Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.
B)  Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
C)  Bond covenants are an effective way to resolve conflicts between shareholders and managers.
D)  Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
E)  One advantage to forming a corporation is that the owners of the firm have limited liability.F) C) and D)
G) A) and B)

Question 2

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
B)  The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
C)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.
D)  Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value.
E)  The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.F) B) and C)
G) B) and D)

Question 4

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Accepted Answer

A) True 
 B)False

Question 5

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.

Accepted Answer

A) True 
 B)False  True

Question 6

The board of directors is the highest ranking body in a corporation,and the chairman of the board is the highest ranking individual.The CEO generally works under the board and its chairman,and the board generally has the authority to remove the CEO under certain conditions.The CEO,however,cannot remove the board,but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise.It is possible for a person to simultaneously serve as CEO and chairman of the board,though many corporate control experts believe it is bad to vest both offices in the same person.

Accepted Answer

A) True 
 B)False  True

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)  One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
B)  Proprietorships are subject to more regulations than corporations.
C)  In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D)  Corporations of all types are subject to the corporate income tax.
E)  Proprietorships and partnerships generally have a tax advantage over corporations.F) A) and C)
G) C) and D)

Question 8

New Business is just being formed by 10 investors,each of whom will own 10% of the business.The firm is expected to earn $1,000,000 before taxes each year.The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%.The firm does not need to retain any earnings,so all of its after-tax income will be paid out as dividends to its investors.The investors will have to pay personal taxes on whatever they receive.How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

Accepted Answer

A)  $20,384
B)  $20,800
C)  $21,225
D)  $21,658
E)  $22,100F) B) and E)
G) C) and D)

Question 9

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

Accepted Answer

A) True 
 B)False

Question 10

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

A) True 
 B)False

Question 11

Some partners in a partnership may have different rights,privileges,and responsibilities than other partners.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Accepted Answer

A)  The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.
B)  The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.
C)  The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
D)  The firm's founder, who is also president and chairman of the board, sells 90% of her shares.
E)  The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.F) C) and D)
G) C) and E)

Question 13

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  Corporations are taxed more favorably than proprietorships.
B)  Corporations have unlimited liability.
C)  Because of their size, large corporations face fewer regulations than smaller corporations and proprietorships.
D)  Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests.
E)  Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.F) B) and E)
G) A) and C)

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)  One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.
B)  Relative to proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.
C)  There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.
D)  Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
E)  Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.F) A) and E)
G) A) and C)

Question 16

Charleston Corporation (CC) now operates as a "regular" corporation,but it is considering a switch to S Corporation status.CC is owned by 100 stockholders who each hold 1% of the stock,and each faces a personal tax rate of 35%.The firm earns $2,000,000 per year before taxes,and since it has no need for retained earnings,it pays out all of its earnings as dividends.Assume that the corporate tax rate is 34% and the personal tax rate is 35%.How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

Accepted Answer

A)  $ 2,565
B)  $ 4,420
C)  $ 8,580
D)  $11,150
E)  $13,000F) B) and C)
G) All of the above

Question 17

Which of the following statements is CORRECT?

Accepted Answer

A)  In most corporations, the CFO ranks above the CEO.
B)  By law in most states, the chairman of the board must also be the CEO.
C)  The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
D)  The CFO generally reports to the firm's chief accounting officer, who is normally the controller.
E)  The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.F) None of the above
G) A) and B)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  A hostile takeover is the main method of transferring ownership interest in a corporation.
B)  A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.
C)  Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
D)  Limited liability is an advantage of the corporate form of organization to its owners (stockholders) , but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E)  Although the 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, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.F) A) and D)
G) A) and B)

Question 19

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.

Accepted Answer

A) True 
 B)False

Question 20

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

Accepted Answer

A) True 
 B)False  True

Exam 1: An Overview of Financial Management

Which of the following statements is CORRECT?

Correct Answer
verified

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Correct Answer
verified

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.

Correct Answer
verified
True

Correct Answer
verified
True

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

Correct Answer
verified

Partnerships and proprietorships generally have a tax advantage over corporations.

Correct Answer
verified

Some partners in a partnership may have different rights,privileges,and responsibilities than other partners.

Correct Answer
verified

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Correct Answer
verified

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.

Correct Answer
verified

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

Correct Answer
verified
True

Exam 1: An Overview of Financial Management

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Correct AnswerverifiedShow Answer

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.

Correct AnswerverifiedTrue

Correct AnswerverifiedTrue

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

Correct AnswerverifiedShow Answer

Partnerships and proprietorships generally have a tax advantage over corporations.

Correct AnswerverifiedShow Answer

Some partners in a partnership may have different rights,privileges,and responsibilities than other partners.

Correct AnswerverifiedShow Answer

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

Correct AnswerverifiedShow Answer

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.

Correct AnswerverifiedShow Answer

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

Correct AnswerverifiedTrue

Correct Answer
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True

Correct Answer
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True

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