Question 1

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.

Accepted Answer

If all investors had all the information available about the stock, they would be able to accurately calculate the stock's intrinsic value. In this scenario, the stock's market price would inevitably converge to its intrinsic value, leading to a situation where the two prices are equal.

Question 2

There are many types of unethical business behavior.One example is where executives provide information that they know is incorrect to banks and to stockholders.It is illegal to provide such information to banks,but it is not illegal to provide it to stockholders because they are the owners of the firm,not outsiders.

Accepted Answer

Providing incorrect information to stockholders is also illegal and considered a form of securities fraud. It is important for companies to provide accurate and transparent information to both banks and stockholders to maintain trust and legitimacy in the business world.

Question 3

Which of the following statements is CORRECT?
A) One of the advantages of the corporate form of organization is that it avoids double taxation.
B) It is easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.
D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights,i.e. ,"one person,one vote."
E) Corporations of all types are subject to the corporate income tax.

Accepted Answer

One of the disadvantages of a proprietorship is unlimited liability, meaning the owner is personally responsible for all debts and obligations of the business. The other statements are incorrect. The corporate form of organization may result in double taxation, transferring ownership interest in a partnership is often more difficult than in a corporation, not all corporations have equal voting rights and some corporations are exempt from corporate income tax.

Question 4

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
A) Maximize its expected total corporate income.
B) Maximize its expected EPS.
C) Minimize the chances of losses.
D) Maximize the stock price per share over the long run,which is the stock's intrinsic value.
E) Maximize the stock price on a specific target date.

Accepted Answer

The primary operating goal should be to maximize the long-run stock price,or the intrinsic value.

Question 5

Managers always attempt to maximize the long-run value of their firms' stocks,or the stocks' intrinsic values.This is exactly what stockholders desire.Thus,conflicts between stockholders and managers are not possible.

Accepted Answer

Although both stockholders and managers may desire to maximize the long-run value of the firm's stocks, there can still be conflicts between them. For example, managers may prioritize their own interests or perks over those of the stockholders, or they may adopt strategies that increase their own job security at the expense of the company's long-term growth. These conflicts can create agency problems, which may need to be addressed through mechanisms such as performance-based compensation, board oversight, or shareholder activism.

Question 6

Relaxant Inc.operates as a partnership.Now the partners have decided to convert the business into a corporation.Which of the following statements is CORRECT?
A) Relaxant's shareholders (the ex-partners)will now be exposed to less liability.
B) The company will probably be subject to fewer regulations and required disclosures.
C) Assuming the firm is profitable,none of its income will be subject to federal income taxes.
D) The firm's investors will be exposed to less liability,but they will find it more difficult to transfer their ownership.
E) The firm will find it more difficult to raise additional capital to support its growth.

Accepted Answer

A) When a partnership is converted into a corporation, the shareholders (formerly partners) are typically exposed to less personal liability. This is because a corporation is a separate legal entity, and shareholders are not personally liable for the corporation's debts beyond their investment in the company.

Question 7

If a lower level person in a firm does something illegal,like "cooking the books" to understate costs and thereby increase profits above the correct profits ,ecause he or she was told to do so by a superior,the lower level person cannot be prosecuted but the superior can be prosecuted.

Accepted Answer

Both the lower level person and the superior can be prosecuted in this situation. Ignorance of the law is not a valid defense for committing illegal acts, even if one was ordered to do so by a superior.

Question 8

If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.

Accepted Answer

If a stock's market price is above its intrinsic value, then the stock is overvalued, not undervalued. It would not be a good buy as it is trading at a premium.

Question 9

For a stock to be in equilibrium as the book defines it,its market price should exceed its intrinsic value.

Accepted Answer

According to the book's definition of equilibrium, a stock's market price should equal its intrinsic value.

Question 10

​The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Accepted Answer

This is the correct definition of a marginal investor and their role in determining stock prices based on their buying or selling behavior.

Question 11

Which of the following statements is CORRECT?
A) One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
B) Corporations face fewer regulations than proprietorships.
C) One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation,because taxes are levied at both the firm level and the owner level.
D) It is generally less expensive to form a corporation than a proprietorship because,with a proprietorship,extensive legal documents are required.
E) If a partnership goes bankrupt,each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Accepted Answer

Corporations have limited liability;however,they face more regulations than the other forms of organization.Proprietorships do not pay corporate taxes.

Question 12

As a result of financial scandals occurring during the past decade,there has been a strong push to improve business ethics.

Accepted Answer

The statement is true. Financial scandals such as Enron and WorldCom have led to increased awareness and efforts to improve business ethics in the corporate world.

Question 13

Which of the following statements is CORRECT?
A) In most corporations,the CFO ranks above the CEO.
B) By law in most states,the chairman of the board must also be the CEO.
C) 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.
D) The CFO generally reports to the firm's chief accounting officer,who is normally the controller.
E) The CFO is responsible for raising capital and for making sure that capital expenditures are desirable,but he or she is not responsible for the validity of the financial statements,as the controller and the auditors have that responsibility.

Accepted Answer

Option A is incorrect as the CEO ranks above the CFO in most corporations. Option B is incorrect as there is no such law in most states. Option D is incorrect as the CFO generally reports to the CEO and not the chief accounting officer or controller. Option E is incorrect as the CFO is responsible for the validity of financial statements. Only option C correctly explains the hierarchy in a corporation and the roles and responsibilities of the CEO, CFO, and board of directors.

Question 14

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

Accepted Answer

If a stock's intrinsic value is greater than its market price, then the stock is undervalued, not overvalued. It may be a good opportunity to buy, not sell.

Question 15

A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers.If the old managers were managing the firm inefficiently,then hostile takeovers can improve the economy.However,hostile takeovers are controversial,and legislative actions have been taken to make them more difficult to undertake.

Accepted Answer

This statement accurately describes what a hostile takeover is, and acknowledges that they can have positive or negative effects on the economy. It also notes that there have been efforts to make hostile takeovers more difficult to carry out, implying that they are indeed controversial.

Question 16

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?
A) Corporations generally face fewer regulations.
B) Less of a corporation's income is generally subject to federal taxes.
C) Corporate shareholders are exposed to unlimited liability,but this factor is offset by the tax advantages of incorporation.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally find it easier to raise large amounts of capital.

Accepted Answer

Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability,and they also want to be able to sell their shares should they choose to do so.Corporations provide these advantages;hence,firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate.

Question 17

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders),it should design an executive compensation system whose focus is on the firm's long-term value.

Accepted Answer

Designing an executive compensation system that focuses on the firm's long-term value aligns the interests of executives with those of the stockholders and promotes actions that create sustainable long-term value. This benefits all stockholders in general.

Question 18

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Accepted Answer

Deliberately understating costs to increase profits is considered fraud, and can lead to a false inflation of the stock price. Eventually, the true value of the stock will be revealed and the price will fall. Additionally, those involved in the fraud can face legal consequences, and the firm itself can be penalized for misleading investors.

Question 19

Which of the following statements is CORRECT?
A) One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
B) Proprietorships are subject to more regulations than corporations.
C) In any partnership,every partner has the same rights,privileges,and liability exposure as every other partner.
D) Corporations of all types are subject to the corporate income tax.
E) Proprietorships and partnerships generally have a tax advantage over corporations.

Accepted Answer

Some corporations (S corporations)are able to avoid the corporate income tax.Proprietorships and partnerships pay personal income tax,but they avoid the corporate income tax.

Question 20

Which of the following statements is CORRECT?
A) Corporations generally face fewer regulations than proprietorships.
B) Corporate shareholders are exposed to unlimited liability.
C) It is usually easier to transfer ownership in a corporation than in a partnership.
D) Corporate shareholders are exposed to unlimited liability,but this factor is offset by the tax advantages of incorporation.
E) There is a tax disadvantage to incorporation,and there is no way any corporation can escape this disadvantage,even if it is very small.

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.

Quiz 1: An Overview of Financial Management

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock.In this case the stock's market price would equal its intrinsic value.

Which of the following statements is CORRECT?

The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

Managers always attempt to maximize the long-run value of their firms' stocks,or the stocks' intrinsic values.This is exactly what stockholders desire.Thus,conflicts between stockholders and managers are not possible.

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

If a lower level person in a firm does something illegal,like "cooking the books" to understate costs and thereby increase profits above the correct profits ,ecause he or she was told to do so by a superior,the lower level person cannot be prosecuted but the superior can be prosecuted.

If a stock's market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.

For a stock to be in equilibrium as the book defines it,its market price should exceed its intrinsic value.

​The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.

Which of the following statements is CORRECT?

As a result of financial scandals occurring during the past decade,there has been a strong push to improve business ethics.

Which of the following statements is CORRECT?

If a stock's intrinsic value is greater than its market price,then the stock is overvalued and should be sold.

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

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders),it should design an executive compensation system whose focus is on the firm's long-term value.

If someone deliberately understates costs and thereby increases profits,this can cause the stock price to rise above its intrinsic value.The stock price will probably fall in the future.Also,those who participated in the fraud can be prosecuted,and the firm itself can be penalized.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

The term "marginal investor" means an investor who is active in the market and would tend to buy a stock if its price fell and sell it if it rose,barring any new information coming out about the stock.It is the "marginal investor" who determines the actual stock price.