Exam 1: An Overview of Financial Management

A) Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
B) The efficiency of the U.S.economy would probably be increased if hostile takeovers were absolutely forbidden.
C) The managers of established,stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.
D) In general,it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe,stable investments and into risky investments,especially those that primarily involve research and development.
E) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Correct Answer

verified

A

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) A good goal for a firm's management is the 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) Conflicts can exist between stockholders and managers,but potential conflicts are reduced by the possibility of hostile takeovers.
D) Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability,but the liability of all investors in the other types of businesses is more limited.
E) For a stock to be in equilibrium,its intrinsic value must be greater than the actual market price.

Correct Answer

verified

Show Answer

A) One of the advantages of the corporate form of organization is that it avoids double taxation.
B) It is easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
D) 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."
E) Corporations of all types are subject to the corporate income tax.

Correct Answer

verified

Show Answer

Correct Answer

verified

True

Correct Answer

verified

True

Correct Answer

verified

Show Answer

A) 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.
B) 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.
C) 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.
D) Large corporations are taxed more favorably than proprietorships.
E) Corporate stockholders are exposed to unlimited liability.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) If a lower level person in a firm does something illegal,like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior,the lower level person cannot be prosecuted but the superior can be prosecuted.
B) There are many types of unethical business behavior.One example is where executives provide information that they know is incorrect to outsiders.It is illegal to provide such information to federally regulated banks,but it is not illegal to provide it to stockholders because they are the owners of the firm.
C) If someone deliberately understates costs and thereby causes reported profits to increase,this can cause the stock price to rise above its intrinsic value.The stock will probably fall in the future.Both those who participated in the fraud and the firm itself can be prosecuted.
D) Ethical behavior is not influenced by training and auditing procedures.People are either ethical or they are not,and this is what determines ethical behavior in business.
E) ​Ethics is not an important consideration in business and in business schools.

Correct Answer

verified

Show Answer

A) One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.
B) Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.
C) Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started.
D) The managers of established,stable companies sometimes attempt to get their state legislatures to ​impose rules that make it more difficult for raiders to succeed with hostile takeovers.
E) Most business in U.S.is conducted by corporations,and corporations' popularity results primarily from their favorable tax treatment.

Correct Answer

verified

Show Answer

A) 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.
B) The more capital a firm is likely to require,the smaller the probability that it will be organized as a corporation.
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
D) 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.
E) Corporate shareholders are exposed to unlimited liability,but this factor is offset by the tax advantages of incorporation.

Correct Answer

verified

Show Answer

A) 22.61%
B) 23.80%
C) 21.90%
D) 23.56%
E) 28.56%

Correct Answer

verified

Show Answer

A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.
B) Relative to proprietorships,corporations generally face fewer regulations,and they also find it easier to raise capital.
C) There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.
D) Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
E) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Correct Answer

verified

Show Answer

A) Maximize managers' own interests,which are by definition consistent with maximizing shareholders' wealth.
B) Maximize the firm's expected EPS,which must also maximize the firm's price per share.
C) Minimize the firm's risks because most stockholders dislike risk.In turn,this will maximize the firm's stock price.
D) Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
E) 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.

Correct Answer

verified

Show Answer

A) Corporations face few regulations and more favorable tax treatment than do proprietorships and partnerships.
B) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
C) Bond covenants are an effective way to resolve conflicts between shareholders and managers.
D) Because of their simplified organization,it is easier for proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
E) One advantage to forming a corporation is that the owners of the firm have limited liability.

Correct Answer

verified

Show Answer

A) Maximize its expected total corporate income.
B) Maximize its expected EPS.
C) Minimize the chances of losses.
D) Maximize the stock price per share over the long run,which is the stock's intrinsic value.
E) Maximize the stock price on a specific target date.

Correct Answer

verified

Show Answer