Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)   One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.
B)   Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.
C)   Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started.
D)   The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.
E)   Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.F) A) and D)
G) B) and D)

Question 2

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Accepted Answer

A) True 
 B)False

Question 3

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Accepted Answer

A) True 
 B)False

Question 4

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

Question 5

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) C) and D)
G) C) and E)

Question 6

As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B)   In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
C)   A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
D)   Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling)  of partnership interests.
E)   A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.F) C) and D)
G) A) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.
B)   Capital market transactions involve only preferred stock or common stock.
C)   If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding.
D)   Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.
E)   Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.F) A) and B)
G) A) and E)

Question 9

There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
B)   Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
C)   One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
D)   One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.
E)   Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.F) A) and E)
G) A) and D)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.
B)   IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.
C)   In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
D)   It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.
E)   It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.F) B) and E)
G) A) and D)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.
B)   If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
C)   The NYSE is an example of an over-the-counter market.
D)   Only institutions, and not individuals, can engage in derivative market transactions.
E)   As they are generally defined, money market transactions involve debt securities with maturities of less than one year.F) C) and E)
G) B) and C)

Question 13

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)   Maximize its expected total corporate income.
B)   Maximize its expected EPS.
C)   Minimize the chances of losses.
D)   Maximize the stock price per share over the long run, which is the stock's intrinsic value.
E)   Maximize the stock price on a specific target date.F) C) and D)
G) All of the above

Question 15

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Accepted Answer

A) True 
 B)False

Question 16

Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

Accepted Answer

A) True 
 B)False

Question 17

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Accepted Answer

A) True 
 B)False

Question 18

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Accepted Answer

A) True 
 B)False

Question 19

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) B) and D)
G) B) and C)

Question 20

Assume that the corporate tax rate is 34% and the personal tax rate is 35%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?

Accepted Answer

A)   20.4%
B)   20.8%
C)   21.2%
D)   21.7%
E)   22.1%F) A) and B)
G) A) and C)

Exam 1: An Overview of Financial Management

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

Correct Answer
verified

Correct Answer
verified

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Correct Answer
verified

As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.

Correct Answer
verified

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Correct Answer
verified

Correct Answer
verified

Exam 1: An Overview of Financial Management

Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Correct AnswerverifiedShow Answer

As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.

Correct AnswerverifiedShow Answer

A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A publicly owned corporation is a company whose shares are held by the investing public, which may include other corporations as well as institutional investors.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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