fianance 4309 introduction

Which of the following statements is CORRECT? a.It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.b.If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.c.One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.d.Corporations face fewer regulations than sole proprietorships.e.One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.

C

Which of the following statements is CORRECT? a.The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed.b.The financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth.c.The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year.d.Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests.e.Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.

E

Which of the following statements is CORRECT? a.Corporations of all types are subject to the corporate income tax.b.One of the advantages of the corporate form of organization is that it avoids double taxation.c.It is generally easier to transfer one's ownership interest in a partnership than in a corporation.d.One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.e.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."

a

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 business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.c.Corporate stockholders are exposed to unlimited liability.d.Large corporations are taxed more favorably than sole proprietorships.e.Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.

a

Which of the following statements is CORRECT? a.The potential exists for agency conflicts between stockholders and managers.b.Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.c.A good goal for a firm's management is maximization of expected EPS.d.Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.e.Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.

a

With which of the following statements would most people in business agree? a.Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.b.Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.c.The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.d.Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.e.Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.

a

Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates? a.Prices would rise and interest rates would decline.b.Prices would decline and interest rates would rise.c.Prices and interest rates would both decline.d.There would be no changes in either prices or interest rates.e.Prices and interest rates would both rise.

b

Which of the following is a primary market transaction? a.​You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock&φραχ34;the trade is not made through a broker.b.​Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.c.​You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.d.​You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE.e.​One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction.

b

Which of the following statements is CORRECT? a.Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.b.If expected inflation increases, interest rates are likely to increase.c.Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.d.If companies have fewer good investment opportunities, interest rates are likely to increase.e.If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.

b

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT? a.Cheers will find it more difficult to raise additional capital.b.Assuming Cheers is profitable, less of its income will be subject to federal income taxes.c.Cheers' shareholders (the ex-partners) will now be exposed to less liability.d.Cheers will now be subject to fewer regulations.e.Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.

c

Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs? a.In this situation, the various forms of organization seem equally desirable.b.Proprietorship, because of ease of entry.c.S corporation, to gain some tax advantages and also to obtain limited liability.d.Regular corporation, because of the limited liability.e.Partnership, but only if she needs additional capital.

c

Which of the following statements is CORRECT? a.Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.b.Corporations generally face fewer regulations than sole proprietorships.c.It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.d.Corporate shareholders are exposed to unlimited liability.e.Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.

c

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy? a.The Federal Reserve uses monetary policy in an attempt to stimulate the economy.b.The level of inflation begins to decline.c.Corporations step up their expansion plans and thus increase their demand for capital.d.The economy moves from a boom to a recession.e.Households start saving a larger percentage of their income.

c

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction? a.This is an example of a primary market transaction.b.This is an example of an exchange of physical assets.c.This is an example of a direct transfer of capital.d.This is an example of a derivatives market transactione.This is an example of a money market transaction.

c

Which of the following statements is CORRECT? a.A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.b.A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.c.Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.d.Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.e.In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.

d

Which of the following statements is CORRECT? a.Corporations of all types are subject to the corporate income tax.b.One of the advantages of the corporate form of organization is that it avoids double taxation.c.It is generally easier to transfer one's ownership interest in a partnership than in a corporation.d.One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.e.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."

d

One drawback of switching from a partnership to the corporate form of organization is the following: a.It makes it more difficult for the firm to raise additional capital.b.It makes the firm's investors subject to greater potential personal liabilities.c.It cannot affect the amount of the firm's operating income that goes to taxes.d.It makes it more difficult for the firm's investors to transfer their ownership interests.e.It subjects the firm to additional regulations.

e

Which of the following statements is CORRECT? a.Bond covenants are an effective way to resolve conflicts between shareholders and managers.b.Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.c.Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.d.Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.e.One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.

e

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

e

You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of: a.​A futures market transaction.b.​An over-the-counter market transaction.c.​A primary market transaction.d.​A money market transaction.e.​A secondary market transaction.

e

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership? a.Corporations generally find it relatively difficult to raise large amounts of capital.b.Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.c.Corporations generally face relatively few regulations.d.Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.e.Corporate investors are exposed to unlimited liability.

not a

Which of the following statements is CORRECT? a.​Only institutions, and not individuals, can participate in derivatives market transactions.b.​As they are generally defined, money market transactions involve debt securities with maturities of less than one year.c.​If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.d.​If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.e.​The IPO market is a subset of the secondary market. 1

not b

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to a.Maximize the stock price per share over the long run, which is the stock's intrinsic value.b.Maximize the firm's expected total income.c.Maximize the stock price on a specific target date.d.Minimize the chances of losses.e.Maximize the firm's expected EPS.

not c

Which of the following statements is CORRECT? a.Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.b.A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.c.Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.d.Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.e.The main method of transferring ownership interest in a corporation is by means of a hostile takeover.

not d