Foundation of Financial Management
Foundation of Financial Management
Foundation of Financial Management
Diff: E
Corporations
Corporations
Corporations
Corporations
Statements c
Firm organization
2.
Answer: c
Answer: c
Diff: E
Firm organization
3.
Answer: c
Diff: E
Firm organization
4.
Answer: a
Diff: E
Firm organization
5.
Answer: a
Diff: E
Until this year, Cheers Inc. was organized as a partnership. This year,
the partners have decided to organize the business as a corporation. As
a result of this change in organizational form, which of the following
statements is most correct?
a. Cheers shareholders (the ex-partners) will now have limited
liability.
b. Cheers will now be subject to fewer regulations.
c. Cheers will now pay less in taxes.
d. Cheers investors will now find it more difficult to transfer
ownership.
e. Cheers will now find it more difficult to raise additional capital.
Answer: a
Diff: E
Goal of firm
7.
Answer: d
Maximize
Maximize
Minimize
Maximize
Maximize
Agency
8.
Diff: E
Answer: d
Diff: E
Agency
9.
to
reduce
agency
Answer: a
Diff: E
conflicts
between
Answer: d
Diff: E
Which of the following actions are likely to reduce the agency problem
between stockholders and managers?
a. Congress passes a law that severely restricts hostile takeovers.
b. A manager receives a lower salary but receives additional shares of
the companys stock.
c. The board of directors has become more vigilant in its oversight of
the companys management.
d. Statements b and c are correct.
e. All of the statements above are correct.
Agency
11.
Answer: b
Managerial incentives
12.
Diff: E
Answer: e
Diff: E
Bond covenants.
The threat of a takeover.
Pressure from the board of directors.
Answers a and b are correct.
Answers b and c are correct.
Miscellaneous concepts
13.
Answer: a
Diff: E
Miscellaneous concepts
14.
Answer: b
Diff: E
Miscellaneous concepts
15.
Answer: c
Diff: E
Miscellaneous concepts
16.
Answer: e
Diff: E
Miscellaneous concepts
17.
Answer: c
Diff: E
Business ethics
18.
Diff: M
Social welfare
19.
Answer: e
Answer: a
Diff: M
Answer: b
Diff: M
Corporate form
21.
Answer: d
Diff: M
Partnership
22.
Answer: d
Diff: M
Firm organization
23.
Answer: c
Diff: M
Firm organization
24.
Diff: M
Jane Doe, who has substantial personal wealth and income, is considering
the possibility of opening a new business in the chemical waste
management field. She will be the sole owner. The business will have a
relatively high degree of risk, and it is expected that the firm will
incur losses for the first few years. However, the prospects for growth
and positive future income look good, and Jane expects to realize
substantial cash flows from dividends the firm will eventually pay out.
Which of the legal forms of business organization would probably best
suit her needs?
a.
b.
c.
d.
e.
Firm organization
25.
Answer: d
Answer: e
Diff: M
Answer: c
Diff: M
Answer: e
Diff: M
Agency
28.
Answer: c
Diff: M
Agency
29.
Answer: d
Diff: M
Miscellaneous concepts
30.
Answer: e
Diff: M
CHAPTER 1-A
Answers and Solutions
1.
Answer: c
Diff: E
The advantages of incorporation are unlimited life, easy transferability of ownership interest, limited liability, and ease of raising
money in the capital markets. Regulations and double taxation are
disadvantages of corporations.
2.
Firm organization
Answer: c
Diff: E
Statement c is correct.
Sole proprietorships pay personal income tax
not corporate tax.
The other statements are false.
Corporations are
subject to limited liability, but are subject to more regulations than
the other forms of business organization.
3.
Firm organization
Answer: c
Diff: E
Firm organization
Answer: a
Diff: E
Firm organization
Answer: a
Diff: E
Except for statement a, all the other statements are exactly opposite
for corporations.
6.
Answer: a
Diff: E
Statement a is correct.
The other statements are false.
Limited
liability is an advantage of the corporate form, and it is generally
easier for corporations to raise capital as compared to partnerships or
proprietorships.
7.
Goal of firm
Answer: d
Diff: E
8.
Agency
Answer: d
Diff: E
Agency
Answer: a
Diff: E
10.
Agency
Answer: d
Diff: E
Agency
Answer: b
Diff: E
Managerial incentives
Answer: e
Diff: E
Miscellaneous concepts
Answer: a
Diff: E
Miscellaneous concepts
Answer: b
Diff: E
Miscellaneous concepts
Answer: c
Diff: E
16.
Miscellaneous concepts
Answer: e
Diff: E
17.
Miscellaneous concepts
Statement
conflict
Statement
Statement
Answer: c
Diff: E
c is correct.
Statement a is false; bond covenants reduce
between stockholders (through managers) and bondholders.
b is false; a takeover usually increases a firms stock price.
c is true; therefore, the remaining statements are false.
18.
Business ethics
Answer: e
Diff: M
19.
Social welfare
Answer: a
Diff: M
20.
Answer: b
Diff: M
21.
Corporate form
22.
Partnership
Answer: d
Diff: M
23.
Firm organization
Answer: c
Diff: M
24.
Firm organization
Answer: d
Diff: M
25.
Firm organization
Answer: e
Diff: M
26.
Answer: c
Diff: M
27.
Answer: e
Diff: M
28.
Agency
Answer: d
Answer: c
Diff: M
Diff: M
Agency
Answer: d
Diff: M
Miscellaneous concepts
Answer: e
because
Diff: M