Chapter 1 Practice Quiz

A sole proprietorship is owned by: a. one person. b. two or more persons. c. shareholders. d. bankers.

a

In a corporation, the ultimate decisions regarding business matters are made by: a. the Board of Directors. b. debt holders. c. shareholders. d. investors.

a

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 agency problem. b. an adverse selection problem. c. a moral hazard. d. a publicity problem.

a

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 21% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporation's earnings is closest to: a. 15% b. 33% c. 45% d. 50%

b; Explanation: First the corporation pays taxes. It earned $4 per share, but must pay $4 × .21 = $0.84 to the government in corporate taxes. That leaves $4.00 - $0.84 = $3.16 to distribute to the shareholders. However, the shareholder must pay $3.16 × .15 = $0.47 in income taxes on this amount, leaving only $2.69 to the shareholder after all taxes are paid. The total amount paid in taxes is $0.84 + 0.47 = $1.31. The effective tax rate is then $1.31 ÷ $4 = .3275 or 32.75% which is closest to 33%.

An investment is said to be liquid if the investment: a. has large day-to-day fluctuations in price. b. has a large bid-ask spread. c. can easily be converted into cash. d. is traded on a stock exchange.

c

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

c

Which of the following organization forms accounts for the greatest number of firms? a. "S" corporation b. Limited partnership c. Sole proprietorship d. "C" corporation

c

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 21% 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

c; Explanation: EPS × number of shares × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .30) = $350

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 proposal b. leveraged buyout c. shareholder action d. hostile takeover

d

What type of company trades on an organized stock exchange? a. A limited liability company b. A private company c. An "S" corporation d. A public company

d