Question 1

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is correct?

Accepted Answer

A)  Other things held constant,it generally is safer to invest money in a proprietorship than in a partnership or a corporation. 
B)  According to the text,law firms and accounting firms must be organized as proprietorships or partnerships;these businesses do not have the option of incorporating. 
C)  If you are planning to start a business,which you will run as the sole employee,and if you expect the business to earn $1,000,000 per year before taxes,you can minimize federal income taxes by setting up the business as a corporation. 
D)  According to the text,"agency problems" tend to increase as the percentage of a corporation's stock owned by its managers increases. 
E)  Maximizing the income statement item "net income" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm's stockholders. 
A)  Other things held constant,it generally is safer to invest money in a proprietorship than in a partnership or a corporation. 
B)  According to the text,law firms and accounting firms must be organized as proprietorships or partnerships;these businesses do not have the option of incorporating. 
C)  If you are planning to start a business,which you will run as the sole employee,and if you expect the business to earn $1,000,000 per year before taxes,you can minimize federal income taxes by setting up the business as a corporation. 
D)  According to the text,"agency problems" tend to increase as the percentage of a corporation's stock owned by its managers increases. 
E)  Maximizing the income statement item "net income" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm's stockholders.

Question 3

An agency problem exists between stockholders and managers.A second agency problem arises between stockholders and creditors.

Accepted Answer

A) True 
 B)False

Question 4

Interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship?

Accepted Answer

A)  Limited liability. 
B)  Ease of transfer of ownership interest. 
C)  Unlimited life. 
D)  Elimination of double taxation. 
E)  Ability to retain earnings and thus convert income from personal income to capital gains. 
A)  Limited liability. 
B)  Ease of transfer of ownership interest. 
C)  Unlimited life. 
D)  Elimination of double taxation. 
E)  Ability to retain earnings and thus convert income from personal income to capital gains.

Question 6

As a corporate investor paying a marginal tax rate of 34 percent,if 70 percent of dividends are excludable,what would be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield?

Accepted Answer

A)  6.36% 
B)  7.36% 
C)  12.19% 
D)  13.01% 
E)  14.37% 
A)  6.36% 
B)  7.36% 
C)  12.19% 
D)  13.01% 
E)  14.37%

Question 7

Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?

Accepted Answer

A)  Attracting and sustaining new customers. 
B)  Hiring and keeping skilled employees. 
C)  Keeping up with competition. 
D)  Dealing with firms who use "questionable" ethics. 
E)  None of the above. 
A)  Attracting and sustaining new customers. 
B)  Hiring and keeping skilled employees. 
C)  Keeping up with competition. 
D)  Dealing with firms who use "questionable" ethics. 
E)  None of the above.

Question 8

One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets,liabilities,and capital which will generate the largest expected projected income over the relevant time horizon.

Accepted Answer

A) True 
 B)False

Question 9

The key value of limited liability is that it lowers the firm's risk thereby enhancing its value.

Accepted Answer

A) True 
 B)False

Question 10

Individual taxpayers can itemize allowed expenses if they have income of over $250,000,but they must take the standard deduction if their income is below $250,000.

Accepted Answer

A) True 
 B)False

Question 11

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

Accepted Answer

A) True 
 B)False

Question 12

A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par,assuming a 70 percent dividend exclusion?

Accepted Answer

A)  11.03% 
B)  10.78% 
C)  6.48% 
D)  7.31% 
E)  5.52% 
A)  11.03% 
B)  10.78% 
C)  6.48% 
D)  7.31% 
E)  5.52%

Question 13

Which of the following statements is correct?

Accepted Answer

A)  For the most part,our federal tax rates are progressive,because higher incomes are taxed at higher average rates. 
B)  Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light. 
C)  Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities. 
D)  Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds.However,other factors may offset tax considerations. 
E)  All of the above statements are true. 
A)  For the most part,our federal tax rates are progressive,because higher incomes are taxed at higher average rates. 
B)  Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light. 
C)  Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities. 
D)  Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds.However,other factors may offset tax considerations. 
E)  All of the above statements are true.

Question 14

In a limited liability partnership only the general partner can participate in the management of the business.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

Accepted Answer

A)  Threat of firing. 
B)  Managerial compensation. 
C)  Performance shares. 
D)  Threat of takeover. 
E)  Answers b and c above. 
A)  Threat of firing. 
B)  Managerial compensation. 
C)  Performance shares. 
D)  Threat of takeover. 
E)  Answers b and c above.

Question 16

A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket?

Accepted Answer

A)  12.50% 
B)  17.50% 
C)  7.00% 
D)  14.00% 
E)  9.00% 
A)  12.50% 
B)  17.50% 
C)  7.00% 
D)  14.00% 
E)  9.00%

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Which of the following statements is correct?

An agency problem exists between stockholders and managers.A second agency problem arises between stockholders and creditors.

Interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship?

As a corporate investor paying a marginal tax rate of 34 percent,if 70 percent of dividends are excludable,what would be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield?

Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?

One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets,liabilities,and capital which will generate the largest expected projected income over the relevant time horizon.

The key value of limited liability is that it lowers the firm's risk thereby enhancing its value.

Individual taxpayers can itemize allowed expenses if they have income of over $250,000,but they must take the standard deduction if their income is below $250,000.

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par,assuming a 70 percent dividend exclusion?

Which of the following statements is correct?

In a limited liability partnership only the general partner can participate in the management of the business.

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 6: Business Organizations and the Tax Environment

Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.

Which of the following statements is correct?

An agency problem exists between stockholders and managers.A second agency problem arises between stockholders and creditors.

Interest and dividends paid by a corporation are considered to be deductible operating expenses,hence they decrease the firm's tax liability.

Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship?

As a corporate investor paying a marginal tax rate of 34 percent,if 70 percent of dividends are excludable,what would be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield?

Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?

One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets,liabilities,and capital which will generate the largest expected projected income over the relevant time horizon.

The key value of limited liability is that it lowers the firm's risk thereby enhancing its value.

Individual taxpayers can itemize allowed expenses if they have income of over $250,000,but they must take the standard deduction if their income is below $250,000.

Interest paid by a corporation is a tax deduction for the paying corporation,but dividends paid are not deductible.This treatment,other things held constant,tends to encourage the use of debt financing by corporations.

A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par,assuming a 70 percent dividend exclusion?

Which of the following statements is correct?

In a limited liability partnership only the general partner can participate in the management of the business.

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?

A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity.What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters