Exam 1: An Overview of Financial Management and the Financial Environment

Correct Answer

verified

Show Answer

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.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B) Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C) A corporation is a legal entity that is generally created by a state; its life and existence 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 corporation's legal status 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.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which 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.

Correct Answer

verified

Show Answer

A) ​You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.
B) ​Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
C) ​You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock-the trade is not made through a broker.
D) ​One financial institution buys 200,000 shares of Johnson & Johnson 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 Johnson & Johnson shares on the NYSE.

Correct Answer

verified

Show Answer

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) Regular corporation, because of the limited liability.
E) In this situation, the various forms of organization seem equally desirable.

Correct Answer

verified

Show Answer

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.
E) ​It is possible for a firm to go public and yet not raise any additional new capital at the time.

Correct Answer

verified

Show Answer

A) It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B) Corporate shareholders are exposed to unlimited liability.
C) Corporations generally face fewer regulations than sole proprietorships.
D) Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E) Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

Correct Answer

verified

Show Answer

A) If expected inflation increases, interest rates are likely to increase.
B) If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C) If companies have fewer good investment opportunities, interest rates are likely to increase.
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.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Correct Answer

verified

Show Answer

A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
E) Corporations of all types are subject to the corporate income tax.

Correct Answer

verified

Show Answer

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) Attracting large amounts of capital is more difficult for partnerships than for 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) The limited partners in a limited partnership 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 compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Correct Answer

verified

Show Answer

A) The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
B) Government agencies and firms 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) Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. 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) Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

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.

Correct Answer

verified

Show Answer