Which of the following statements is CORRECT?

Proprietorships and partnerships generally have a tax advantage over corporations.

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 are subject to more regulations than corporations.

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

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

Which of the following statements is CORRECT?

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

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 advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., 'one person, one vote.'

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

Which of the following statements is CORRECT?

One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.

Corporations face fewer regulations than proprietorships.

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.

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

If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

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?

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

Corporations generally face fewer regulations than proprietorships.

Corporate shareholders are exposed to unlimited liability.

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.

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

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

Corporations generally face fewer regulations.

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

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

Corporate investors are exposed to unlimited liability.

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Maximize the stock price per share over the long run, which is the stock's intrinsic value.

Maximize its expected total corporate income.

Minimize the chances of losses.

Maximize the stock price on a specific target date.

Which of the following statements is CORRECT?

In most corporations, the CFO ranks above the CEO.

By law in most states, the chairman of the board must also be the CEO.

The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

Which of the following statements is CORRECT?

One drawback of forming a corporation is that it generally subjects the firm to additional regulations.

One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities.

One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.

One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes.

One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.

Which of the following statements is CORRECT?

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.

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation.

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

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

Which of the following statements is CORRECT?

Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.

Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.

Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.

Large corporations are taxed more favorably than proprietorships.

Corporate stockholders are exposed to unlimited liability.

Which of the following statements is CORRECT?

A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.

A hostile takeover is the main method of transferring ownership interest in a corporation.

Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e., bondholders can sue the firm's managers if the firm defaults on its debt.

Which of the following statements is CORRECT?

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.

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.

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.

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

Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth.

Maximize the firm's expected EPS, which must also maximize the firm's price per share.

Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price.

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.

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

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.

Pay managers large cash salaries and give them no stock options.

Beef up the restrictive covenants in the firm's debt agreements.

Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.

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.

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

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.

Congress passes a law that severely restricts hostile takeovers.

A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock.

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.

The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company.

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

Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

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.

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

Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?

The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%

The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.

The state legislature passes a law that makes it more difficult for hostile takeovers to occur.

The firm's founder, who is also president and chairman of the board, sells 90% of her shares.

The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval

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

The use of covenants in bond agreement that limit the firm’s use of additional debt and constraint managers’ actions

Compensating managers with stock options

Financing risky project with additional debt

The threat of hostile takeovers

Abolishing the Security and Exchange Commission

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Quiz

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Financial Education

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University

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Practice Problem

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Easy

Thanagid Chaichayanon

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In most corporations, the CFO ranks under the CEO.

The Chairman of the Board must also be the CEO.

Partnerships and proprietorships generally have a tax advantage over corporations.

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

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

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

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

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.

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