Q&A Hero

Q: Tibbs Inc. had the following data for the year ending 12/31/2015: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)?a. 14.91%b. 15.70%c. 16.52%d. 17.39%e. 18.26%

Q: EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?Sales $1,800.00Costs 1,400.00Depreciation 250.00EBIT $ 150.00Interest expense 70.00EBT $ 80.00Taxes (40%) 32.00Net income $ 48.00a. $81.23b. $85.50c. $90.00d. $94.50e. $99.23

Q: Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?Sales $2,000.00Costs 1,200.00Depreciation 100.00EBIT $ 700.00Interest expense 200.00EBT $ 500.00Taxes (35%) 175.00Net income $ 325.00a. $370.60b. $390.11c. $410.64d. $432.25e. $455.00

Q: Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?Cash $ 10 Accounts payable $ 20Short-term investments Accruals 20Accounts receivable 50 Notes payable 50Inventory 40 Current liabilities $ 90 Current assets $130 Long-term debt 0Net fixed assets 100 Common equity 30 Retained earnings 50Total assets $230 Total liab. & equity $230a. $54.00b. $60.00c. $66.00d. $72.60e. $79.86

Q: TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?a. $383b. $425c. $468d. $514e. $566

Q: NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets. All of these assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR's total investor-provided operating capital?a. $4,694,128b. $4,941,188c. $5,201,250d. $5,475,000e. $5,748,750

Q: Swinnerton Clothing Company's balance sheet showed total current assets of $2,250, all of which were required in operations. Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes. What was its net operating working capital that was financed by investors?a. $1,454b. $1,530c. $1,607d. $1,687e. $1,771

Q: Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation? a. The company had a sharp increase in its depreciation and amortization expenses. b. The company had a sharp increase in its inventories. c. The company had a sharp increase in its accrued liabilities. d. The company sold a new issue of common stock. e. The company made a large capital investment early in the year.

Q: Which of the following statements is CORRECT?a. Net cash flow (NCF) is defined as follows:NCF = Net income -Depreciation and Amortization.b. Changes in working capital have no effect on free cash flow.c. Free cash flow (FCF) is defined as follows:FCF = EBIT(1 - T)+ Depreciation and Amortization- Capital expenditures required to sustain operations- Required changes in net operating working capital.d. Free cash flow (FCF) is defined as follows:FCF = EBIT(1- T)+ Depreciation and Amortization + Capital expenditures.e. Net cash flow is the same as free cash flow (FCF).

Q: For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT? a. The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements. b. The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units. c. The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide. d. The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP. e. The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

Q: Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.a. -463.13b. -487.50c. -511.88d. -537.47e. -564.34

Q: Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.a. $3,284.55b. $3,457.42c. $3,639.39d. $3,830.94e. $4,022.48

Q: Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT)?a. $3,230.00b. $3,400.00c. $3,570.00d. $3,748.50e. $3,935.93

Q: Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley's operating income, or EBIT?a. $3,462b. $3,644c. $3,836d. $4,038e. $4,250

Q: Which of the following statements is CORRECT? a. The more depreciation a firm has in a given year, the higher its EPS, other things held constant. b. Typically, a firm's DPS should exceed its EPS. c. Typically, a firm's EBIT should exceed its EBITDA. d. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share. e. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

Q: Which of the following statements is CORRECT? a. The income statement for a given year is designed to give us an idea of how much the firm earned during that year. b. The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks." c. The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP). d. The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC). e. If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.

Q: Hunter Manufacturing Inc.'s December 31, 2014 balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2015, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/2015, assuming that Hunter neither issued nor retired any common stock during 2015?a. $20.90b. $22.00c. $23.10d. $24.26e. $25.47

Q: Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ?a. $27.50b. $28.88c. $30.32d. $31.83e. $33.43

Q: Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets: 2015 2014Common stock $2,000 $1,000Retained earnings 2,000 2,340Total common equity $4,000 $3,340The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?a. The company's net income in 2014 was higher than in 2015.b. The company issued common stock in 2015.c. The market price of the company's stock doubled in 2015.d. The company had positive net income in both 2014 and 2015, but the company's net income in 2014 was lower than it was in 2015.e. The company has more equity than debt on its balance sheet.

Q: On its 2014 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2015. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year. b. If the company lost money in 2015, they must have paid dividends. c. The company must have had zero net income in 2015. d. The company must have paid out half of its earnings as dividends. e. The company must have paid no dividends in 2015.

Q: Below are the year-end balance sheets for Wolken Enterprises:Assets: 2015 2014Cash $ 200,000 $ 170,000Accounts receivable 864,000 700,000Inventories 2,000,000 1,400,000 Total current assets $3,064,000 $2,270,000Net fixed assets 6,000,000 5,600,000Total assets $9,064,000 $7,870,000 Liabilities and equity: Accounts payable $1,400,000 $1,090,000Notes payable 1,600,000 1,800,000 Total current liabilities $3,000,000 $2,890,000Long-term debt 2,400,000 2,400,000Common stock 3,000,000 2,000,000Retained earnings 664,000 580,000 Total common equity $3,664,000 $2,580,000Total liabilities and equity $9,064,000 $7,870,000Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2014. As of the end of 2015, none of the principal on this debt had been repaid. Assume that the company's sales in 2014 and 2015 were the same. Which of the following statements must be CORRECT?a. Wolken increased its short-term bank debt in 2015.b. Wolken issued long-term debt in 2015.c. Wolken issued new common stock in 2015.d. Wolken repurchased some common stock in 2015.e. Wolken had negative net income in 2015.

Q: Which of the following items cannot be found on a firm's balance sheet under current liabilities? a. Accrued payroll taxes. b. Accounts payable. c. Short-term notes payable to the bank. d. Accrued wages. e. Cost of goods sold.

Q: Which of the following items is NOT included in current assets? a. Short-term, highly liquid, marketable securities. b. Accounts receivable. c. Inventory. d. Bonds. e. Cash.

Q: Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? a. The company purchases a new piece of equipment. b. The company repurchases common stock. c. The company pays a dividend. d. The company issues new common stock. e. The company gives customers more time to pay their bills.

Q: Which of the following statements is CORRECT? a. A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last. b. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year. c. The balance sheet for a given year tells us how much money the company earned during that year. d. The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP). e. For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

Q: Which of the following statements is CORRECT? a. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. b. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. c. The balance sheet gives us a picture of the firm's financial position at a point in time. d. The income statement gives us a picture of the firm's financial position at a point in time. e. The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

Q: The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.a. Trueb. False

Q: To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue. a. True b. False

Q: In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business. a. True b. False

Q: The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings. a. True b. False

Q: Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings. a. True b. False

Q: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. a. True b. False

Q: The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability. a. True b. False

Q: If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant. a. True b. False

Q: The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision. a. True b. False

Q: The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned. a. True b. False

Q: Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense. a. True b. False

Q: Total net operating capital is equal to net fixed assets. a. True b. False

Q: Net operating working capital is equal to operating current assets minus operating current liabilities. a. True b. False

Q: The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time. a. True b. False

Q: The income statement shows the difference between a firm's income and its costs⎯i.e., its profits⎯during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period. a. True b. False

Q: Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books. a. True b. False

Q: On the balance sheet, total assets must always equal total liabilities and equity. a. True b. False

Q: Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.Cash $ 50,000 Accounts payable $ 100,000Inventory 200,000 Accruals 100,000Accounts receivable 250,000 Total CL $ 200,000Total CA $ 500,000 Debt 200,000Net fixed assets $ 900,000 Common stock 200,000 _________ Retained earnings 800,000Total assets $1,400,000 Total L & E $1,400,000a. Trueb. False

Q: The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. a. True b. False

Q: The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity. a. True b. False

Q: Money markets are markets for a. Foreign stocks. b. Consumer automobile loans. c. U.S. stocks. d. Short-term debt securities. e. Long-term bonds.

Q: Which of the following statements is NOTCORRECT? a. When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held." b. "Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares. c. When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. d. Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC. e. It is possible for a firm to go public and yet not raise any additional new capital at the time.

Q: You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of: a. A futures market transaction. b. A primary market transaction. c. A secondary market transaction. d. A money market transaction. e. An over-the-counter market transaction.

Q: Which of the following statements is CORRECT? a. If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction. b. If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction. c. The IPO market is a subset of the secondary market. d. Only institutions, and not individuals, can participate in derivatives market transactions. e. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

Q: Which of the following is a primary market transaction? a. You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker. b. Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker. c. You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stockthe trade is not made through a broker. d. One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction. e. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE.

Q: Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction. a. True b. False

Q: If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction. a. True b. False

Q: Which of the following statements is CORRECT? a. In Europe and Asia hedge funds are legal, but they are not permitted to operate in the United States. b. Hedge funds have more in common with commercial banks than with any other type of financial institution. c. Hedge funds have more in common with investment banks than with any other type of financial institution. d. In the United States hedge funds are legal, but in Europe and Asia they are not permitted to operate. e. The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

Q: Which of the following factors would be most likely to lead to an increasein interest rates in the economy?a. Households reduce their consumption and increase their savings.b. The Federal Reserve decides to try to stimulate the economy.c. There is a decrease in expected inflation.d. The economy falls into a recession.e. Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.

Q: Which of the following would be most likely to lead to higherinterest rates on all debt securities in the economy?a. Households start saving a larger percentage of their income.b. The economy moves from a boom to a recession.c. The level of inflation begins to decline.d. Corporations step up their expansion plans and thus increase their demand for capital.e. The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

Q: Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?a. Prices and interest rates would both rise.b. Prices would rise and interest rates would decline.c. Prices and interest rates would both decline.d. There would be no changes in either prices or interest rates.e. Prices would decline and interest rates would rise.

Q: Which of the following statements is CORRECT?a. If expected inflation increases, interest rates are likely to increase.b. If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.c. If companies have fewer good investment opportunities, interest rates are likely to increase.d. 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.e. Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Q: Debt is a less risky than equity because a debtholder's claim has priority to an equity holder's claim. a. True b. False

Q: You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?a. This is an example of an exchange of physical assets.b. This is an example of a primary market transaction.c. This is an example of a direct transfer of capital.d. This is an example of a money market transaction.e. This is an example of a derivatives market transaction

Q: If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary. a. True b. False

Q: Which of the following statements is CORRECT?a. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.b. There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.c. Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.d. Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.e. Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.

Q: Which of the following statements is CORRECT?a. A good goal for a firm's management is maximization of expected EPS.b. Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.c. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.e. The potential exists for agency conflicts between stockholders and managers.

Q: Which of the following statements is CORRECT?a. Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.c. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.d. Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.e. Bond covenants are an effective way to resolve conflicts between shareholders and managers.

Q: Which of the following statements is CORRECT?a. The financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth.b. The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year.c. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed.d. Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.e. Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests.

Q: The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa. Maximize the stock price per share over the long run, which is the stock's intrinsic value.b. Maximize the firm's expected EPS.c. Minimize the chances of losses.d. Maximize the firm's expected total income.e. Maximize the stock price on a specific target date.

Q: With which of the following statements would most people in business agree?a. The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.b. Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.c. Although people's 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.d. Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. 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.e. Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.

Q: If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth. a. True b. False

Q: Which of the following statements is CORRECT?a. 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 firm's managers run the firm in accordance with state laws.b. The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's 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.c. 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.d. 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.e. 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.

Q: 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?a. Proprietorship, because of ease of entry.b. S corporation, to gain some tax advantages and also to obtain limited liability.c. Partnership, but only if she needs additional capital.d. Regular corporation, because of the limited liability.e. In this situation, the various forms of organization seem equally desirable.

Q: Which of the following statements is CORRECT?a. Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.b. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.c. Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.d. Large corporations are taxed more favorably than sole proprietorships.e. Corporate stockholders are exposed to unlimited liability.

Q: Which of the following statements is CORRECT?a. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.b. In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.c. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.d. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.e. A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

Q: Which of the following statements is CORRECT?a. In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.b. Attracting large amounts of capital is more difficult for partnerships than for 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.c. 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.d. The limited partners in a limited partnership 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 firm's debts in the event of bankruptcy.e. A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

Q: Which of the following statements is CORRECT?a. The main method of transferring ownership interest in a corporation is by means of a hostile takeover.b. Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.c. A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.d. 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.e. Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's 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.

Q: One drawback of switching from a partnership to the corporate form of organization is the following:a. It subjects the firm to additional regulations.b. It cannot affect the amount of the firm's operating income that goes to taxes.c. It makes it more difficult for the firm to raise additional capital.d. It makes the firm's investors subject to greater potential personal liabilities.e. It makes it more difficult for the firm's investors to transfer their ownership interests.

Q: Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?a. Corporations generally find it relatively difficult to raise large amounts of capital.b. Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.c. Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.d. Corporate investors are exposed to unlimited liability.e. Corporations generally face relatively few regulations.

Q: Which of the following statements is CORRECT?a. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.b. Corporate shareholders are exposed to unlimited liability.c. Corporations generally face fewer regulations than sole proprietorships.d. Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.e. Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

Q: 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?a. Assuming Cheers is profitable, less of its income will be subject to federal income taxes.b. Cheers will now be subject to fewer regulations.c. Cheers' shareholders (the ex-partners) will now be exposed to less liability.d. Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.e. Cheers will find it more difficult to raise additional capital.

Q: Which of the following statements is CORRECT?a. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.b. Corporations face fewer regulations than sole proprietorships.c. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.d. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.e. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Q: Which of the following statements is CORRECT?a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.b. It is generally easier to transfer one's ownership interest in a partnership than in a corporation.c. One of the advantages of the corporate form of organization is that it avoids double taxation.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.