Finance Ch1

Which of the following is NOT an advantage of a sole proprietorship?

limited liability

Which of the following statements regarding limited partnerships is TRUE?

A limited partner's liability is limited by the amount of their investment.

What type of company trades on an organized stock exchange

A public company

Which of the following statements is FALSE?

Bid prices exceed ask prices.

In a corporation, the ultimate decisions regarding business matters are made by

Board of Directors

The Principal-Agent Problem arises

Both because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest and because of the separation of ownership and control in a corporation

Which of the following statements is most correct?

Corporations face more regulations when compared to partnerships.

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?

EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate) $5.00 per share × 100 shares × (1 - .40) × (1 - .30) = $210

The largest stock market in the world by volume is:

MASDAQ

The largest stock market in the world by market capitalization is:

NYSE

Do corporate decisions that increase the value of the firm's equity benefit society as a whole?

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 limited partnership without a general partner

The most senior financial manager in a corporation is usually called:

chief financial officer

Which of the following are subject to double taxation

corporation

If you buy shares of Coca-Cola on the secondary market:

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?

$350

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:

45% First the corporation pays taxes. It earned $4 per share, but must pay $4 × .35 = $1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the shareholders. However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this amount, leaving only $2.21 to the shareholder after all taxes are paid. The total amount paid in taxes is $1.40 + 0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which is closest to 45%.

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:

agency problem

An investment is said to be liquid if the investment:

can easily be converted into cash

If shareholders are unhappy with a CEO's performance, they are most likely to:

sell their shares