ASSIGNMENT
1. Which of the following could explain why a business might choose to organize as a corporation rather as a sole proprietorship or a partnership?
A. Corporations generally face fewer regulations.
B. Corporations generally face lower taxes.
C. Corporations generally find it easier to raise capital.
D. Corporations enjoy limited liability.
E. Statements C and D are correct.
2. Which of the following statements is true?
A. One of the benefits of incorporating your business is that you become entitled to receive unlimited liability.
B. Sole proprietorships are subject to more regulations than corporations.
C. Sole proprietorships do not have to pay corporate tax.
D. All of the above are correct.
E. None of the answers above is correct.
3. Which of the following statements is most correct?
A. One of the advantages of the corporate form of organization is that there is no double taxation.
B. In the partnership form of organization, it is not easy to transfer ownership.
C. One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability.
D. Both b and c are correct .
E. None of the answers above is correct.
4. Which of the following statements is most correct?
A. One drawback of forming a corporation is that it subjects the firm to additional regulations.
B. One drawback of forming a corporation is that it subjects the firm to limited liability.
C. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
D. All of the answers above are correct.
E. Answers b and c are correct.
5. Which of the following statements is most correct?
A. One advantage of forming a corporation is that you have limited liability.
B. Corporations face fewer regulations than sole proprietorships.
C. One disadvantage of being a sole proprietor is that you have to pay corporate taxes, even though you don't realize the benefits of being a corporation.
D. Statements b and c are correct.
E. None of the statements above is correct.
6. The New York Stock Exchange is primarily
A. A secondary market.
B. An organized auction market.
C. Is a capital market.
D. Answers a and b are correct.
E. All the above are correct.
7. Which of the following statements is most correct?
A. The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock electronically.
B. An example of a primary market transaction is buying 100 shares of Wal-Mart stock from Walmart through an Investment Banker.
C. Capital market instruments include long-term debt and common stock.
D. Statements B and C are correct.
E. Statements A, B, and C are correct.
8. Which of the following statements is most correct?
A. If the investor sells 100 shares of Microsoft to his brother-in-law, this is a primary market transaction.
B. Private securities are generally less liquid than publicly traded securities.
C. Money markets are where short-term, liquid securities are traded, whereas capital markets represent the markets for long-term debt and common stock.
D. Statements B and C are correct.
E. All of the statements above are correct.
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 statements is correct?
A. The New York Stock Exchange is a physical location auction market.
B. Money Markets include markets for consumer automobile loans.
C. If an investor sells shares of stock through a broker, then it would be a primary market transaction.
D. Capital market transactions involve only the purchase and sale of equity securities.
E. None of the answers above is correct.
11. Which of the following statements is most correct?
A. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction.
B. If Disney issues additional shares of common stock, this is an example of a secondary market transaction.
C. The NYSE is an example of an over-the-counter market.
D. Answers a and b are correct.
E. None of the answers above is correct.
12. Which of the following are examples of a primary market transaction?
A. A company issues new common stock.
B. A company issues new bonds.
C. An investor asks his brother to purchase 1,000 shares of Microsoft common stock.
D. All of the statements above are correct.
e. Statements a and b are correct.
13. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
A. Maximize expected total profits
b. Maximize expected EPS
C. Maximize management benefits
D. Maximize employee benefits
E. Maximize the stock price per share
14. Which of the following is an important trend(s) for financial management in the new millennium?
i. Globalization of Business.
ii. Decrease use of computer technology.
iii. Decline in productivity efficiency.
iv. Profound changes in business practices
A. i and iv
B. i, ii, iv
C. i, ii, iii
D. i, iii
E. All of the above
15. Which of the following statements is CORRECT?
A. The New York Stock Exchange is an auction market with a physical location.
B. Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
C. If an investor sells shares of stock through a broker, then this would be a primary market transaction.
D. Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market.
E. While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
16. Which of the following statements is CORRECT?
A. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
B. Corporations face fewer regulations than sole proprietorships.
C. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
D. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
17. Which of the following statements is CORRECT?
A. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B. Corporate shareholders are exposed to unlimited liability.
C. Corporations generally face fewer regulations than sole proprietorships.
D. Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E. Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.
18. Which of the following is a primary market transaction?
A. You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.
B. Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
C. You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock?the trade is not made through a broker.
D. One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction.
E. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE.
19. Which of the following statements is CORRECT?
A. If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.
B. If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.
C. The IPO market is a subset of the secondary market.
D. Only institutions, and not individuals, can participate in derivatives market transactions.
E. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
20. Which of the following statements is CORRECT?
A. Capital market instruments include both long-term debt and common stocks.
B. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
C. The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
D. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
E. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
21. One drawback of switching from a partnership to the corporate form of organization is the following:
A. It subjects the firm to additional regulations.
B. It cannot affect the amount of the firm's operating income that goes to taxes.
C. It makes it more difficult for the firm to raise additional capital.
D. It makes the firm's investors subject to greater potential personal liabilities.
E. It makes it more difficult for the firm's investors to transfer their ownership interests.
22. Which of the following statements is CORRECT?
A. The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B. Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C. A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.
D. Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E. Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.
23. Which of the following statements is CORRECT?
A. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B. Attracting large amounts of capital is more difficult for partnerships than for 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.
C. 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.
D. The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
E. A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
24. Which of the following statements is CORRECT?
A. Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.
B. 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.
C. Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.
D. Large corporations are taxed more favorably than sole proprietorships.
E. Corporate stockholders are exposed to unlimited liability.
25. With which of the following statements would most people in business agree?
A. The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.
B. Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C. Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
D. Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
E. Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.
26. Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?
A. Prices and interest rates would both rise.
B. Prices would rise and interest rates would decline.
C. Prices and interest rates would both decline.
D. There would be no changes in either prices or interest rates.
E. Prices would decline and interest rates would rise.
27. Which of the following statements is CORRECT?
A. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.
B. Capital market transactions only include preferred stock and common stock transactions.
C. The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.
D. Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.
E. An electronic communications network (ECN) is a physical location exchange.
28. Which of the following statements is CORRECT?
A. Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.
B. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.
C. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.
D. Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.
E. Bond covenants are an effective way to resolve conflicts between shareholders and managers.
29. Which of the following statements is CORRECT?
A. A good goal for a firm's management is maximization of expected EPS.
B. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.
D. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E. The potential exists for agency conflicts between stockholders and managers.
30. Which of the following statements is NOT CORRECT?
A. When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held."
B. "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares.
C. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.
D. Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.
e. It is possible for a firm to go public and yet not raise any additional new capital at the time.