Exam 6: Business Organizations and the Tax Environment

If management is maximizing the firm's net income,this is necessarily identical to maximizing earnings per share and stock price.

Jane Doe,who has substantial personal wealth and income,is considering the possibility of opening a new business in the chemical waste management field.She will be the sole owner.The business will have a relatively high degree of risk,and it is expected that the firm will incur losses for the first few years.However,the prospects for growth and positive future income look good,and Jane expects to realize substantial cash flows from dividends the firm will eventually pay out.Which of the legal forms of business organization would probably best suit her needs?

Your corporation has the following cash flows: Operating income :$250,000 Interest received:10,000 Interest paid:45,000 Dividends received:20,000 Dividends paid:50,000 If the applicable income tax rate is 40 percent,and if 70 percent of dividends received are exempt from taxes,what is the corporation's tax liability?

Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial markets.

Which of the following does not need to be considered when assessing the impact of financial decisions?

Managers can increase the value of a firm by making decisions that

The fact that a proprietorship,as a business,pays no corporate income tax and that it is easily and inexpensively formed are often cited as key advantages to that form of business.

Which of the following is not a limitation of the proprietorship form of business?

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability,whereas proprietorships do not.

Your corporation has the following cash flows: Operating income:$250,000 Interest received:10,000 Interest paid:45,000 Dividends received:20,000 Dividends paid:50,000 If 70 percent of dividends received are excludable,and if the applicable tax table is as follows, What is the corporation's tax liability?

A financial decision which results in an increase in net income is necessarily consistent with the firm's objective of maximizing its stock price.

By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized,hence shareholders' wealth also will be maximized.

Which of the following statements is correct?

____ decisions are decisions about how much and what types of debt and equity should be used to finance the firm.

Multinational managerial finance requires that financial analyses consider the effects of changing currency values.

Most firms today use executive stock options,as opposed to other incentive methods,to induce management to act in the best interests of stockholders.

Managers of a firm can increase the value of a firm by

____ decisions are decisions as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm.

Solarcell Corporation has $20,000 which it plans to invest in marketable securities.It is choosing between AT&T bonds which yield 11%,State of Florida municipal bonds which yield 8%,and AT&T preferred stock with a dividend yield of 9%.Solarcell's corporate tax rate is 40%,and 70% of the preferred stock dividends it receives are tax exempt.Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns,which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.

If a firm's stock price falls during the year,this indicates that the firm's managers are not acting in the shareholders' best interest.