a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
b. One drawback of forming a corporation is that it subjects the firm’s investors to increased personal liabilities.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
d. One advantage of forming a corporation is that it subjects the firm’s investors to fewer taxes.
e. One disadvantage of forming a corporation is that it is more difficult for the firm’s investors to transfer their ownership interests.
Answer Options:
a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
b. One drawback of forming a corporation is that it subjects the firm’s investors to increased personal liabilities.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
d. One advantage of forming a corporation is that it subjects the firm’s investors to fewer taxes.
e. One disadvantage of forming a corporation is that it is more difficult for the firm’s investors to transfer their ownership interests.
Answer: a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
Question: Which of the following statements is CORRECT?
Answer Options:
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.
Answer: d
Question: 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.
a. True
b. False
Answer: True
Question: A warrant is an option, and as such it cannot be used as a “sweetener.”
Answer Options:
a. True
b. False
Answer: b. False
Question: The annual rate of return on any given stock can be found as the stock’s dividend for the year plus the change in the stock’s price during the year, divided by its beginning-of-year price.
Answer Options:
a. True
b. False
Answer: 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: a. True
Question: Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?
Corporations generally face fewer regulations.
Less of a corporation’s income is generally subject to federal taxes.
Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
Corporate investors are exposed to unlimited liability.
Corporations generally find it easier to raise large amounts of capital.
Answer: e. Corporations generally find it easier to raise large amounts of capital.
Question: The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.
Answer Options:
a. True
b. False
Answer: a. True
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: In a “Dutch auction” for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the “market clearing price.” All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
Answer Options:
a. True
b. False
Answer: True
Question: As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.
a. True
b. False
Answer: True
Question: Which of the following actions would be likely to encourage a firm’s managers to make decisions that are in the best interests of shareholders?
Answer Options:
a. The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.
b. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.
c. The percentage of the firm’s stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
d. The firm’s founder, who is also president and chairman of the board, sells 90% of her shares.
e. The firm’s board of directors gives the firm’s managers greater freedom to take whatever actions they think best without obtaining board approval.
Answer: c
Question: Which of the following statements is CORRECT?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ less favorable tax treatment.
d. Large corporations are taxed more favorably than proprietorships.
e. Corporate stockholders are exposed to unlimited liability.
Answer Options:
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations’ less favorable tax treatment.
d. Large corporations are taxed more favorably than proprietorships.
e. Corporate stockholders are exposed to unlimited liability.
Answer: b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
Question: If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.
a. True
b. False
Answer: b. False
Question: 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.
a. True
b. False
Answer: False
Question: Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
Answer Options:
a. Pay managers large cash salaries and give them no stock options.
b. Change the corporation’s formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
c. Beef up the restrictive covenants in the firm’s debt agreements.
d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.
e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.
Answer: b
Question: Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?
Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.
The company will probably be subject to fewer regulations and required disclosures.
Assuming the firm is profitable, none of its income will be subject to federal income taxes.
The firm’s investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
The firm will find it more difficult to raise additional capital to support its growth.
Answer: a. Relaxant’s shareholders (the ex-partners) will now be exposed to less liability.
Question: Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don’t want to relinquish voting control.
Answer Options:
a. True
b. False
Answer: a. 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: False
Question: Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?
Answer Options:
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.
Answer: d