Question 1

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 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

The Chairman of the Board must also be the CEO.

Accepted Answer

A) True 
 B)False

Question 4

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A) Corporations generally face fewer regulations than proprietorships. 
B) Corporate shareholders are exposed to unlimited liability. 
C) It is usually easier to transfer ownership in a corporation than in a partnership. 
D) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
E) There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small. 
A) Corporations generally face fewer regulations than proprietorships. 
B) Corporate shareholders are exposed to unlimited liability. 
C) It is usually easier to transfer ownership in a corporation than in a partnership. 
D) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
E) There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small.

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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 8

In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price on a specific target date.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A) 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. 
B) The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. 
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
D) 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. 
E) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. 
A) 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. 
B) The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. 
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation. 
D) 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. 
E) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

Question 13

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 14

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders),it should design an executive compensation system whose focus is on the firm's long-term value.

Accepted Answer

A) True 
 B)False

Question 15

The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A) One of the advantages of the corporate form of organization is that it avoids double taxation. 
B) It is easier to transfer one's ownership interest in a partnership than in a corporation. 
C) One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability. 
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E) Corporations of all types are subject to the corporate income tax. 
A) One of the advantages of the corporate form of organization is that it avoids double taxation. 
B) It is easier to transfer one's ownership interest in a partnership than in a corporation. 
C) One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability. 
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote." 
E) Corporations of all types are subject to the corporate income tax.

Question 17

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?

Accepted Answer

A) 20.4% 
B) 20.8% 
C) 21.2% 
D) 21.7% 
E) 22.1% 
A) 20.4% 
B) 20.8% 
C) 21.2% 
D) 21.7% 
E) 22.1%

Question 18

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 19

Which of the following statements is CORRECT?

Accepted Answer

A) Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. 
B) Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. 
C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. 
D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. 
E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock. 
A) Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects. 
B) Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. 
C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. 
D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. 
E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A) One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability. 
B) Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers. 
C) Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started. 
D) The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers. 
E) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. 
A) One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability. 
B) Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers. 
C) Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started. 
D) The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers. 
E) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.

Exam 1: An Overview of Financial Management

Which of the following statements is CORRECT?

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.

The Chairman of the Board must also be the CEO.

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price on a specific target date.

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

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.

In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.

Which of the following statements is CORRECT?

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

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders),it should design an executive compensation system whose focus is on the firm's long-term value.

The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Which of the following statements is CORRECT?

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?

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