Question 1

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. C

Question 2

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  False

Question 3

New Business is just being formed by 10 investors,each of whom will own 10% of the business.The firm is expected to earn $500,000 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?

Accepted Answer

A)   $11,050
B)   $12,266
C)   $10,056
D)   $9,282
E)   $11,713 A

Question 4

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 5

The Chairman of the Board must also be the CEO.

Accepted Answer

A) True 
 B)False

Question 6

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 7

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.

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A)   Maximize managers' own interests,which are by definition consistent with maximizing shareholders' wealth.
B)   Maximize the firm's expected EPS,which must also maximize the firm's price per share.
C)   Minimize the firm's risks because most stockholders dislike risk.In turn,this will maximize the firm's stock price.
D)   Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
E)   Since it is impossible to measure a stock's intrinsic value,the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

Question 10

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.

Question 11

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 12

Which of the following statements is CORRECT?

Accepted Answer

A)   A hostile takeover is the main method of transferring ownership interest in a corporation.
B)   A corporation is a legal entity created by a state,and it has a life and existence that is separate from the lives and existence of its owners and managers.
C)   Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
D)   Limited liability is an advantage of the corporate form of organization to its owners (stockholders) ,but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E)   Although the stockholders of the corporation are insulated by limited legal liability,the legal status of the corporation does not protect the firm's managers in the same way,i.e. ,bondholders can sue the firm's managers if the firm defaults on its debt.

Question 13

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 $2,800,000 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?

Accepted Answer

A)   $6,436
B)   $5,507
C)   $6,188
D)   $6,497
E)   $6,250

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

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 17

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.

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.
B)   Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
C)   Bond covenants are an effective way to resolve conflicts between shareholders and managers.
D)   Because of their simplified organization,it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
E)   One advantage to forming a corporation is that the owners of the firm have limited liability.

Question 19

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.

Question 20

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

Exam 1: An Overview of Financial Management

Which of the following statements is CORRECT?

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.

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

The Chairman of the Board must also be the CEO.

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.

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.

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

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?

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?

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.

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.

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

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

Which of the following statements is CORRECT?

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