Question 1

The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

Accepted Answer

The board of directors is indeed the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO works under the board and its chairman, and the board can generally remove the CEO under certain conditions. The CEO cannot remove the board, but can try to have the board voted out and a new board voted in. While it is possible for a person to hold both positions of CEO and chairman of the board, it is generally considered bad corporate governance.

Question 2

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Accepted Answer

This statement is false. Stockholders in a corporation are not personally liable for the corporation's debts and obligations. Their liability is limited to the amount of their investment in the corporation's stock. In contrast, partners in a general partnership are personally liable for the partnership's debts and obligations.

Question 3

The Chairman of the Board must also be the CEO.

Accepted Answer

The Chairman of the Board and CEO roles can be held by the same person, but it is not required. The two roles have different responsibilities and duties.

Question 4

In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.

Accepted Answer

The answer of In order to maximize its shareholders' value,...

Question 5

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

Partnerships and proprietorships are not taxed as separate entities like corporations. Instead, the profits and losses are passed through to the individual owners and taxed at their personal income tax rate, which can often result in a lower tax burden compared to the corporate tax rate.

Question 6

Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Accepted Answer

Corporations can issue stocks and bonds to raise capital, and stockholders are not personally liable for the firm's debts, which makes it easier for them to raise money from investors. Additionally, shares of stock are more easily transferable than partnership interests, which can make it easier for corporations to attract new investors and raise additional capital.

Question 7

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

Accepted Answer

Partnership agreements can dictate that certain partners have different levels of authority, decision-making power, profit sharing, liability, and other factors. This allows partners to negotiate agreements that work best for their individual needs and goals.

Question 8

In most corporations, the CFO ranks under the CEO.

Accepted Answer

In a typical corporate hierarchy, the CEO is the highest-ranking officer, followed by other top executives, including the CFO who typically reports directly to the CEO.

Question 9

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."

Accepted Answer

Maximizing the stock price in the long run, or the stock's intrinsic value, is one of the main goals of management in order to maximize shareholders' value.

Question 10

In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.

Accepted Answer

Maximizing stock price on a specific target date is not the primary focus of maximizing shareholder value. Shareholder value is maximized over the long term through strategies that optimize profits, cash flows, and dividends. Focusing on short-term stock price increases can actually harm shareholder value in the long run.

Question 11

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.

Accepted Answer

A proprietorship does not provide limited liability protection, so the owner's personal assets can be at risk if the business faces financial difficulties. In contrast, a corporation is a separate legal entity from its owners, which can offer limited liability protection to shareholders.

Question 12

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Accepted Answer

In a partnership, ownership is tied to the individual partners, while in a corporation, ownership is tied to shares of stock, which can be easily transferred. Transferring ownership in a partnership usually requires the approval and agreement of all partners, whereas transferring ownership in a corporation can be done through buying and selling shares on a stock exchange.

Question 13

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

Accepted Answer

When a corporation elects to be taxed as an S corporation, it is considered a pass-through entity and avoids the double taxation associated with a traditional C corporation. However, the net income is still considered taxable income for the individual stockholders and they must pay personal taxes on their share of the income.

Question 14

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Accepted Answer

The statement is false. Corporations are actually more highly regulated than proprietorships and partnerships, as they are subject to more extensive government oversight and must comply with more laws and regulations.

Question 15

One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

The answer of One disadvantage of forming a corporation rather...

Question 16

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.

Accepted Answer

While S corporations do provide tax benefits for their stockholders, they still have to pay certain taxes at the corporate level. Additionally, not all businesses qualify to be taxed as an S corporation, and the main purpose of this provision is to provide a certain tax structure for small businesses, not necessarily to completely eliminate federal taxes for corporations or their stockholders.

Question 17

One advantage of the corporate form of organization is that it avoids double taxation.

Accepted Answer

The answer of One advantage of the corporate form of...

Question 18

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

Accepted Answer

This statement is false. Forming a corporation typically requires more legal and administrative steps, and therefore can be more expensive than a proprietorship.

Question 19

If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.

Accepted Answer

The answer of If management operates in a manner designed...

Question 20

The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.

Accepted Answer

This is because corporations have easier access to large amounts of capital through the issuance of stocks and bonds. Additionally, the limited liability protection offered by the corporate structure may attract investors who are more willing to contribute significant amounts of capital.

Quiz 1: Overview