Question 1

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

One advantage of operating as a corporation is that shareholders escape liability for the firm's debts, which is not the case for sole proprietorships or partnerships. However, corporations may face tax disadvantages as compared to other forms of organization.

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

Proprietorships are not subject to corporate income tax, and they can be formed with minimal legal formalities and costs, making it a popular choice for small businesses.

Question 3

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

A proprietorship is a business owned and operated by one individual, and the owner is personally responsible for all aspects of the business, including its debts. This can make it difficult to raise new capital, as lenders and investors may be hesitant to provide funds to a business with only one owner. Additionally, the owner's personal assets are at risk if the business is unable to pay its debts, which represents a significant liability.

Question 4

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 one of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability is correct. This means that the owner's personal assets can be used to satisfy business liabilities, which poses a significant risk. Option B is incorrect because transferring ownership in a partnership usually requires the consent of all partners, while ownership can be easily transferred through buying and selling shares in a corporation. Option C is incorrect because corporations are subject to double taxation, first at the corporate level through corporate income tax, and then again at the individual level through personal income tax on dividends. Option D is incorrect because voting rights in a corporation are determined by the number of shares owned, not by the principle of one person, one vote. Option E is incorrect because some types of corporations, such as S corporations, are not subject to corporate income tax.

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 primary disadvantages of a regular partnership and the challenges it faces in terms of attracting capital and expanding.

Question 6

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 7

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 is a direct transfer of capital because the shares were sold directly to your brother without involving any intermediary or third party. It is not an exchange of physical assets because ownership of the stock was transferred without any exchange of physical assets other than the check used for payment. It is not a primary market transaction because the shares were sold after the initial public offering (IPO) and not directly by the company. It is not a money market transaction or a derivatives market transaction because those involve different types of securities and markets.

Question 8

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 9

Which of the following statements is CORRECT?
A)In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B)Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
C)A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
D)The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
E)A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Accepted Answer

Partnership has limitations in attracting large amounts of capital because of the disadvantages such as unlimited liability, the need to reorganize when a partner dies, and the illiquidity of partnership interests.

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

If expected inflation increases, lenders will want to be compensated for the declining value of money over time, so they will demand higher interest rates.

Answer: B 
 When people save more, there is less money available for spending and investing, which decreases demand for loans and raises interest rates.

Answer: C 
 If companies don't have many profitable investment opportunities, they may have to pay higher interest rates to attract investors.

Answer: D is not correct. Interest rates on debt securities can actually fall during recessions if the central bank chooses to lower interest rates to stimulate the economy.

Answer: E is not correct. Short-term rates tend to be more volatile than long-term rates because short-term rates are more sensitive to changes in the central bank's policy rate, while long-term rates reflect more complex factors.

Question 11

One drawback of switching from a partnership to the corporate form of organization is the following:
A)It subjects the firm to additional regulations.
B)It cannot affect the amount of the firm's operating income that goes to taxes.
C)It makes it more difficult for the firm to raise additional capital.
D)It makes the firm's investors subject to greater potential personal liabilities.
E)It makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

Switching from a partnership to the corporate form of organization subjects the firm to additional regulations, which can be a significant drawback as it increases compliance costs and may limit the flexibility of the business.

Question 12

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 responsible for the debts of the business, similar to a sole proprietorship. Only corporations offer their owners limited liability, protecting their personal assets from business debts.

Question 13

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 firm's overall value, which involves considering factors beyond just EPS, such as investment decisions, financing strategies, and dividend policies that affect the stock price in the long term.

Question 14

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 is a type of financial institution that collects funds from savers and channels them into investments.

Question 15

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 16

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

Converting a partnership into a corporation generally limits the liability of the shareholders (the ex-partners) to the amount they have invested in the company, protecting their personal assets from the company's debts and obligations.

Question 17

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 is incorrect as partnerships also face difficulties in raising large amounts of capital due to the personal liability of partners.

Question 18

Which of the following statements is CORRECT?
A)The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
B)Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.
C)A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.
D)Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E)Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

Accepted Answer

A corporation is a separate legal entity that is created by a state and has a life and existence that is distinct from its individual owners and managers. This legal structure allows for limited liability for its owners (stockholders) and provides a framework for the organization to operate and conduct business activities.

Question 19

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, as different forms of organization (such as sole proprietorship, partnership, corporation) have different tax implications, legal liabilities, and ownership structures that can affect profitability and financial risks.

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 the owners of a company are only responsible for the debts and obligations of the company up to the amount of their investment. This reduces the personal financial risk of the owners and can make the company more attractive to investors, which can increase its value.

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

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 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.

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?

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 statements is CORRECT?

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?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

One drawback of switching from a partnership to the corporate form of organization is the following:

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.

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 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.

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?

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.

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