Test Bank For Intermediate Financial Management, 12th Edition

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage11.Theformoforganizationforabusinessisnotanimportantissue,asthisdecisionhasverylittleeffectontheincomeandwealthofthefirm'sowners.a.Trueb.FalseANSWER:FalsePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:Knowledge2.Themajoradvantageofaregularpartnershiporacorporationasaformofbusinessorganizationisthefactthatbothoffertheirownerslimitedliability,whereasproprietorshipsdonot.a.Trueb.FalseANSWER:FalsePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:Knowledge3.Therearethreeprimarydisadvantagesofaregularpartnership:(1)unlimitedliability,(2)limitedlifeoftheorganization,and(3)difficultyoftransferringownership.Thesecombinetomakeitdifficultforpartnershipstoattractlargeamountsofcapitalandthustogrowtoaverylargesize.a.Trueb.FalseANSWER:TruePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:Partnership

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage2KEYWORDS:Bloom’s:Knowledge4.Twodisadvantagesofaproprietorshipare(1)therelativedifficultyofraisingnewcapitaland(2)theowner'sunlimitedpersonalliabilityforthebusiness'debts.a.Trueb.FalseANSWER:TruePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:ProprietorshipKEYWORDS:Bloom’s:Knowledge5.Onekeyvalueoflimitedliabilityisthatitlowersowners'risksandtherebyenhancesafirm'svalue.a.Trueb.FalseANSWER:TruePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:LimitedliabilityKEYWORDS:Bloom’s:Knowledge6.Ifafirm'sgoalistomaximizeitsearningspershare,thisisthebestwaytomaximizethepriceofthecommonstockandthusshareholders'wealth.a.Trueb.FalseANSWER:FalsePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:Valuemaximization

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage3KEYWORDS:Bloom’s:Knowledge7.IfFirmA'sbusinessistoobtainsavingsfromindividualsandtheninvesttheminfinancialassetsissuedbyotherfirmsorindividuals,FirmAisafinancialintermediary.a.Trueb.FalseANSWER:TruePOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.3-LO:1-4NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FinancialintermediariesKEYWORDS:Bloom’s:Knowledge8.Thedisadvantagesassociatedwithaproprietorshiparesimilartothoseunderapartnership.Oneexceptionrelatestothemoreformalnatureofthepartnershipagreementandthecommitmentofallpartners'personalassets.Asaresult,partnershipsdonothavedifficultyraisinglargeamountsofcapital.a.Trueb.FalseANSWER:FalsePOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:PartnershipKEYWORDS:Bloom’s:Comprehension9.Thefactsthataproprietorship,asabusiness,paysnocorporateincometax,andthatitiseasilyandinexpensivelyformed,aretwokeyadvantagestothatformofbusiness.a.Trueb.FalseANSWER:TruePOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:ReflectiveThinkingSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformation

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage4LOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:ProprietorshipKEYWORDS:Bloom’s:Comprehension10.WhichofthefollowingstatementsisCORRECT?a.Oneofthedisadvantagesofincorporatingabusinessisthattheownersthenbecomesubjecttoliabilitiesintheeventthefirmgoesbankrupt.b.Soleproprietorshipsaresubjecttomoreregulationsthancorporations.c.Inanytypeofpartnership,everypartnerhasthesamerights,privileges,andliabilityexposureaseveryotherpartner.d.Soleproprietorshipsandpartnershipsgenerallyhaveataxadvantageovermanycorporations,especiallylargeones.e.Corporationsofalltypesaresubjecttothecorporateincometax.ANSWER:dRATIONALE:Soleproprietorshipsandpartnershipspaypersonalincometax,buttheyavoidthecorporateincometax.SmallcorporationsthatmeetcertainrequirementscanelecttobeclassifiedasSCorporations,andthenthebusinessistaxedasapartnership.POINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual11.WhichofthefollowingstatementsisCORRECT?a.Oneofthedisadvantagesofasoleproprietorshipisthattheproprietorisexposedtounlimitedliability.b.Itisgenerallyeasiertotransferone'sownershipinterestinapartnershipthaninacorporation.c.Oneoftheadvantagesofthecorporateformoforganizationisthatitavoidsdoubletaxation.d.Oneoftheadvantagesofacorporationfromasocialstandpointisthateverystockholderhasequalvotingrights,i.e.,"oneperson,onevote."e.Corporationsofalltypesaresubjecttothecorporateincometax.ANSWER:aPOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:Firmorganization

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage5KEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual12.WhichofthefollowingstatementsisCORRECT?a.Itisgenerallymoreexpensivetoformaproprietorshipthanacorporationbecause,withaproprietorship,extensivelegaldocumentsarerequired.b.Corporationsfacefewerregulationsthansoleproprietorships.c.Onedisadvantageofoperatingabusinessasasoleproprietorshipisthatthefirmissubjecttodoubletaxation,atboththefirmlevelandtheownerlevel.d.Oneadvantageofformingacorporationisthatequityinvestorsareusuallyexposedtolessliabilitythaninaregularpartnership.e.Ifaregularpartnershipgoesbankrupt,eachpartnerisexposedtoliabilitiesonlyuptotheamountofhisorherinvestmentinthebusiness.ANSWER:dRATIONALE:Corporationshavelimitedliability;however,theyfacemoreregulationsthantheotherformsoforganization.POINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual13.CheersInc.operatesasapartnership.Nowthepartnershavedecidedtoconvertthebusinessintoaregularcorporation.WhichofthefollowingstatementsisCORRECT?a.AssumingCheersisprofitable,lessofitsincomewillbesubjecttofederalincometaxes.b.Cheerswillnowbesubjecttofewerregulations.c.Cheers'shareholders(theex-partners)willnowbeexposedtolessliability.d.Cheers'investorswillbeexposedtolessliability,buttheywillfinditmoredifficulttotransfertheirownership.e.Cheerswillfinditmoredifficulttoraiseadditionalcapital.ANSWER:cPOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:Firmorganization

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage6KEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual14.WhichofthefollowingstatementsisCORRECT?a.Itisusuallyeasiertotransferownershipinacorporationthanitistotransferownershipinasoleproprietorship.b.Corporateshareholdersareexposedtounlimitedliability.c.Corporationsgenerallyfacefewerregulationsthansoleproprietorships.d.Corporateshareholdersareexposedtounlimitedliability,andthisfactormaybecompoundedbythetaxdisadvantagesofincorporation.e.Shareholdersinaregularcorporation(notanScorporation)payhighertaxesthanownersofanotherwiseidenticalproprietorship.ANSWER:aRATIONALE:Ifownershipinaproprietorshiporpartnershipistransferred,thebasicdocumentsunderwhichthefirmoperatesmustberewritten,whereasforacorporationthesellersimplysellssharestoabuyer,andthecorporationrecordsthetransferonitsbooks.POINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual15.Whichofthefollowingcouldexplainwhyabusinessmightchoosetooperateasacorporationratherthanasasoleproprietorshiporapartnership?a.Corporationsgenerallyfinditrelativelydifficulttoraiselargeamountsofcapital.b.Lessofacorporation'sincomeisgenerallysubjectedtotaxesthanwouldbetrueifthefirmwereapartnership.c.Corporateshareholdersescapeliabilityforthefirm'sdebts,butthisfactormaybeoffsetbythetaxdisadvantagesofthecorporateformoforganization.d.Corporateinvestorsareexposedtounlimitedliability.e.Corporationsgenerallyfacerelativelyfewregulations.ANSWER:cPOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:CorporateformoforganizationKEYWORDS:Bloom’s:Comprehension

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage7OTHER:TYPE:MultipleChoice:Conceptual16.Yourecentlysold100sharesofyournewcompany,XYZCorporation,toyourbrotheratafamilyreunion.Atthereunionyourbrothergaveyouacheckforthestockandyougaveyourbrotherthestockcertificates.Whichofthefollowingstatementsbestdescribesthistransaction?a.Thisisanexampleofanexchangeofphysicalassets.b.Thisisanexampleofaprimarymarkettransaction.c.Thisisanexampleofadirecttransferofcapital.d.Thisisanexampleofamoneymarkettransaction.e.ThisisanexampleofaderivativesmarkettransactionANSWER:cPOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.3-LO:1-4NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Financialmarkets,institu-DISC:Financialmarkets,institutions,andinterestratesLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FinancialtransactionsKEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual17.WhichofthefollowingstatementsisCORRECT?a.Ifexpectedinflationincreases,interestratesarelikelytoincrease.b.Ifindividualsingeneralincreasethepercentageoftheirincomethattheysave,interestratesarelikelytoincrease.c.Ifcompanieshavefewergoodinvestmentopportunities,interestratesarelikelytoincrease.d.Interestratesonalldebtsecuritiestendtoriseduringrecessionsbecauserecessionsincreasethepossibilityofbankruptcy,hencetheriskinessofalldebtsecurities.e.Interestratesonlong-termbondsaremorevolatilethanratesonshort-termdebtsecuritieslikeT-bills.ANSWER:aPOINTS:1DIFFICULTY:Difficulty:EasyLEARNINGOBJECTIVES:INTE.GENE.16.4-LO:1-6NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Financialmarkets,institu-DISC:Financialmarkets,institutions,andinterestratesLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:InterestratesKEYWORDS:Bloom’s:ComprehensionOTHER:TYPE:MultipleChoice:Conceptual18.Onedrawbackofswitchingfromapartnershiptothecorporateformoforganizationisthefollowing:a.Itsubjectsthefirmtoadditionalregulations.

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage8b.Itcannotaffecttheamountofthefirm'soperatingincomethatgoestotaxes.c.Itmakesitmoredifficultforthefirmtoraiseadditionalcapital.d.Itmakesthefirm'sinvestorssubjecttogreaterpotentialpersonalliabilities.e.Itmakesitmoredifficultforthefirm'sinvestorstotransfertheirownershipinterests.ANSWER:aPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:CorporateformoforganizationKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual19.WhichofthefollowingstatementsisCORRECT?a.Themainmethodoftransferringownershipinterestinacorporationisbymeansofahostiletakeover.b.Twokeyadvantagesofthecorporateformoverotherformsofbusinessorganizationareunlimitedliabilityandlimitedlife.c.Acorporationisalegalentitythatisgenerallycreatedbyastate;itslifeandexistenceisseparatefromthelivesofitsindividualownersandmanagers.d.Limitedliabilityofitsstockholdersisanadvantageofthecorporateformoforganization,butcorporationshavemoretroubleraisingmoneyinfinancialmarketsbecauseofthecomplexityofthisformoforganization.e.Althoughitsstockholdersareinsulatedbylimitedlegalliability,thecorporation'slegalstatusdoesnotprotectthefirm'smanagersinthesameway;i.e.,bondholderscansueitsmanagersifthefirmdefaultsonitsdebt,evenifthedefaultistheresultofpooreconomicconditions.ANSWER:cPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:CorporateformoforganizationKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual20.WhichofthefollowingstatementsisCORRECT?a.Inaregularpartnership,liabilityforotherpartners'misdeedsislimitedtotheamountofaparticularpartner'sinvestmentinthebusiness.b.Attractinglargeamountsofcapitalismoredifficultforpartnershipsthanforcorporationsbecauseofsuchfactorsasunlimitedliability,theneedtoreorganizewhenapartnerdies,andtheilliquidity(difficultybuying

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage9andselling)ofpartnershipinterests.c.Aslow-growthcompany,withlittleneedfornewcapital,wouldbemorelikelytoorganizeasacorporationthanwouldafastergrowingcompany.d.Thelimitedpartnersinalimitedpartnershiphavevotingcontrol,whilethegeneralpartnerhasoperatingcontroloverthebusiness.Also,thelimitedpartnersareindividuallyresponsible,onaproratabasis,forthefirm'sdebtsintheeventofbankruptcy.e.Amajordisadvantageofallpartnershipscomparedtoallcorporationsisthefactthatfederalincometaxesmustbepaidbythepartnersratherthanbythefirmitself.ANSWER:bPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:PartnershipformoforganizationKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual21.WhichofthefollowingstatementsisCORRECT?a.Corporationsareatadisadvantagerelativetopartnershipsbecausetheyhavetofilemorereportstostateandfederalagencies,includingtheSecuritiesandExchangeAdministration,eveniftheyarenotpubliclyowned.b.Inaregularpartnership,liabilityforthefirm'sdebtsislimitedtotheamountaparticularpartnerhasinvestedinthebusiness.c.Afast-growthcompanywouldbemorelikelytosetupasapartnershipforitsbusinessorganizationthanwouldaslow-growthcompany.d.Partnershipshavedifficultyattractingcapitalinpartbecauseoftheirunlimitedliability,thelackofimpermanenceoftheorganization,anddifficultyintransferringownership.e.Amajordisadvantageofapartnershiprelativetoacorporationasaformofbusinessorganizationisthehighcostandpracticaldifficultyofitsformation.ANSWER:dPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:PartnershipformoforganizationKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual22.WhichofthefollowingstatementsisCORRECT?a.Mostbusinesses(bynumberandtotaldollarsales)areorganizedaspartnershipsorproprietorshipsbecauseit

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage10iseasiertosetupandoperateinoneoftheseformsratherthanasacorporation.However,ifthebusinessgetsverylarge,itbecomesadvantageoustoconverttoacorporation,mainlybecausecorporationshaveimportanttaxadvantagesoverproprietorshipsandpartnerships.b.Duetolimitedliability,unlimitedlives,andeaseofownershiptransfer,thevastmajorityofU.S.businesses(intermsofnumberofbusinesses)areorganizedascorporations.c.Mostbusiness(measuredbydollarsales)isconductedbycorporationsinspiteoflargecorporations'oftenlessfavorabletaxtreatment,duetolegalconsiderationsrelatedtoownershiptransfersandlimitedliability.d.Largecorporationsaretaxedmorefavorablythansoleproprietorships.e.Corporatestockholdersareexposedtounlimitedliability.ANSWER:cPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:FirmorganizationKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual23.JaneDoe,whohassubstantialpersonalwealthandincome,isconsideringthepossibilityofstartinganewbusinessinthechemicalwastemanagementfield.Shewillbethesoleowner,andshehasenoughfundstofinancetheoperation.Thebusinesswillhavearelativelyhighdegreeofrisk,anditisexpectedthatthefirmwillincurlossesforthefirstfewyears.However,theprospectsforgrowthandpositivefutureincomelookgood,andJaneplanstohavethefirmpayoutallofitsincomeasdividendstoheronceitiswellestablished.Whichofthelegalformsofbusinessorganizationwouldprobablybestsuitherneeds?a.Proprietorship,becauseofeaseofentry.b.Scorporation,togainsometaxadvantagesandalsotoobtainlimitedliability.c.Partnership,butonlyifsheneedsadditionalcapital.d.Regularcorporation,becauseofthelimitedliability.e.Inthissituation,thevariousformsoforganizationseemequallydesirable.ANSWER:bRATIONALE:TheScorporationwouldallowhertotakeearlylossesasdeductionsagainstherotherincome,hencesavesometaxes.Then,whenthefirmbecameprofitable,shewouldreceivedividendsandpaytaxesonthem,butthefirmitselfwouldavoidcorporatetaxesanddoubletaxation.POINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:Firmorganization

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage11KEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual24.WhichofthefollowingstatementsisCORRECT?a.Thecorporatebylawsareastandardsetofrulesestablishedbythestateofincorporation.Theserulesareidenticalforallcorporationsinthestate,andtheirpurposeistoensurethatthefirm'smanagersrunthefirminaccordancewithstatelaws.b.Thecorporatecharterisastandarddocumentprescribedbythestateofincorporation,anditspurposeistoensurethatthefirm'smanagersrunthefirminaccordancewithstatelaws.Proceduresforelectingcorporatedirectorsarecontainedinbylaws,whilethedeclarationoftheactivitiesthatthefirmwillpursueandthenumberofdirectorsareincludedinthecorporatecharter.c.Companiesmustestablishahomeoffice,ordomicile,inaparticularstate,andthatstatemustbetheoneinwhichmostoftheirbusiness(sales,manufacturing,andsoforth)isconducted.d.Attorneyfeesaregenerallyinvolvedwhenacompanydevelopsitscharterandbylaws,butsincethesedocumentsarevoluntary,anewcorporationcanavoidthesecostsbydecidingnottohaveeitheracharterorbylaws.e.Thecorporatecharterisconcernedwiththingslikewhatbusinessthecompanywillengagein,whereasthebylawsareconcernedwiththingslikeproceduresforelectingtheboardofdirectors.ANSWER:ePOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.1-LO:1-2NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:CorporatecharterandbylawsKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual25.Withwhichofthefollowingstatementswouldmostpeopleinbusinessagree?a.Theshort-runprofitsofacorporationwillalmostalwaysincreaseifthefirmtakesactionsthegovernmenthasdeterminedareinthenation'sbestinterests.b.Governmentagenciesandfirmsalmostalwaysagreewithoneanotherregardingtherestrictionsthatshouldbeplacedonhiringandfiringemployees.c.Althoughpeople'smoralcharactersareprobablydevelopedbeforetheygetintoabusinessschool,itisstillusefulforbusinessschoolstocoverethics,includinggivingstudentsanideaabouttheadverseconsequencesofunethicalbehaviortothemselves,theirfirms,andthenation.d.Developingaformalsetofrulesdefiningethicalandunethicalbehaviorisnotusefulforalargecorporation.Suchrulesgenerallycan'tbeappliedinmanyspecificinstances,soitisbettertodealwithethicalissuesonacase-by-casebasis.e.Becauseofthecourageittakestoblowthewhistle,"whistleblowers"aregenerallypromotedmorerapidlythanotheremployees.ANSWER:cRATIONALE:Itisimportanttohaveaspecificsetofrulesthatallemployeesareexpectedtofollow.Thishelpsconstrainactions,anditisalsoimportantto"prove"thatthecompanyistryingtodo

Test Bank For Intermediate Financial Management, 12th Edition - Page 13 preview image

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage12rightifsomeemployeedoessomethingwrong.POINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:EthicsSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:BusinessethicsKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual26.Theprimaryoperatinggoalofapublicly-ownedfirminterestedinservingitsstockholdersshouldbetoa.Maximizethestockpricepershareoverthelongrun,whichisthestock'sintrinsicvalue.b.Maximizethefirm'sexpectedEPS.c.Minimizethechancesoflosses.d.Maximizethefirm'sexpectedtotalincome.e.Maximizethestockpriceonaspecifictargetdate.ANSWER:aPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:GoaloffirmKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual27.WhichofthefollowingstatementsisCORRECT?a.Thefinancialmanager'spropergoalshouldbetoattempttomaximizethefirm'sexpectedcashflows,sincethatwilladdthemosttotheindividualshareholders'wealth.b.Thefinancialmanagershouldseekthatcombinationofassets,liabilities,andcapitalthatwillgeneratethelargestexpectedprojectedafter-taxincomeovertherelevanttimehorizon,generallythecomingyear.c.Theriskinessinherentinafirm'searningspershare(EPS)dependsonthecharacteristicsoftheprojectsthefirmselects,andthusonthefirm'sassets.However,EPSisnotaffectedbythemannerinwhichthoseassetsarefinanced.d.Potentialagencyproblemscanarisebetweenmanagersandstockholders,becausemanagershiredasagentstoactonbehalfoftheownersmayinsteadmakedecisionsfavorabletothemselvesratherthanthestockholders.e.Large,publiclyownedfirmslikeIBMandGEarecontrolledbytheirmanagementteams.Ownershipisgenerallywidelydispersed;hencemanagershavegreatfreedominhowtheyrunthefirm.Managersmayoperateinstockholders'bestinterests,buttheyalsomayoperateintheirownpersonalbestinterests.Aslongastheystaywithinthelaw,thereisnowaytoeitherforceormotivatemanagerstoactinthestockholders'bestinterests.

Test Bank For Intermediate Financial Management, 12th Edition - Page 14 preview image

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage13ANSWER:dPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:CorporategoalsandcontrolKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual28.SupposetheU.S.Treasuryannouncesplanstoissue$50billionofnewbonds.Assumingtheannouncementwasnotexpected,whateffect,otherthingsheldconstant,wouldthathaveonbondpricesandinterestrates?a.Pricesandinterestrateswouldbothrise.b.Priceswouldriseandinterestrateswoulddecline.c.Pricesandinterestrateswouldbothdecline.d.Therewouldbenochangesineitherpricesorinterestrates.e.Priceswoulddeclineandinterestrateswouldrise.ANSWER:ePOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.4-LO:1-6NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Financialmarkets,institu-DISC:Financialmarkets,institutions,andinterestratesLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:SecuritypricesandinterestratesKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual29.Whichofthefollowingwouldbemostlikelytoleadtohigherinterestratesonalldebtsecuritiesintheeconomy?a.Householdsstartsavingalargerpercentageoftheirincome.b.Theeconomymovesfromaboomtoarecession.c.Thelevelofinflationbeginstodecline.d.Corporationsstepuptheirexpansionplansandthusincreasetheirdemandforcapital.e.TheFederalReserveusesmonetarypolicyinanattempttostimulatetheeconomy.ANSWER:dPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.4-LO:1-6NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Financialmarkets,institu-DISC:Financialmarkets,institutions,

Test Bank For Intermediate Financial Management, 12th Edition - Page 15 preview image

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage14andinterestratesLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:InterestratesKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual30.Whichofthefollowingfactorswouldbemostlikelytoleadtoanincreaseininterestratesintheeconomy?a.Householdsreducetheirconsumptionandincreasetheirsavings.b.TheFederalReservedecidestotrytostimulatetheeconomy.c.Thereisadecreaseinexpectedinflation.d.Theeconomyfallsintoarecession.e.Mostbusinessesdecidetomodernizeandexpandtheirmanufacturingcapacity,andtoinstallnewequipmenttoreducelaborcosts.ANSWER:eRATIONALE:Anincreaseinthedemandforcapitalbybusinesseswillincreaseinterestratesintheeconomy.POINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.4-LO:1-6NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Financialmarkets,institu-DISC:Financialmarkets,institutions,andinterestratesLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:InterestratesKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual31.WhichofthefollowingstatementsisCORRECT?a.Corporationsgenerallyaresubjecttomorefavorabletaxtreatmentandfewerregulationsthanpartnershipsandsoleproprietorships,whichiswhycorporationsdomostofthebusinessintheUnitedStates.b.Managerswhofacethethreatofhostiletakeoversarelesslikelytopursuepoliciesthatmaximizeshareholdervaluethanaremanagerswhodonotfacethethreatofhostiletakeovers.c.Oneadvantageofthecorporateformoforganizationisthatliabilityoftheownersofthefirmislimitedtotheirinvestmentinthefirm.d.Becauseoftheirsimplifiedorganization,itiseasierforsoleproprietorshipsandpartnershipstoraiselargeamountsofoutsidecapitalthanitisforcorporations.e.Bondcovenantsareaneffectivewaytoresolveconflictsbetweenshareholdersandmanagers.ANSWER:cPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformation

Test Bank For Intermediate Financial Management, 12th Edition - Page 16 preview image

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CHAPTER1—ANOVERVIEWOFFINANCIALMANAGEMENTANDTHEFINANCIALENVIRONMENTCengageLearningTesting,PoweredbyCogneroPage15LOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:MiscellaneousconceptsKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual32.WhichofthefollowingstatementsisCORRECT?a.Agoodgoalforafirm'smanagementismaximizationofexpectedEPS.b.MostbusinessintheU.S.isconductedbycorporations,andcorporations'popularityresultsprimarilyfromtheirfavorabletaxtreatment.c.Becausemoststockownershipisconcentratedinthehandsofarelativelysmallsegmentofsociety,firms'actionstomaximizetheirstockpriceshavelittlebenefittosociety.d.Corporationsandpartnershipshaveanadvantageoverproprietorshipsbecauseasoleproprietorisexposedtounlimitedliability,buttheliabilityofallinvestorsintheothertypesofbusinessesismorelimited.e.Thepotentialexistsforagencyconflictsbetweenstockholdersandmanagers.ANSWER:ePOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformationLOCALSTANDARDS:UnitedStates-OH-DefaultCity-TBATOPICS:MiscellaneousconceptsKEYWORDS:Bloom’s:AnalysisOTHER:TYPE:MultipleChoice:Conceptual33.WhichofthefollowingstatementsisCORRECT?a.Onedisadvantageofoperatingasacorporationratherthanasapartnershipisthatcorporateshareholdersareexposedtomorepersonalliabilitythanpartners.b.Thereisnogoodreasontoexpectafirm'sbondholdersandstockholderstoreactdifferentlytothetypesofnewassetinvestmentsafirmmakes.c.Bondholdersaregenerallymorewillingthanstockholderstohavemanagersinvestinriskyprojectswithhighpotentialreturnsasopposedtosaferprojectswithlowerexpectedreturns.d.Stockholdersaregenerallymorewillingthanbondholderstohavemanagersinvestinriskyprojectswithhighpotentialreturnsasopposedtosaferprojectswithlowerexpectedreturns.e.Relativetosoleproprietorships,corporationsgenerallyfacefewerregulations,whichmakesraisingcapitaleasierforcorporations.ANSWER:dPOINTS:1DIFFICULTY:Difficulty:ModerateLEARNINGOBJECTIVES:INTE.GENE.16.2-LO:1-3NATIONALSTANDARDS:UnitedStates-BUSPROG:AnalyticSTATESTANDARDS:UnitedStates-AK-DISC:Goalsofthefirm,roleof-DISC:Goalsofthefirm,roleoffinance,andanalysisofpublicinformation

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