Answer Options:
a. True
b. False
Answer: a. True
Question: If management operates in a manner designed to maximize the firm’s expected profits for the current year, this will maximize the stockholders’ wealth as of the current year.
a. True
b. False
Answer: False
Question: It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
a. True
b. False
Answer: False
Question: The problem of dilution of stockholders’ earnings never results from the sale of call options, but it can arise if warrants are used.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Options:
a. A good goal for a firm’s management is the maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations, and corporations’ popularity results primarily from their favorable tax treatment.
c. Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
d. Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
e. For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.
Answer: c
Question: Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, and they also benefit from the 70% tax exemption on preferred dividends received.
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: d
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: d
Question: The NYSE is defined as a “spot” market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: e
Question: The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price.
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.
c. Capital market instruments include both long-term debt and common stocks.
d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
Answer: c
Question: Private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions.
Answer Options:
a. True
b. False
Answer: False
Question: If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index.
Answer Options:
a. True
b. False
Answer: True
Question: Financial institutions are more diversified today than they were in the past, when federal laws kept investment banks, commercial banks, insurance companies, and similar organizations quite separate. Today the larger financial services corporations offer a variety of services, ranging from checking accounts, to insurance, to underwriting securities, to stock brokerage.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
Answer Options:
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.
Answer: d
Question: Which of the following statements is CORRECT?
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.
Answer: e
Question: The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.
Answer Options:
a. True
b. False
Answer: a. True
Question: The “over-the-counter” market received its name years ago because brokerage firms would hold inventories of stocks and then sell them by literally passing them over the counter to the buyer.
Answer Options:
a. True
b. False
Answer: True
Question: Primary markets are large and important, while secondary markets are smaller and less important.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT?
One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
Corporations face fewer regulations than proprietorships.
One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
In a partnership business, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
Answer: a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.