Chapter 1 Finance

 It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

• True

• False

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

• True

• False

Which of the following statements is CORRECT?

• One of the advantages of the corporate form of organization is that it avoids double taxation.

• It is easier to transfer one's ownership interest in a partnership than in a corporation.

• One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

• 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."

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

• Decrease the use of restrictive covenants in bond agreements.

• Take actions that reduce the possibility of a hostile takeover.

• Elect a board of directors that allows managers greater freedom of action

• 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 is an advantage of the general partnership form of business organization? 

• limited liability of business owners

• low cost of formation

• easy ability to raise capital 

• double taxation

Which of the following is NOT considered to be a disadvantage of the sole proprietorship form of business organization? 

• limited ability to raise capital 

• life is limited to that of the owner

• unlimited liability of business owners

• fewer regulations and reporting requirements

Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends?

• corporations

• general partnerships

• limited partnerships

• both A and C

The true owners of the corporation are the 

• holders of debt issues of the firm

• preferred stockholders. 

• board of directors of the firm. 

• common stockholders.

Which of the following statements best represents the "Agency Problem"? 

• Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders.

• The agency problem results from the separation of management and the ownership of the firm. 

• The agency problem may interfere with the implementation of maximizing shareholder wealth. 

• all of the above

In finance, we assume that investors are generally 

• neutral to risk. 

• averse to risk. 

• fond of risk. 

• none of the above