Exam 1: An Overview of Financial Management

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.

Assume that the corporate tax rate is 34% and the personal tax rate is 34%.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 ?

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.

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

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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?

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.

Which of the following statements is CORRECT?

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

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?

Partnerships and proprietorships generally have a tax advantage over corporations.

The Chairman of the Board must also be the CEO.

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

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.

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Which of the following statements is CORRECT?