B) False
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A) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships 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, primarily 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) Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.
G) A) and B)
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A) If expected inflation increases, interest rates are likely to increase.
B) If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C) If companies have fewer good investment opportunities, interest rates are likely to increase.
D) Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
G) None of the above
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A
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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.
G) B) and E)
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A) Foreign stocks.
B) Consumer automobile loans.
C) U.S. stocks.
D) Short-term debt securities.
E) Long-term bonds.
G) A) and C)
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B) False
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A) Households reduce their consumption and increase their savings.
B) The Central Bank decides to try to stimulate the economy.
C) There is a decrease in expected inflation.
D) The economy falls into a recession.
E) Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.
G) C) and E)
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B) False
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B) False
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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.
G) C) and D)
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D
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B) False
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A) Households start saving a larger percentage of their income.
B) The economy moves from a boom to a recession.
C) The level of inflation begins to decline.
D) Corporations step up their expansion plans and thus increase their demand for capital.
E) The Central Bank uses monetary policy in an attempt to stimulate the economy.
G) A) and D)
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A) Maximize the stock price per share over the long run, which is the stock's intrinsic value.
B) Maximize the firm's expected EPS.
C) Minimize the chances of losses.
D) Maximize the firm's expected total income.
E) Maximize the stock price on a specific target date.
G) A) and B)
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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.
G) All of the above
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B) False
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A) You sell 200 shares of IBM stock on the NYSE through your broker.
B) IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
C) You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock.
D) One financial institution buys 200,000 shares of IBM 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 IBM shares on the NYSE.
G) B) and E)
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A) A hostile takeover is the main method of transferring ownership interest in a corporation.
B) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
C) A corporation is a legal entity that is generally created by a state, and it has a life and existence that 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 legal status of the corporation 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.
G) A) and E)
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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.
G) None of the above
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A) Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.
B) Hedge funds have more in common with commercial banks than with any other type of financial institution.
C) Hedge funds have more in common with investment banks than with any other type of financial institution.
D) Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.
E) The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.
G) B) and E)
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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.
G) A) and D)
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A
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