Which of the following statements accurately describes business organizations?
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
Which of the following statements reflects the position of most people in business?
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 them
The Gabriel Corporation has asked you, a consultant, to recommend an action that is likely to reduce potential conflicts between stockholders and bondholders. Which action do you propose?
Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).
Which of the following situations would most likely encourage a firm's managers to make decisions that are in the best interests of shareholders?
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%.
If you sat on the board of directors of Tyng Corporation, which of the following actions would you recommend to reduce potential conflicts of interest between Tyng's stockholders and bondholders?
The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
Calistoga Combines is a publicly-owned firm. In order to best serve shareholders, its' primary operating goal should be to:
Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers
Which is TRUE about business organizations?
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 about business organizations is CORRECT?
A significant risk in 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 represents a significant disadvantage to the corporate form of organization?
Exposure to taxation of corporate earnings and stockholder dividend income.
Which of the following factors tend to encourage management to act in their stockholders' best interests?
All of the above encourage management to act in shareholders' best interests.
Bethany is planning to start a business. Why might she choose to operate her business as a corporation rather than as a proprietorship or a partnership?
Corporations generally find it easier to raise large amounts of capital.
Of the following actions, which one is most likely to reduce conflicts of interest between managers and stockholders?
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.
Of the following policy changes, which would be the most likely to REDUCE potential conflicts of interest between stockholders and managers?
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.
Imagine that you are the chairman of the board of a large corporation. Which of the following mechanisms do you think the board should choose to adopt to motivate top-level 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 statements about legal and ethical issues is CORRECT?
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
Which of the following statements about hedge funds is CORRECT?
Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only the wealthiest investors invest in hedge funds, and they understand the risks.
Which of the following statements about financial markets is CORRECT?
The New York Stock Exchange is an auction market, and it has a physical location.
One of the following statements about issuing and owning securities is incorrect. Which statement is NOT CORRECT?
Going public establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.
Of the following statements, which is CORRECT?
As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
Which of the following statements about financial institutions and securities is CORRECT?
The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
Three years ago you purchased 500 shares in the Kellogg Company, but yesterday you sold 200 those shares through your broker. This is:
A secondary market transaction.
You recently sold 100 shares of Facebook stock to your uncle. You had the certificates and gave them to him. In exchange, he wrote you a check. Which of the following best describes this transaction?
This is an example of a direct transfer of capital.
Thinking about the financial markets, which of the following statements is CORRECT?
Both NASDAQ dealers and specialists on the NYSE hold inventories of stocks.
Which of the following is an example of a capital market instrument?
Preferred stock.
Which of the following is an example of securities traded in money markets?
Short-term debt securities such as Treasury bills and commercial paper.
Which of the following statements describes a primary market transaction?
Facebook issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
Which of the following statements about IPOs is CORRECT?
In a Dutch auction, investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the compa
Assume that you have analyzed the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following possible changes in the scenario would lower the calculated value of the investment?
The discount rate increases.
Choose the CORRECT statement.
Time lines are useful for visualizing complex problems prior to doing actual calculations.
Which of the following statements about annuities is CORRECT?
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month
Of the following statements, which is CORRECT?
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
Assume that you have analyzed the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following possible changes in the scenario would increase the calculated value of cash flows from an in
the discount rate decreases
Which of the following statements about the present value of an annuity is CORRECT?
You can still solve for I, even if CF0 is positive and all the other CFs are negative.
Which of the following statements about annuity calculations is CORRECT?
To solve for I, you must try different values for I until you find the one that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is a difficult procedure to do without a computer or financial calculator.