Exam 1: An Overview of Financial Management

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.

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

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.

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

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?

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

New Business is just being formed by 10 investors,each of whom will own 10% of the business.The firm is expected to earn $1,000,000 before taxes each year.The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%.The firm does not need to retain any earnings,so all of its after-tax income will be paid out as dividends to its investors.The investors will have to pay personal taxes on whatever they receive.How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

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?

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

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.

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?

Partnerships and proprietorships generally have a tax advantage over corporations.

Which of the following statements is CORRECT?