Finance Exam 1

1. Which of the following statements is CORRECT?

• 1. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.

• Proprietorships and partnerships generally have a tax advantage over corporations.

• 1. Proprietorships are subject to more regulations than corporations.

• 1. In any partnership, every partner has the same rights, privileges, and liability exposure as

     every other partner.

• 1. Corporations of all types are subject to the corporate income tax.

1. Sammy’s Pizza is a sole proprietorship. Sammy used this form of business organization because:

• 1. It lets him avoid paying all taxes.

• 1. It is simple to set up.

• 1. It is required for small businesses.

• 1. It allows him to be a non-profit organization.

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

• 1. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).

• 1. Compensating managers with more stock options and less cash income.

• 1. The passage of laws that make it harder for hostile takeovers to succeed.

• 4. A government regulation that banned the use of convertible bonds.

• 4. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather

     than debt that matures in less than one year.

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

• True

• False

Money markets are markets for

• 1. Foreign currencies

• 1. Common stocks

• 1. Consumer automobile loans.

• 1. Long-term bonds.

• 1. Short-term debt securities such as Treasury bills.

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

• 1. Corporations generally face fewer regulations.

• 1. Less of a corporation's income is generally subject to federal taxes.

• 1. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax

     advantages of incorporation.

• 1. Corporate investors are exposed to unlimited liability.

• 1. Corporations generally find it easier to raise large amounts of capital.

You recently sold 200 shares of Disney stock, and the transfer was made through a broker (a broker is someone who specialize on helping you to buy or sell stocks). This is an example of:

• 1. A money market transaction.

• 1. A primary market transaction.

• 1. A secondary market transaction.

• 1. A derivative market transaction.

If Bearkat autos uses a lot of aluminum in their production and is worried about the price of aluminum increasing substantially in the next 6 -12 months, they can purchase futures or options on aluminum which will give them a fixed price and reduce their risk. This is called:

• Hedging

• Speculating

• Capitalizing

• Marginalizing

Bearkat Autos is organized as a corporation. Unfortunately, a number of people crashed their Bearkat cars due to faulty brakes. It was determined that the assembly plant did a poor job testing and installing the brakes. The individuals who had wrecks sued Sammy Bearkat who owns Bearkat Autos. Sammy lives in a nice three-bedroom house over by Elkins Lake and drives a Porsche. Is it possible that Sammy will lose his house and his car due to this lawsuit?

• 1. Yes, Sammy will lose his house

• 1. No, Sammy will not lose his house

Bearkat Autos decided to go public and issued stock. But the funds from stock were not enough and they also sold bonds, which means they issued debt instruments as well. Steve bought 1,000 shares of Bearkat Autos stock. Jim bought $50,000 worth of Bearkat Autos bonds (debt). Bearkat Autos is considering making three wheeled, electric motorcycles. This will cost the firm $25 million to build a new plant. There is a 60% chance that this will be successful and will double the profits of the firm. But if it fails, there is a 10% chance that the firm will go bankrupt.

10. Do you think Jim (bond buyer) would be in favor of moving forward with this new project?

• 1. Yes, Jim would be in favor of moving forward with this new project

• 1. No, Jim would not be in favor of moving forward with this new project