Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Well designed bond covenants are useful for reducing agency conflicts between stockholders and managers. 
B)  The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail. 
C)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. 
D)  Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value. 
E)  The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. 
A)  Well designed bond covenants are useful for reducing agency conflicts between stockholders and managers. 
B)  The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail. 
C)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value. 
D)  Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value. 
E)  The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A)  In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. 
B)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
E)  A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself. 
A)  In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. 
B)  In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 
C)  A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company. 
D)  Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. 
E)  A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Question 3

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. 
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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

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 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 sole 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 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 sole proprietorships. 
E)  Corporate stockholders are exposed to unlimited liability.

Question 7

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

A) True 
 B)False

Question 8

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 9

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 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  The proper goal of the financial manager should be to maximize the firm's expected cash flows, because this will add the most wealth to each of the individual shareholders (owners) of the firm. 
B)  The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected after-tax income over the relevant time horizon. 
C)  The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed. 
D)  Large, publicly-owned firms like AT&T and GM, are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there are no effective tools that can be used to motivate them to take actions that are in the stockholders' best interests. 
E)  Potential conflicts of interest can exist between stockholders and managers, and also between stockholders and bondholders. 
A)  The proper goal of the financial manager should be to maximize the firm's expected cash flows, because this will add the most wealth to each of the individual shareholders (owners) of the firm. 
B)  The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected after-tax income over the relevant time horizon. 
C)  The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed. 
D)  Large, publicly-owned firms like AT&T and GM, are controlled by their management teams. Ownership is generally widely dispersed, hence managers have great freedom in how they manage the firm. Managers may operate in stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there are no effective tools that can be used to motivate them to take actions that are in the stockholders' best interests. 
E)  Potential conflicts of interest can exist between stockholders and managers, and also between stockholders and bondholders.

Question 12

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 38%. 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 35% and the personal tax rate is 38%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Accepted Answer

A)  $85,064 
B)  $86,800 
C)  $88,536 
D)  $90,307 
E)  $92,113 
A)  $85,064 
B)  $86,800 
C)  $88,536 
D)  $90,307 
E)  $92,113

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C)  has eliminated conflicts between managers and stockholders. 
A)  One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. 
B)  The threat of takeover generally increases potential conflicts between stockholders and managers. 
C)  Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. 
D)  The threat of takeovers tends to reduce potential conflicts between stockholders and managers. 
E)  The creation of the Securities and Exchange Commission (SE
C)  has eliminated conflicts between managers and stockholders.

Question 14

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole 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 15

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

Accepted Answer

A)  Congress passes a law that severely restricts hostile takeovers. 
B)  A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. 
C)  The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest e2 years over a 10-year period. 
D)  The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. 
E)  The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. 
A)  Congress passes a law that severely restricts hostile takeovers. 
B)  A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. 
C)  The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest e2 years over a 10-year period. 
D)  The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. 
E)  The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

Question 16

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements would most people in business agree with?

Accepted Answer

A)  A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B)  Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C)  "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. 
D)  It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E)  Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation. 
A)  A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation. 
B)  Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees. 
C)  "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees. 
D)  It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior. 
E)  Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)  The ability of firms in competitive industries to voluntarily undertake socially beneficial but costly projects is constrained by competition and the need to attract capital. 
B)  Any action that would maximize a firm's stock price must be consistent with the maximization of social welfare. 
C)  Decisions regarding social and ethical behavior have no effect, either positive or negative, on firms' stock prices. 
D)  In a competitive industry, if one group of firms is "socially conscious" and takes costly actions designed to improve social welfare, but other firms do not, then most investors will flock to the socially conscious firms, thus enhancing their ability to attract capital. Eventually, these firms must dominate the industry. 
E)  Even if the government did not mandate some actions deemed to be socially responsible, such as those relating to fair hiring and environmentally sound practices, most firms in competitive markets would still pursue these policies. 
A)  The ability of firms in competitive industries to voluntarily undertake socially beneficial but costly projects is constrained by competition and the need to attract capital. 
B)  Any action that would maximize a firm's stock price must be consistent with the maximization of social welfare. 
C)  Decisions regarding social and ethical behavior have no effect, either positive or negative, on firms' stock prices. 
D)  In a competitive industry, if one group of firms is "socially conscious" and takes costly actions designed to improve social welfare, but other firms do not, then most investors will flock to the socially conscious firms, thus enhancing their ability to attract capital. Eventually, these firms must dominate the industry. 
E)  Even if the government did not mandate some actions deemed to be socially responsible, such as those relating to fair hiring and environmentally sound practices, most firms in competitive markets would still pursue these policies.

Question 20

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?

Accepted Answer

A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval. 
A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. 
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. 
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. 
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares. 
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.

Exam 1: An Overview of Financial Management

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

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?

Partnerships and proprietorships generally have a tax advantage over corporations.

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.

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."

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.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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

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.

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 would most people in business agree with?

Which of the following statements is CORRECT?

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?

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters