Question 1

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Accepted Answer

A) True 
 B)False

Question 2

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 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Corporations generally face fewer regulations than sole proprietorships.
B)   Corporate shareholders are exposed to unlimited liability.
C)   It is usually easier to transfer ownership in a corporation than in a partnership.
D)   Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
E)   There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small.F) B) and E)
G) None of the above

Question 4

As a result of the Enron scandal and other recent scandals, there has been a strong push to improve business ethics.

Accepted Answer

A) True 
 B)False  True

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)   Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
B)   The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
C)   Hostile takeovers are most likely to occur when a firm's stock sells at a price above its intrinsic value because its management has been issuing overly optimistic statements about its likely future performance.
D)   In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.
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 D)
G) A) and E)

Question 6

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 7

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Accepted Answer

A)   Compensating managers with stock options.
B)   Financing risky projects with additional debt.
C)   The threat of hostile takeovers.
D)   The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
E)   Abolishing the Security and Exchange Commission.F) None of the above
G) A) and D)

Question 8

Globalization of business has been facilitated by improvements in information technology.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.
B)   The threat of takeover generally increases potential conflicts between stockholders and managers.
C)   Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.
D)   The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
E)   The creation of the Securities and Exchange Commission (SE
C)   has eliminated conflicts between managers and stockholders.F) A) and E)
G) C) and E)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   Corporations are taxed more favorably than sole proprietorships.
B)   Corporations have unlimited liability.
C)   Because of their size, large corporations face fewer regulations than smaller corporations and sole 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) A) and C)
G) None of the above

Question 11

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

Accepted Answer

A) True 
 B)False

Question 12

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

Question 13

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)   Sole 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)   Sole proprietorships and partnerships generally have a tax advantage over corporations.F) A) and D)
G) D) and E) E

Question 14

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Accepted Answer

A) True 
 B)False

Question 15

One advantage of the corporate form of organization is that it avoids double taxation.

Accepted Answer

A) True 
 B)False

Question 16

In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.

Accepted Answer

A) True 
 B)False

Question 17

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) A) and C)
G) All of the above

Question 18

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Accepted Answer

A)   Decrease the use of restrictive covenants in bond agreements.
B)   Take actions that reduce the possibility of a hostile takeover.
C)   Elect a board of directors that allows managers greater freedom of action.
D)   Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
E)   Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.F) C) and E)
G) C) and D)

Question 19

With which of the following statements would most people in business agree?

Accepted Answer

A)   A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
B)   Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C)   "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.
D)   It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior.
E)   Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.F) A) and C)
G) A) and B)

Question 20

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) A) and E)
G) B) and E) B

Exam 1: Overview

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

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

As a result of the Enron scandal and other recent scandals, there has been a strong push to improve business ethics.

Correct Answer
verified
True

Which of the following statements is CORRECT?

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

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Correct Answer
verified

Globalization of business has been facilitated by improvements in information technology.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

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

Which of the following statements is CORRECT?

Correct Answer
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E

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Correct Answer
verified

One advantage of the corporate form of organization is that it avoids double taxation.

Correct Answer
verified

In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.

Correct Answer
verified

Correct Answer
verified

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Correct Answer
verified

With which of the following statements would most people in business agree?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified
B

Exam 1: Overview

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

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

As a result of the Enron scandal and other recent scandals, there has been a strong push to improve business ethics.

Correct AnswerverifiedTrue

Which of the following statements is CORRECT?

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

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Correct AnswerverifiedShow Answer

Globalization of business has been facilitated by improvements in information technology.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

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 AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedE

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Correct AnswerverifiedShow Answer

One advantage of the corporate form of organization is that it avoids double taxation.

Correct AnswerverifiedShow Answer

In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Correct AnswerverifiedShow Answer

With which of the following statements would most people in business agree?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedB

Correct Answer
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Correct Answer
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Correct Answer
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True

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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E

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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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B