Exam 6: Business Organizations and the Tax Environment

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.

In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business.Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.

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

The two major advantages of a limited liability company are flexibility of ownership structure and the ability to elect to be taxed either as a corporation or as a partnership while maintaining limited liability for the owners.

The U.S.corporate tax rate is lower than most industrialized nations.

No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to compete, even if those cost-increasing actions yield significant benefits to the firm.

The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.

In a limited partnership, the liability of the limited partners generally is restricted to the amount of funds that they have invested in the company but the general partners have unlimited liability.

Which of the following statements is correct?

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

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

Which of the following is not a disadvantage of forming a business as a partnership?

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

When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.

Your corporation has the following cash flows: If 70 percent of dividends received are excludable, and if the applicable tax table is as follows, What is the corporation's tax liability?

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

The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most socially beneficial but cost increasing actions will have to be made mandatory by government.

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.

Deciding upon the form of organization for a business is an important financial decision with potentially significant consequences for the future wealth of the owners.

Which of the following statements is correct?