FIN 534 Chapter 1 Quiz 1 Solution –
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CHAPTER
1
AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL
ENVIRONMENT
Please see the
preface for information on the AACSB letter indicators (F, M, etc.) on the
subject lines.
True/False
Easy:
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(1.2) Firm organization F M
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Answer:
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EASY
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|||||||||||||||||
[1].
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The form of organization for a
business is not an important issue, as this decision has very little effect
on the income and wealth of the firm's owners.
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a.
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True
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b.
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False
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(1.2) Firm organization F M
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Answer:
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EASY
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[2].
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The major advantage of a regular
partnership or a corporation as a form of business organization is the fact
that both offer their owners limited liability, whereas proprietorships do
not.
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a.
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True
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b.
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False
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(1.2) Partnership F M
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Answer:
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EASY
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[3].
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There are three primary disadvantages
of a regular partnership: (1)
unlimited liability, (2) limited life of the organization, and (3) difficulty
of transferring ownership. These
combine to make it difficult for partnerships to attract large amounts of
capital and thus to grow to a very large size.
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a.
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True
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b.
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False
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(1.2) Proprietorship F M
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Answer:
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EASY
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[4].
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Two disadvantages of a
proprietorship are (1) the relative difficulty of raising new capital and (2)
the owner's unlimited personal liability for the business' debts.
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a.
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True
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b.
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False
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(1.2) Limited liability F M
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Answer:
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EASY
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[5].
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One key value of limited liability
is that it lowers owners' risks and thereby enhances a firm's value.
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a.
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True
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b.
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False
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(1.3) Value maximization F M
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Answer:
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EASY
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[6].
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If a firm's goal is to maximize
its earnings per share, this is the best way to maximize the price of the
common stock and thus shareholders' wealth.
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a.
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True
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b.
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False
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(1.4) Financial intermediaries F M
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Answer:
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EASY
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[7].
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If Firm A's business is to obtain
savings from individuals and then invest them in financial assets issued by
other firms or individuals, Firm A is a financial intermediary.
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a.
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True
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b.
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False
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(1.8) Financial markets F H
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Answer:
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EASY
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[8].
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If an individual investor buys or
sells a currently outstanding stock through a broker, this is a primary
market transaction.
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a.
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True
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b.
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False
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(1.8) Financial markets F H
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Answer:
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EASY
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[9].
|
Recently, Hale Corporation
announced the sale of 2.5 million newly issued shares of its stock at a price
of $21 per share. Hale sold the stock
to an investment banker, who in turn sold it to individual and institutional
investors. This is a primary market
transaction.
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a.
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True
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b.
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False
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(1.11) Stock market transactions F H
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Answer:
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EASY
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[10].
|
One of the functions of NYSE
specialists is to facilitate trading by keeping an inventory of shares of the
stocks in which they specialize, buying when investors want to sell and
selling when they want to buy. They change
the bid and ask prices of the securities so as to keep supply and demand in
balance.
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a.
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True
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b.
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False
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Medium:
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(1.2) Partnership F M
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Answer:
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MEDIUM
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[11].
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The disadvantages associated with
a proprietorship are similar to those under a partnership. One exception relates to the more formal
nature of the partnership agreement and the commitment of all partners'
personal assets. As a result,
partnerships do not have difficulty raising large amounts of capital.
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a.
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True
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b.
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False
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(1.2) Proprietorship F M
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Answer:
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MEDIUM
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[12].
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The facts that a proprietorship,
as a business, pays no corporate income tax, and that it is easily and
inexpensively formed, are two key advantages to that form of business.
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a.
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True
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b.
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False
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Multiple
Choice: Conceptual
Easy:
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(1.2) Firm organization C M
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Answer:
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EASY
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[13].
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Which of the following statements
is CORRECT?
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a.
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One of the disadvantages of
incorporating a business is that the owners then become subject to
liabilities in the event the firm goes bankrupt.
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b.
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Sole proprietorships are subject
to more regulations than corporations.
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c.
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In any type of partnership, every
partner has the same rights, privileges, and liability exposure as every other
partner.
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d.
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Sole proprietorships and
partnerships generally have a tax advantage over many corporations,
especially large ones.
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e.
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Corporations of all types are
subject to the corporate income tax.
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(1.2) Firm organization C M
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Answer:
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EASY
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|||||||
[14].
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Which of the following statements
is CORRECT?
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a.
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One of the disadvantages of a sole
proprietorship is that the proprietor is exposed to unlimited liability.
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b.
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It is generally easier to transfer
one’s ownership interest in a partnership than in a corporation.
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c.
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One of the advantages of the
corporate form of organization is that it avoids double taxation.
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d.
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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.”
|
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e.
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Corporations of all types are
subject to the corporate income tax.
|
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(1.2) Firm organization C M
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Answer:
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EASY
|
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[15].
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Which of the following statements
is CORRECT?
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a.
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It is generally more expensive to
form a proprietorship than a corporation because, with a proprietorship,
extensive legal documents are required.
|
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b.
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Corporations face fewer regulations
than sole proprietorships.
|
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c.
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One disadvantage of operating a
business as a sole proprietorship is that the firm is subject to double
taxation, at both the firm level and the owner level.
|
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d.
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One advantage of forming a
corporation is that equity investors are usually exposed to less liability
than in a regular partnership.
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e.
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If a regular partnership goes
bankrupt, each partner is exposed to liabilities only up to the amount of his
or her investment in the business.
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(1.2) Firm organization C M
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Answer:
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EASY
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[16].
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Cheers Inc. operates as a
partnership. Now the partners have
decided to convert the business into a regular corporation. Which of the
following statements is CORRECT?
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a.
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Assuming Cheers is profitable, less
of its income will be subject to federal income taxes.
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b.
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Cheers will now be subject to
fewer regulations.
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c.
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Cheers’ shareholders (the
ex-partners) will now be exposed to less liability.
|
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d.
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Cheers’ investors will be exposed
to less liability, but they will find it more difficult to transfer their
ownership.
|
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e.
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Cheers will find it more difficult
to raise additional capital.
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(1.2) Firm organization C M
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Answer:
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EASY
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[17].
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Which of the following statements
is CORRECT?
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a.
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It is usually easier to transfer
ownership in a corporation than it is to transfer ownership in a sole
proprietorship.
|
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b.
|
Corporate shareholders are exposed
to unlimited liability.
|
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c.
|
Corporations generally face fewer
regulations than sole proprietorships.
|
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d.
|
Corporate shareholders are exposed
to unlimited liability, and this factor may be compounded by the tax
disadvantages of incorporation.
|
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e.
|
Shareholders in a regular
corporation (not an S corporation) pay higher taxes than owners of an
otherwise identical proprietorship.
|
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(1.2)
Corporate form of organization C M
|
Answer:
|
EASY
|
||||||||
[18].
|
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?
|
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a.
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Corporations
generally find it relatively difficult to raise large amounts of capital.
|
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b.
|
Less
of a corporation’s income is generally subjected to taxes than would be true
if the firm were a partnership.
|
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c.
|
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.
|
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d.
|
Corporate
investors are exposed to unlimited liability.
|
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e.
|
Corporations
generally face relatively few regulations.
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(1.4)
Financial transactions C H
|
Answer:
|
EASY
|
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[19].
|
You
recently sold 100 shares of your new company, XYZ Corporation, to your
brother at a family reunion. At the
reunion your brother gave you a check for the stock and you gave your brother
the stock certificates. Which of the
following statements best describes this transaction?
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a.
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This
is an example of an exchange of physical assets.
|
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b.
|
This
is an example of a primary market transaction.
|
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c.
|
This
is an example of a direct transfer of capital.
|
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d.
|
This
is an example of a money market transaction.
|
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e.
|
This
is an example of a derivatives market transaction.
|
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(1.6)
Interest rates C H
|
Answer:
|
EASY
|
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[20].
|
Which
of the following statements is CORRECT?
|
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a.
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If
expected inflation increases, interest rates are likely to increase.
|
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b.
|
If
individuals in general increase the percentage of their income that they
save, interest rates are likely to increase.
|
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c.
|
If
companies have fewer good investment opportunities, interest rates are likely
to increase.
|
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d.
|
Interest
rates on all debt securities tend to rise during recessions because
recessions increase the possibility of bankruptcy, hence the riskiness of all
debt securities.
|
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e.
|
Interest
rates on long-term bonds are more volatile than rates on short-term debt
securities like T-bills.
|
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(1.7)
Hedge funds C O
|
Answer:
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EASY
|
|||||||
[21].
|
Which
of the following statements is CORRECT?
|
|||||||||
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a.
|
Hedge
funds are legal in Europe and Asia, but they are not permitted to operate in
the United States.
|
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b.
|
Hedge funds have more in common
with commercial banks than with any other type of financial institution.
|
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c.
|
Hedge funds have more in common
with investment banks than with any other type of financial institution.
|
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d.
|
Hedge funds are legal in the
United States, but they are not permitted to operate in Europe or Asia.
|
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|
e.
|
The justification for the
"light" regulation of hedge funds is that only “sophisticated”
investors with high net worths and high incomes are permitted to invest in
these funds, and such investors supposedly can do the necessary “due
diligence” on their own rather than have it done by the SEC or some other
regulator.
|
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(1.8) Money markets C O
|
Answer:
|
EASY
|
|||||||
[22].
|
Money markets are markets for
|
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|
|||||||
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|
|||||||
|
a.
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Foreign stocks.
|
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b.
|
Consumer automobile loans.
|
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|
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c.
|
U.S. stocks.
|
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|
||||||
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d.
|
Short-term debt securities.
|
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|
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e.
|
Long-term bonds.
|
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|
||||||
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|
|||||||
|
(1.8) Financial markets C H
|
Answer:
|
EASY
|
|||||||
[23].
|
Which of the following is a
primary market transaction?
|
|||||||||
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a.
|
You sell 200 shares of IBM stock
on the NYSE through your broker.
|
||||||||
|
b.
|
IBM issues 2,000,000 shares of new
stock and sells them to the public through an investment banker.
|
||||||||
|
c.
|
You buy 200 shares of IBM stock
from your brother. The trade is not
made through a broker--you just give him cash and he gives you the stock.
|
||||||||
|
d.
|
One financial institution buys
200,000 shares of IBM stock from another institution. An investment banker
arranges the transaction.
|
||||||||
|
e.
|
You invest $10,000 in a mutual
fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.
|
||||||||
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|
|
(1.8) Financial markets C H
|
Answer:
|
EASY
|
|||||||
[24].
|
Which of the following statements
is CORRECT?
|
|||||||||
|
|
|
|
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|
|
|
|
|
|
a.
|
If Disney issues additional shares
of common stock through an investment banker, this would be a secondary
market transaction.
|
||||||||
|
b.
|
If you purchased 100 shares of
Disney stock from your brother-in-law, this would be an example of a primary
market transaction.
|
||||||||
|
c.
|
The IPO market is a subset of the
secondary market.
|
||||||||
|
d.
|
Only institutions, and not
individuals, can participate in derivatives market transactions.
|
||||||||
|
e.
|
As they are generally defined,
money market transactions involve debt securities with maturities of less
than one year.
|
||||||||
|
(1.8) Financial markets C H
|
Answer:
|
EASY
|
|||||||
[25].
|
You recently sold to your brother
200 shares of Disney stock, and the transfer was made through a broker, and
the trade occurred on the NYSE. This
is an example of:
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
A futures market transaction.
|
||||||||
|
b.
|
A primary market transaction.
|
||||||||
|
c.
|
A secondary market transaction.
|
||||||||
|
d.
|
A money market transaction.
|
||||||||
|
e.
|
An over-the-counter market
transaction.
|
||||||||
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|
|
(Comp: 1.7-1.9) Financial markets C H
|
Answer:
|
EASY
|
|||||||
[26].
|
Which of the following statements
is CORRECT?
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
The New York Stock Exchange is an
auction market with a physical location.
|
||||||||
|
b.
|
Capital market transactions
involve only the purchase and sale of equity securities, i.e., common stocks.
|
||||||||
|
c.
|
If an investor sells shares of
stock through a broker, then this would be a primary market transaction.
|
||||||||
|
d.
|
Consumer automobile loans are evidenced
by legal documents called "promissory notes," and these individual
notes are traded in the money market.
|
||||||||
|
e.
|
While the distinctions are
blurring as investment banks are today buying commercial banks, and vice
versa, investment banks generally specialize in lending money, whereas
commercial banks generally help companies raise capital from other parties.
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Comp: 1.7-1.9) Financial markets C H
|
Answer:
|
EASY
|
|||||||
[27].
|
Which of the following statements
is CORRECT?
|
|||||||||
|
|
|
|
|
|
|
|
|
|
|
|
a.
|
Capital market instruments include
both long-term debt and common stocks.
|
||||||||
|
b.
|
An example of a primary market
transaction would be your uncle transferring 100 shares of Wal-Mart stock to
you as a birthday gift.
|
||||||||
|
c.
|
The NYSE does not exist as a
physical location; rather, it represents a loose collection of dealers who
trade stocks electronically.
|
||||||||
|
d.
|
If your uncle in New York sold 100
shares of Microsoft through his broker to an investor in Los Angeles, this
would be a primary market transaction.
|
||||||||
|
e.
|
While the two frequently perform
similar functions, investment banks generally specialize in lending money,
whereas commercial banks generally help companies raise large blocks of
capital from investors.
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(Comp: 1.7-1.9) Financial markets C H
|
Answer:
|
EASY
|
|||||||||
[28].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
While the distinctions are
blurring, investment banks generally specialize in lending money, whereas
commercial banks generally help companies raise capital from other parties.
|
||||||||||
|
b.
|
A liquid security is a security
whose value is derived from the price of some other “underlying” asset.
|
||||||||||
|
c.
|
Money market mutual funds usually
invest most of their money in a well-diversified portfolio of liquid common
stocks.
|
||||||||||
|
d.
|
Money markets are markets for
long-term debt and common stocks.
|
||||||||||
|
e.
|
The NYSE operates as an auction
market, whereas the Nasdaq is a dealer market.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
Medium:
|
(1.2) Corporate form of
organization C M
|
Answer:
|
MEDIUM
|
|||||||||
[29].
|
One drawback of switching from a
partnership to the corporate form of organization is the following:
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
It subjects the firm to additional
regulations.
|
||||||||||
|
b.
|
It cannot affect the amount of the
firm's operating income that goes to taxes.
|
||||||||||
|
c.
|
It makes it more difficult for the
firm to raise additional capital.
|
||||||||||
|
d.
|
It makes the firm’s investors
subject to greater potential personal liabilities.
|
||||||||||
|
e.
|
It makes it more difficult for the
firm’s investors to transfer their ownership interests.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.2) Corporate form of organization C M
|
Answer:
|
MEDIUM
|
|||||||||
[30].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
A hostile takeover is the main
method of transferring ownership interest in a corporation.
|
||||||||||
|
b.
|
Unlimited liability and limited
life are two key advantages of the corporate form over other forms of
business organization.
|
||||||||||
|
c.
|
A corporation is a legal entity
that is generally created by a state, and it has a life and existence that is
separate from the lives of its individual owners and managers.
|
||||||||||
|
d.
|
Limited liability of its
stockholders is an advantage of the corporate form of organization, but
corporations have more trouble raising money in financial markets because of
the complexity of this form of organization.
|
||||||||||
|
e.
|
Although its stockholders 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 its managers if the firm defaults on its debt, even if the default is the
result of poor economic conditions.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.2) Partnership form of
organization C M
|
Answer:
|
MEDIUM
|
|||||||||
[31].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
In a regular partnership,
liability for other partners’ misdeeds is limited to the amount of a
particular partner’s investment in the business.
|
||||||||||
|
b.
|
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.
|
||||||||||
|
c.
|
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.
|
||||||||||
|
d.
|
In a limited partnership, the
limited partners have voting control, while the general partner has operating
control over the business. Also, the
limited partners are individually responsible, on a pro rata basis, for the
firm’s debts in the event of bankruptcy.
|
||||||||||
|
e.
|
A major disadvantage of all
partnerships relative to all corporations is the fact that federal income
taxes must be paid by the partners rather than by the firm itself.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.2) Partnership form of
organization C M
|
Answer:
|
MEDIUM
|
|||||||||
[32].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Corporations are at a disadvantage
relative to partnerships because they have to file more reports to state and
federal agencies, including the Securities and Exchange Administration, even
if they are not publicly owned.
|
||||||||||
|
b.
|
In a regular partnership, liability
for the firm's debts is limited to the amount a particular partner has
invested in the business.
|
||||||||||
|
c.
|
A fast-growth company would be
more likely to set up as a partnership for its business organization than
would a slow-growth company.
|
||||||||||
|
d.
|
Partnerships have difficulty
attracting capital in part because of their unlimited liability, the lack of
impermanence of the organization, and difficulty in transferring ownership.
|
||||||||||
|
e.
|
A major disadvantage of a
partnership relative to a corporation as a form of business organization is
the high cost and practical difficulty of its formation.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
(1.2) Firm organization C M
|
Answer:
|
MEDIUM
|
||||||||||
[33].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Most businesses (by number and
total dollar sales) are organized as proprietorships or partnerships because
it is easier to set up and operate in 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.
|
||||||||||
|
b.
|
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.
|
||||||||||
|
c.
|
Due to legal considerations
related to ownership transfers and limited liability, most business (measured
by dollar sales) is conducted by corporations in spite of large corporations’
often less favorable tax treatment.
|
||||||||||
|
d.
|
Large corporations are taxed more
favorably than sole proprietorships.
|
||||||||||
|
e.
|
Corporate stockholders are exposed
to unlimited liability.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.2) Firm organization C M
|
Answer:
|
MEDIUM
|
|||||||||
[34].
|
||||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Proprietorship, because of ease of
entry.
|
||||||||||
|
b.
|
S corporation, to gain some tax
advantages and also to obtain limited liability.
|
||||||||||
|
c.
|
Partnership, but only if she needs
additional capital.
|
||||||||||
|
d.
|
|||||||||||
|
e.
|
In this situation, the various
forms of organization seem equally desirable.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.2) Corporate charter and bylaws C M
|
Answer:
|
MEDIUM
|
|||||||||
[35].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
The corporate bylaws are a
standard set of rules established by the state of incorporation. These rules are identical for all
corporations in the state, and their purpose is to ensure that the firm’s
managers run the firm in accordance with state laws.
|
||||||||||
|
b.
|
The corporate charter is a
standard document prescribed by the state of incorporation, and its purpose
is to ensure that the firm’s managers run the firm in accordance with state
laws. Procedures for electing corporate
directors are contained in bylaws, while the declaration of the activities
that the firm will pursue and the number of directors are included in the
corporate charter.
|
||||||||||
|
c.
|
Companies must establish a home
office, or domicile, in a particular state, and that state must be the one in
which most of their business (sales, manufacturing, and so forth) is
conducted.
|
||||||||||
|
d.
|
Attorney fees are generally
involved when a company develops its charter and bylaws, but since these
documents are voluntary, a new corporation can avoid these costs by deciding not
to have either a charter or bylaws.
|
||||||||||
|
e.
|
The corporate charter is concerned
with things like what business the company will engage in, whereas the bylaws
are concerned with things like procedures for electing the board of
directors.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.3) Business ethics B M
|
Answer:
|
MEDIUM
|
|||||||||
[36].
|
With which of the following
statements would most people in business agree?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
A corporation’s short-run profits
will almost always increase if the firm takes actions that the government has
determined are in the best interests of the nation.
|
||||||||||
|
b.
|
Firms and government agencies
almost always agree with one another regarding the restrictions that should
be placed on hiring and firing employees.
|
||||||||||
|
c.
|
Although people’s moral characters
are probably developed before they get into a business school, it is still
useful for business schools to cover ethics, including giving students an
idea about the adverse consequences of unethical behavior to themselves,
their firms, and the nation.
|
||||||||||
|
d.
|
It is not useful for a large
corporation to develop a formal set of rules defining ethical and unethical
behavior. Such rules generally can't
be applied in many specific instances, so it is better to deal with ethical
issues on a case-by-case basis.
|
||||||||||
|
e.
|
“Whistle blowers,” because of the
courage it takes to blow the whistle, are generally promoted more rapidly
than other employees.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.3) Goal of firm C M
|
Answer:
|
MEDIUM
|
|||||||||
[37].
|
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 firm's expected EPS.
|
||||||||||
|
c.
|
Minimize the chances of losses.
|
||||||||||
|
d.
|
Maximize the firm's expected total
income.
|
||||||||||
|
e.
|
Maximize the stock price on a
specific target date.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.3) Corporate goals and control C M
|
Answer:
|
MEDIUM
|
|||||||||
[38].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
The proper goal of the financial
manager should be to attempt to maximize the firm’s expected cash flows,
because this will add the most to the wealth of the individual shareholders.
|
||||||||||
|
b.
|
The financial manager should seek
that combination of assets, liabilities, and capital that will generate the
largest expected projected after-tax income over the relevant time horizon,
generally the coming year.
|
||||||||||
|
c.
|
The riskiness inherent in a firm’s
earnings per share (EPS) depends on the characteristics of the projects the
firm selects, and thus on the firm’s assets. However, EPS is not affected by the manner
in which those assets are financed.
|
||||||||||
|
d.
|
Potential agency problems can
arise between stockholders and managers, because managers hired as agents to
act on behalf of the owners may instead make decisions favorable to
themselves rather than the stockholders.
|
||||||||||
|
e.
|
Large, publicly-owned firms like
AT&T and GM are controlled by their management teams. Ownership is
generally widely dispersed, hence managers have great freedom in how they
manage the firm. Managers may operate
in stockholders’ best interests, but they may also operate in their own
personal best interests. As long as
managers stay within the law, there is no way to either force or motivate
them to act in the stockholders’ best interests.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.6) Security prices and interest
rates C H
|
Answer:
|
MEDIUM
|
|||||||||
[39].
|
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?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Prices and interest rates would
both rise.
|
||||||||||
|
b.
|
Prices would rise and interest
rates would decline.
|
||||||||||
|
c.
|
Prices and interest rates would
both decline.
|
||||||||||
|
d.
|
There would be no changes in
either prices or interest rates.
|
||||||||||
|
e.
|
Prices would decline and interest
rates would rise.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.6) Interest rates C H
|
Answer:
|
MEDIUM
|
|||||||||
[40].
|
Which of the following would be
most likely to lead to higher interest rates on all debt securities in
the economy?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Households start saving a larger
percentage of their income.
|
||||||||||
|
b.
|
The economy moves from a boom to a
recession.
|
||||||||||
|
c.
|
The level of inflation begins to
decline.
|
||||||||||
|
d.
|
Corporations step up their
expansion plans and thus increase their demand for capital.
|
||||||||||
|
e.
|
The Federal Reserve uses monetary
policy in an attempt to stimulate the economy.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(1.6) Interest rates C H
|
Answer:
|
MEDIUM
|
|||||||||
[41].
|
Which of the following factors
would be most likely to lead to an increase in interest rates in the
economy?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Households reduce their
consumption and increase their savings.
|
||||||||||
|
b.
|
The Federal Reserve decides to try
to stimulate the economy.
|
||||||||||
|
c.
|
There is a decrease in expected
inflation.
|
||||||||||
|
d.
|
The economy falls into a
recession.
|
||||||||||
|
e.
|
Most businesses decide to
modernize and expand their manufacturing capacity, and to install new
equipment to reduce labor costs.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(Comp: 1.8,1.9,1.11) Financial
transactions C H
|
Answer:
|
MEDIUM
|
|||||||||
[42].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
If General Electric were to issue
new stock this year it would be considered a secondary market transaction
since the company already has stock outstanding.
|
||||||||||
|
b.
|
Capital market transactions only
include preferred stock and common stock transactions.
|
||||||||||
|
c.
|
The distinguishing feature between
spot markets versus futures markets transactions is the maturity of the
investments. That is, spot market
transactions involve securities that have maturities of less than one year,
whereas futures markets transactions involve securities with maturities
greater than one year.
|
||||||||||
|
d.
|
|||||||||||
|
e.
|
An electronic communications
network (ECN) is a physical location exchange.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(Comp: 1.2,1.3) Miscellaneous
concepts C M
|
Answer:
|
MEDIUM
|
|||||||||
[43].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
Corporations generally are subject
to fewer regulations and more favorable tax treatment than sole
proprietorships and partnerships. This
is why corporations do most of the business in the United States.
|
||||||||||
|
b.
|
Managers who face the threat of
hostile takeovers are less likely to pursue policies that maximize
shareholder value than are managers who do not face the threat of hostile
takeovers.
|
||||||||||
|
c.
|
One advantage of the corporate
form of organization is that liability of the owners of the firm is limited
to their investment in the firm.
|
||||||||||
|
d.
|
Because of their simplified
organization, it is easier for sole proprietorships and partnerships to raise
large amounts of outside capital than it is for corporations.
|
||||||||||
|
e.
|
Bond covenants are an effective
way to resolve conflicts between shareholders and managers.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
(Comp: 1.2,1.3) Miscellaneous
concepts C M
|
Answer:
|
MEDIUM
|
|||||||||
[44].
|
Which of the following statements
is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
A good goal for a firm’s
management is maximization of expected EPS.
|
||||||||||
|
b.
|
Most business in the U.S. is
conducted by corporations, and corporations’ popularity results primarily
from their favorable tax treatment.
|
||||||||||
|
c.
|
Because most stock ownership is
concentrated in the hands of a relatively small segment of society, firms'
actions to maximize their stock prices have little benefit to society.
|
||||||||||
|
d.
|
Corporations and partnerships have
an advantage over proprietorships because a sole proprietor is exposed to
unlimited liability, but the liability of all investors in the other types of
businesses is more limited.
|
||||||||||
|
e.
|
The potential exists for agency
conflicts between stockholders and managers.
|
||||||||||
|
|
|
|
|
|
|
|
|
|
|||
(Comp:
1.2,1.3) Miscellaneous concepts C M
|
Answer:
|
MEDIUM
|
||||||||||
[45].
|
Which
of the following statements is CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
One
disadvantage of operating as a corporation rather than as a partnership is
that corporate shareholders are exposed to more personal liability than
partners.
|
||||||||||
|
b.
|
There
is no good reason to expect a firm's stockholders and bondholders to react
differently to the types of new asset investments a firm makes.
|
||||||||||
|
c.
|
Bondholders
are generally more willing than stockholders to have managers invest in risky
projects with high potential returns as opposed to safer projects with lower
expected returns.
|
||||||||||
|
d.
|
Stockholders
are generally more willing than bondholders to have managers invest in risky
projects with high potential returns as opposed to safer projects with lower
expected returns.
|
||||||||||
|
e.
|
Relative to sole proprietorships, corporations
generally face fewer regulations, and this makes it easier for corporations
to raise capital.
|
||||||||||
Medium/Hard:
|
(1.8) Ownership and going public C M
|
Answer:
|
MEDIUM/HARD
|
|||||||||
[46].
|
Which of the following statements
is NOT CORRECT?
|
|||||||||||
|
|
|
|
|
|
|
|
|
|
|||
|
a.
|
When a corporation’s shares are
owned by a few individuals and are not traded on public markets, we say that
the firm is “closely, or privately, held."
|
||||||||||
|
b.
|
“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.
|
||||||||||
|
c.
|
When stock in a closely held
corporation is offered to the public for the first time, the transaction is
called “going public,” and the market for such stock is called the new issue
market.
|
||||||||||
|
d.
|
Publicly owned companies have
shares owned by investors who are not associated with management, and public
companies must register with and report to a regulatory agency such as the
SEC.
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e.
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It is possible for a firm to go
public and yet not raise any additional new capital at the time.
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CHAPTER 1
ANSWERS AND
SOLUTIONS
[1]. (1.2) Firm organizationF M Answer:EASY
[2]. (1.2) Firm organizationF M Answer:EASY
[3]. (1.2) PartnershipF M Answer: EASY
[4]. (1.2) ProprietorshipF M Answer : EASY
[5]. (1.2) Limited liability F M Answer: EASY
[6]. (1.3) Value maximizationF M Answer:EASY
[7]. (1.4) Financial intermediariesF M Answer : EASY
[8]. (1.8) Financial marketsF H Answer:EASY
[9]. (1.8) Financial markets F H Answer: EASY
[10]. (1.11) Stock market transactions F H Answer: EASY
[11]. (1.2) Partnership F M Answer:MEDIUM
[12]. (1.2) Proprietorship F M Answer: MEDIUM
[13]. (1.2) Firm organization C M Answer:
EASY
Sole proprietorships and partnerships pay personal income
tax, but they avoid the corporate income tax.
Small corporations that meet certain requirements can elect to be
classified as S Corporations, and then the business is taxed as a partnership.
[14]. (1.2) Firm organization C M Answer:
EASY
[15]. (1.2) Firm organization C M Answer:
EASY
Corporations have limited liability; however, they face
more regulations than the other forms of organization.
[16]. (1.2) Firm organization C M Answer: EASY
[17]. (1.2) Firm organization C M Answer:
EASY
If ownership in a proprietorship or partnership is
transferred, the basic documents under which the firm operates must be
rewritten, whereas for a corporation the seller simply sells shares to a buyer,
and the corporation records the transfer on its books.
[18]. (1.2) Corporate form of organization C M Answer: EASY
[19]. (1.4) Financial transactions C H Answer:
EASY
[20]. (1.6) Interest rates C H Answer:
EASY
[21]. (1.7) Hedge funds C O Answer: EASY
[22]. (1.8) Money markets C O Answer:
EASY
[23]. (1.8) Financial markets C H Answer:EASY
Statement b is a primary market transaction, since the
money and the security pass directly between the issuing firm and the investor.
[24]. (1.8) Financial markets C H Answer: EASY
[25]. (1.8) Financial markets C H Answer: EASY
It is a secondary market transaction because the stock is
transferred from one investor to another.
[26]. (Comp: 1.7-1.9) Financial markets C H Answer: EASY
[27]. (Comp: 1.7-1.9) Financial markets C H Answer:
EASY
[28]. (Comp: 1.7-1.9)
Financial markets C H Answer: EASY
[29]. (1.2) Corporate form of organization C M Answer: MEDIUM
[30]. (1.2) Corporate form of organization C M Answer: MEDIUM
[31]. (1.2) Partnership form of organization C M Answer:MEDIUM
[32]. (1.2) Partnership form of organization C M Answer: MEDIUM
[33]. (1.2) Firm organization C M Answer: MEDIUM
[34]. (1.2) Firm organization C M Answer:MEDIUM
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.
[35]. (1.2) Corporate charter and bylaws C M Answer:
MEDIUM
[36]. (1.3) Business ethics B M Answer:
MEDIUM
It is important to have a specific set of rules that all
employees are expected to follow. This
helps constrain actions, and it is also important to "prove" that the
company is trying to do right if some employee does something wrong.
[37]. (1.3) Goal of firm C M Answer: MEDIUM
[38]. (1.3) Corporate goals and control C M Answer: MEDIUM
[39]. (1.5) Security prices and interest rates C H Answer: MEDIUM
[40]. (1.6) Interest rates C H Answer: MEDIUM
[41]. (1.6) Interest rates C H Answer: MEDIUM
An increase in the demand for capital by businesses will
increase interest rates in the economy.
[42]. (Comp: 1.8,1.9,1.11) Financial transactions C H Answer:
MEDIUM
[43]. (Comp: 1.2,1.3) Miscellaneous concepts C M Answer: MEDIUM
[44]. (Comp: 1.2,1.3) Miscellaneous concepts C M Answer: MEDIUM
[45]. (Comp: 1.2,1.3) Miscellaneous concepts C M Answer: MEDIUM
[46]. (1.8) Ownership and going public C M Answer:MEDIUM/HARD
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