Question 1

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's debts.

Accepted Answer

This statement accurately reflects two common disadvantages of operating as a proprietorship.

Question 2

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 financial institutions that channel savings from savers to investors.

Question 3

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 describes the three primary disadvantages of a regular partnership and how they can hinder the ability to attract large amounts of capital and grow to a large size.

Question 4

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 firm's debts. However, corporations may face tax disadvantages compared to other forms of organization.

Question 5

The form of organizing a business is unimportant issue, as this decision has very little effect on the income and wealth of the firm's owners.

Accepted Answer

The form of organizing a business, such as sole proprietorship, partnership, LLC, or corporation, has a significant impact on the income, taxes, legal liability, and ownership structure of the firm's owners. Each type of organization has different advantages and disadvantages that can affect the profitability and sustainability of the business. Therefore, choosing the right business structure is an important decision that should be based on the owner's goals, vision, and context.

Question 6

Two key advantages to proprietorship are that, as a business, it pays no corporate income tax and is easily and inexpensively formed.

Accepted Answer

Proprietorships are not subject to corporate income tax and can be formed with relative ease and low cost, making them popular among small business owners.

Question 7

Fighting recession with low interest rates is technically impossible when we have large trade deficits and huge national debt.

Accepted Answer

Low interest rates may stimulate borrowing and investment, but they may also worsen trade deficits and add to the national debt. In the long run, reducing trade deficits and national debt requires structural changes to the economy, not just monetary policy.

Question 8

Which of the following statements best describes firm organization?

Accepted Answer

Corporations allow for easier transfer of ownership through the sale of stocks, which is not as straightforward in sole proprietorships where the entire business must be sold. Corporate shareholders also have limited liability, not unlimited, and corporations typically face more regulations than sole proprietorships.

Question 9

Which of the following statements best describes firm organization?

Accepted Answer

One advantage of forming a corporation is that it provides limited liability protection for equity investors. This means that the personal assets of shareholders are not at risk for the debts and obligations of the corporation. In a regular partnership, each partner is personally liable for the entire amount of the business's debts and obligations. A and B are incorrect because they contain inaccurate information about the differences between proprietorships and corporations. D is incorrect because it describes the liability exposure of partners in a regular partnership, not a corporation.

Question 10

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, which in turn sold it to individual and institutional investors. This is a primary market transaction.

Accepted Answer

A primary market transaction is the initial sale of newly issued securities, like the sale of shares by Hale Corporation to the investment banker in this scenario. The subsequent sale of those shares by the investment banker to individual and institutional investors would be considered a secondary market transaction.

Question 11

With the more formal nature of the partnership agreement and the commitment of all partners'
personal assets, partnerships have no difficulty raising large amounts of capital as do proprietorships.

Accepted Answer

Partnerships, while potentially having more resources than sole proprietorships due to the combined assets of all partners, still face significant challenges in raising large amounts of capital compared to corporations. This is because they do not have access to public markets to issue stocks or bonds, and the personal liability involved can deter investment.

Question 12

If an individual investor trades currently outstanding common shares through a broker, this is a secondary market transaction.

Accepted Answer

A secondary market transaction involves the buying and selling of existing securities between investors, rather than the issuing of new securities by the company. When an individual investor trades currently outstanding common shares through a broker, it is a secondary market transaction.

Question 13

The best way to maximize the intrinsic value of a company and thus shareholders' wealth is to maximize its earnings per share.

Accepted Answer

Maximizing earnings per share can sometimes come at the expense of long-term investments and growth opportunities. Instead, a company should focus on creating value for its customers, building a strong brand, and investing in research and development to enhance innovation and competitiveness. This approach can lead to sustainable growth and ultimately increase shareholders' wealth.

Question 14

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements best describes firm organization?

Accepted Answer

By converting to a regular corporation, Cheers will become a separate legal entity from its shareholders. This means that the shareholders will have limited liability, and their personal assets will not be at risk if the company encounters financial difficulties or is sued. This is one of the chief advantages of incorporating a business.

Question 15

Which of the following statements best describes firm organization?

Accepted Answer

Sole proprietorships and partnerships are taxed as pass-through entities, which means that the profits and losses are reported on the owner's personal tax return. This can result in a lower tax rate compared to corporations, especially large ones, which are subject to double taxation.

Question 16

An income trust essentially pays no corporate taxes.

Accepted Answer

Income trusts are typically structured in a way that allows them to distribute their income to unit holders without paying corporate taxes. However, changes to taxation laws in some countries may impact the tax treatment of income trusts.

Question 17

By being too involved in the business operation, limited partners can lose their limited liability status.

Accepted Answer

Limited partners are only liable for the amount of their investment as long as they do not engage in the management or operation of the business. If they become too involved, they can be considered general partners and may lose their limited liability status.

Question 18

Today, trustee services can be arranged only with trust companies.

Accepted Answer

Trustee services can be arranged with both trust companies and law firms that have trust capabilities.

Question 19

While skillful workers and adequate capital support good businesses, outside connection and networking play no role.

Accepted Answer

Outside connections and networking are important for businesses as they can lead to partnerships, collaborations, and new opportunities. Building relationships with customers, suppliers, and other businesses can also help with growth and success.

Question 20

Which of the following statements best describes firm organization?

Accepted Answer

A sole proprietorship exposes the owner to unlimited liability, meaning the owner is personally responsible for all the debts and obligations of the business. This is a key characteristic and disadvantage of this form of business organization. Choices B, C, and D are incorrect because: B) it is generally easier to transfer ownership in a corporation than in a partnership; C) corporations are subject to double taxation (once at the corporate level and again at the shareholder level on dividends); and D) in many corporations, voting rights are based on the number of shares owned, not the "one person, one vote" principle.

Quiz 1: Overview of Financial Management and the Financial Environment

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's debts.

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.

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.

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?

The form of organizing a business is unimportant issue, as this decision has very little effect on the income and wealth of the firm's owners.

Two key advantages to proprietorship are that, as a business, it pays no corporate income tax and is easily and inexpensively formed.

Fighting recession with low interest rates is technically impossible when we have large trade deficits and huge national debt.

Which of the following statements best describes firm organization?

Which of the following statements best describes firm organization?

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, which in turn sold it to individual and institutional investors. This is a primary market transaction.

With the more formal nature of the partnership agreement and the commitment of all partners' personal assets, partnerships have no difficulty raising large amounts of capital as do proprietorships.

If an individual investor trades currently outstanding common shares through a broker, this is a secondary market transaction.

The best way to maximize the intrinsic value of a company and thus shareholders' wealth is to maximize its earnings per share.

Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements best describes firm organization?

Which of the following statements best describes firm organization?

An income trust essentially pays no corporate taxes.

By being too involved in the business operation, limited partners can lose their limited liability status.

Today, trustee services can be arranged only with trust companies.

While skillful workers and adequate capital support good businesses, outside connection and networking play no role.

Which of the following statements best describes firm organization?