Question 1

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 have all the information available about the stock, they would be able to accurately assess its future cash flows and risks, which would result in the stock's market price being equal to its intrinsic value.

Question 2

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 book, for a stock to be in equilibrium, its market price should be equal to its intrinsic value. If the market price is less than intrinsic value, the stock is undervalued and if it is more than intrinsic value, the stock is overvalued.

Question 3

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

Converting a partnership into a corporation generally results in the shareholders (formerly partners) being exposed to less personal liability. In a partnership, partners can be personally liable for the debts and obligations of the business, whereas in a corporation, shareholders' liability is typically limited to their investment in the company.

Question 4

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 overvalued and not a good buy.

Question 5

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

It is usually easier to transfer ownership in a corporation than in a partnership. Proprietorships face fewer regulations than corporations, so option A is incorrect. Corporate shareholders enjoy limited liability protection, unlike proprietors, so option B is also incorrect. Option D is incorrect because corporate shareholders have limited liability, so there is no need to offset it against tax advantages. Option E is incorrect because corporations enjoy tax advantages, such as the ability to deduct business expenses from their taxes.

Question 6

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 it may be a good time to buy the stock. As the stock price eventually rises towards its intrinsic value, the investor can make a profit.

Question 7

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 maximizing long-run value and intrinsic value of stocks is in the interest of stockholders, there may still be conflicts between stockholders and managers, such as when managers prioritize their own interests over those of the stockholders or when they take actions that benefit them in the short-term but harm the company's long-term value.

Question 8

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

Proprietorship is the type of business where the owner and the business are considered the same entity. The proprietor is personally liable for all the business obligations, and his/her personal assets may need to be liquidated to meet the business obligations. Therefore, a proprietorship exposes the proprietor to unlimited liability.

Question 9

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 as financial scandals such as Enron, Worldcom, and Bernie Madoff's Ponzi scheme have led to increased awareness and efforts to improve business ethics.

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

This is because an executive compensation system that emphasizes long-term value encourages executives to make decisions that benefit the overall success and growth of the firm, rather than just short-term gains that may only benefit certain stockholders. This ultimately leads to higher value for all stockholders.

Question 11

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 12

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

It is illegal to provide false information to both banks and stockholders, regardless of whether stockholders are considered owners of the firm. Providing false information is a form of securities fraud and can lead to legal consequences.

Question 13

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 illegal activities such as "cooking the books." The lower level person cannot use the excuse of being told to do so by a superior as a defense against prosecution. Both parties are responsible for their own actions.

Question 14

​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 the definition of a marginal investor and how they influence the stock price.

Question 15

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

Proprietorships and partnerships are generally taxed only at the owner or partner level, avoiding the double taxation (corporate income tax and then personal tax on dividends) that corporations can face. This is considered a tax advantage.

Question 16

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

This statement is true. Hostile takeovers are often seen as a way to remove inefficient management and improve the performance of a company, but they are also controversial and have faced legal challenges to make them more difficult to carry out.

Question 17

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 that the owners' liability is limited to the amount of their investment. This means that equity investors are exposed to less liability than they would be in a partnership where each partner is personally liable for the firm's debts and obligations.

B, C, D, and E are all incorrect. B is incorrect because corporations typically face more regulations than proprietorships or partnerships. C is incorrect because double taxation is a disadvantage of operating a business as a corporation, not a proprietorship. D is incorrect because forming a corporation is generally more expensive than a proprietorship due to legal fees and filing requirements. E is incorrect because each partner in a partnership is personally liable for the full amount of the business's debts and obligations, not just up to the amount of their investment.

Question 18

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 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 aligns the interests of the stockholders with the firm's management, as a higher stock price generally indicates higher corporate performance and ultimately results in increased shareholder value. Maximizing EPS or minimizing losses may not always lead to long-term value creation for the shareholders. Maximizing total corporate income may not necessarily result in higher shareholder value if it does not lead to a higher stock price. Maximizing the stock price on a specific target date could lead to short-term thinking and may not align with the long-term interests of the firm or its shareholders.

Question 19

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. This can lead to the stock price rising above its true value, and when investors realize the fraud, the stock price is likely to fall. Those who participated in the fraud can also face legal consequences, and the firm can be penalized.

Question 20

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

Option C correctly explains the hierarchy and roles within a corporation, stating that the board of directors is the highest ranking body and the chairman of the board is the highest ranking individual. The CEO works under the board and can be removed under certain conditions, but cannot remove the board. It is also noted that it is possible for a person to hold both positions of CEO and chairman, but it may not be advisable according to corporate control experts. The other options contain incorrect statements, such as option A which is completely opposite to the actual hierarchy, and options B, D, and E which also contain incorrect information.

Quiz 1: An Overview of Financial Management

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.

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

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 market price is above its intrinsic value,then the stock can be thought of as being undervalued,and it would be a good buy.

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.

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.

Which of the following statements is CORRECT?

As a result of financial scandals occurring during the past decade,there has been a strong push to improve business ethics.

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 could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

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.

​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 statements is CORRECT?

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

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.

Which of the following statements is CORRECT?

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.