CH 1/ quiz 1/ week 1

Sole proprietorship and partnership generally have a tax advantage over corporations.

True

Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. Correct Response A) True B) False

A) True

Which of the following is 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 sole proprietorship's. C) One disadvantage of operating a business as a sole 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 a proprietorship because, with a 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 or 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.

It is usually easier to transfer ownership in a corporation than in a partnership. A) True B) FAalse

A) True

Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. Correct Response A) True B) False

A) True

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? A) Pay managers large cash salaries and give them no stock options. Correct Response B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover. C) Beef up the restrictive covenants in the firm's debt agreements. D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock. E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. A) True B) False

B) False

Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value. Correct Response A) True B) False

B) False

The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden. Correct Response A) True B) False

B) False

Which of the following 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 sole 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 "one person one vote"

C) One of the disadvantages of a proprietor is exposed to unlimited liability.

Which of the following is correct? A) If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profit because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted. B) There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is illegal to provide it to stockholders because they are the owners of the firm. C) The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was the focus of news stories, but it did not lead to any important changes in business practices. D) If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted. E) Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.

D) If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? A) Decrease the use of restrictive covenants in bond agreements. B) Take actions that reduce the possibility of a hostile takeover. C) Elect a board of directors that allows managers greater freedom of action. Correct Response D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

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

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to? A) Maximize its expected total corporate income. B) Maximize its expected EPS C) Minimize the chance of losses D) Maximize the stock price per share over the long run, which is the stock's intrinsic value. E) Maximize the stock price on a specific target date.

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

Which of the following statements are correct? A) If a corporation elects to be taxed as a s corporation, then both it and its stockholders can avoid taxes. This provision was put into the federal Tax Code in order to encourage the formation of a small business. 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 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 advantage of incorporation.

D) 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.

Which of the following statements is CORRECT? A) One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure. B) The threat of takeover generally increases potential conflicts between stockholders and managers. C) Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers. Correct Response D) The threat of takeovers tends to reduce potential conflicts between stockholders and managers. E) The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.

D) The threat of takeovers tends to reduce potential conflicts between stockholders and managers.

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? A) Compensating managers with stock options. B) Financing risky projects with additional debt. C) The threat of hostile takeovers. Correct Response D) The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. E) Abolishing the Security and Exchange Commission.

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

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to? A) Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. B) Maximize the firms's expected EPS, which must also maximize the firm's price per share. C) Minimize the firm's ricks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. D) Use a well-structured managerial compensation package to reduce conflict that may exist between stockholders and managers. E) Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

D) Use a well-structured managerial compensation package to reduce conflict that may exist between stockholders and managers.

Which of the following statements is CORRECT? A) Corporations are taxed more favorably than sole proprietorships. B) Corporations have unlimited liability. C) Because of their size, large corporations face fewer regulations than smaller corporations and sole proprietorships. D) Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests. Correct Response E) Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

E) Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.

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 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 advantage 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.

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? A) Congress passes a law that severely restricts hostile takeovers. B) A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. C) The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. D) The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. Correct Response E) 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.

E) 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.