Question 1

Proprietorship

Accepted Answer

Unincorporated business owned by one individual

Question 2

Advantages of Proprietorship

Accepted Answer

1. Easy and inexpensive to form  2. Subject to few government regulations  3. Taxed like an individual

Question 3

Disadvantages of Proprietorship

Accepted Answer

1. Proprietor has unlimited liability for business debts  2. Life of proprietorship is limited to time the creator owns it  3. Transferring ownership can be difficult  4. Difficult for proprietorship to obtain large sums of capital

Question 4

Partnership

Accepted Answer

unincorporated business owned by two or more persons

Question 5

Advantages of Partnership

Accepted Answer

1. Easy and inexpensive to form  2. Subject to few government regulations  3. Taxed like an individual  (same as proprietorship)

Question 6

Disadvantages of Partnership

Accepted Answer

1. Proprietor has unlimited liability for business debts  2. Life of partnership is limited to time the same group of partners owns it  3. Transferring ownership can be difficult  4. Difficult for partnership to obtain large sums of capital (but better than for a proprietorship)

Question 7

Corporation

Accepted Answer

legal entity created by a state

Question 8

Advantages of Corporation

Accepted Answer

1. Separate and distinct from its owners  2. Unlimited life  3. Easy transferability of ownership  4. Limited liability  5. Easier for corporations than for proprietorships and partnerships to raise money in the financial markets

Question 9

Disadvantages of Corporation

Accepted Answer

1. Setting up and filing state and federal reports is complex   -Corporate charter is filed with the state providing information about the company and directors   -Bylaws are for internal management and procedures  2. Earnings are subject to double taxation

Question 10

Limited Liability Partnership

Accepted Answer

A partnership form of business that provides for limited liability for some partners.  At least one partner must be a general partner who is fully responsible for the firm\'s liabilities.

Question 11

Limited liability company (LLC)

Accepted Answer

-Provides for limited liability for owners  -Taxed like a partnership  -Flexible ownership structure

Question 12

S Corporation

Accepted Answer

-100 or fewer stockholders  -Only one kind of stock  -Chooses to be taxed like a partnership

Question 13

Goals of the Corporation

Accepted Answer

1. Stockholder wealth maximization  2. Managerial incentives to maximize shareholder wealth  3. Social responsibility  4. Stock price maximization and social welfare

Question 14

According to Sarbanes-Oxley Act (2002), corporations must

Accepted Answer

1. Have a committee of outside directors to oversee audits  2. Hire an external auditor  3. Provide information about procedures used to construct financial statements

Question 15

Why would a company want to operate in more than one country?

Accepted Answer

To seek new markets  To seek raw materials  To seek new technology  To seek production efficiency  To avoid political and regulatory hurdles

Question 16

Progressive tax

Accepted Answer

higher tax on higher incomes

Question 17

Taxable income

Accepted Answer

gross income minus exemptions and allowable deductions

Question 18

Marginal tax rate

Accepted Answer

the tax on the last unit of income

Question 19

Average tax rate

Accepted Answer

taxes paid divided by taxable income

Question 20

What is the role of ethics in successful businesses?

Accepted Answer

Established codes of conduct help \"ethical\" firms prosper whereas \"unethical\" firms do not

Question 21

Why is it important for a business to have a clear corporate governance policy?

Accepted Answer

Rules for managers help stakeholders have a clear understanding of how executives run the business   and who is accountable for important decisions

Question 22

Why is it important to consider taxes when making financial decisions?

Accepted Answer

Because taxes must be paid in cash, the effects of taxes on cash flows must be considered

Question 23

Corporate charter

Accepted Answer

A document filed with the secretary of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock

Question 24

Bylaws

Accepted Answer

A set of rules drawn up by the founders of the corporation that indicate how the company is to be governed; includes procedures for electing directors, the rights of the stockholders, and how to change the bylaws when necessary

Question 25

Stockholder wealth maximization

Accepted Answer

The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm\'s common stock.

Question 26

Profit maximization

Accepted Answer

Maximization of the firm\'s net income each year.

Question 27

Earnings per share (EPS)

Accepted Answer

Net income divided by the number of shares of common stock outstanding

Question 28

Agency problem

Accepted Answer

A potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm.

Question 29

performance shares

Accepted Answer

A type of incentive plan in which managers are awarded shares of stock on the basis of the firm\'s performance over given intervals with respect to earnings per share or other measures.

Question 30

executive stock options

Accepted Answer

A type of incentive plan that allows managers to purchase stock at some future time at a given price.

Question 31

restricted stock grants

Accepted Answer

Stock is granted to employees based on the firm\'s performance, but the stock is restricted in the sense that an employee is not vestedâthat is, does not have the right to ownership of the stockâuntil some period in the future.

Question 32

stakeholders

Accepted Answer

Those who are associated with a business; stakeholders include managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm.

Question 33

business ethics

Accepted Answer

A company\'s attitude and conduct toward its stakeholdersâ employees, customers, stockholders, and so forth; ethical behavior requires fair and honest treatment of all parties.

Question 34

corporate governance

Accepted Answer

The \"set of rules\" that a firm follows when conducting business; these rules identify who is accountable for major financial decisions.

Question 35

proxy votes

Accepted Answer

Voting power that is assigned to another party, such as another stockholder or institution

Question 36

industrial groups

Accepted Answer

Organizations that consist of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell productsâa network of manufacturers, suppliers, marketing organizations, distributors, retailers, and creditors

Question 37

tax loss carryback (carryover)

Accepted Answer

Losses that can be carried backward (forward) in time to offset taxable income in a given year.

Question 38

Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital and the presence of unlimited personal liability for business debts.

Accepted Answer

True

Question 39

Four of the disadvantages of a partnership are (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty in attracting large amounts of capital.

Accepted Answer

True

Question 40

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.

Accepted Answer

False

Question 41

The proper goal of the financial manager should be to maximize the firm\'s expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.

Accepted Answer

False

Question 42

If a firm has a single owner, we can say that the proper goal of a financial manager would be to maximize the firm\'s earnings per share.

Accepted Answer

False

Question 43

By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence shareholders\' wealth also will be maximized.

Accepted Answer

False

Question 44

If a firm\'s stock price falls during the year, this indicates that the firm\'s managers are not acting in the shareholders\' best interest.

Accepted Answer

False

Question 45

An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors.

Accepted Answer

True

Question 46

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Accepted Answer

False

Question 47

Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a form of double taxation.

Accepted Answer

True

Question 48

The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Accepted Answer

False

Question 49

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm\'s tax liability.

Accepted Answer

False

Question 50

The fact that a proprietorship, as a business, pays no corporate income tax and that it is easily and inexpensively formed are often cited as key advantages to that form of business.

Accepted Answer

True

Question 51

Multinational managerial finance requires that financial analyses consider the effects of changing currency values.

Accepted Answer

True

Question 52

In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources.

Accepted Answer

False

Question 53

Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship?  a. Limited liability.  b. Ease of transfer of ownership interest.  c. Unlimited life.  d. Elimination of double taxation.  e. Ability to retain earnings and thus convert income from personal income to capital gains.

Accepted Answer

d. Elimination of double taxation.

Question 54

Which of the following does not need to be considered when assessing the impact of financial decisions?  a. Projected earnings.  b. Financial market conditions.  c. Timing of the earnings flow.  d. Riskiness of the firm.  e. All of the above must be considered.

Accepted Answer

e. All of the above

Question 55

Which of the following mechanisms is not used by shareholders to get managers to act in shareholders\' best interests?  a. Threat of firing.  b. Managerial compensation.  c. Performance shares.  d. Threat of takeover.  e. Answers b and c above.

Accepted Answer

c. Performance shares.

Question 56

Which of the following statements is correct?  a. A good goal for a corporate manager is maximization of expected EPS.  b. Most business in the U.S. is conducted by corporations; corporations\' popularity results primarily from their favorable tax treatment.  c. A good example of an agency relationship is the one between stockholders and managers.  d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not.  e. Firms in highly competitive industries find it easier to exercise \"social responsibility\" than do firms in oligopolistic industries.

Accepted Answer

c. A good example of an agency relationship is the one between stockholders and managers.

Question 57

Which of the following statements is correct?  a. The major disadvantage of organizing as a corporation is that it does not provide its owners with limited liability.  b. Bond covenants, or restrictions on debt, are an important device to reduce agency conflicts between stockholders and bondholders.  c. The threat of a hostile takeover serves to reduce agency conflicts between stockholders and bondholders.  d. Compensation packages are designed, in part, to reduce agency conflicts between shareholders and managers.  e. Both answers b and d are correct.

Accepted Answer

e. Both answers b and d are correct.

Question 58

Current tax laws have which of the following effects?  a. Favor dividends because there are no capital gains taxes on dividends.  b. Do not favor capital gains because the tax must be paid as the value of the stock increases, whether or not the stock is sold.  c. Favor capital gains because the tax does not have to be paid until the stock is sold.  d. Do not favor dividends or capital gains for most people because different people are in different tax brackets.  e. Favor dividends since dividends are tax-deductible for the paying corporation whereas retained earnings, which produce capital gains, are not tax-deductible.

Accepted Answer

c. Favor capital gains because the tax does not have to be paid until the stock is sold.

Question 59

Which of the following statements is correct?  a. For the most part, our federal tax rates are progressive, because higher incomes are taxed at higher average rates.  b. Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light.  c. Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities.  d. Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds. However, other factors may offset tax considerations.  e. All of the above statements are true.

Accepted Answer

e. All of the above statements are true.

Question 60

Which of the following is a reason why companies move into international operations?  a. To take advantage of lower production costs in regions of inexpensive labor.  b. To develop new markets for their finished products.  c. To better serve their primary customers.  d. Because important raw materials are located abroad.  e. All of the above.

Accepted Answer

e. All of the above.

Question 61

Which of the following actions is consistent with social responsibility but is necessarily inconsistent with stockholder wealth maximization?  a. Investing in a smokestack \"scrubber\" to reduce the firm\'s air pollution as mandated by law.  b. Voluntarily installing expensive machinery to treat effluent discharge which currently is being dumped into a river where it is ruining the drinking water of the community where the plant is located.  c. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.  d. Making a large corporate donation to the local community in order to fund a recreation complex that will be used by the community and the firm\'s employees.  e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with stockholder wealth maximization.

Accepted Answer

e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with stockholder wealth maximization.

Question 62

Which of the following statements is correct?  a. A hostile takeover is a primary method of transferring ownership interest in a corporation.  b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation.  c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.  d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.  e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm\'s managers in the same way.

Accepted Answer

d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

Question 63

Which of the following statements is correct?  a. In a partnership, liability for other partners\' misdeeds includes but is limited to the amount a particular partner has invested in the business.  b. Partnerships must be formed according to specific rules which include the filing of a formal written agreement with state authorities where the partnership does business.  c. A fast growth company would be more likely to set up a partnership for its business organization than would a slow-growth company.  d. Partnerships have difficulties attracting capital in part because of the other disadvantages of the partnership form of business, including impermanence of the organization.  e. A major disadvantage of a partnership as a form of business organization is the high cost and practical difficulties of its formation

Accepted Answer

d. Partnerships have difficulties attracting capital in part because of the other disadvantages of the partnership form of business, including impermanence of the organization.

Question 64

Which of the following statements is correct?  a. Other things held constant, it generally is safer to invest money in a proprietorship than in a partnership or a corporation.  b. According to the text, law firms and accounting firms must be organized as proprietorships or partnerships; these businesses do not have the option of incorporating.  c. If you are planning to start a business, which you will run as the sole employee, and if you expect the business to earn $1,000,000 per year before taxes, you can minimize federal income taxes by setting up the business as a corporation.  d. According to the text, \"agency problems\" tend to increase as the percentage of a corporation\'s stock owned by its managers increases.  e. Maximizing the income statement item \"net income\" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm\'s stockholders.

Accepted Answer

e. Maximizing the income statement item \"net income\" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm\'s stockholders.

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