Module 1

Which of the following statements is NOT CORRECT?

"Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares.

Which of the following statements is CORRECT?

If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

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?

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.

Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?

Corporations step up their expansion plans and thus increase their demand for capital.

Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim

False

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

False

Which of the following is a primary market transaction?

Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

Which of the following statements is CORRECT?

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.

Which of the following statements is CORRECT?

Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.

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?

Prices would decline and interest rates would rise

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?

S corporation, to gain some tax advantages and also to obtain limited liability. Explanation: The S corporation would allow her to take early losses as deductions against her other income, hence save some taxes. Then, when the firm became profitable, she would receive dividends and pay taxes on them, but the firm itself would avoid corporate taxes and double taxation.

Which of the following factors would be most likely to lead to an increase in interest rates in the economy

Which of the following factors would be most likely to lead to an increase in interest rates in the economy Explanation: An increase in the demand for capital by businesses will increase interest rates in the economy.