Question 1

Which of the following types of firms do not have limited liability?

Accepted Answer

Sole proprietorships do not have limited liability, meaning the owner is personally responsible for all debts and liabilities of the business. Limited partnerships and corporations both have limited liability.

Question 2

Which of the following is typically the major factor in limiting the growth of a sole proprietorship?

Accepted Answer

As a sole proprietorship has only one owner who is personally liable for all the debts of the company, the amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts. This can potentially limit the growth of the company. Choice A is not a typical factor, as the organization of sole proprietorships tends to be relatively simple. Choice B may be a challenge, but it is not a major factor in limiting growth. Choice D is not applicable as there are no investors in a sole proprietorship.

Question 3

What is the major advantage corporations have over other business entities?

Accepted Answer

- Option A is true because a corporation can issue stocks to raise capital, and investors can buy and sell these stocks to raise even more capital.
- Option B is true because a corporation is treated as a separate legal entity, which means it can enter contracts, own assets, sue and be sued in its own name, and pay taxes on its own.
- Option C is true because a corporation's shares can be bought and sold in the stock market or through private transactions, allowing shareholders to easily enter or exit the company. Therefore, all of these advantages make D the correct answer.

Question 4

Financial decisions require that you weigh alternatives in strictly monetary terms.

Accepted Answer

Financial decisions often involve considering non-monetary factors such as risk, personal values, and the impact on stakeholders, in addition to monetary terms.

Question 5

Why is it possible for a corporation to enter into contracts,acquire assets,incur obligations,and enjoy protection against the seizure of its property?

Accepted Answer

A corporation is considered a separate legal entity from its owners, meaning that it can enter into contracts, acquire assets, and incur obligations without directly involving its owners. This also provides protection for the corporation's property, as the owners are not personally liable for any debts or legal issues the corporation may face.

Question 6

You are a shareholder in a corporation which has elected chapter S treatment.The corporation announces a profit of $6 per share,of which it retains $2 for reinvestment and distributes the rest as dividend payments.Given that the personal tax rate is 35%,how much tax must you pay per share?

Accepted Answer

Chapter S corporations are pass-through entities, meaning that shareholders are taxed on their share of the corporation's income. In this case, the corporation is distributing $4 per share as dividends, and since dividends are taxed at a lower rate than ordinary income, the shareholder will owe 35% of $4, or $1.40, in taxes. However, since the corporation is retaining $2 for reinvestment, the shareholder will not owe any tax on that portion of the profit. Therefore, the total tax owed per share is $1.40, which is closest to answer choice B ($2.10 is greater than $1.40, while $2.60 and $3.90 are much greater).

Question 7

ValiantCorp is a C corporation that earned $3 per share before it paid any taxes.ValiantCorp retained $1 of after tax earnings for reinvestment,and distributed what remained in dividend payments.If the corporate tax rate was 30% and dividend earnings were taxed at 12.5%,what was the value of the dividend earnings received after tax by a holder of 100,000 shares of ValiantCorp?

Accepted Answer

ValiantCorp's earnings per share after corporate tax is $3 * (1 - 0.30) = $2.10. After retaining $1, the dividend per share is $2.10 - $1 = $1.10. The after-tax dividend per share is $1.10 * (1 - 0.125) = $0.9625. For 100,000 shares, the total after-tax dividend is $0.9625 * 100,000 = $96,250.

Question 8

In which of the following ways is a limited liability company like a corporation?

Accepted Answer

Both limited liability companies and corporations offer limited liability protection to their owners. This means the personal assets of the owners are protected from the company's liabilities, and the owners' liability is restricted to the amount they have invested in the company.

Question 9

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?

Accepted Answer

Owners of a limited liability company can take an active role in running the company, whereas limited partners in a limited partnership typically have limited involvement in the management and operation of the business.

Question 10

A C corporation earns $7.40 per share before taxes.The corporate tax rate is 39%,the personal tax rate on dividends is 15%,and the personal tax rate on non-dividend income is 36%.What is the total amount of taxes paid if the company pays a $5.00 dividend?

Accepted Answer

First, the corporation will pay taxes on its earnings before distributing any dividends:

$7.40 earnings per share * 0.39 corporate tax rate = $2.886 in corporate taxes

Next, the corporation will distribute $5 per share as dividends, and individuals who receive these dividends will pay personal taxes.

Individuals will first pay taxes on the dividends at a rate of 15%:

$5 dividend per share * 0.15 personal tax rate on dividends = $0.75 in personal taxes on dividends

Individuals will also pay personal taxes on any non-dividend income they receive. Assuming they have no other income besides the dividend, an additional $1.40 per share ($7.40 earnings per share - $5 dividend per share) would be considered non-dividend income.

$1.40 non-dividend income per share * 0.36 personal tax rate on non-dividend income = $0.504 in personal taxes on non-dividend income

The total amount of taxes paid is the sum of the corporate taxes and personal taxes:

$2.886 + $0.75 + $0.504 = $4.14

Therefore, the closest answer choice is (C) $3.64, which is the amount of taxes paid after rounding to the nearest cent.

Question 11

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?

Accepted Answer

The Valuation Principle helps to make costs and benefits of a decision comparable so that they can be weighed properly, which is crucial in making sound financial decisions. While options A, B, and C are relevant to finance, they do not accurately describe the importance of the Valuation Principle.

Question 12

What is the most common type of firm in the United States and the world?

Accepted Answer

Sole proprietorships are the most common type of firm in both the United States and the world due to their simplicity and the minimal legal requirements needed to establish them.

Question 13

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

Accepted Answer

Corporations are able to raise large amounts of capital through the sale of stocks, which allows them to dominate the business world.

Question 14

Helen owns 12.5% of the stock of the Median Corporation.If Median makes a dividend payment of $25,000,000 paid proportionally to its shareholders,how much of this amount would Helen receive,disregarding tax?

Accepted Answer

To find out how much Helen would receive, we need to calculate her proportion of the dividend payment. Since she owns 12.5% of the stock, she is entitled to 12.5% of the dividend payment.

12.5% of $25,000,000 = $3,125,000

Therefore, the answer is B.

Question 15

Which of the following are unique for an S corporation?

Accepted Answer

All of the options listed are unique for an S corporation. The profits and losses pass through to the individual shareholders' tax returns, even though the corporation itself does not have to pay taxes on them. Shareholders are required to include the profits and losses in their individual income taxes, regardless of whether or not the money is distributed to them. Finally, there is a maximum limit on the number of shareholders an S corporation can have, with the current limit set at 100.

Question 16

Which of the following features of a corporation is LEAST accurate?

Accepted Answer

The answer of Which of the following features of a...

Question 17

Joe is a general partner in a limited partnership firm,while Jane is a limited partner in that same firm.Which of the following statements regarding their respective relationships to the firm are correct?

Accepted Answer

As a limited partner, Jane's liability is limited to her investment in the firm. General partners like Joe have management authority, while limited partners like Jane do not. Jane's withdrawal does not dissolve the partnership.

Question 18

Partnerships are the most common type of business firm in the world.

Accepted Answer

Sole proprietorships are the most common type of business firm in the world due to their simplicity and the ease with which they can be established.

Question 19

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

Accepted Answer

The Valuation Principle is a fundamental concept in economics that emphasizes the importance of evaluating costs and benefits in a comparable way.

Question 20

Over four-fifths of all U.S.business revenue is generated by which type of firm?

Accepted Answer

Corporations generate over four-fifths of all U.S. business revenue.

Quiz 1: Corporate Finance and the Financial Manager