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.
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A) 20.4%
B) 20.8%
C) 21.2%
D) 21.7%
E) 22.1%
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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) Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
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A) One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.
B) The threat of takeover generally increases potential conflicts between stockholders and managers.
C) Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.
D) The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
E) The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.
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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.
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D
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A) Well designed bond covenants are useful for reducing potential conflicts between stockholders and managers.
B) The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
C) 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.
D) Takeovers are most likely to be attempted if the target firm's stock price is above its intrinsic value.
E) The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
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A) A hostile takeover is the main method of transferring ownership interest in a corporation.
B) A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.
C) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
D) Limited liability is an advantage of the corporate form of organization to its owners (stockholders) , but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E) Although the stockholders of the corporation 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 the firm's managers if the firm defaults on its debt.
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B
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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 price of the stock 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.
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A) The percentage of executive compensation that comes in the form of cash is increased and the percentage coming from long-term stock options is reduced.
B) The state legislature passes a law that makes it more difficult to successfully complete a hostile takeover.
C) The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%.
D) The firm's founder, who is also president and chairman of the board, sells 90% of her shares.
E) The firm's board of directors gives the firm's managers greater freedom to take whatever actions they think best without obtaining board approval.
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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.
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A) Corporations generally face fewer regulations.
B) Less of a corporation's income is generally subject to federal taxes.
C) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally find it easier to raise large amounts of capital.
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A) Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
B) The company will probably be subject to fewer regulations and required disclosures.
C) Assuming the firm is profitable, none of its income will be subject to federal income taxes.
D) The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) The firm will find it more difficult to raise additional capital to support its growth.
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A
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