Question 1

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 but the superior can be prosecuted.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

Accepted Answer

A)   Congress passes a law that severely restricts hostile takeovers.
B)   A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.
C)   The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period.
D)   The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.
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.F) B) and C)
G) C) and D)

Question 3

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Accepted Answer

A)   Compensating managers with stock options.
B)   Financing risky projects with additional debt.
C)   The threat of hostile takeovers.
D)   The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
E)   Abolishing the Security and Exchange Commission.F) A) and B)
G) A) and C)

Question 4

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. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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 the firm itself can be penalized.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Accepted Answer

A) True 
 B)False

Question 9

Charleston Corporation (CC)  now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by five stockholders who each hold 20% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,000,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less)  spendable income would each stockholder have if the firm elected S Corporation status?

Accepted Answer

A)   $86,632
B)   $88,400
C)   $90,168
D)   $91,971
E)   $93,811F) A) and B)
G) A) and C)

Question 10

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 stockholders because they are the owners of the firm, not outsiders.

Accepted Answer

A) True 
 B)False

Question 11

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Accepted Answer

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)   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.F) A) and C)
G) All of the above

Question 12

Which of the following statements is CORRECT?

Accepted Answer

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 maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
C)   Bond covenants are an effective way to resolve conflicts between shareholders and managers.
D)   Because of their simplified organization, it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
E)   One advantage to forming a corporation is that the owners of the firm have limited liability.F) B) and E)
G) B) and D)

Question 13

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Accepted Answer

A)   Pay managers large cash salaries and give them no stock options.
B)   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.
C)   Beef up the restrictive covenants in the firm's debt agreements.
D)   Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E)   For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.F) A) and E)
G) None of the above

Question 14

New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $1,000,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

Accepted Answer

A)   $20,384
B)   $20,800
C)   $21,225
D)   $21,658
E)   $22,100F) A) and B)
G) B) and C)

Question 15

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is CORRECT?

Accepted Answer

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 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.
D)   It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
E)   If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.F) A) and D)
G) A) and E)

Question 17

Which of the following statements is CORRECT?

Accepted Answer

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 proprietorships.
D)   Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests.
E)   Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.F) C) and D)
G) A) and B)

Question 18

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 actual stock price.

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Accepted Answer

A)   Decrease the use of restrictive covenants in bond agreements.
B)   Take actions that reduce the possibility of a hostile takeover.
C)   Elect a board of directors that allows managers greater freedom of action.
D)   Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
E)   Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.F) None of the above
G) A) and D)

Exam 1: Overview

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Correct Answer
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Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

Correct Answer
verified

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Correct Answer
verified

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Correct Answer
verified

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 actual stock price.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Correct Answer
verified

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.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Correct Answer
verified

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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 the firm itself can be penalized.

Correct Answer
verified

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 but the superior can be prosecuted.

Correct Answer
verified

Exam 1: Overview

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

Correct AnswerverifiedShow Answer

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?

Correct AnswerverifiedShow Answer

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

Correct AnswerverifiedShow Answer

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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 actual stock price.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Correct AnswerverifiedShow Answer

For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If someone deliberately understates costs and thereby increases profits, this can cause the price of the stock 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 the firm itself can be penalized.

Correct AnswerverifiedShow Answer

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 but the superior can be prosecuted.

Correct AnswerverifiedShow Answer

Correct Answer
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