Answer Options:
a. The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses, even though they report high accounting profits.
b. All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.
c. Small corporations that qualify under the Tax Code can elect not to pay corporate taxes, but then each stockholder must report his or her pro rata shares of the firm’s income as personal income and pay taxes on that income.
d. Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the corporation’s income and stockholders were taxed again on this income when it was paid to them as dividends.
e. All corporations other than non-profits are subject to corporate income taxes, which are 15% for the lowest amounts of income and 38% for the highest income amounts.
Answer: c
Question: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
Answer Options:
a. True
b. False
Answer: True
Question: 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.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following would be most likely to lead to a higher level of interest rates in the economy?
a. Households start saving a larger percentage of their income.
b. Corporations step up their expansion plans and thus increase their demand for capital.
c. The level of inflation begins to decline.
d. The economy moves from a boom to a recession.
e. The Federal Reserve decides to try to stimulate the economy.
Answer: b
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: b
Question: 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.
a. True
b. False
Answer: False
Question: 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.
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.
b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.
c. Hedge funds have more in common with investment banks than with any other type of financial institution.
d. Hedge funds have more in common with commercial banks than with any other type of financial institution.
e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only “sophisticated investors” (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary “due diligence” on their own rather than have it done by the SEC or some other regulator.
Answer: e
Question: A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.
Answer Options:
a. True
b. False
Answer: b. False
Question: You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:
a. A money market transaction.
b. A primary market transaction.
c. A secondary market transaction.
d. A futures market transaction.
e. An over-the-counter market transaction.
Answer: c
Question: One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm’s investors to transfer their ownership interests.
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: e
Question: The owner of a convertible bond owns, in effect, both a bond and a call option.
Answer Options:
a. True
b. False
Answer: a. True
Question: If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.
Answer Options:
a. True
b. False
Answer: True
Question: Assume that a piece of leased equipment has a relatively high expected residual value. From the lessee’s viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.
a. True
b. False
Answer: a. True