate income. 
B)  Maximize its expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the stock price per share over the long run, which is the stock's intrinsic value. 
E)  Maximize the stock price on a specific target date. 
A)  Maximize its expected total corporate income. 
B)  Maximize its expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the stock price per share over the long run, which is the stock's intrinsic value. 
E)  Maximize the stock price on a specific target date.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the advantages of the corporate form of organization is that it avoids double taxation. 
B)  It is easier to transfer one's ownership interest in a partnership than in a corporation. 
C)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E)  Corporations of all types are subject to the corporate income tax. 
A)  One of the advantages of the corporate form of organization is that it avoids double taxation. 
B)  It is easier to transfer one's ownership interest in a partnership than in a corporation. 
C)  One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. 
D)  One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E)  Corporations of all types are subject to the corporate income tax.

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. 
B)  The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. 
C)  It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
D)  One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. 
E)  Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
A)  If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. 
B)  The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. 
C)  It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
D)  One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business. 
E)  Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. 
B)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
E)  A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself. 
A)  In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. 
B)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
E)  A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Question 15

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

Accepted Answer

A)  Congress passes a law that severely restricts hostile takeovers. 
B)  A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. 
C)  The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. 
D)  The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. 
E)  The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. 
A)  Congress passes a law that severely restricts hostile takeovers. 
B)  A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. 
C)  The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. 
D)  The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. 
E)  The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

Question 16

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

Accepted Answer

A) True 
 B)False

Question 17

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose goal is to maximize the stock's intrinsic value rather than the stock's current market price.

Accepted Answer

A) True 
 B)False

Question 18

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

Accepted Answer

A) True 
 B)False

Question 19

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Accepted Answer

A) True 
 B)False

Question 20

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

A) True 
 B)False

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Which of the following statements is CORRECT?

The Chairman of the Board must also be the CEO.

Which of the following statements is CORRECT?

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose goal is to maximize the stock's intrinsic value rather than the stock's current market price.

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Partnerships and proprietorships generally have a tax advantage over corporations.

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

Filters

Exam 1: Overview

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Which of the following statements is CORRECT?

The Chairman of the Board must also be the CEO.

Which of the following statements is CORRECT?

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose goal is to maximize the stock's intrinsic value rather than the stock's current market price.

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Partnerships and proprietorships generally have a tax advantage over corporations.

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Capital Structure

Dividends

Working Capital

Forecasting

Multinational

Stock Equilibrium and Project Evaluation

Filters