Question 1

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

Partnerships and proprietorships are taxed as pass-through entities, meaning the business profits and losses are reported on the individual tax returns of the owners. This can result in a lower overall tax rate compared to corporations, which are taxed separately from their owners.

Question 2

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 shareholders' value involves considering long-term sustainability and profitability rather than just focusing on short-term stock price. Focusing on short-term stock price can lead to unhealthy practices like sacrificing long-term investments for short-term gains.

Question 3

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 statement accurately describes the hierarchy and relationship between the board of directors, chairman of the board, and CEO in a corporation. It also notes that while it is possible for one person to hold both positions, it is typically viewed as risky by experts in corporate governance.

Question 4

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 generally not personally liable for the corporation's debts and obligations. Their liability is limited to the investment they have made in the corporation. In contrast, partners in a partnership are personally liable for the debts and obligations of the partnership.

Question 5

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

This is correct, as S corporations are pass-through entities, meaning the profits and losses pass through to the shareholders who report them on their personal tax returns. Therefore, the corporation itself does not pay taxes on its income like traditional C corporations do.

Question 6

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 a common way for management to increase shareholders' value.

Question 7

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 8

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 9

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

Accepted Answer

This statement is false. Corporations are actually typically subject to more regulation than other forms of organization, due in part to their legal status as separate entities and potential impact on the public.

Question 10

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. Proprietorships are typically less expensive to form than corporations because they do not require extensive legal documents such as articles of incorporation and bylaws.

Question 11

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

This statement is true. Corporations have advantages in raising capital due to limited liability for stockholders and the ease of transferring ownership through stock shares.

Question 12

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

Accepted Answer

This is true. Partnerships can have different types of partners with varying levels of authority, decision-making power, liability, and profit-sharing arrangements.

Question 13

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 14

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

Accepted Answer

Unlike a corporation, a partnership often has restrictions on transferring ownership interests. Partners must typically obtain approval from the other partners before transferring their interest, and the process can be more complicated and time-consuming than selling shares of stock in a corporation.

Question 15

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 certain tax benefits for small businesses, they are not completely exempt from federal taxes. S corporations pass their income, losses, deductions, and credits through to their shareholders, who then report this information on their personal tax returns. However, the S corporation itself must still file a tax return with the IRS and pay certain taxes, such as employment taxes for its employees.

Question 16

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 sole proprietorship does not provide any legal separation between the owner and the business. As a result, the owner's personal assets could be seized to pay off business debts if the business fails. In contrast, a corporation is a separate legal entity with its own assets and liabilities, so the owners (shareholders) are generally not personally liable for the corporation's debts.

Question 17

The Chairman of the Board must also be the CEO.

Accepted Answer

The answer of The Chairman of the Board must also...

Question 18

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 19

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

Accepted Answer

Corporations are typically used for businesses that require large amounts of capital, as they are able to raise funds through issuing stocks and bonds. Other forms of ownership, such as sole proprietorships or partnerships, may not be suitable for such businesses as they may not have access to significant amounts of investment capital.

Question 20

In most corporations, the CFO ranks under the CEO.

Accepted Answer

This is true in most corporations, where the CEO is the highest-ranking executive and the CFO typically reports directly to them.

Quiz 1: Overview