In most corporations, the CFO ranks under the CEO
True
The Chairman of the Board must also be the CEO
False
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 und
True
Partnerships and proprietorships generally have a tax advantage over corporations.
True
A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership
False
An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.
False
Some partners in a partnership may have different rights, privileges, and responsibilities than other partners
True
One advantage of the corporate form of organization is that it avoids double taxation.
False
It is generally harder to transfer one's ownership interest in a partnership than in a corporation
True
10. 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.
True
11. If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.
True
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.
False
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
False
The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation
True
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.
False
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partners
True
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value.
True
If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.
False
In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
False
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.
False
As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.
True
There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to s
False
A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value.
True
If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
False
If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold.
False
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
False
The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose, barring any new information coming out about the stock. It is the "marginal investor" who determines the act
True
Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus, conflicts between stockholders and managers are not possible.
False
A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. Ho
True
If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted bu
False
If someone deliberately understates costs and thereby increases profits, this can cause the stock price to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and t
True
If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.
True
Proprietorships and partnerships generally have a tax advantage over corporations
True
Which of the following statements 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 disa
c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
Which of the following statements 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 proprietorships.
c. One
a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
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. Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
b. The com
Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
Which of the following statements is CORRECT?
a. Corporations generally face fewer regulations than proprietorships.
b. Corporate shareholders are exposed to unlimited liability.
c. It is usually easier to transfer ownership in a corporation than in a par
c. It is usually easier to transfer ownership in a corporation than in a partnership.
. Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Less of a corporation's income is generally subject to fe
e. Corporations generally find it easier to raise large amounts of capital.
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
d. Maximize the stock price per share over the long run, which is the stock's intrinsic value.
40. Which of the following statements is CORRECT?
a. In most corporations, the CFO ranks above the CEO.
b. By law in most states, the chairman of the board must also be the CEO.
c. The board of directors is the highest ranking body in a corporation, and t
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 und
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 subjects the firm's investors to increased persona
One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
. Which of the following statements is CORRECT?
a. 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
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. 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.
b. Most businesses (by number
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 treatme
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 li
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.
45. Which of the following statements is CORRECT?
a. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
b. In a limited partnership, the limited partners have vot
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 interest
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
d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
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.
b. Change the corporation's formal documents to make it ea
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.
. 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 r
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.
Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
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 executive compensation that comes in the form of cash is increased and the percentage comi
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%.
small stockholders have little clout with management, while la
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 tak
d. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
Stock options and the threat of takeovers reduce conflicts between managers and shareholders. Financing risky projects with additional
52. Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders?
a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).
a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).
53. Which of the following statements 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
c. 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 fi
54. 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
e. Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to t
55. 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 takeo
d. The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
56. Which of the following statements is CORRECT?
a. Corporations are taxed more favorably than proprietorships.
b. Corporations have unlimited liability.
c. Because of their size, large corporations face fewer regulations than smaller corporations and pr
e. Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.
57. Which of the following statements is CORRECT?
a. A good goal for a firm's management is the maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable ta
c Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
58. Which of the following statements is CORRECT?
a. One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.
b. Using restrictive covenants in d
The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.
59. Which of the following statements is CORRECT?
a. Well-designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
b. The bid price in a hostile takeover is generally above the price before the takeover attemp
b. The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
60. Which of the following statements is CORRECT?
a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
b. The efficiency of the U.S. economy would probably be increased if h
a. Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
61. 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 are partners.
b. Relative to proprietorships, corpo
d. 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.
62. Which of the following statements is CORRECT?
a. 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 projec
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 generall
63. Which of the following statements is CORRECT?
a. Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.
b. Managers who face the threat of hostile takeovers are less likely to pursue policies that
e. One advantage to forming a corporation is that the owners of the firm have limited liability.