01 The Corporation
01 The Corporation
01 The Corporation
2) Which of the following organization forms does not have limited liability?
A) sole proprietorship
B) limited partnerships
C) corporations
D) none of the above
Answer: A
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual
3) Over four-fifths of all U.S. business revenue is generated by which type of organization?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: D
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual
4) Which of the following is the most common type of organization in the U.S. and worldwide?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
Answer: A
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual
1
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5) Which of the following is NOT an advantage of a sole proprietorship?
A) Single taxation
B) Ease of setup
C) Limited liability
D) No separation of ownership and control
Answer: C
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Conceptual
2
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9) A limited liability company is essentially
A) a limited partnership.
B) a legal entity separate from its owners.
C) just another name for a limited partnership.
D) just another name for a private company.
Answer: B
Diff: 1
Section: 1.1 The Four Types of Firms
Skill: Conceptual
12) You own 100 shares in a corporation. The corporation earns $5.00 per share before taxes.
Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its
earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your
personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is
left for you after all taxes have been paid?
A) $210
B) $300
C) $350
D) $500
Answer: A
Explanation: A) EPS × number of shares × (1 - Corporate Tax Rate) × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .40) x (1 - .30) = $210
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Analytical
3
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13) You own 100 shares of a subchapter "S" Corporation. The corporation earns $5.00 per share
before taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the
rest of its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40%
and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much
money is left for you after all taxes have been paid?
A) $210
B) $300
C) $350
D) $500
Answer: C
Explanation: C) EPS × number of shares × (1 - Individual Tax Rate)
$5.00 per share × 100 shares × (1 - .30) = $350
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Analytical
14) You are a shareholder in a corporation. This corporation earns $4 per share before taxes.
After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The
dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is
35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the
corporations earnings is closest to:
A) 15%
B) 35%
C) 45%
D) 50%
Answer: C
Explanation: C) Fist the corporation pays taxes. It earned $4 per share, but must pay $4 × .35 =
$1.40 to the government in corporate taxes. That leaves $4.00 - $1.40 = $2.60 to distribute to the
shareholders. However, the shareholder must pay $2.60 × .15 = $0.39 in income taxes on this
amount, leaving only $2.21 to the shareholder after all taxes are paid. The total amount paid in
taxes is $1.40 + 0.39 = $1.79. The effective tax rate is then $1.79 ÷ $4 = .4475 or 44.75% which
is closest to 45%.
Diff: 3
Section: 1.1 The Four Types of Firms
Skill: Analytical
4
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16) Explain the difference between a U.S. subchapter "S" corporation and a subchapter "C"
corporation.
Answer:
Diff: 2
Section: 1.1 The Four Types of Firms
Skill: Conceptual
2) The person charged with running the corporation by instituting the rules and policies set by
the board of directors is called
A) the Chief Operating Officer.
B) the Company President.
C) the Chief Executive Officer.
D) the Chief Financial Officer.
Answer: C
Diff: 1
Section: 1.2 Ownership Versus Control of Corporations
Skill: Definition
5
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4) If shareholders are unhappy with a CEO's performance, they are most likely to
A) buy more shares in an effort to gain control of the firm.
B) file a shareholder resolution.
C) replace the CEO through a grassroots shareholder uprising.
D) sell their shares.
Answer: D
Diff: 2
Section: 1.2 Ownership Versus Control of Corporations
Skill: Conceptual
5) A ________, is when a rich individual or organization purchases a large fraction of the equity
of a poorly performing firm and in doing so gets enough votes to replace the board of directors
and the CEO.
A) shareholder proposal
B) leveraged buyout
C) shareholder action
D) hostile takeover
Answer: D
Diff: 2
Section: 1.2 Ownership Versus Control of Corporations
Skill: Definition
6
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8) Which of the following are the major duties of a financial manager?
1. to make investment decisions
2. to make financing decisions
3. to manage cash flow and working capital
A) 1 only
B) 1 and 2 only
C) 1 and 3 only
D) all of the above
Answer: D
Diff: 1
Section: 1.2 Ownership Versus Control of Corporations
Skill: Conceptual
9) You overhear your manager saying that she plans to book an Ocean-view room on her
upcoming trip to Miami for a meeting. You know that the interior rooms are much less
expensive, but that your manager is traveling at the company's expense. This use of additional
funds comes about as a result of:
A) an agency problem.
B) an adverse selection problem.
C) a moral hazard.
D) a publicity problem.
Answer: A
Diff: 1
Section: 1.2 Ownership Versus Control of Corporations
Skill: Definition
11) What strategies are available to shareholders to help ensure that managers are motivated to
act in the interest of the shareholders rather than their own interest?
Answer:
1. The threat of a hostile takeover
2. Shareholder initiatives
3. Performance based compensation
Diff: 3
Section: 1.2 Ownership Versus Control of Corporations
Skill: Conceptual
7
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1.3 The Stock Market
1) How much would you have to pay to purchase 100 shares of XYZ stock on November 18th?
A) $2520
B) $2525
C) $2593
D) $2600
Answer: D
Explanation: D) 100 shares × $26.00 (ask price) = $2600
Diff: 1
Section: 1.3 The Stock Market
Skill: Analytical
2) How much would you receive if you sold 200 shares of XYZ stock on November 11th?
A) $5050
B) $5040
C) $5186
D) $5200
Answer: B
Explanation: B) 200 shares × $25.20 (bid price) = $5040
Diff: 1
Section: 1.3 The Stock Market
Skill: Analytical
8
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4) An investment is said to be liquid if the investment
A) has large day to day fluctuations in price.
B) has a large bid-ask spread.
C) can easily be converted into cash.
D) is traded on a stock exchange.
Answer: C
Diff: 2
Section: 1.3 The Stock Market
Skill: Definition
9
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8) If you buy shares of Coca-Cola on the secondary market,
A) Coca-Cola receives the money because the company has issued new shares.
B) you buy the shares from another investor who decided to sell the shares.
C) you buy the shares from the New York Stock Exchange.
D) you buy the shares from the Federal Reserve.
Answer: B
Diff: 1
Section: 1.3 The Stock Market
Skill: Definition
9) What are your net proceeds if you purchased 2500 shares of XYZ stock on November 11th
and then sold them a week later on November 18th?
Answer:
sell at bid price 11/18 = 2500 × $25.93 = $64,825
now subtract the price paid for the shares
buy at ask price 11/11 = 2500 × $25.25 = $63,125
so net proceeds = 64,825 - 63,125 = $1700
Diff: 2
Section: 1.3 The Stock Market
Skill: Analytical
10) Explain the main differences between the NYSE and NASDAQ stock markets.
Answer:
Key points:
NYSE has physical location—NASDAQ is an electronic market.
NYSE has one specialist in each stock and his role is to match buyers and sellers.
NASDAQ has multiple market makers (dealers) in each stock who stand ready to trade on their
own accounts.
Diff: 2
Section: 1.3 The Stock Market
Skill: Conceptual
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