Question 1

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

Accepted Answer

Maximizing earnings per share (EPS) does not necessarily lead to maximizing shareholders' wealth. Shareholders' wealth is more directly tied to the overall value of the firm, which includes factors like future growth prospects, risk, and cash flows, not just current EPS.

Question 2

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

Accepted Answer

This is true. As a sole proprietorship, the business owner reports the profits and losses of the business on their personal tax return, and the business itself does not file a separate tax return or pay corporate income tax. Additionally, forming a proprietorship typically involves minimal paperwork and fees compared to other forms of business.

Question 3

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors.This is a primary market transaction.

Accepted Answer

Since Hale Corporation issued and sold the shares for the first time directly to investors through an investment banker, this constitutes a primary market transaction.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A sole proprietorship offers no protection to the owner's personal assets. Therefore, the owner is personally responsible for all debts and liabilities of the business, which means unlimited liability.

Option B is incorrect because transferring ownership in a partnership can be challenging, particularly if the partnership agreement does not specify the procedure for doing so.

Option C is incorrect because the corporate form of organization is commonly subjected to double taxation. A corporation pays taxes on its earnings, and the shareholders pay taxes on their dividends or capital gains.

Option D is incorrect because not all corporations practice one person, one vote. The voting power may be proportional to the number of shares held, or certain classes of shares may have superior voting rights.

Option E is incorrect because only some types of corporations are subject to the corporate income tax. For example, in the US, C-Corporations are typically subject to the corporate income tax, while S-Corporations are pass-through entities that do not pay a corporate income tax.

Question 5

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

Accepted Answer

This is the definition of a financial intermediary, which includes banks, mutual funds, and other institutions that pool funds from savers and invest them in financial assets.

Question 6

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

Accepted Answer

In a regular partnership, the partners do not have limited liability but are personally liable for the debts of the business, similar to a sole proprietorship. Only in a corporation do the owners (shareholders) enjoy limited liability, meaning they are not personally liable for the debts of the corporation.

Question 7

Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.

Accepted Answer

Proprietorships generally rely on the personal funds of the owner or borrowing from banks, making it difficult to raise new capital from outside sources. Additionally, the owner of a proprietorship has unlimited personal liability for business debts, meaning they are personally responsible for paying back any debts incurred by the business.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

If ownership in a proprietorship or partnership is transferred, the basic documents under which the firm operates must be rewritten, whereas for a corporation the seller simply sells shares to a buyer, and the corporation records the transfer on its books.

Question 9

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

Accepted Answer

By converting to a corporation, Cheers' partners have reduced their personal liability. As a partnership, they were personally responsible for all obligations and debts of the business. However, as shareholders in a corporation, they are only liable for the amount of money they have invested in the company.

Question 10

One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy.They change the bid and ask prices of the securities so as to keep supply and demand in balance.

Accepted Answer

This statement accurately reflects the function of NYSE specialists. They hold an inventory of shares and help to facilitate trading by adjusting prices to maintain balance between supply and demand.

Question 11

The disadvantages associated with a proprietorship are similar to those under a partnership.One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets.As a result, partnerships do not have difficulty raising large amounts of capital.

Accepted Answer

The statement incorrectly asserts that partnerships do not have difficulty raising large amounts of capital, which is not necessarily true. Partnerships still face limitations on their ability to raise capital compared to larger corporations with access to public markets and institutional investors.

Question 12

Which of the following statements is CORRECT?

Accepted Answer

If expected inflation increases, lenders will demand a higher interest rate to compensate for the expected loss in purchasing power of the money they receive in repayment.

Answer: B 
 If individuals in general increase the percentage of their income that they save, the supply of funds loanable will increase, leading to a decrease in the equilibrium interest rate unless the demand for credit also increases, which is unlikely to happen in this scenario.

Answer: C 
 If companies have fewer good investment opportunities, they will be less likely to borrow new funds, and as a result, demand for credit will decrease relative to the supply. This scenario will cause a decrease in the equilibrium interest rate, all else equal.

Answer: D 
 Interest rates on all debt securities tend to decrease during recessions because of the low demand for credit, reflecting weak economic activity. While the riskiness of default may increase, the overall supply and demand dynamics in the market lead to lower interest rates.

Answer: E 
 Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills because their maturities are further in the future, exposed to greater uncertainty and variability in financial markets and the economy. Longer-term bonds also tend to have more interest rate risk than short-term bonds.

Question 13

There are three primary disadvantages of a regular partnership: (1)unlimited liability, (2)limited life of the organization, and (3)difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

Accepted Answer

The statement accurately reflects the primary disadvantages of a regular partnership and their impact on the partnership's ability to attract capital and grow.

Question 14

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion.At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.Which of the following statements best describes this transaction?

Accepted Answer

This is an example of a direct transfer of capital. The shares were sold directly from the seller (you) to the buyer (your brother) without involving any intermediary or exchange. The transaction also involved the transfer of funds (check) from the buyer to the seller.

Question 15

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

The form of organization for a business has a significant impact on the income and wealth of the firm's owners. For example, the choice between a sole proprietorship, partnership, or corporation can affect taxes, liability, and access to capital. The decision on the form of organization is an important one and requires careful consideration.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

Corporations have limited liability; however, they face more regulations than the other forms of organization.

Question 17

Which of the following statements is CORRECT?

Accepted Answer

Sole proprietorships and partnerships pay personal income tax, but they avoid the corporate income tax.Small corporations that meet certain requirements can elect to be classified as S Corporations, and then the business is taxed as a partnership.

Question 18

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Accepted Answer

By operating as a corporation, shareholders are not personally liable for the debts or legal issues faced by the company. However, corporations may face tax disadvantages, as they are subject to double taxation (taxation on both corporate profits and individual shareholder earnings). This liability protection is not available in sole proprietorships or partnerships, where the business owner is personally responsible for any debts or legal issues faced by the company.

Question 19

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

Accepted Answer

A primary market transaction involves the sale of new securities to investors, typically in the form of an Initial Public Offering (IPO). Buying or selling currently outstanding stocks occurs in the secondary market.

Question 20

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

Accepted Answer

Limited liability means that owners' personal assets are protected from the business's debts and liabilities. As a result, owners have less risk when investing in a business, and this decreases the cost of capital. This lower risk and reduced cost of capital can enhance a firm's value.

Quiz 1: An overview of financial management and the financial environment

If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share.Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors.This is a primary market transaction.

Which of the following statements is CORRECT?

If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

Two disadvantages of a proprietorship are (1)the relative difficulty of raising new capital and (2)the owner's unlimited personal liability for the business' debts.

Which of the following statements is CORRECT?

Cheers Inc.operates as a partnership.Now the partners have decided to convert the business into a regular corporation.Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

There are three primary disadvantages of a regular partnership: (1)unlimited liability, (2)limited life of the organization, and (3)difficulty of transferring ownership.These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion.At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates.Which of the following statements best describes this transaction?

The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.