Exam 1: Overview

Assume that the corporate tax rate is 34% and the personal tax rate is 35%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?

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.

Partnerships and proprietorships generally have a tax advantage over corporations.

Which of the following statements is CORRECT?

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 trying to best serve its stockholders should be to

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.

One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.

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.

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Which of the following statements is CORRECT?

With which of the following statements would most people in business agree?

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

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?