Exam 1: An Overview of Financial Management

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

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There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

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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?

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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

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Which of the following statements is CORRECT?

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A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

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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.

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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.

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.

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Which of the following statements is CORRECT?

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Which of the following statements is CORRECT?

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Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

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A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

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Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

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

(True/False)
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Which of the following statements is CORRECT?

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