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

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

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 6

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. However, there can be conflicts between stockholders and bondholders.

Accepted Answer

A) True 
 B)False

Question 7

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 8

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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 13

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. 
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 14

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 15

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 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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 18

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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.

Accepted Answer

A) True 
 B)False

Question 19

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)  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. 
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)  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.

Question 20

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

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

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

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 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. However, there can be conflicts between stockholders and bondholders.

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

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

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

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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.

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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?

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

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters

Exam 1: Overview

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

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

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 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. However, there can be conflicts between stockholders and bondholders.

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

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

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

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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.

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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?

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

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters