1. A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business which limits his losses to what he has invested in the company.
A) True
B) False
2. Which of the following statements is correct?
A) The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.
B) 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) Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
D) Although most companies design a charter, only the bylaws are legally required to be filed with the secretary of state in order for a corporation to be in official existence.
3. Which of the following statements is correct?
A) A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do.
B) An advantage of the corporate form for many businesses is the fact the corporate tax rate always exceeds the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.
C) There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce more goods and services than do other forms of business.
D) Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large businesses choose to incorporate.
E) Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.
4. Cultural differences do not impact the multinational corporations as they expand into different geographic regions.
A) True
B) False
5. Which of the following statements is correct?
A) The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing.
B) Although the annual report is geared toward the average stockholder, it represents financial analysts' most complete source of financial information about the firm.
C) The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows.
D) The annual report provides no relevant information for use by financial analysts or by the investing public.
E) None of the above statements is correct.
6. One of the biggest noncash items on the income statement is depreciation which needs to be subtracted from net income to determine cash flows for the firm.
A) True
B) False
7. Which of the following statements is correct?
A) If Company A has a higher debt ratio that Company B, then we can be sure that A will have a lower times-interest-earned ratio than B.
B) Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets. However, Company A used more debt than Company B; that is, Company A has a higher debt ratio. Under these conditions, we would expect B's profit margin to be higher than A's.
C) The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA.
D) Statements a, b, and c are all true.
E) Statements a, b, and c are all false.
8. You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36. What is the return on equity (ROE)?
A) 14.0%
B) 12.5%
C) 15.0%
D) 2.5%
E) 13.5%
9. Money markets are markets for
A) Foreign currency exchange.
B) Consumer automobile loans.
C) Corporate stocks.
D) Long-term bonds.
E) Short-term debt securities.
10. Which of the following is usually cited as a disadvantage of issuing new common stock as a method of financing?
A) Common stock does not have a maturity date, thus it is an open-end commitment of the firm's earnings.
B) Since sale of common stock increases the number of owners and the amount of capital at risk, the firm's bond rating is usually negatively affected and its cost of debt rises.
C) If the firm currently has more equity than its optimal capital structure dictates and it issues more equity, then the average cost of capital will most likely rise.
D) Common stock is not an attractive option if the firm seeks to increase its reserve borrowing capacity.