Chapter 1 Finance

Which of the following is true?

As the length of time until an expected cash flow increases, the stock price decreases.

In a large corporation, the controller reports to the:

CFO

A partnership could have all limited partners, but it could not have all general partners. Someone has to be able to assume the full liability of the firm.

False

A principal is a person who has the implied or actual authority to act on behalf of another. The interests of the principals are supposed to be paramount when agents make decisions.

False

Any after-tax income paid by the corporation to common stockholders in the form of dividend is excluded from taxing again on the individual tax returns of the stockholders.

False

In order to avoid double taxation and tax on capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business.

False

The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

False

The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not.

False

The sole proprietorship gives complete control to the owner enabling him/her to make all business decisions, but it subjects to more regulations and laws relative to corporation.

False

Which of the following is least related to the valuation of a firm's stock for most corporations?

Market Share

When large firms fail, leading to financial crises or failure of other firms that are creditors of the large firms, this is an example of:

Systematic risk

A stockholder is a non-owner or manager entity that has an interest in the viability of the corporation.

false

A company that is called "too big to be allowed to fail" is one that has many creditors that would be in danger of failing if the big firm were to fail. This could set up a chain reaction of failures in economy.

True

A partnership itself is not taxed. The income only passes through the partnership to the partners where it is taxed.

True

Agency problems occur when the interests of principals (owners) and agents (managers) diverge.

True

Agency problems were largely non-existent before the 19th century since most of the enterprises were either sole proprietorships or family partnerships.

True

Agents are in a position of trust and must always perform their obligations with the principals' best interest in mind.

True

Any after-tax income paid by the corporation to common stockholders in the form of dividend is then taxed again on the individual tax returns of the stockholders.

True

The general partner(s) could lose their equity contributions and more, with no limit as to the additional amount that could be lost.

True

To avoid the unlimited liability associated with a sole proprietorship, an individual might choose a limited partnership and share the profits with partners.

True

Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a form of double taxation.

True

An important advantage a general partner usually has is:

a share of the profits that are not taxed until received by the partner

All of the following are true about corporations with the exception of:

a. shareholders pay taxes on dividend income received from the corporation b. <--- Correct corporations are natural persons under the law c. corporations are separate legal entities d. corporations have different legal constraints depending upon the state of residence

Which of the following would not impose outside constraints on the firm?

company pricing decisions

The articles of partnership:

define the terms of the partnership

Stakeholders include which of the following?

employees suppliers creditors owners

A limited liability partnership (LLP) is a form of business organization that has the double taxation problem like the C corporation, as does an S corporation.

false

A Subchapter S corporation:

has limited liability for its owners

Larger corporate profit and cash inflows than what had been expected usually:

mean a higher stock price

Value maximization as a goal of the firm:

takes a long-run perspective that focuses on the owners

Who is entitled to the "residual income" of the firm?

the owners

Which statement is correct about limited partners?

they have limited liability