Question 1

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

Accepted Answer

According to data from the U.S. Census Bureau, corporations generate over four-fifths (around 85%) of all U.S. business revenue.

Question 2

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

Accepted Answer

Sole proprietorships are the most common type of business firms in the world, as they are simpler to establish and manage compared to partnerships and corporations.

Question 3

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 by selling shares of ownership to outside investors, often through the stock market. This has contributed to their dominance in the business world.

Question 4

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

Accepted Answer

A corporation has the advantage of being able to raise capital easily through the sale of stocks and bonds, as well as being treated as a separate legal entity for tax and legal purposes, and having shares that can be freely traded among shareholders. This makes it a more attractive business entity for investors and provides greater flexibility in raising funds and conducting business.

Question 5

Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% 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 Valiant Corp.?

Accepted Answer

A) Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190; earnings after- 11ea84dc_f58a_ff3d_9a63_cb6a6e9f480a_TB1316_11_TB1316_11 earnings distributed as 11ea84dc_f58a_ff3e_9a63_4d5c251ffc1d_TB1316_11_TB1316_11 taxes paid on dividends by a 11ea84dc_f58a_ff3f_9a63_bfee29542543_TB1316_11_TB1316_11 after-tax dividends per 11ea84dc_f58b_2650_9a63_75deea576066_TB1316_11_TB1316_11 hence a holder of 100,000 shares receives 11ea84dc_f58b_2651_9a63_a5b06025943f_TB1316_11_TB1316_11

Question 6

Helen owns 10.2% 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

B) Helen will receive ownership dividend payment proportional to her ownership of 10.2%: 11ea84dc_f58a_ff3c_9a63_bfc1945d3d52_TB1316_11_TB1316_11

Question 7

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

Accepted Answer

Both limited liability companies and corporations provide limited liability protection to their owners. This means that the owners' personal assets are shielded from the company's debts and obligations, and their liability is restricted to the amount of their initial investment in the company.

Question 8

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

Accepted Answer

Sole proprietorships are the most common type of business organization in the United States and worldwide due to their simplicity and ease of formation.

Question 9

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

Accepted Answer

This feature is not entirely accurate, as earnings from a corporation can be taxed twice - first at the corporate level and then again as individual income for shareholders when dividends are distributed.

Question 10

Which of the following is unique for an S corporation?

Accepted Answer

The answer of Which of the following is unique for...

Question 11

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

Accepted Answer

Jane, as a limited partner, has her liability for the firm's debts limited to the amount of her investment in the firm. This means she is not personally liable beyond what she has invested.

Question 12

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 a legal entity that is separate from its owners. This means that the corporation can enter into contracts, acquire assets, and incur obligations on its own behalf without directly involving its owners. Additionally, the corporation enjoys protection against the seizure of its property, as it is a separate legal entity with its own rights and responsibilities.

Question 13

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 14

A C corporation earns $8.30 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 $6.00 dividend?

Accepted Answer

First, the company pays taxes on its earnings:
$8.30 x 0.39 = $3.237
This leaves $8.30 - $3.237 = $5.063 per share after taxes.
If the company pays a $6.00 dividend, it will be paying out more than it has after-tax earnings per share. This means the dividend will be paid from both before and after-tax earnings. The before-tax portion of the dividend is:
$6.00 / (1 - 0.15) = $7.06
The after-tax portion of the dividend is the remaining amount:
$6.00 - $7.06 = -$1.06
This negative amount represents a return of capital to the shareholders, and it is not taxable in the current year.
The company will also be able to deduct the dividend payment as a business expense, which will reduce its taxable income. The dividend payment as a business expense is:
$6.00 x (1 - 0.39) = $3.66
The total amount of taxes paid is the sum of the taxes on the company's earnings plus the personal taxes on the dividend income:
$3.237 + ($7.06 x 0.36) + ($3.66 x 0.15) = $3.237 + $2.542 + $0.549 = $6.328
However, the company only has after-tax earnings of $5.063 per share, which means it cannot afford to pay a $6.00 dividend in this situation. The maximum dividend it can pay without having a negative after-tax balance is:
$5.063 x (1 - 0.15) = $4.303
Therefore, the total amount of taxes paid if the company pays a $4.303 dividend is:
$3.237 + ($4.303 x 0.36) + ($4.303 x 0.15) = $3.237 + $1.550 + $0.645 = $4.432, which rounds to $4.14.

Question 15

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 does indeed provide a way to make costs and benefits of a decision comparable. By assigning a monetary value or other measure to each option, we can compare them and make a more informed decision.

Question 16

You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 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

As a shareholder in a subchapter S corporation, the profits are passed through to the individual shareholders and taxed at their personal tax rate. In this case, the dividend payment per share is $5 ($6 profit minus $1 for reinvestment). Therefore, at a personal tax rate of 35%, the tax per share would be $1.75 ($5 dividend payment times 35%). Option A is incorrect because there is a tax owed on the dividend payment. Option B is incorrect because $2.10 is the amount of tax owed if the dividend payment was $6 and no portion was retained for reinvestment. Option D is incorrect because $2.52 is the tax owed if the dividend payment was $7.14 ($6 profit divided by 0.65 to account for the personal tax rate) and no portion was retained for reinvestment.

Question 17

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

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 is that the owners of a limited liability company (LLC) can take an active role in running the company. In a limited partnership, limited partners do not have the ability to actively manage the partnership without risking loss of their limited liability status. In an LLC, however, the owners (also known as "members") have the ability to participate in running the company without losing their limited liability protection.

Question 18

Which of the following types of firms does NOT have limited liability?

Accepted Answer

Sole proprietorships do not have limited liability. The owner is personally responsible for all debts and obligations of the business. Limited partnerships and corporations have limited liability for their owners, meaning their personal assets are protected from business liabilities.

Question 19

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

Accepted Answer

The Valuation Principle is a key concept in making financial decisions because it shows how to make the costs and benefits of a decision comparable so that we can weigh them properly. This helps us to make informed decisions that are in line with our financial goals.

Question 20

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

Accepted Answer

Sole proprietorships are businesses owned and operated by a single individual. As a result, the amount of money that can be raised by such firms is limited because the single owner must make good on all debts. This makes it difficult for the business to acquire significant amounts of funding or credit to support its growth.

Quiz 1: Corporate Finance and the Financial Manager