Question 1

As long as the number of common stock shares outstanding does not change appreciably, the market's perception of the firm and of its management's actions appears in the firm's stock price.

Accepted Answer

The stock price reflects the market's perception of the firm and its management, assuming the number of common stock shares outstanding remains relatively unchanged. Factors such as earnings announcements, news about the company, and changes in the industry or economy can all impact the stock price as well.

Question 2

Under Sarbanes-Oxley, to maintain independence, the lead auditor must be changed at least every three years.

Accepted Answer

Under Sarbanes-Oxley, the lead auditor or coordinating audit partner must rotate off the audit every five years, not three years.

Question 3

The marginal tax rate is the rate paid on the last dollar of income.

Accepted Answer

The marginal tax rate is calculated as the rate at which the next additional unit of income will be taxed. It represents the tax rate on the last dollar of income earned.

Question 4

It is common for firms to use the same accounting firms to audit their books as they use for bookkeeping, financial system consulting, and so on since these firms are familiar with the details of their systems.

Accepted Answer

Using the same firm for both auditing and non-audit services (like bookkeeping or consulting) can lead to conflicts of interest and impair the auditor's independence. Regulations in many jurisdictions limit this practice to ensure audits are objective and independent.

Question 5

The treasurer oversees the traditional functions of financial analysis, including capital budgeting, short-term and long-term financing decisions, and current asset management.

Accepted Answer

This statement is true. The treasurer is responsible for managing a company's financial resources, which includes analyzing capital expenditures, making decisions about how to raise money, and managing current assets such as cash and accounts receivable.

Question 6

Shareholder wealth may be defined as the price of a company's stock times the number of shares outstanding.

Accepted Answer

Shareholder wealth is commonly measured by the market value of a company's stock, which is the stock price multiplied by the number of shares outstanding. This represents the value that shareholders hold in the company.

Question 7

The goal of any firm should be the maximization of sales.

Accepted Answer

The goal of any firm should be the maximization of profits, not just sales. Maximizing sales without considering costs and profitability can result in losses for a firm.

Question 8

The goal of the firm is the maximization of profits and market share.

Accepted Answer

The primary goal of a firm is the maximization of shareholder wealth, typically measured by the market value of the firm's shares. While profit maximization and increasing market share are important, they are means to the end of maximizing shareholder wealth, not ends in themselves.

Question 9

Income from partnerships and proprietorships is combined with other personal income for tax purposes.

Accepted Answer

Income from partnerships and proprietorships is reported on an individual's personal income tax return and is combined with other personal income for tax purposes.

Question 10

Restricted stock is shares of stock awarded to managers that cannot be redeemed unless the manager is currently working for the firm.

Accepted Answer

Restricted stock can be awarded to employees, and while it may have vesting conditions, it does not require the employee to be currently working for the firm at the time of redemption. Vesting conditions often include time-based service requirements or performance milestones, but once vested, the employee owns the stock outright, even if they leave the company.

Question 11

Implicit agency costs do not have a direct expense associated with them, but they harm shareholders anyway.

Accepted Answer

Implicit agency costs refer to the indirect costs incurred by shareholders due to conflicts of interest between management and shareholders which may result in suboptimal decision making. These costs do not have a direct dollar amount associated with them, but they harm shareholders by reducing the value of their investments. Therefore, the answer is true.

Question 12

Two basic tools that can be used to reduce the consequences of managers making self-serving decisions include offering managers stock options and offering managers restricted stock.

Accepted Answer

Offering stock options and restricted stock can align the interests of managers with those of the shareholders, reducing the temptation for managers to make self-serving decisions that may harm the company in the long term.

Question 13

Poison pills are provisions in a corporate charter that make a corporate take-over more unattractive.

Accepted Answer

Poison pills are indeed provisions in a corporate charter that are designed to make a corporate take-over less attractive or more difficult.

Question 14

The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response several accounting scandals.

Accepted Answer

The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response to several high-profile accounting scandals, including Enron and WorldCom.

Question 15

Agency costs are the intangible expenses borne by shareholders because of the actual or potential self-serving actions of managers; they include only implicit (no cash is spent explicitly) expenses.

Accepted Answer

Agency costs include both explicit costs (such as monitoring and bonding costs) and implicit costs (such as lost opportunities) due to the separation of ownership and control in a corporation.

Question 16

Principals are managers hired by the principals to run the firm.

Accepted Answer

Principals are the owners or partners of a firm who hire managers to run the operations.

Question 17

Agency costs are the tangible and intangible expenses borne by shareholders because of the actual or potential self-serving actions of managers; and agency costs can include explicit, out-of-pocket expenses.

Accepted Answer

This statement accurately describes agency costs, which are a well-established concept in finance and economics. Managers may have incentives to act in their own interest rather than the interest of shareholders, and this can lead to agency costs. These costs can be both tangible (such as salaries or bonuses) and intangible (such as the loss of reputation that comes with unethical behavior). Overall, agency costs represent a significant concern for shareholders and are an important area of research in corporate finance.

Question 18

Income tax liabilities may differ for each form of business organization selected.

Accepted Answer

Each form of business organization has different tax structures and liabilities. For example, sole proprietorship and partnership entities are pass-through entities where income is taxed only once on the owner's personal income tax return, whereas corporations are taxed at both the corporate and individual levels. Therefore, income tax liabilities may differ for each form of business organization.

Question 19

Creditors have a fixed claim that usually doesn't change with variations in the value of the firm's assets over time.

Accepted Answer

Creditors have a fixed claim or priority over the assets of the company, and their claim is not affected by fluctuations in the value of the assets.

Question 20

The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response several ethical scandals.

Accepted Answer

The Sarbanes-Oxley Act of 2002 was passed by the U.S. Congress in response to several high-profile corporate accounting scandals, including those at Enron, WorldCom, and Tyco.

Quiz 13: Business Organization and Financial Data