Corporate Finance Quiz

Which of the following statements is CORRECT?

• Corporations generally face fewer regulations than proprietorships.

• Corporate shareholders are exposed to unlimited liability.

• It is usually easier to transfer ownership in a corporation than in a partnership.

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

• There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small.

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

• Relaxant's shareholders (the ex-partners) will now be exposed to less liability.

• The company will probably be subject to fewer regulations and required disclosures.

• Assuming the firm is profitable, none of its income will be subject to federal income taxes.

• The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.

• The firm will find it more difficult to raise additional capital to support its growth.

Which of the following statements is CORRECT?

• In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.

• In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.

• 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.

• 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 interests.

• A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

If you and your roommate start a partnership, what can you do to avoid any conflicts down the road?

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

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

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

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

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

• 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.

Guess the song?

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.

• Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Under which business structure is the owner personally responsible for business debt and could have assets (e.g., car or home) seized? 

• C corporation

• S corporation

• Sole Propreitorship

• All of the above

What is the goal of a CFO?

• Maximize Profit

• Maximize Market Share

• Minimize Costs

• Maximize Share Price

Which superhero below would dominate the stock market if they used their ability/power to invest?

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