Question 1

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

A) True 
 B)False

Question 2

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 3

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.

Accepted Answer

A) True 
 B)False

Question 4

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

Accepted Answer

A)  Relaxant's shareholders (the ex-partners) will now be exposed to less liability. 
B)  The company will probably be subject to fewer regulations and required disclosures. 
C)  Assuming the firm is profitable, none of its income will be subject to federal income taxes. 
D)  The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. 
E)  The firm will find it more difficult to raise additional capital to support its growth. 
A)  Relaxant's shareholders (the ex-partners) will now be exposed to less liability. 
B)  The company will probably be subject to fewer regulations and required disclosures. 
C)  Assuming the firm is profitable, none of its income will be subject to federal income taxes. 
D)  The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. 
E)  The firm will find it more difficult to raise additional capital to support its growth.

Question 5

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)  One drawback of forming a corporation is that it generally subjects the firm to additional regulations. 
B)  One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. 
C)  One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. 
D)  One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. 
E)  One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests. 
A)  One drawback of forming a corporation is that it generally subjects the firm to additional regulations. 
B)  One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. 
C)  One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. 
D)  One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. 
E)  One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.

Question 7

Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)  Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers. 
B)  The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail. 
C)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. 
D)  Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value. 
E)  The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. 
A)  Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers. 
B)  The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail. 
C)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. 
D)  Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value. 
E)  The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.

Question 9

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Which of the following statements is CORRECT?

Accepted Answer

A)  Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. 
B)  Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. 
C)  Hedge funds have more in common with investment banks than with any other type of financial institution. 
D)  Hedge funds have more in common with commercial banks than with any other type of financial institution. 
E)  Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated investors" (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator. 
A)  Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. 
B)  Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. 
C)  Hedge funds have more in common with investment banks than with any other type of financial institution. 
D)  Hedge funds have more in common with commercial banks than with any other type of financial institution. 
E)  Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated investors" (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  A good goal for a firm's management is the maximization of expected EPS. 
B)  Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. 
C)  Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. 
D)  Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. 
E)  For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price. 
A)  A good goal for a firm's management is the maximization of expected EPS. 
B)  Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. 
C)  Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. 
D)  Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. 
E)  For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.

Question 13

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

Accepted Answer

A) True 
 B)False

Question 14

If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C)  has eliminated conflicts between managers and stockholders. 
A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C)  has eliminated conflicts between managers and stockholders.

Question 16

The Chairman of the Board must also be the CEO.

Accepted Answer

A) True 
 B)False

Question 17

If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. 
B)  There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm. 
C)  If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. 
D)  Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business. 
E)  Ethics is not an important consideration in business and in business schools. 
A)  If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. 
B)  There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm. 
C)  If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. 
D)  Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business. 
E)  Ethics is not an important consideration in business and in business schools.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  The New York Stock Exchange is an auction market, and it has a physical location. 
B)  Home mortgage loans are traded in the money market. 
C)  If an investor sells shares of stock through a broker, then it would be a primary market transaction. 
D)  Capital markets deal only with common stocks and other equity securities. 
E)  While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. 
A)  The New York Stock Exchange is an auction market, and it has a physical location. 
B)  Home mortgage loans are traded in the money market. 
C)  If an investor sells shares of stock through a broker, then it would be a primary market transaction. 
D)  Capital markets deal only with common stocks and other equity securities. 
E)  While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

Question 20

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Accepted Answer

A) True 
 B)False

Partnerships and proprietorships generally have a tax advantage over corporations.

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.

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.

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?

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.

Which of the following statements is CORRECT?

The Chairman of the Board must also be the CEO.

If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters

Exam 1: An Overview of Financial Management

Partnerships and proprietorships generally have a tax advantage over corporations.

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.

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the stock is closely held.

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?

The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price.

If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.

Which of the following statements is CORRECT?

The Chairman of the Board must also be the CEO.

If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

The Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Multinational Financial Management

Financial and Operating Leverage: Analysis and Calculation

Filters