Question 1

Which of the following statements is correct?

Accepted Answer

A)  The major disadvantage of organizing as a corporation is that it does not provide its owners with limited liability. 
B)  Bond covenants, or restrictions on debt, are an important device to reduce agency conflicts between stockholders and bondholders. 
C)  The threat of a hostile takeover serves to reduce agency conflicts between stockholders and bondholders. 
D)  Compensation packages are designed, in part, to reduce agency conflicts between shareholders and managers. 
E)  Both answers b and d are correct.

Question 2

A firm's current value is related to its future growth opportunities, and corporations can attract funds more easily than unincorporated businesses to take advantage of growth opportunities.

Accepted Answer

A) True 
 B)False

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

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%

Question 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A)  increasing the size of the cash inflows. 
B)  reducing the riskiness of the cash flows. 
C)  speeding up the timing of the cash flows. 
D)  all of the above will increase the value of the firm.

Question 10

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Accepted Answer

A) True 
 B)False

Question 11

The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A)  8.46% 
B)  8.00% 
C)  7.92% 
D)  9.00% 
E)  9.16%

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.

Question 14

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%

Question 15

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.

Question 16

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

Accepted Answer

A)  Unlimited personal liability 
B)  Difficulty raising capital 
C)  Double taxation 
D)  Difficulty in transferring ownership 
E)  Limited life

Question 17

Which of the following statements is correct?

Accepted Answer

A)  A hostile takeover is a primary method of transferring ownership interest in a corporation. 
B)  The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation. 
C)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. 
D)  In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms. 
E)  Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way.

Question 18

Four of the disadvantages of a partnership are (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty in attracting large amounts of capital.

Accepted Answer

A) True 
 B)False

Question 19

A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 6: Business Organizations and the Tax Environment

Which of the following statements is correct?

A firm's current value is related to its future growth opportunities, and corporations can attract funds more easily than unincorporated businesses to take advantage of growth opportunities.

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

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?

Which of the following statements is correct?

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

Which of the following statements is correct?

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

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

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Which of the following statements is correct?

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

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

Which of the following statements is correct?

Four of the disadvantages of a partnership are (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty in attracting large amounts of capital.

A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price.

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