Question 1
1. Which
of the following statements is CORRECT?
Answer
A
hostile takeover is the main method of transferring ownership interest in a
corporation.
Unlimited
liability and limited life are two key advantages of the corporate form over
other forms of business organization.
A
corporation is a legal entity that is generally created by a state, and it has
a life and existence that is separate from the lives of its individual owners
and managers.
Limited
liability of its stockholders is an advantage of the corporate form of
organization, but corporations have more trouble raising money in financial
markets because of the complexity of this form of organization.
Although
its stockholders are insulated by limited legal liability, the legal status of
the corporation does not protect the firmâs managers in the same way, i.e.,
bondholders can sue its managers if the firm defaults on its debt, even if the
default is the result of poor economic conditions.
2 points
Question 2
Which
of the following statements is CORRECT?
Answer
The
New York Stock Exchange is an auction market with a physical location.
Capital
market transactions involve only the purchase and sale of equity securities,
i.e., common stocks.
If
an investor sells shares of stock through a broker, then this would be a
primary market transaction.
Consumer
automobile loans are evidenced by legal documents called “promissory
notes,” and these individual notes are traded in the money market.
While
the distinctions are blurring as investment banks are today buying commercial
banks, and vice versa, investment banks generally specialize in lending money,
whereas commercial banks generally help companies raise capital from other
parties.
2 points
Question 3
Which
of the following factors would be most likely to lead to an increase in
interest rates in the economy?
Answer
Households
reduce their consumption and increase their savings.
The
Federal Reserve decides to try to stimulate the economy.
There
is a decrease in expected inflation.
The
economy falls into a recession.
Most
businesses decide to modernize and expand their manufacturing capacity, and to
install new equipment to reduce labor costs.
2
points
Question 4
Which
of the following statements is CORRECT?
Answer
It
is usually easier to transfer ownership in a corporation than it is to transfer
ownership in a sole proprietorship.
Corporate
shareholders are exposed to unlimited liability.
Corporations
generally face fewer regulations than sole proprietorships.
Corporate
shareholders are exposed to unlimited liability, and this factor may be
compounded by the tax disadvantages of incorporation.
Shareholders
in a regular corporation (not an S corporation) pay higher taxes than owners of
an otherwise identical proprietorship.
2
points
Question 5
Which
of the following statements is CORRECT?
Answer
One
of the disadvantages of incorporating a business is that the owners then become
subject to liabilities in the event the firm goes bankrupt.
Sole
proprietorships are subject to more regulations than corporations.
In
any type of partnership, every partner has the same rights, privileges, and
liability exposure as every other partner.
Sole
proprietorships and partnerships generally have a tax advantage over many
corporations, especially large ones.
Corporations
of all types are subject to the corporate income tax.
2
points
Question 6
Which
of the following statements is CORRECT?
Answer
While
the distinctions are blurring, investment banks generally specialize in lending
money, whereas commercial banks generally help companies raise capital from
other parties.
A
liquid security is a security whose value is derived from the price of some
other âunderlyingâ asset.
Money
market mutual funds usually invest most of their money in a well-diversified
portfolio of liquid common stocks.
Money
markets are markets for long-term debt and common stocks.
The
NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
2 points
Question 7
Which
of the following statements is CORRECT?
Answer
If
expected inflation increases, interest rates are likely to increase.
If
individuals in general increase the percentage of their income that they save,
interest rates are likely to increase.
If
companies have fewer good investment opportunities, interest rates are likely
to increase.
Interest
rates on all debt securities tend to rise during recessions because recessions
increase the possibility of bankruptcy, hence the riskiness of all debt
securities.
Interest
rates on long-term bonds are more volatile than rates on short-term debt
securities like T-bills.
2
points
Question 8
Money
markets are markets
for
Answer
Foreign
stocks.
Consumer
automobile loans
Short-term
debt securities.
Long-term
bonds
2
points
Question 9
Which
of the following statements is CORRECT?
Answer
The
corporate bylaws are a standard set of rules established by the state of
incorporation. These rules are identical for all corporations in the
state, and their purpose is to ensure that the firmâs managers run the firm in
accordance with state laws.
The
corporate charter is a standard document prescribed by the state of
incorporation, and its purpose is to ensure that the firmâs managers run the
firm in accordance with state laws. Procedures for electing corporate
directors are contained in bylaws, while the declaration of the activities that
the firm will pursue and the number of directors are included in the corporate
charter.
Companies
must establish a home office, or domicile, in a particular state, and that
state must be the one in which most of their business (sales, manufacturing,
and so forth) is conducted.
Attorney
fees are generally involved when a company develops its charter and bylaws, but
since these documents are voluntary, a new corporation can avoid these costs by
deciding not to have either a charter or bylaws.
The
corporate charter is concerned with things like what business the company will
engage in, whereas the bylaws are concerned with things like procedures for
electing the board of directors.
2 points
Question 10
Which
of the following statements is CORRECT?
Answer
In
a regular partnership, liability for other partnersâ misdeeds is limited to the
amount of a particular partnerâs investment in the business.
Partnerships
have more difficulty attracting large amounts of capital than corporations
because of such factors as unlimited liability, the need to reorganize when a
partner dies, and the illiquidity (difficulty buying and selling) of
partnership interests.
A
slow-growth company, with little need for new capital, would be more likely to
organize as a corporation than would a faster growing company.
In
a limited partnership, the limited partners have voting control, while the
general partner has operating control over the business. Also, the
limited partners are individually responsible, on a pro rata basis, for the firmâs
debts in the event of bankruptcy.
A
major disadvantage of all partnerships relative to all corporations is the fact
that federal income taxes must be paid by the partners rather than by the firm
itself.
2 points
Question 11
Which
of the following is a primary market transaction?
Answer
You
sell 200 shares of IBM stock on the NYSE through your broker.
IBM
issues 2,000,000 shares of new stock and sells them to the public through an
investment banker.
You
buy 200 shares of IBM stock from your brother. The trade is not made
through a broker–you just give him cash and he gives you the stock.
One
financial institution buys 200,000 shares of IBM stock from another
institution. An investment banker arranges the transaction.
You
invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of
IBM shares on the NYSE.
2 points
Question 12
Which
of the following statements is CORRECT?
Answer
Capital
market instruments include both long-term debt and common stocks.
An
example of a primary market transaction would be your uncle transferring 100
shares of Wal-Mart stock to you as a birthday gift.
The
NYSE does not exist as a physical location; rather, it represents a loose
collection of dealers who trade stocks electronically.
If
your uncle in New York sold 100 shares of Microsoft through his broker to an
investor in Los Angeles, this would be a primary market transaction.
While
the two frequently perform similar functions, investment banks generally
specialize in lending money, whereas commercial banks generally help companies
raise large blocks of capital from investors.
2 points
Question 13
With
which of the following statements would most people in business agree?
Answer
A
corporationâs short-run profits will almost always increase if the firm takes
actions that the government has determined are in the best interests of the
nation.
Firms
and government agencies almost always agree with one another regarding the
restrictions that should be placed on hiring and firing employees.
Although
peopleâs moral characters are probably developed before they get into a
business school, it is still useful for business schools to cover ethics,
including giving students an idea about the adverse consequences of unethical
behavior to themselves, their firms, and the nation.
It
is not useful for a large corporation to develop a formal set of rules defining
ethical and unethical behavior. Such rules generally can’t be applied in
many specific instances, so it is better to deal with ethical issues on a
case-by-case basis.
âWhistle
blowers,â because of the courage it takes to blow the whistle, are generally
promoted more rapidly than other employees.
2
points
Question 14
Jane Doe, who has substantial personal wealth
and income, is considering the possibility of starting a new business in the
chemical waste management field. She will be the sole owner, and she has
enough funds to finance the operation. The business will have a
relatively high degree of risk, and it is expected that the firm will incur
losses for the first few years. However, the prospects for growth and
positive future income look good, and Jane plans to have the firm pay out all
of its income as dividends to her once it is well established. Which of the
legal forms of business organization would probably best suit her needs?
Answer
Proprietorship,
because of ease of entry.
S
corporation, to gain some tax advantages and also to obtain limited liability.
Partnership,
but only if she needs additional capital.
Regular
corporation, because of the limited liability.
In
this situation, the various forms of organization seem equally desirable.
2
points
Question 15
Cheers
Inc. operates as a partnership. Now the partners have decided to convert
the business into a regular corporation. Which of the following statements is
CORRECT?
Answer
Assuming
Cheers is profitable, less of its income will be subject to federal income
taxes.
Cheers
will now be subject to fewer regulations.
Cheersâ
shareholders (the ex-partners) will now be exposed to less liability.
Cheersâ
investors will be exposed to less liability, but they will find it more
difficult to transfer their ownership.
Cheers
will find it more difficult to raise additional capital.
