Question 1

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 is an accurate description of one of the main functions of NYSE specialists.

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 take in funds from savers and then invest those funds in financial assets on behalf of their clients.

Question 3

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?
A) Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
B) Cheers will now be subject to fewer regulations.
C) Cheers' shareholders (the ex-partners) will now be exposed to less liability.
D) Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) Cheers will find it more difficult to raise additional capital.

Accepted Answer

By converting from a partnership to a regular corporation, the shareholders of Cheers will now have limited liability. As shareholders, they will only be liable for the amount of their investment in the corporation, rather than being personally liable for the partnership's debts and obligations. However, the other statements are incorrect. Converting to a regular corporation does not necessarily mean that less income will be subject to federal income taxes, that the corporation will be subject to fewer regulations, or that it will be more difficult to raise additional capital. Additionally, while investors may face less liability, they will also find it easier to transfer their ownership through the purchase or sale of stock.

Question 4

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 not at risk if the company faces financial difficulties or lawsuits. This lowers the risk for owners and allows them to invest in the company with greater confidence, which can increase the company's overall value.

Question 5

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 make it difficult for the partnership to grow to a large size.

Question 6

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

A proprietorship is not considered a separate legal entity from its owner, and therefore does not pay corporate income tax. Additionally, it is relatively simple and inexpensive to form compared to other business structures like corporations and partnerships.

Question 7

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; they are personally responsible for the debts of the business, similar to a sole proprietorship. It is corporations that offer limited liability to their owners (shareholders).

Question 8

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?
A) Corporations generally find it relatively difficult to raise large amounts of capital.
B) Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.
C) Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally face relatively few regulations.

Accepted Answer

The main advantage of a corporation over a sole proprietorship or a partnership is that the owners (shareholders) have limited liability for the debts and obligations of the corporation. This means that their personal assets are protected in case the corporation is sued or goes bankrupt. However, the corporate form of organization has significant tax disadvantages, such as double taxation of profits (once at the level of the corporation and again at the level of the shareholders) and fewer tax deductions for the owners. The choice of whether to operate as a corporation depends on factors such as the size of the business, the need for capital, the desire for limited liability, the tax implications, and the regulatory environment.

Question 9

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 can have a significant impact on the income and wealth of the firm's owners, as different forms (such as sole proprietorship, partnership, corporation, etc.) have different legal, tax, and liability implications. Choosing the wrong form of organization could result in higher taxes, greater personal liability, and reduced profits.

Question 10

Which of the following statements is CORRECT?
A) If expected inflation increases, interest rates are likely to increase.
B) If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
C) If companies have fewer good investment opportunities, interest rates are likely to increase.
D) Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.
E) Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Accepted Answer

Expected inflation and interest rates are positively correlated. As inflation expectations increase, lenders demand higher interest rates to compensate for the decrease in purchasing power of future cash flows.

Answer: B
 As individuals increase their savings rate, there is an increase in the supply of loanable funds available in the market. This increase in supply of funds leads to a decrease in interest rates.

Answer: C
 If companies have fewer investment opportunities, they need to offer higher interest rates to attract investors for the few projects that are profitable.

Answer: D
 During recessions, default rates on debt securities increase due to the economic downturn in industries. This additional risk leads to lower demand for the securities, which increases the interest rates.

Answer: E
 Long-term bonds are exposed to more interest rate risk because their cash flows are further into the future. Short-term securities like T-bills have less interest rate risk due to their shorter maturity.

Question 11

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

This is a primary market transaction as the company is issuing and selling new shares directly to investors through an investment banker.

Question 12

Which of the following statements is CORRECT?
A) It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
B) Corporate shareholders are exposed to unlimited liability.
C) Corporations generally face fewer regulations than sole proprietorships.
D) Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
E) Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

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 13

Which of the following statements is CORRECT?
A) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
B) Corporations face fewer regulations than sole proprietorships.
C) One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.
D) One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.
E) If a regular 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.

Question 14

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 falsely implies that partnerships do not have difficulty raising large amounts of capital, while in reality, large partnerships may still struggle to raise capital due to legal and financial complexities.

Question 15

Which of the following statements is CORRECT?
A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
E) Corporations of all types are subject to the corporate income tax.

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 16

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 maximize shareholders' wealth because it does not account for risk or the timing of returns. Shareholders' wealth is maximized by increasing the stock price through sustainable growth, risk management, and strategic investments that may not immediately maximize EPS.

Question 17

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 issuing of a new stock to the public, while buying or selling an already outstanding stock in the secondary market.

Question 18

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?
A) This is an example of an exchange of physical assets.
B) This is an example of a primary market transaction.
C) This is an example of a direct transfer of capital.
D) This is an example of a money market transaction.
E) This is an example of a derivatives market transaction

Accepted Answer

This transaction does not involve the creation of new securities (primary market) or the trading of debt securities with maturities less than one year (money market). It also does not involve the use of financial instruments whose value is derived from underlying assets (derivatives market). Rather, it is a direct transfer of ownership from one party to another, which is referred to as a direct transfer of capital.

Question 19

Which of the following statements is CORRECT?
A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
B) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
C) One of the advantages of the corporate form of organization is that it avoids double taxation.
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

The statement that is correct is that one of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. This means that the owner is personally responsible for all debts and obligations of the business, and if the business cannot pay its debts, the owner's personal assets may be seized to satisfy those debts. The other statements are incorrect. B is false because it is generally easier to transfer ownership interest in a corporation than in a partnership. C is false because the corporate form of organization is subject to double taxation, meaning that both the corporation and its shareholders must pay taxes on corporate profits. D is false because not all corporations have equal voting rights. Some corporations have different classes of stock with different voting rights attached to each class. E is false because some corporations, such as S corporations, are not subject to the corporate income tax.

Question 20

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

This statement is true. Proprietorships are considered to have limited ability to raise new capital compared to corporations, and the owner is personally liable for all debts and legal issues related to the business.

Quiz 1: An Overview of Financial Management and the Financial Environment

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.

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?

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

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.

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.

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.

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 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?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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.

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

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?

Which of the following statements is CORRECT?

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.