Exam 1: An Overview of Financial Management

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."

One advantage of the corporate form of organization is that it avoids double taxation.

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?

If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.

Which of the following is a primary market transaction?

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.

Which of the following statements is CORRECT?

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

In most corporations, the CFO ranks under the CEO.

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.

Which of the following actions would be most 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.

Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Primary markets are large and important, while secondary markets are smaller and less important.

Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,000,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.