corporate finance
You own 100 shares of a "C" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non−dividend) income is 30%, then how much money is left for you after all taxes have been paid?
A. $210 B. $300 C. $350 D. $500 ANSWER: A. $210 100 shares * $5 per share = $500 500 * 40% = $200 $500 - $200 = $300 $300 * 30% = $90 $300 - $90 = $210
Consider the following two quotes for XYZ stock: November 11th November 18th Ask: 25.25 Ask: 26.00 Bid: 25.20 Bid: 25.93 How much would you have to pay to purchase 100 shares of XYZ stock on November 18th?
A. $2520 B. $2525 C. $2593 D. $2600 ANSWER: D. $2600 26 * 100 shares = $2600
Consider the following two quotes for XYZ stock: November 11th November 18th Ask: 25.25 Ask: 26.00 Bid: 25.20 Bid: 25.93 How much would you receive if you sold 200 shares of XYZ stock on November 11th?
A. $5040 B. $5050 C. $5186 D. $5200 ANSWER: A. $5040 25.20 * 200 shares = $5040
You are a shareholder in a "C" corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to:
A. 15% B. 35% C. 45% D. 50% ANSWER: C. 45% Corporate taxes: $4 * 35% = $1.40 Net remaining amount: $4 - $1.40 = $2.60 Dividend tax: $2.60 * 15% = 0.39 Remaining amount: $2.60 - $0.39 = $2.21 Therefore, effective tax rate: ($1.40 + $0.39) / 4 * 100 = 44.75 %
What type of company trades on an organized stock exchange?
A. A limited liability company B. An "S" corporation C. A private company D. A public company ANSWER: D. A public company
Which of the following statements is most correct?
A. An advantage of a corporation is that it is subject to double taxation. B. Corporations face more regulations when compared to partnerships. C. Unlike a partnership, a disadvantage of a corporation is that has limited liability. D. An advantage to incorporation is that it allows for less regulation of the business. ANSWER: B. Corporations face more regulations when compared to partnerships.
Which of the following statements is FALSE?
A. As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. B. Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. C. In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. D. If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm. ANSWER: D. If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm.
If you buy shares of Coca−Cola on the primary market:
A. Coca−Cola receives the money because the company has issued new shares. B. you buy the shares from another investor who decided to sell the shares. C. you buy the shares from the New York Stock Exchange. D. you buy the shares from the Federal Reserve. ANSWER: A. Coca−Cola receives the money because the company has issued new shares.
Which of the following is/are an advantage of incorporation?
A. Limited liability B. Access to capital markets C. Unlimited life D. All of the above ANSWER: D. All of the above
Which of the following organization forms accounts for the greatest number of firms?
A. Limited partnership B. "C" corporation C. Sole proprietorship D. "S" corporation ANSWER: C. Sole proprietorship
Which of the following organization forms accounts for the most revenue?
A. Limited partnership B. "S" corporation C. "C" corporation D. Limited liability company ANSWER: C. "C" corporation
Which of the following organization forms for a business does NOT avoid double taxation?
A. Limited partnership B. "S" corporation C. "C" corporation D. Limited liability company ANSWER: C. "C" corporation
Which of the following statements is FALSE?
A. On Nasdaq, stocks can and do have multiple market makers who compete with each other. Each market maker must post bid and ask prices in the Nasdaq network where they can be viewed by all participants. B. Because customers always buy at the ask and sell at the bid, the bid−ask spread is a transaction cost investors have to pay in order to trade. C. On the floor of the NYSE, prior to 2005 market makers (known on the NYSE as specialists) matched buyers and sellers. D. Bid prices exceed ask prices. ANSWER: D. Bid prices exceed ask prices.
Which of the following are subject to double taxation?
A. Partnership B. Corporation C. Sole proprietorship D. A and B ANSWER: B. Corporation
Which of the following is NOT an advantage of a sole proprietorship?
A. Single taxation B. Ease of setup C. Limited liability D. No separation of ownership and control ANSWER: C. Limited liability
Which of the following statements regarding limited partnerships is TRUE?
A. There is no limit on a limited partner's liability. B. A limited partner's liability is limited by the amount of their investment. C. A limited partner is not liable until all the assets of the general partners have been exhausted. D. A general partner's liability is limited by the amount of their investment. ANSWER: B. A limited partner's liability is limited by the amount of their investment.
Do corporate decisions that increase the value of the firm's equity benefit society as a whole?
A. Yes, as long as the increase in the value of the firm's equity does not come at the expense of others. B. No, any gains in the value of the firm's equity are perfectly offset by societal costs. C. No, any gain in the value of the firm's equity is always less than the cost to society. D. Yes, as long as the value of the firm's equity increases, society is better off. ANSWER: A. Yes, as long as the increase in the value of the firm's equity does not come at the expense of others.
A limited liability company is essentially:
A. a limited partnership without a general partner. B. just another name for a limited partnership. C. a limited partnership without limited partners. D. just another name for a corporation. ANSWER: A. a limited partnership without a general partner.
You overhear your manager saying that she plans to book an Ocean−view room on her upcoming trip to Miami for a meeting. You know that the interior rooms are much less expensive and that your manager is traveling at the Company's expense. This use of additional funds comes about as a result of:
A. an adverse selection problem. B. a moral hazard. C. a publicity problem. D. an agency problem. ANSWER: D. an agency problem
The Principal−Agent Problem arises:
A. because managers have little incentive to work in the interest of shareholders when this means working against their own self−interest. B. because of the separation of ownership and control in a corporation. C. Both A and B D. None of the above ANSWER: C. Both A and B
If shareholders are unhappy with a CEO's performance, they are most likely to:
A. buy more shares in an effort to gain control of the firm. B. file a shareholder resolution. C. replace the CEO through a grassroots shareholder uprising. D. sell their shares. ANSWER: D. Sell their shares
An investment is said to be liquid if the investment:
A. has large day-to-day fluctuations in price. B. can easily be converted into cash. C. is traded on a stock exchange. D. has a large bid−ask spread. ANSWER: B. can easily be converted into cash.
The long-run goal of the firm is to (Select the best choice below.)
A. hold large quantities of cash. B. maximize earnings per share. C. Increase sales regularly. D. maximize shareholder wealth. ANSWER: D. Maximize shareholder wealth
An agency problem can be alleviated by:
A. requiring all firms to be sole proprietorships. B. compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers. C. asking managers to take on more risk than they are comfortable taking. D. A and B. ANSWER: D. A and B
A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
A. shareholder action B. shareholder proposal C. leveraged buyout D. hostile takeover ANSWER: D. hostile takeover
In a corporation, the ultimate decisions regarding business matters are made by:
A. shareholders. B. investors. C. debt holders. D. the Board of Directors. ANSWER: D. The Board of Directors
The largest stock market in the world by volume is:
A. the London Stock Exchange. B. the American Stock Exchange. C. the New York Stock Exchange. D. NASDAQ. ANSWER: D. NASDAQ.
The largest stock market in the world by market capitalization is:
A. the London Stock Exchange. B. the New York Stock Exchange. C. the American Stock Exchange. D. NASDAQ ANSWER: B. The New York Stock Exchange
The most senior financial manager in a corporation is usually called:
A. the chief operating officer. B. the chairman of the board. C. the chief financial officer. D. the chief executive officer. ANSWER: C. the chief financial officer
The person charged with running the corporation by instituting the rules and policies set by the board of directors is called:
A. the company president. B. the chief financial officer. C. the chief operating officer. D. the chief executive officer. ANSWER: D. the chief executive officer.
The distinguishing feature of a corporation is that:
A. their is no legal difference between the corporation and its owners. B. it spreads liability for its corporate obligations to all shareholders. C. it is a legally defined, artificial being, separate from its owners. D. provides limited liability only to small shareholders. ANSWER: C. t is a legally defined, artificial being, separate from its owners.
A sole proprietorship is owned by:
A. two or more persons. B. one person. C. shareholders. D. bankers. ANSWER: B. One person
If you buy shares of Coca−Cola on the secondary market:
A. you buy the shares from another investor who decided to sell the shares. B. Coca−Cola receives the money because the company has issued new shares. C. you buy the shares from the New York Stock Exchange. D. you buy the shares from the Federal Reserve. ANSWER: A. you buy the shares from another investor who decided to sell the shares.
You own 100 shares of a Sub Chapter "S" corporation. The corporation earns $5.00 per share before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax rate on (both dividend and non−dividend) income is 30%, then how much money is left for you after all taxes have been paid?
A. $210 B. $300 C. $350 D. $500 ANSWER: C. $350 $5 per share * 100 shares * (1 - .30) = $350
(Computing earnings per share) If ABC Company earned $380,000 in net income and paid cash dividends of $55,000, what areABC's earnings per share if it has 55,000 sharesoutstanding?
EPS = net income/ number of shares outstanding $380,000 / 55,000 shares = $6.91
The financial statements for 2017 and 2018 for Crosby Co. are shown in this popup window, and those for Prairie Inc. are shown in this popup window a. How did Crosby Co.'s profit margins change from 2017 to 2018? To what would you attribute the differences? Answer the same question for Prairie Inc. b. Compare the profit margins between Crosby Co. and Prairie Inc. How are they different? How would you explain these differences? c. What differences do you notice in the common-sized balance sheets that might indicate that one of the firms is doing better than the other?
Example shown in notes (1)
(Preparing an income statement) Prepare an income statement and acommon-sized income statement from the following information.
Example shown in notes (3)
(Preparing a balance sheet) Prepare a balance sheet from the information in the popupwindow What is the net working capital and debtratio?
Example shown in notes (4)
