Chapter 1 & 2 HW Questions

D

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? a. The company will probably be subject to fewer regulations and required disclosures. b. The firm will find it more difficult to raise additional capital to support its growth. c. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. d. Relaxant's shareholders (the ex-partners) will now be exposed to less liability. e. Assuming the firm is profitable, none of its income will be subject to federal income taxes.

A

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 stock price on a specific target date. c. Maximize its expected total corporate income. d. Minimize the chances of losses. e. Maximize its expected EPS.

E

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 firm's expected EPS, which must also maximize the firm's price per share. c. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. d. 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. e. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

D

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to a. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. b. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. c. Maximize the firm's expected EPS, which must also maximize the firm's price per share. d. Use a well-structured managerial compensation package to reduce conflicts 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.

A

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders? a. The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%. b. The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval. c. The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced. d. The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover. e. The firm's founder, who is also president and chairman of the board, sells 90% of her shares.

C

Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders? a. A government regulation that banned the use of convertible bonds. b. Compensating managers with more stock options and less cash income. c. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders). d. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year. e. The passage of laws that make it harder for hostile takeovers to succeed.

E

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. Abolishing the Security and Exchange Commission. d. The threat of hostile takeovers. e. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.

C

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

D

Which of the following statement 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 profits 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 not illegal to provide it to stockholders because they are the owners of the firm. c. Ethics is not an important consideration in business and in business schools. d. If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price 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.

A

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

B

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

A

Which of the following statements is CORRECT? a. Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. b. Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. c. A good goal for a firm's management is the maximization of expected EPS. d. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. e. For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.

B

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

E

Which of the following statements is CORRECT? a. Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited. b. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment. c. For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price. d. A good goal for a firm's management is the maximization of expected EPS. e. Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.

D

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

B

Which of the following statements is CORRECT? a. Corporations generally face fewer regulations than proprietorships. b. It is usually easier to transfer ownership in a corporation than in a partnership. c. Corporate shareholders are exposed to unlimited liability. d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small.

D

Which of the following statements is CORRECT? a. Corporations of all types are subject to the corporate income tax. b. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. c. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. d. Proprietorships and partnerships generally have a tax advantage over corporations. e. Proprietorships are subject to more regulations than corporations.

C

Which of the following statements is CORRECT? a. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. 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. Partnerships have more difficulty attracting large amounts of capital than 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. d. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. e. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

B

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

B

Which of the following statements is CORRECT? a. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers. b. One advantage to forming a corporation is that the owners of the firm have limited liability. c. Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations. d. Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships. e. Bond covenants are an effective way to resolve conflicts between shareholders and managers.

E

Which of the following statements is CORRECT? a. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. b. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. c. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. d. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests. e. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.

A

Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations. b. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. c. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. d. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests. e. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities.

B

Which of the following statements is CORRECT? a. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock. b. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects. c. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership. d. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor. e. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

D

Which of the following statements is CORRECT? a. Proprietorships are subject to more regulations than corporations. b. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. c. Corporations of all types are subject to the corporate income tax. d. Proprietorships and partnerships generally have a tax advantage over corporations. e. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.

D

Which of the following statements is CORRECT? a. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility. b. In most corporations, the CFO ranks above the CEO. c. The CFO generally reports to the firm's chief accounting officer, who is normally the controller. d. The board of directors is the highest-ranking body in a corporation, and the chairman of the board is the highest-ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person. e. By law in most states, the chairman of the board must also be the CEO.

E

Which of the following statements is CORRECT? a. The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation. b. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses. c. It is generally easier to transfer one's ownership interest in a partnership than in a corporation. d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. e. 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.