Exam 1: An Overview of Financial Management

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.

New Business is just being formed by 10 investors,each of whom will own 10% of the business.The firm is expected to earn $1,200,000 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 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.

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?