Concept Questions - Business Organization

Finance Chapter 1

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

a. Maximize the stock price on a specific target date

b. Maximize the stock price per share over the long run, which is the stock's intrinsic value.

c. Maximize its expected EPS

d. Maximize its expected total corporate income

e. Minimize the chances of losses

b

One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

True or False?

True

A limited liability company (LLC) is

a. an unincorporated business owned by one individual

b. a legal arrangement between two or more people who decide to do business together

c. often established easily and inexpensively

d. a hybrid between a partnership and a corporation

e. a legal entity created by a state, separate and distinct from its owners and managers.

d

The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.

True or False?

True

Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

a. Assuming the firm is profitable, none of its income will be subject to federal income taxes.

b. Relaxant's shareholders (the ex-partners) will now be exposed to less liability

c. The firm will find it more difficult to raise additional capital to support its growth

d. The company will probably be subject to fewer regulations and required disclosures

e. The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership

b

Partnerships and proprietorships generally have a tax advantage over corporations.

True or False?

True

It is generally harder to transfer one's ownership interest in a partnership than in a corporation.

True or False?

True

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.

True or False?

False

Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

a. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

b. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock

c. Beef up the restrictive covenants in the firm's debt agreements.

d. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

e. Pay managers large cash salaries and give them no stock options

a

Double taxation is a major drawback to which form of business organization?

a. Partnerships

b. C corporations

c. LLCs and LLPs

d. S corporations

e. Proprietorships

b

It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

True or False?

False

Which of the following is NOT a part of effective corporate governance?

a. Which of the following is NOT a part of effective corporate governance?

b. Use of stock-based compensation for key employees

c. Holding managers accountable for poor performance

d. Rules and practices to ensure that managers balance the needs of customers, employees, and affected citizens with shareholder interests

e. Having a strong, independent board of directors

a

The Chairman of the Board must also be the CEO.

True or False?

False

Which of the following statements about managers' compensation is true?

a. High salaries motivate managers to increase stockholders' wealth.

b. Awarding managers stock options on a monthly basis instead of yearly keeps stock prices high

c. Basing managers' compensation on intrinsic value, not market price, will lead to constant increases in stock price.

d. Yearly changes in compensation policies keep managers alert to differences in stock prices.

e. Rewarding managers for stock performance over the long run gives them an incentive to keep the stock price high over time

e

To maximize shareholder wealth, decisions are evaluated

a. based on how they affect the stock price.

b. in terms of financial consequences and how they affect society at large

c. consistent with management goals.

d. to prioritize the broader needs of society .

e. for transparency and corporate governance

b

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.

True or False?

True

Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.

True or False?

True

Which of the following are stakeholders in a corporation?

a. A corporation's shareholders

b. A corporation's employees

c. A corporation's customers

d. A corporation's vendors

e. All the above are stakeholders in a corporation

e

In most corporations, the CFO ranks under the CEO.

True or False?

True

Which of the following statements is CORRECT?

a. In most corporations, the CFO ranks above the CEO.

b. The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.

c. By law in most states, the chairman of the board must also be the CEO.

d. The CFO generally reports to the firm's chief accounting officer, who is normally the controller.

e. The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.

b