Question 1

The Chairman of the Board must also be the CEO.

Accepted Answer

It is not necessary for the Chairman of the Board to also be the CEO, although it is common in many companies. The roles can be separate with the Chairman providing leadership and oversight to the Board, while the CEO handles the day-to-day operations of the company.

Question 2

It is generally less expensive to form a corporation than a proprietorship because,with a proprietorship,extensive legal documents are required.

Accepted Answer

This statement is false. Forming a corporation involves more legal paperwork and fees than forming a proprietorship.

Question 3

If a corporation elects to be taxed as an S corporation,then it can avoid the corporate tax.However,its stockholders will have to pay personal taxes on the firm's net income.

Accepted Answer

When a corporation elects to be taxed as an S corporation, it becomes a pass-through entity, which means that the company's income, deductions, and credits flow through to the shareholders who report it on their personal tax returns. Therefore, the corporation does not pay corporate taxes, but the shareholders are subject to personal taxes on the firm's net income.

Question 4

In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price on a specific target date.

Accepted Answer

Maximizing shareholder value involves focusing on long-term growth and profitability, rather than targeting the stock price on a specific date, which can encourage short-term thinking and potentially harmful strategies.

Question 5

In order to maximize its shareholders' value,a firm's management must attempt to maximize the stock price in the long run,or the stock's "intrinsic value."

Accepted Answer

Maximizing the stock price in the long run or the stock's intrinsic value is one of the key objectives of management in order to enhance the shareholders' value.

Question 6

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.This problem would be avoided if you formed a corporation to operate the business.

Accepted Answer

In a proprietorship, the business owner is not legally separate from the business, so they are personally responsible for any debts or lawsuits. However, in a corporation, the business is a separate legal entity from the owners, which limits their personal liability.

Question 7

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

Accepted Answer

Transferring ownership in a partnership requires the approval of all partners, while transferring ownership in a corporation can be done more easily through buying or selling shares.

Question 8

In most corporations,the CFO ranks under the CEO.

Accepted Answer

The CFO (Chief Financial Officer) is usually a top executive who reports directly to the CEO (Chief Executive Officer). Therefore, the CFO ranks under the CEO in most corporations.

Question 9

Some partners in a partnership may have different rights,privileges,and responsibilities than other partners.

Accepted Answer

Partnerships can be structured in different ways, and the partners may agree to different terms regarding their contributions, decision-making power, profit-sharing, and liabilities. Some partners may be general partners who manage the business and are personally liable for its debts, while others may be limited partners who provide capital and share in the profits but do not have a say in the daily operations. Additionally, some partners may have priority over others in certain matters or have the right to veto certain decisions. Therefore, it is possible for partners in a partnership to have different rights, privileges, and responsibilities.

Question 10

If a corporation elects to be taxed as an S corporation,then both it and its stockholders can avoid all Federal taxes.This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.

Accepted Answer

While an S corporation allows for pass-through taxation, where the corporation's income is not subject to federal tax and instead flows through to the stockholders' personal tax returns, this does not mean that both the corporation and its stockholders can avoid all Federal taxes. Additionally, the primary reason for the creation of the S corporation election was to provide small businesses with the benefits of incorporation while avoiding the double taxation of traditional corporations, not to eliminate all federal taxes.

Question 11

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership.

Accepted Answer

This statement is false. In a corporation, shareholders are not personally liable for the company's debts or legal issues. Their liability is limited to the amount of money they have invested in the company. This is one of the main advantages of the corporate form of organization. In a partnership, on the other hand, partners have unlimited personal liability for the partnership's debts and legal issues.

Question 12

The more capital a firm is likely to require,the greater the probability that it will be organized as a corporation.

Accepted Answer

Corporations have an advantage in raising large amounts of capital through the sale of stocks and bonds. Therefore, firms that require more capital are more likely to organize as corporations.

Question 13

One advantage of the corporate form of organization is that it avoids double taxation.

Accepted Answer

Corporations face double taxation because profits are taxed at the corporate level and dividends are taxed again at the shareholder level.

Question 14

Organizing as a corporation makes it easier for the firm to raise capital.This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.

Accepted Answer

Organizing as a corporation does make it easier for the firm to raise capital for the reasons stated.

Question 15

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.

Accepted Answer

This statement accurately describes the roles and hierarchy within a corporation.

Question 16

One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests.

Accepted Answer

Corporations typically allow easier transfer of ownership through the sale of stock, whereas partnerships may have restrictions on ownership transfer without the consent of other partners.

Question 17

If management operates in a manner designed to maximize the firm's expected profits for the current year,this will also maximize the stockholders' wealth as of the current year.

Accepted Answer

Maximizing a firm's expected profits for the current year might not align with maximizing stockholders' wealth, as the latter often involves considering long-term growth, sustainability, and risk management, which may require short-term sacrifices.

Question 18

Partnerships and proprietorships generally have a tax advantage over corporations.

Accepted Answer

Partnerships and proprietorships are considered pass-through entities, which means that the profits and losses are passed through to the owners and are reported on their personal tax returns. This often results in a lower overall tax rate compared to corporations, which are subject to double taxation (being taxed at both the corporate and individual level).

Question 19

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

Accepted Answer

The statement is false. Corporations are actually more highly regulated than proprietorships and partnerships, due to requirements for corporate filings, shareholder meetings, and compliance with securities laws.

Question 20

In order to maximize its shareholders' value,a firm's management must attempt to maximize the expected EPS.

Accepted Answer

Maximizing shareholders' value often involves a broader strategy than just focusing on maximizing expected Earnings Per Share (EPS). It includes considering the risk, the cost of capital, investment in growth opportunities, and sustainable business practices, among other factors, to ensure long-term value creation.

Quiz 1: An Overview of Financial Management