CH 1

In order to maximize its shareholders value, a firm's management must attempt to maximize the expected EPS

False

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date

False

Managers always attempt to maximize the long-run value of their firm's stocks, or the stocks' intrinsic value. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible

False

One advantage of the corporate form of organization is that it avoids double taxation

False

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and parnerships

False

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

False

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Maximize the stock price per share over the long-run, which is the stock's intrinsic value

What would reduce potential conflicts between stockholders and managers?

The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash

What would likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

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%

What would help reduce potential conflicts of interest between stockholder's and bondholders

The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions

If someone deliberately lerstates costs an thereby increases profits, this can cause the stock price to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can prosecuted, and the firm itself can penalized.

True

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership? a. Corporations generally face fewer regulations b. Less of a corporation's income is generally subject to federal taxes c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation d. Corporate investors are exposed to unlimited liability e. Corporations generally find it easier to raise large amounts of capital

e. Corporations generally find it easier to raise large amounts of capital

The chairman of the board must also be CEO

false

One disadvantage fo forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests

False

Which of the following is CORRECT? a. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy b. Proprietorships are subject to more regulations than corporations c. In any partnerships, every partner has the same rights, privileges, and liability exposure as every other partner d. Corporations of all types are subject to the corporate income tax e. Proprietorships and partnerships generally have a tax advantage over corporations

E. Proprietorships and partnerships generally have a tax advantage over corporations

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnerships

False

For a stock to be in a equilibrium as the book defines it, its market price should exceed its intrinsic vlaue

False

If a corporation elects to be taxed as a 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

False

If a lower level person in a firm does something illegal, like "cooking the books", to understate cost and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted

False

If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold

False

If a stock's market price is above its intrinsic value, then the stock can be thought fo as being undervalued, and it would be a good buy

False

If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year

False

It is generally harder to transfer one's ownership interest in a partnership than in corporation

False

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required

False

What would help reduce potential conflicts between stockholders and bondholders?

Including restrictive covenants in the company's bond indentured ( which is the contract between the company and its bondholders)

What would help motivate managers to act in the best interests of shareholders

Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries

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 difficult to undertake.

True

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value

True

As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics

True

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income

True

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long term value

True

In most corporations, the CFO ranks under the CEO

True

In order to maximize its shareholder's value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value"

True

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

True

Organizing as a corporation makes it easier for the firm to raise capital. That is because corporation's 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

True

Partnerships and proprietorships generally have a tax advantage over corporations.

True

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners

True

The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation

True

The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell if it rose, barring any new information coming out about the stock. It is the "marginal investor" who determines the actual stock price

True

the board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. the CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO however cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in conflicts arise. it is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person

True

Which of the following statements are CORRECT? a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership b. Corporations face fewer regulations than proprietorships c. 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 d. It is generally less expensive to form a corporation than proprietorship, extensive legal documents are required e. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his of her investment in the business

a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership

Which of the following statements is CORRECT? a. One of the drawbacks 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 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 disadvantages of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests

a. One of the drawbacks of forming a corporation is that it generally subjects the firm to additional regulations

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? a. Relaxant's shareholders (the ex-parnters) will now be exposed to less liability b. The company will probably be subject to fewer regulations and required disclosures c. Assuming the firm is profitable, none of its income will be subject to federal income taxes d. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership e. The firm will find it more difficult to raise additional capital to support its growth

a. Relaxant's shareholders (the ex-parnters) will now be exposed to less liability

Which of the following statements is CORRECT? a. a hostile takeover is the main method of transferring ownership interest in a corporation b. A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers c. Unlimited liability and limited life are two key advantages of the corporate form over other forms fo business organizations d. Limited liability is an advantage of the corporate form of organization to is owners (stockholders), but corporations have more trouble raising money in financial markets because of the complicity of this form fo organization e. Although the stockholders of the corporation does not protect the firm's managers in the same way, ie. bondholders can sue the firm's managers if the firm defaults on its debt

a. a hostile takeover is the main method of transferring ownership interest in a corporation

Which of the following statements is CORRECT? a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast of majority of US businesses (in terms of number of businesses) are organized as corporations b. Most businesses (by number and total dollar sales) are organized as proprietorship or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business get 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

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

Which of the following statements is CORRECT? a. Corporations generally face fewer regulations than proprietorships b. Corporate shareholders are exposed to unlimited liability c. It is usually easier to transfer ownership in a corporation than in a partnership d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporations e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small

c. It is usually easier to transfer ownership in a corporation than in a partnership

Which of the following statements is CORRECT? a. One of the advantages of the corporate form of organization is that it avoids double taxation b. It is easier to transfer one's ownership interest in a partnership than in a corporation c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e. "one person, one vote" e. Corporations of all types are subject to the corporate income tax

c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability

Which of the following statements is CORRECT? a. In most corporations, the CFO ranks above the CEO b. By law in most states, the chairman of the board must also be the CEO c. The board of directors is the highest ranking body of corporation, and the chairman of the board is the highest ranking individual. the CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. the CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously save as CEO and chairman of the board, though many corporate control expert believe it is bad to vest both offices in the same person d. the CFO generally reports to the firm's chief accounting officer, who is normally the controller e. the CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have the responsibility

c. The board of directors is the highest ranking body of corporation, and the chairman of the board is the highest ranking individual. the CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. the CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously save as CEO and chairman of the board, though many corporate control expert believe it is bad to vest both offices in the same person

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 a 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

d. One danger of starting a proprietorship is that you may be exposed to a personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business

Which of the following statements is CORRECT? a. IN a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partners' investment in the business b. IN a limited partnership, the limited partners have voting control, while the general partner has rata basis, for the firm's debts in the event of bankruptcy c. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing corporation d. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) fo partnership interests e. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself

d. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) fo partnership interests