Question 1

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

Accepted Answer

A)  Minimize the debt used by a firm. 
B)  Maximize expected EPS. 
C)  Minimize the chances of losses. 
D)  Maximize the stock price per share. 
E)  Maximize expected net income.

Question 2

Which of the following statements is correct?

Accepted Answer

A)  Given the multi-owner nature of most large corporations,agency costs associated with perquisite consumption are not really a problem. 
B)  Managers may operate in the stockholders' best interests,but they may also operate in their own personal best interests.As long as managers stay within the law,there simply are not any effective controls that stockholders can implement to control managerial decision making. 
C)  Shareholder agency costs include the opportunity costs associated with constraining managerial freedom but do not include managerial salaries. 
D)  An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person. 
E)  All of the above statements are false.

Question 3

Which of the following statements is correct?

Accepted Answer

A)  The optimal dividend policy is the one that satisfies the shareholders because they supply the firm's capital. 
B)  The use of debt financing has no effect on earnings per share (EPS)or stock price. 
C)  The riskiness of projected EPS depends upon how the firm is financed. 
D)  Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream. 
E)  Dividend policy is one aspect of the firm's financial policy that is determined directly by the shareholders.

Question 4

Current tax laws have which of the following effects?

Accepted Answer

A)  Favor dividends because there are no capital gains taxes on dividends. 
B)  Do not favor capital gains because the tax must be paid as the value of the stock increases,whether or not the stock is sold. 
C)  Favor capital gains because the tax does not have to be paid until the stock is sold. 
D)  Do not favor dividends or capital gains for most people because different people are in different tax brackets. 
E)  Favor dividends since dividends are tax-deductible for the paying corporation whereas retained earnings,which produce capital gains,are not tax-deductible.

Question 5

Which of the following statements is correct?

Accepted Answer

A)  A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability,whereas proprietorships do. 
B)  An advantage of the corporate form for many businesses is the fact that the corporate tax rate always exceeds the personal tax rate,which is the rate at which proprietorships and partnerships are taxed. 
C)  There are more partnerships and sole proprietorships than corporations in the U.S. ,but corporations produce more goods and services than do other forms of business. 
D)  Because corporations enjoy the benefits of limited liability,easy transferability of ownership interest,unlimited life,and favorable tax status relative to the situation for partnerships and proprietorships,most large businesses choose to incorporate. 
E)  Because lawyers have the incorporation process so automated (e.g. ,word processors for drawing up the necessary papers),it is less expensive to form a corporation than to form a proprietorship or partnership.

Question 6

Allen Corporation can (1)build a new plant which should generate a before-tax return of 11 percent,or (2)invest the same funds in the preferred stock of FPL,which should provide Allen with a before-tax return of 9%,all in the form of dividends.Assume that Allen's marginal tax rate is 25 percent,and that 70 percent of dividends received are excluded from taxable income.If the plant project is divisible into small increments,and if the two investments are equally risky,what combination of these two possibilities will maximize Allen's effective return on the money invested?

Accepted Answer

A)  All in the plant project. 
B)  All in FPL preferred stock. 
C)  60% in the project;40% in FPL. 
D)  60% in FPL;40% in the project. 
E)  50% in each.

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

Profit maximization does not always lead to wealth maximization because

Accepted Answer

A)  it does not consider the riskiness of the cash flows. 
B)  it does not consider the timing of the cash flows. 
C)  it does not consider the size of the cash flows. 
D)  two of the above are correct. 
E)  all of the above are correct

Question 9

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 in one of these forms rather than as a corporation.However,if the business gets very large,it becomes advantageous to convert to a corporation,primarily because corporations have important tax advantages over proprietorships and partnerships. 
C)  For a large company (taxable income over $1 million),the tax situation would,generally,favor organization as a partnership or proprietorship,or possibly as an S corporation,rather than as a regular corporation.However,legal considerations related to ownership transfers and liability offset the tax situation,with the result that most business (measured by dollar sales)is conducted by corporations. 
D)  In the typical situation,a taxpayer's average tax rate is below his or her marginal rate.However,there is an income range within which the average rate exceeds the marginal rate. 
E)  Statements c and d are both correct.

Question 10

Performance shares are dollar bonuses awarded to managers on the basis of corporate performance.

Accepted Answer

A) True 
 B)False

Question 11

Under our current tax laws,when investors pay taxes on their corporate dividend income,they are being subjected to a form of double taxation.

Accepted Answer

A) True 
 B)False

Question 12

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 flow,because this will add the most wealth to each of the individual shareholders (owners)of the firm. 
B)  One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The financial manager should seek that combination of assets,liabilities,and capital which will generate the largest expected projected 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)  Because large,publicly-owned firms are controlled by their management teams,and typically,ownership is widely dispersed,managers have great freedom in managing the firm.Managers may operate in the stockholders' best interest,but they may also operate in their own personal best interests.As long as managers stay within the law,there simply aren't any effective controls over managerial decisions in such situations. 
E)  Agency problems exist between stockholders and managers,and between stockholders and creditors.

Question 13

Multinational managerial finance requires that

Accepted Answer

A)  The effects of changing currency values be included in financial analyses. 
B)  Legal and economic differences be considered in financial decisions. 
C)  Political risk be excluded from multinational corporate financial analyses. 
D)  All of the above. 
E)  Only a and b above.

Question 14

Legal and economic differences among countries,although important,do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Accepted Answer

A) True 
 B)False

Question 15

In 2014,Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name.They were thinking of incorporating if that would lower their total tax liability.The Koehlers expected the company to earn $100,000 before taxes next year.They planned to take out salaries of $45,000,and to reinvest the rest in the business.Their personal deductions total $8,150 and they will file a joint return for their personal income.(1)What is their expected total tax liability as a proprietorship? (2)As a corporation?
(3)Based on current taxes,should they incorporate?

Accepted Answer

A)  $23,304.50;$14,675.00;Yes 
B)  $14,675.00;$13,427.50;Yes 
C)  $23,304.50;$13,427.50;Yes 
D)  $15,212.50;$23,450.00;No 
E)  $20,778.00;$23,450.00;No

Question 16

The corporate charter of a firm includes all of the following information except

Accepted Answer

A)  the initial price of the stock to be issued. 
B)  the types of activities it will pursue. 
C)  the name of the proposed corporation. 
D)  the amount of capital stock. 
E)  the number of directors.

Question 17

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

Accepted Answer

A)  avoids fines and legal expenses. 
B)  reduces corporate taxes 
C)  attracts business from customers who appreciate and support ethical policies. 
D)  attracts and keeps employees of the highest caliber.

Question 18

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

Accepted Answer

A)  Unlimited liability for the owners. 
B)  Limited life of the organization. 
C)  Difficulty of transferring ownership. 
D)  Difficulty in raising capital. 
E)  Business is taxed like an individual.

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Although over half of all corporations select the S corporation status when filing taxes,these firms generate only around 25 percent of the total revenues provided by corporations.

Accepted Answer

A) True 
 B)False

Exam 6: Business Organizations and the Tax Environment

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

Which of the following statements is correct?

Which of the following statements is correct?

Current tax laws have which of the following effects?

Which of the following statements is correct?

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.

Profit maximization does not always lead to wealth maximization because

Which of the following statements is correct?

Performance shares are dollar bonuses awarded to managers on the basis of corporate performance.

Under our current tax laws,when investors pay taxes on their corporate dividend income,they are being subjected to a form of double taxation.

Which of the following statements is correct?

Multinational managerial finance requires that

Legal and economic differences among countries,although important,do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

The corporate charter of a firm includes all of the following information except

Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except

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

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.

Although over half of all corporations select the S corporation status when filing taxes,these firms generate only around 25 percent of the total revenues provided by corporations.