Question 1

Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial markets.

Accepted Answer

Normal profits are the minimum level of profit necessary to keep a firm in operation and to keep owners and investors satisfied. They represent a rate of return that is just sufficient to keep owners' and investors' capital at the same level as it would earn in a financial market, so they do not have to look for better investment opportunities.

Question 2

An agency problem exists between stockholders and managers.A second agency problem arises between stockholders and creditors.

Accepted Answer

The statement is true. An agency problem exists between stockholders and managers as the managers may prioritize their own interests over the interests of the stockholders. Additionally, a second agency problem can arise between stockholders and creditors as the stockholders may take actions that benefit them at the expense of the creditors.

Question 3

The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing.

Accepted Answer

The statement refers to the tax treatment of interest and dividends. In reality, the tax code typically allows corporations to deduct interest expenses on debt from their taxable income, which can encourage the use of debt financing. However, the exclusion from taxable income usually pertains to dividends received from investments in other corporations, not interest income, and this mechanism aims to mitigate double taxation of income rather than encourage debt financing.

Question 4

Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a form of double taxation.

Accepted Answer

This is because the corporation has already paid taxes on its profits before distributing them as dividends to shareholders, and then the shareholders are again paying taxes on that same income.

Question 5

Multinational managerial finance requires that financial analyses consider the effects of changing currency values.

Accepted Answer

Multinational managerial finance involves dealing with multiple currencies and foreign exchange rates, hence financial analyses must take into account the impact of fluctuations in currency values on the company's financial performance.

Question 6

Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders.

Accepted Answer

The answer of Most firms today use executive stock options,...

Question 7

The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society.

Accepted Answer

The answer of The goal of maximizing stock price is...

Question 8

Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

Accepted Answer

The answer of Interest and dividends paid by a corporation...

Question 9

If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant.

Accepted Answer

The answer of If the tax laws stated that $0.50...

Question 10

Performance shares are dollar bonuses awarded to managers on the basis of corporate performance.

Accepted Answer

Performance shares are actually shares of stock given to managers as compensation, the vesting of which is contingent upon meeting certain performance criteria, not dollar bonuses.

Question 11

The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on and the manner in which the projects are financed.

Accepted Answer

The riskiness of a firm's earnings per share is dependent on the projects it undertakes, and the way it is financed. Risk arises due to fluctuations in the projects' outcomes, and how these outcomes are impacted by financial events. Therefore, both project risk and financing risk affect the firm's EPS risk.

Question 12

If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in the shareholders' best interest.

Accepted Answer

A firm's stock price can be affected by various factors such as market conditions, industry trends, economic conditions, and company-specific events. Stock price fluctuations do not necessarily indicate that the firm's managers are not acting in the shareholders' best interest. Managers can make sound decisions and implement strategies to improve the company's performance and long-term value, but external factors beyond their control may cause the stock price to decline in the short term.

Question 13

Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis.

Accepted Answer

Political risk can be explicitly addressed in multinational corporate financial analysis, for example, by conducting risk assessments and factoring in the potential impact of political events on the company's operations and investments. However, it may not always be fully negotiable in the sense that a company cannot always control or influence political decisions made by governments.

Question 14

In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market.Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests.

Accepted Answer

In a competitive marketplace, managers who deviate too far from making decisions consistent with stockholder wealth maximization may be disciplined by the market and may risk being taken over by groups who are more aligned with stockholder interests.

Question 15

By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence shareholders' wealth also will be maximized.

Accepted Answer

The answer of By maximizing the earnings of the firm...

Question 16

When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification.

Accepted Answer

This statement is true. Exchange rate risk and political risk are two common factors that contribute to higher risk in foreign investment. On the other hand, international diversification can help reduce risk.

Question 17

The fact that a proprietorship, as a business, pays no corporate income tax and that it is easily and inexpensively formed are often cited as key advantages to that form of business.

Accepted Answer

This statement is true. As a sole proprietorship, the business owner reports the business income on their personal tax return and is not subject to corporate income tax. Additionally, forming a proprietorship typically involves minimal legal and accounting fees.

Question 18

Legal and economic differences among countries, although important, do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries.

Accepted Answer

Legal and economic differences among countries can pose significant problems for multinational corporations when they try to coordinate and control worldwide operations of subsidiaries. These differences can affect aspects such as tax regulations, labor laws, intellectual property rights, and cultural norms, making it challenging for companies to standardize their operations across different countries. Companies need to carefully navigate these differences to ensure compliance with local regulations and ensure successful operations in each market.

Question 19

If management is maximizing the firm's net income, this is necessarily identical to maximizing earnings per share and stock price.

Accepted Answer

Maximizing net income does not necessarily lead to maximizing earnings per share and stock price. There are other factors that can impact earnings per share and stock price, such as the number of outstanding shares and market conditions.

Question 20

If a firm's managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate.

Accepted Answer

Maximizing stock price involves maintaining a strong and successful business, which includes efficient operations, desirable products, and good relationships with stakeholders.

Quiz 6: Business Organizations and the Tax Environment