Exam 1: Overview

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.

Which of the following statements is CORRECT?

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?

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

Which of the following statements is CORRECT?

In most corporations, the CFO ranks under the CEO.

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.

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Globalization of business has been facilitated by improvements in information technology.

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?

Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by five stockholders who each hold 20% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,000,000 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?

The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.

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?

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.

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.