Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. 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.
b. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation.
c. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation.
d. 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.
e. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
Answer Options:
a. 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.
b. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation.
c. It is generally easier to transfer one’s ownership interest in a partnership than in a corporation.
d. 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.
e. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
Answer: d. 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.
Question: A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more acceptable to managers.
a. True
b. False
Answer: True
Question: Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm’s taxes.
Answer Options:
a. True
b. False
Answer: b. False
Question: The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
One of the disadvantages of incorporating your business is that you could be subject to double taxation.
Proprietorships are subject to more regulations than corporations.
In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
Corporations of all types are subject to the corporate income tax.
Proprietorships and partnerships generally have a tax advantage over corporations.
Answer: e. Proprietorships and partnerships generally have a tax advantage over corporations.
Question: An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.
a. True
b. False
Answer: False
Question: With which of the following statements would most people in business agree?
Answer Options:
a. A corporation’s short-run profits would 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.
Answer: e
Question: Partnerships and proprietorships generally have a tax advantage over corporations.
a. True
b. False
Answer: True
Question: Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Options:
a. True
b. False
Answer: a. True
Question: (Multiple Choice: True/False):
In most corporations, the CFO ranks under the CEO.
a. True
b. False
Answer: True
Question: Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
a. True
b. False
Answer: True
Question: 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.
Answer Options:
a. True
b. False
Answer: True
Question: It is generally harder to transfer one’s ownership interest in a partnership than in a corporation.
a. True
b. False
Answer: True
Question: In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the expected EPS.
a. True
b. False
Answer: False
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: a. True
Question: Which of the following statements is CORRECT?
One of the advantages of the corporate form of organization is that it avoids double taxation.
It is easier to transfer one’s ownership interest in a partnership than in a corporation.
One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights.
Answer: c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
Question: Which of the following statements is NOT CORRECT?
Answer Options:
a. When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”
b. “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares.
c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.
d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market.
e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.
Answer: b
Question: Which of the following statements is most correct?
Answer Options:
a. Corporations are allowed to exclude 70% of their interest income from corporate taxes.
b. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
c. Individuals pay taxes on only 30% of the income realized from municipal bonds.
d. Individuals are allowed to exclude 70% of their interest income from their taxes.
e. Individuals are allowed to exclude 70% of their dividend income from their taxes.
Answer: c
Question: When a corporation’s shares are owned by a few individuals who are associated with the firm’s management, we say that the stock is closely held.
Answer Options:
a. True
b. False
Answer: True
Question: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm’s stockholders.
a. True
b. False
Answer: True
Question: In order to maximize its shareholders’ value, a firm’s management must attempt to maximize the stock price on a specific target date.
a. True
b. False
Answer: False
Question: 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.
a. True
b. False
Answer: True
Question: Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?
a. Because of the call premium, the required rate of return would decline.
b. There is no reason to expect a change in the required rate of return.
c. The required rate of return would decline because the bond would then be less risky to a bondholder.
d. The required rate of return would increase because the bond would then be more risky to a bondholder.
e. It is impossible to say without more information.
Answer: d