Question 1

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  False

Question 2

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.

Accepted Answer

A) True 
 B)False  False

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

A)   Projected earnings.
B)   Financial market conditions.
C)   Timing of the earnings flow.
D)   Riskiness of the firm.
E)   All of the above must be considered.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

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 15

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?

Accepted Answer

A)   $57,530
B)   $65,350
C)   $69,440
D)   $88,350
E)   $100,280

Question 16

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

Accepted Answer

A)   Capital structure
B)   Capital budgeting
C)   Dividend policy
D)   Risk tolerance

Question 17

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 18

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.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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.

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.

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?