Question 1

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 the Enron scandal in 2001, have led to increased emphasis on business ethics and corporate social responsibility.

Question 2

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

This statement correctly explains the hierarchy and roles within a corporation, including the authority of the board of directors over the CEO, and the potential for conflict when one person holds both the CEO and chairman positions. The other statements are incorrect - A is false as the CEO typically outranks the CFO, B is false as it is not required by law for the chairman of the board to also be the CEO, D is false as the CFO typically reports directly to the CEO and not the controller, and E is false as the CFO is responsible for the validity of the financial statements.

Question 3

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 because 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 for participating in an illegal activity such as "cooking the books." It is not a valid legal defense to claim that the activity was performed under the direction of a superior.

Question 4

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 a form of financial fraud and can have negative consequences such as inflated stock prices that eventually fall and legal penalties for those involved.

Question 5

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 that is available about the stock, then they would be able to accurately determine the stock's intrinsic value. This would lead to the stock's market price being equal to its intrinsic value. However, in reality, it is very difficult for investors to have access to all the information about a stock, so the market price may deviate from the intrinsic value.

Question 6

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

The statement accurately describes what a hostile takeover is and why it can be controversial. It also mentions that legislative actions have been taken to make them more difficult, which is true.

Question 7

​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 a correct definition of the "marginal investor" and how they influence stock prices.

Question 8

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

One advantage of forming a corporation is limited liability for equity investors, which means they are not personally liable for the debts or obligations of the corporation. In a partnership, partners are personally liable for the debts and obligations of the business.

Question 9

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

Corporations generally find it easier to raise large amounts of capital.

Question 10

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 will align the interests of management with those of the stockholders and help maximize the firm's overall value. This approach also reduces the likelihood of short-term decisions that may benefit some specific stockholders, but harm the firm's long-term value.

Question 11

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

A proprietorship exposes the owner to unlimited liability, meaning they are personally responsible for all the business's debts and obligations. A corporation can avoid double taxation by electing to be taxed as an S corporation or by distributing all profits to shareholders as dividends, which are then taxed at the individual level. It is generally easier to transfer ownership interest in a corporation than in a partnership. Voting rights in a corporation can vary depending on the type and size of the company. Different types of corporations may be subject to different tax laws.

Question 12

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

The answer of Relaxant Inc.operates as a partnership.Now the partners...

Question 13

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 and may be a good investment opportunity. It is important to conduct further analysis and consider other factors before making a decision to buy or sell a stock.

Question 14

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

The answer of Which of the following statements is CORRECT?
A)...

Question 15

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 a form of unethical behavior. The information provided to stockholders must be accurate and truthful.

Question 16

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

Transferring ownership in a corporation is usually easier than in a partnership because ownership in a corporation is represented by shares of stock, which can be bought and sold more easily than a partnership interest. The other options are incorrect: A is false, as corporations generally face more regulations than proprietorships; B is false, as corporate shareholders have limited liability; D is false, as corporate shareholders have limited liability and also benefit from tax advantages; and E is false, as there may be tax disadvantages to incorporation, but there are also potential tax benefits.

Question 17

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 definition of equilibrium as stated in the book, a stock is in equilibrium when its market price is equal to its intrinsic value. Therefore, option B is correct, while option A is false.

Question 18

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

While it is true that managers aim to maximize the long-run value of their firm's stocks, their goals and interests may not always align with those of the stockholders. Conflicts can arise if managers prioritize their own personal interests or short-term gains over the long-term success of the company, which may negatively impact the stock's intrinsic value. Therefore, conflicts between stockholders and managers are possible.

Question 19

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 overpriced and should be considered overvalued. It would not be a good buy in this situation.

Question 20

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 of a publicly-owned firm interested in serving its stockholders should be to maximize the stock price per share over the long run, which is the stock's intrinsic value. This is because maximizing the stock price over the long run would benefit all the shareholders since it reflects the firm's expected future earnings and cash flows. It would also attract investors who are looking for long-term investments, which would increase demand for the stock and ultimately push the stock price up. Furthermore, since stock prices are forward-looking, focusing on maximizing the stock price over the long run would incentivize the firm to invest in profitable long-term projects that would increase its earnings and future cash flows.

Quiz 1: An Overview of Financial Management

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 lower level person in a firm does something illegal,like "cooking the books" to understate costs and thereby increase profits above the correct profits because 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 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.

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.

​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?

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.

Which of the following statements is CORRECT?

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

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

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

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.

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.

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

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.