Question 1

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

Accepted Answer

A) Corporations generally face fewer regulations. 
B) Less of a corporation's income is generally subject to federal taxes. 
C) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
D) Corporate investors are exposed to unlimited liability. 
E) Corporations generally find it easier to raise large amounts of capital. 
A) Corporations generally face fewer regulations. 
B) Less of a corporation's income is generally subject to federal taxes. 
C) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
D) Corporate investors are exposed to unlimited liability. 
E) Corporations generally find it easier to raise large amounts of capital.

Question 2

In most corporations,the CFO ranks under the CEO.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. 
B) Corporations face fewer regulations than proprietorships. 
C) One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. 
D) It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. 
E) If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business. 
A) One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership. 
B) Corporations face fewer regulations than proprietorships. 
C) One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level. 
D) It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required. 
E) If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) Decrease the use of restrictive covenants in bond agreements. 
B) Take actions that reduce the possibility of a hostile takeover. 
C) Elect a board of directors that allows managers greater freedom of action. 
D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 
E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 
A) Decrease the use of restrictive covenants in bond agreements. 
B) Take actions that reduce the possibility of a hostile takeover. 
C) Elect a board of directors that allows managers greater freedom of action. 
D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 
E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Question 8

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

Accepted Answer

A) Maximize its expected total corporate income. 
B) Maximize its expected EPS. 
C) Minimize the chances of losses. 
D) Maximize the stock price per share over the long run, which is the stock's intrinsic value. 
E) Maximize the stock price on a specific target date. 
A) Maximize its expected total corporate income. 
B) Maximize its expected EPS. 
C) Minimize the chances of losses. 
D) Maximize the stock price per share over the long run, which is the stock's intrinsic value. 
E) Maximize the stock price on a specific target date.

Question 9

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 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. 
B) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. 
C) Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. 
D) Large corporations are taxed more favorably than proprietorships. 
E) Corporate stockholders are exposed to unlimited liability. 
A) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. 
B) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. 
C) Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment. 
D) Large corporations are taxed more favorably than proprietorships. 
E) Corporate stockholders are exposed to unlimited liability.

Question 12

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 13

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

Accepted Answer

A) Compensating managers with stock options. 
B) Financing risky projects with additional debt. 
C) The threat of hostile takeovers. 
D) The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. 
E) Abolishing the Security and Exchange Commission. 
A) Compensating managers with stock options. 
B) Financing risky projects with additional debt. 
C) The threat of hostile takeovers. 
D) The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. 
E) Abolishing the Security and Exchange Commission.

Question 14

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

Accepted Answer

A) Pay managers large cash salaries and give them no stock options. 
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. 
C) Beef up the restrictive covenants in the firm's debt agreements. 
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. 
E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold. 
A) Pay managers large cash salaries and give them no stock options. 
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. 
C) Beef up the restrictive covenants in the firm's debt agreements. 
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. 
E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

Question 15

A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers.If the old managers were managing the firm inefficiently,then hostile takeovers can improve the economy.However,hostile takeovers are controversial,and legislative actions have been taken to make them more difficult to undertake.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B) Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C) "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. 
D) It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E) Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. 
A) A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B) Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C) "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. 
D) It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E) Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A) Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management. 
B) The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. 
C) The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. 
D) In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development. 
E) 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. 
A) Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management. 
B) The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. 
C) The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers. 
D) In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development. 
E) 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.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 1: An Overview of Financial Management

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.

Which of the following statements is CORRECT?

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

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

If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.

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

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

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

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?

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

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

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.

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

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Financial Markets and Institutions

Financial Statements, cash Flow, and Taxes

Analysis of Financial Statements

Time 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

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Mergers and Acquisitions

Continuous Compounding and Discounting

Zero Coupon Bonds

Bankruptcy and Reorganization

Calculating Beta Coefficients

Using the Capm to Estimate the Risk-Adjusted Cost of Capital

Techniques for Measuring Beta Risk

Degree of Leverage

Filters