Ful

lfi
l
eatht
tps:
//t
est
banku.
eu/

TestBankforFundamentalsofFinancialManagement13t hEdi
ti
onby
Brigham
Completedownl oadablefi
l
eat :
ht
tps:
//t
est
banku.eu/
Test
-Bank- f
or-
Fundament al
s-of
-Fi
nanci
al-
Management
-13th-Edit
ion-by-
Brigham

(
Dif
fi
cul
tyLev
els:Easy
,Easy
/Medi
um,
Medi
um,
Medi
um/
Har
d,andHar
d)

Notethatt
hereisanover
lapbetweentheT/Fandmul t
iple-choi
cequesti
ons,assome
oftheT/Fstat
ementsareusedinmulti
ple-
choi
cequestions.Seet hepref
acefor
i
nformati
onont heAACSBlett
erindi
cat
ors(F,M,et
c.)ont hesubjectl
i
nes.

Mul
ti
pleChoi
ce:Tr
ue/
Fal
se
(
1-1)Rol
eoff
inance FM Answer
:aEASY
1. I
nmostcor
por
ati
ons,
theCFOr
anksundert
heCEO.

a. True
b. False

(
1-1)Rol
eoff
inance FM Answer
:bEASY
2. TheChai
rmanoft
heBoar
dmustal
sobet
heCEO.

a. True
b. False

(
1-1)Rol
eoff
inance FM Answer
:aEASY
3. Theboardofdi r
ectorsisthehighestr anki
ngbodyinacorporati
on,andthechairmanoftheboar
d
i
st hehi
ghestrankingindivi
dual.TheCEOgener al
lyworksundertheboardandi t
schair
man,and
theboar
dgener all
yhast heaut hori
tytoremovetheCEOundercer tai
ncondit
ions.TheCEO,
however,cannotremov etheboar d,butheorshecanendeav ortohavetheboardv ot
edoutanda
newboar dvotedinshouldaconf l
ictari
se.Iti
spossibl
eforapersontosimultaneousl
yserv
eas
CEOandchai rmanoft heboar d,thoughmanycor por
atecontrol
expertsbel
i
ev eiti
sbadtovest
bothoff
icesinthesameper son.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
4. Par
tner
shi
psandpr
opr
iet
orshi
psgener
all
yhav
eat
axadv
ant
ageov
ercor
por
ati
ons.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
5. Adisadv
antageofthecorpor
atef
orm ofor
ganizat
ioni
sthatcor
poratestockhol
dersar
emore
ex
posedt oper
sonall
iabi
l
iti
esint
heeventofbankrupt
cythanar
einvestorsinatypi
cal
par
tner
shi
p.

Chapt
er1:Ov
erv
iew Tr
ue/
Fal
se Page1
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 a. True
b. False

Page2 Tr
ue/
Fal
se Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
6. Anadv ant
ageofthecorporat
efor
m oforgani
zat
ioni
sthatcor
por
ati
onsar
egener
all
ylesshi
ghl
y
regul
atedthanpr
opri
etorshi
psandpart
nershi
ps.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
7. Somepart
ner
sinapar
tner
shi
pmayhav
edi
ff
erentr
ight
s,pr
ivi
l
eges,
andr
esponsi
bil
i
tiest
hanot
her
par
tner
s.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
8. Oneadv
ant
ageoft
hecor
por
atef
orm ofor
gani
zat
ioni
sthati
tav
oidsdoubl
etax
ati
on.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
9. I
tisgener
all
yhar
dert
otr
ansf
erone’
sowner
shi
pint
eresti
napar
tner
shi
pthani
nacor
por
ati
on.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
10. Onedangerofst
arti
ngapropri
etorshi
pisthaty
oumaybeexposedtoper
sonall
iabil
i
tyift
he
busi
nessgoesbankrupt
.Thisproblem woul
dbeavoi
dedi
fyoufor
medacor por
ationtooper
atet
he
busi
ness.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
11. I
facorpor
ati
onelect
stobet
axedasanScorpor
ati
on,
thenitcanavoidt
hecor
por
atet
ax.Howev
er,
i
tsst
ockhol
derswil
lhav
etopayper
sonal
tax
esonthefi
rm'snetincome.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
12. I
facorporati
onelect
stobet axedasanScorporat
ion,
thenbot
hitandi
tsst
ockhol
derscanavoi
d
all
Federal
taxes.Thispr
ovisionwasputi
ntotheFederal
TaxCodeinor
dert
oencouragethe
for
mationofsmallbusi
nesses.

a. True
b. False

Chapt
er1:Ov
erv
iew Tr
ue/
Fal
se Page3
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
13. I
tisgener
all
ylessexpensi
vetofor
m acor
porat
iont
hanapr
opr
iet
orshi
pbecause,
wit
ha
pr
opri
etor
ship,ex
tensi
velegal
document
sarerequi
red.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
14. Themorecapi
tal
afi
rmi
sli
kel
ytor
equi
re,
thegr
eat
ert
hepr
obabi
l
ityt
hati
twi
l
lbeor
gani
zedasa
cor
por
ati
on.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY
15. Onedisadvant
ageoffor
mingacor
porat
ionrat
hert
hanapart
nershipi
sthatt
hismakesi
tmor
e
di
ff
icul
tforthefi
rm’
sinv
estor
stot
ransf
erthei
rowner
shi
pint
erests.

a. True
b. False

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
16. Organi
zingasacor por
ati
onmakesi teasi
erfort
hef i
rmt or
aisecapi
tal
.Thisisbecause
corpor
ations'
stockhol
dersarenotsubj
ecttopersonall
i
abil
it
iesi
fthefi
rm goesbankruptandal
so
becauseitiseasi
ertotr
ansfershar
esofstockthanpartner
shipi
nter
ests.

a. True
b. False

(
1-4)Shar
ehol
derv
alue FM Answer
:bEASY
17. Inordertomaxi
miz
eit
sshar
ehol
der
s'v
alue,
afi
rm'
smanagementmustat
temptt
omax
imi
zet
he
expectedEPS.

a. True
b. False

(
1-4)Shar
ehol
derv
alue FM Answer
:bEASY
18. Inordert
omaximi
zeit
ssharehol
ders'v
alue,
afi
rm'
smanagementmustat
temptt
omax
imi
zet
he
stockpri
ceonaspeci
fi
ctar
getdate.

a. True
b. False

(
1-5)I
ntr
insi
cval
ues FGM Answer
:aEASY
19. Inordert
omaximi
zeit
ssharehol
ders'
val
ue,afir
m'smanagementmustat
temptt
omax
imi
zet
he
stockpri
cei
nthel
ongrun,
orthestock'
s“i
ntr
insi
cval
ue.
”

a. True
b. False

Page4 Tr
ue/
Fal
se Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-5)I
ntr
insi
cval
ues FM Answer
:bEASY
20. Ifmanagementoper
atesi
namannerdesi
gnedtomaximiz
ethefi
rm'sexpect
edprofi
tsf
ort
he
curr
entyear
,thi
swil
lal
somax
imiz
ethestockhol
der
s'weal
thasofthecurr
entyear
.

a. True
b. False

(
1-6)I
mpor
tantt
rends EFM Answer
:aEASY
21. Gl
obal
i
zat
ionofbusi
nesshasbeenf
aci
l
itat
edbyi
mpr
ovement
sini
nfor
mat
iont
echnol
ogy
.

a. True
b. False

(
1-7)Busi
nesset
hics BFM Answer
:aEASY
22. Asaresul
toff
inanci
alscandal
soccur
ri
ngdur
ingt
hepastdecade,
ther
ehasbeenast
rongpusht
o
i
mprovebusi
nessethi
cs.

a. True
b. False

(
1-7)Busi
nesset
hics BFM Answer
:bEASY
23. Therear
emanyt ypesofunethical
businessbehavi
or.Oneex ampleiswhereexecut
ivesprov
ide
i
nformati
onthattheyknowisincorr
ecttobanksandtostockholder
s.Iti
sill
egaltopr
ov i
desuch
i
nformati
ontobanks,butiti
snotill
egaltopr
ovidei
ttostockholder
sbecausetheyaretheowners
ofthefi
rm,notoutsi
ders.

a. True
b. False

(
1-5)I
ntr
insi
cval
ues FG Answer
:aMEDI
UM
24. Astock'
smarketpr
icewoul
dequali
tsi
ntr
insicval
uei
falli
nvest
orshadallt
heinfor
mati
onthati
s
av
ail
ableaboutt
hestock
.Inthi
scaset
hest ock
'smarketpr
icewouldequali
tsint
ri
nsi
cval
ue.

a. True
b. False

(
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM
25. I
fastock'
smarketpr
icei
sabovei
tsi
ntr
insi
cval
ue,
thent
hest
ockcanbet
houghtofasbei
ng
under
val
ued,
anditwouldbeagoodbuy
.

a. True
b. False

(
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM
26. I
fastock'
sint
ri
nsi
cval
uei
sgr
eat
ert
hani
tsmar
ketpr
ice,
thent
hest
ocki
sov
erv
aluedandshoul
d
besol
d.

a. True
b. False

Chapt
er1:Ov
erv
iew Tr
ue/
Fal
se Page5
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM
27. Forast
ockt
obei
nequi
l
ibr
ium ast
hebookdef
inesi
t,
it
smar
ketpr
iceshoul
dex
ceedi
tsi
ntr
insi
c
val
ue.

a. True
b. False

(
1-5)I
ntr
insi
cval
ues FG Answer
:aMEDI
UM
28. Thet
erm“mar gi
nali
nvestor
”meansani nv
estorwhoisacti
veinthemarketandwouldt
endt
obuya
st
ocki
fit
spricefel
landselli
tifi
trose,barr
inganynewinfor
mationcomingoutaboutt
hest
ock
.It
i
sthe“mar
ginali
nvestor
”whodet erminestheactual
stockpri
ce.

a. True
b. False

(
1-7)Busi
nesset
hics BFM Answer
:bMEDI
UM
29. Ifalowerlevelpersoninaf i
rm doessomethingil
legal
,l
ike“cooki
ngthebooks”t
ounderst
atecost
s
andt her
ebyincreaseprofit
sabov ethecor
rectprofi
tsbecauseheorshewast ol
dtodosobya
superior
,thelowerlevelpersoncannotbeprosecutedbutthesuperi
orcanbeprosecut
ed.

a. True
b. False

(
1-7)Busi
nesset
hics BFG Answer
:aMEDI
UM
30. I
fsomeonedeli
berat
elyunderst
atescostsandtherebyincr
easespr ofi
ts,t
hiscancausethepr
iceof
t
hestocktori
seaboveit
si nt
ri
nsi
cv al
ue.Thestockpr i
cewi l
lprobablyfal
li
nt hefut
ure.Al
so,
those
whopart
ici
pat
edinthefraudcanbepr osecut
ed,andthef i
rmitselfcanbepenaliz
ed.

a. Tr
ue
b. Fal
se

(
1-8)Conf
li
cts BFM Answer
:bMEDI
UM
31. Managersalwaysat
tempttomax i
mizet helong-
runval
ueoftheirfi
rms'st
ocks,ort
hest ocks'
i
ntri
nsi
cvalues.Thi
sisexactl
ywhatstockholdersdesi
re.Thus,confl
i
ctsbetweenstockholder
s
andmanager sar
enotpossibl
e.Howev er,t
herecanbeconfli
ctsbetweenstockhol
dersand
bondhol
ders.

a. True
b. False

(
1-8)Conf
li
cts FM Answer
:aMEDI
UM
32. Ahosti
letakeov eri
ssaidtooccurwhenanothercorporat
ionorgroupofi
nvestor
sgainsvot
ing
cont
roloveraf i
rm andrepl
acestheoldmanagers.Iftheoldmanagersweremanagingthefir
m
i
neff
ici
entl
y,thenhostil
etakeoverscani
mprovetheeconomy .Howev er
,hosti
let
akeover
sare
cont
rover
sial
, andlegi
sl
ativ
eactionshav
ebeent akentomaket hem moredif
fi
cultt
oundert
ake.

a. True
b. False

Page6 Tr
ue/
Fal
se Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-5)I
ntr
insi
cval
ues FM Answer
:aHARD
33. Ifaf
ir
m'sboar
dofdirectorswant stomax i
mizeval
uefori
tsst
ockhol
dersingeneral(
asopposedt
o
somespeci
fi
cstockholders)
,itshoul
ddesignanexecuti
vecompensat
ionsystem whosegoali
sto
maxi
mi z
ethest
ock'sintr
insi
cv al
uer at
herthant
hestock'
scur
rentmarketpr
ice.

a. True
b. False

Mul
ti
pleChoi
ce:Concept
ual

Pl
easenotethatsomeoftheanswerchoi
ces,
oranswersthatarev
eryclose,areusedin
di
ff
erentquest
ions.Thi
shascausedusnodif
ficul
ti
es,
butpleaset
akethisintoaccount
whenyoumakeupexams.
(
1-3)For
msofor
gani
zat
ion FM Answer
:eEASY
34. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Oneoft hedisadv ant

agesofi ncorpor
ati
ngy ourbusinessist hatyoucoul
dbecomesubjectto
thefi
rm'sliabili
ti
esintheeventofbankr upt
cy.
b. Propri
etorshipsaresubjecttomor eregulat
ionsthancor porati
ons.
c. I
nanypar tner shi
p,everypart
nerhast hesamer i
ghts,privi
leges,andli
abi
l
ityex
posureasevery
otherpart
ner .
d. Corporati
onsofal ltypesaresubjecttothecorporateincomet ax
.
e. Propri
etorshipsandpar tner
shipsgenerall
yhaveat axadv antageovercor
porati
ons.

(
1-3)For
msofor
gani
zat
ion FM Answer
:cEASY
35. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Oneoft headvantagesoft hecorporateform oforgani z

at i
onisthati
tavoi
dsdoubl etaxat
ion.
b. Iti
seasiertotransferone’
sowner shipinter
estinapar t
nershipthaninacorpor
ation.
c. Oneoft hedisadvantagesofapr opri
etorshi
pist hatthepr opri
etori
sexposedtounl i
mited
l
iabi
li
ty.
d. Oneoft headvantagesofacor porati
onf rom asocial standpointi
sthatev
erystockholderhas
equalvoti
ngr i
ghts,i.
e.,
“oneperson,onev ote.
”
e. Corpor
at i
onsofal l
typesaresubjecttot hecorporateincomet ax.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page7
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
36. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Oneadv ant ageoff ormingacor porati

oni st hatequi tyinvestorsareusuall
yexposedtol
ess
l
iabil
i
tyt hant heywoul dbei napar tnership.
b. Corporationsf acefewerr egulat i
onst hanpr opri
etorshi ps.
c. Onedi sadv antageofoper atingabusi nessasapr opr ietori
st hatthefir
missubjectt
odoubl
e
taxat
ion, becauset axesar eleviedatbot ht hef i
rml evel andtheownerl evel
.
d. I
tisgener allylessexpensi vetof or
m acor por at
iont hanapr opr i
etorshi
pbecause,wi
tha
propri
etor ship, ext
ensivelegal document sar erequired.
e. I
fapar t
ner shi pgoesbankr upt, eachpar tneri sex posedt oli
abili
ti
esonlyuptotheamountof
hisorheri nvest mentinthebusi ness.

(
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY
37. Rel
axantI
nc.oper
atesasapart
nershi
p.Nowthepar
tner
shavedeci
dedt
oconv
ertt
hebusi
ness
i
ntoacorpor
ati
on.Whichofthefol
lowi
ngst
atement
sisCORRECT?

a. Relaxant’
sshar eholder
s( t
heex -part
ners)willnowbeex posedtolessli
abi
li
ty.
b. Thecompanywi l
lprobablybesubj ecttofewerr egul
ati
onsandr equireddi
scl
osur es.
c. Assumi ngthef i
rmi sprofi
table,noneofitsincomewi l
lbesubjecttofeder
alincomet axes.
d. Thefirm'sinvestorswil
l beex posedtolessliabil
it
y,buttheywill
finditmorediffi
cultt
otransf
er
thei
rowner ship.
e. Thefirm will
finditmor ediff
iculttorai
seaddi ti
onalcapital
tosupportit
sgrowt h.

(
1-3)For
msofor
gani
zat
ion FM Answer
:cEASY
38. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Corporati
onsgener al
lyf acef ewerregulati
onst hanpropriet
orshi
ps.
b. Corporateshareholdersar eex posedt ounli
mi t
edl i
abil
it
y.
c. I
tisusuallyeasiertotransf erowner shi
pi nacor porat
ionthaninapartnershi
p.
d. Corporateshareholdersar eex posedt ounli
mi t
edl i
abil
it
y,butthi
sfact
orisof f
setbythet
ax
advantagesofincorpor ation.
e. Thereisat axdisadvant agetoi ncorporati
on,andt her
eisnowayanycor porat
ioncanescape
thi
sdisadvantage,eveni fiti
sv erysmal l
.

(
1-3)For
msofor
gani
zat
ion FM Answer
:eEASY
39. Whichoft
hefol
l
owingcouldexpl
ai
nwhyabusinessmi
ghtchooset
ooper
ateasacor
por
ati
on
r
athert
hanasapropr
iet
orshi
porapar
tner
shi
p?

a. Corpor
ati
onsgenerall
yf acefewerregul
ations.
b. Lessofacorporati
on’sincomeisgenerall
ysubj ecttof
ederal
taxes.
c. Corpor
atesharehol
dersar eexposedtounl imit
edli
abil
i
ty,
butthi
sf act
ori
sof
fsetbyt
het
ax
advant
agesofincorporati
on.
d. Corpor
ateinv
estorsareex posedtounli
mi tedli
abil
it
y.
e. Corpor
ati
onsgenerall
yf i
nditeasiert
oraisel ar
geamountsofcapital.

Page8 Concept
ual
M/C Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-4)Shar
ehol
derv
alue FM Answer
:dEASY
40. Thepr
imar
yoper
ati
nggoal
ofapubl
i
cly
-ownedf
ir
mint
erest
edi
nser
vingi
tsst
ockhol
der
sshoul
dbe
to

a. Maxi
mizei
tsexpect
edtot
alcorpor
ateincome.
b. Maxi
mizei
tsexpect
edEPS.
c. Mi
nimiz
ethechancesofl
osses.
d. Maxi
mizet
hestockpri
cepershareoverthelongrun,
whi
chi
sthest
ock
’si
ntr
insi
cval
ue.
e. Maxi
mizet
hestockpri
ceonaspecifi
ct ar
getdate.

(
1-1)Rol
eoff
inance FM Answer
:cMEDI
UM
41. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Inmostcor por ations, theCFOr anksabov etheCEO.

b. Bylawi nmostst ates,thechai rmanoft heboar dmustal sobet heCEO.
c. Theboar dofdi rect orsi sthehi ghestrankingbodyi nacor por ati
on,andthechairmanoft he
boardist hehi ghestr anki ngindi v
idual
.TheCEOgener all
ywor ksundertheboar dandits
chai
rman, andt heboar dgener all
yhast heauthorit
ytor emov et heCEOundercer t
ain
condit
ions.TheCEO, howev er,cannotremov etheboar d,butheorshecanendeav ortohave
theboar dv otedoutandanewboar dvotedinshouldaconf lictar i
se.Iti
spossibleforaperson
tosimultaneousl yser v easCEOandchai rmanoft heboar d,thoughmanycor poratecont
rol
expert
sbel i
ev ei tisbadt ov estbot hoffi
cesint hesameper son.
d. TheCFOgener allyrepor tstot hef ir
m'schiefaccounti
ngof f
icer ,whoisnormallythecontrol
l
er.
e. TheCFOi sr esponsi blef orraisingcapitalandformakingsur et hatcapit
alexpendit
uresare
desi
rable, butheorshei snotr esponsibleforthevali
dityoft hef i
nancialst
atements,asthe
contr
ollerandt heaudi tor shav ethatresponsibil
it
y.

(
1-3)For
msofor
gani
zat
ion FM Answer
:aMEDI
UM
42. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Onedr awbackoff or mingacor porati

onisthatitgener al
l
ysubjectsthef irmtoadditi
onal
regulations.
b. Onedr awbackoff or mingacor porati
onisthatitsubjectsthefir
m’si nvestorstoi
ncreased
personal l
iabil
iti
es.
c. Onedr awbackoff or mingacor porati
onisthatitmakesi tmor ediff
icultforthefi
rmtor aise
capital.
d. Oneadv antageoff ormi ngacor porat
ionisthatitsubject
st hefi
rm’si nvestor
stofewert axes.
e. Onedi sadv antageoff ormingacor porati
onisthatitismor ediff
icul
tf orthefir
m’sinvestorsto
transfert heirowner shi
pi nt
erests.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page9
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
1-3)For
msofor
gani
zat
ion FM Answer
:dMEDI
UM
43. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. I
facor porationelectstobet ax edasanScor poration,thenbot hi tandi t
sstockhol derscan
avoi
dal l
Feder altaxes.Thi spr ovi
sionwasputi ntot heFeder alTaxCodei nordert oencourage
theformat i
onofsmal lbusinesses.
b. Themor ecapi talafir
mi slikelytorequir
e,t
hesmal lerthepr obabi l
itythatitwillbeorganizedas
acor poration.
c. I
tisgener all
yeasiertot r
ansf erone’sownershipinterestinapar tnershipthani nacor porati
on.
d. Onedangerofst arti
ngapr opr i
etorshi
pisthaty oumaybeex posedt opersonal li
abil
i
tyifthe
businessgoesbankr upt.Thispr oblem wouldbeav oidedifyouf or medacor por at
ionto
operatet hebusi ness.
e. Corporateshar eholdersar eex posedt ounl
imitedliabili
ty,butthisf actori
sof fsetbyt hetax
advantagesofi ncorporati
on.

(
1-3)For
msofor
gani
zat
ion FM Answer
:cMEDI
UM
44. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Duet ol imi t
edliabil
i
ty,unli
mitedlives, andeaseofowner shi pt r
ansfer,t
hev astmaj or
it
yofU.S.
businesses( intermsofnumberofbusi nesses)areor ganiz edascor porati
ons.
b. Mostbusi nesses(bynumberandt otal doll
arsales)ar eor gani zedaspr opri
etorshi
psor
partner shipsbecausei tiseasiert osetupandoper ateoneoft hesef or
msr atherthanasa
corpor at i
on.Howev er,i
fthebusi nessget sv er
ylarge, itbecomesadv antageoust oconvertt
oa
corpor at i
on,pri
mar i
lybecausecor por ationshav eimpor t
antt axadvantagesov er
propriet orshi
psandpar t
nerships.
c. Duet ol egal considerat
ionsrelatedt oowner shiptransf ersandl imit
edliabi
li
ty,whichaffectt
he
abil
ityt oat tr
actcapital
,mostbusi ness( measuredbydol l
arsal es)isconduct edby
corpor at i
onsinspi t
eofl ar
gecor por ations’lessfavor ablet axt reat
ment .
d. Largecor porati
onsar etaxedmor ef av orablythanpr opr i
etor ships.
e. Corpor at estockholdersareex posedt ounl i
mi t
edl i
abi l
ity
.

(
1-3)Cor
por
atef
orm FM Answer
:bMEDI
UM
45. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Ahost il
et akeoverist hemai nmet hodoft ransf er
ringownershipinterestinacor por
ation.
b. Acor porationisal egal entit
ycr eatedbyast ate,andithasal i
feandex ist
encethatisseparate
from thelivesandex i
st enceofi tsowner sandmanager s.
c. Unlimitedliabil
i
tyandl imitedlif
ear etwokeyadv antagesofthecor porateform overother
formsofbusi nessor gani zat
ion.
d. Limi t
edliabil
it
yisanadv antageoft hecor poratef orm ofor
ganizationt oit
sowner s
(stockholders),butcor porationshav emor et roubleraisi
ngmoneyi nfinancialmarketsbecause
oft hecompl exityofthi sform ofor gani
zat i
on.
e. Althought hestockhol der softhecor porationar einsulat
edbyl i
mitedl egalli
abil
i
ty,t
hel egal
statusoft hecor porationdoesnotpr otectt hef i
rm’smanager sinthesameway ,i.
e.,
bondhol derscansuet hefirm’smanager si fthef ir
m defaul
tsoni tsdebt .

Page10 Concept
ual
M/C Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-3)Par
tner
shi
pfor
m FM Answer
:dMEDI
UM
46. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Inat ypical part

ner shi
p, l
i
abi l
i
tyforot herpar tners’misdeedsi slimit
edt otheamountofa
particularpar t
ner’sinvestmenti nthebusi ness.
b. Inal imitedpar tnership,t
hel i
mi t
edpar t
ner shav evotingcont rol
,whilethegeneralpartnerhas
oper ati
ngcont r
ol overthebusi ness,andt hel imitedpar t
ner sareindivi
duall
yresponsible,ona
pror atabasi s,forthef i
rm’sdebt sint heev entofbankr upt cy.
c. Asl ow- growthcompany ,withlit
tl
eneedf ornewcapi tal,woul dbemor eli
kelytoorganiz easa
corpor ati
ont hanwoul daf astergrowi ngcompany .
d. Partner shipshav emor ediffi
cult
yat t
ract i
ngl argeamount sofcapi t
althancorporati
ons
becauseofsuchf actorsasunl imitedl i
abili
ty,theneedt or eorganiz
ewhenapar tnerdies,and
theilli
quidity(diff
icult
ybuy ingandsel l
ing)ofpar t
nershipinterests.
e. Amaj ordi sadvantageofapar t
nershipr el
at i
vet oacor porationisthefactthatfeder
al income
taxesmustbepai dbyt hepar tnersrathert hanbyt hef i
rmi tself
.

(
1-5)Val
ueandcompensat
ion FM Answer
:dMEDI
UM
47. Thepr
imar
yoper
ati
nggoal
ofapubl
i
cly
-ownedf
ir
mtr
yingt
obestser
vei
tsst
ockhol
der
sshoul
dbe
to

a. Max i
mi z
emanager s'owninterest
s,whichar ebydefini
tionconsi st
entwi thmax i
miz
ing
shar eholders'weal th.
b. Max i
mi z
et hefirm' sexpectedEPS,whichmustal somax imizet hefi
rm' spricepershare.
c. Mi nimizethef i
r m'sr i
sksbecausemostst ockholdersdisli
kerisk.Int urn,thiswil
lmaximizet
he
fi
rm' sstockpr ice.
d. Useawel l
-str
uct uredmanager i
alcompensat ionpackaget oreduceconf l
ictsthatmayex i
st
bet weenst ockhol dersandmanager s.
e. Sincei ti
si mpossi bletomeasur eastock'
si ntri
nsicval
ue,thet extstatesthati ti
sbett
erfor
manager st oattemptt omax imizethecurr
entst ockpri
cet hani tsi
ntrinsi
cv alue.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page11
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
1-7)Busi
nesset
hics BFGM Answer
:cMEDI
UM
48. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Ifal owerl evelper soni naf i

rm doessomet hi ngi l
l
egal ,l
ike“ cookingt hebooks”t ounderstat
e
cost sandt herebyar tifi
ci
all
yi ncreasepr ofit
sbecauseheorshewasor deredtodosobya
super i
or,t
hel owerl ev elpersoncannotbepr osecut edbutt hesuper i
orcanbepr osecuted.
b. Ther ear emanyt ypesofunet hicalbusi nessbehav i
or .Oneex amplei swhereex ecuti
ves
prov ideinformat i
ont hattheyknowi si ncor rectt oout siders.I tisil
legaltoprovi
desuch
i
nf ormat i
ont of eder all
yregulatedbanks, buti tisnoti ll
egal topr ovideittostockholders
becauset heyar et heowner soft hef i
r m.
c. Ifsomeonedel iberat el
yunder statescost sandt her ebycausesr eportedprofi
tstoincrease,t
his
cancauset hepr i
ceoft hest ockt oriseabov ei t
sint r
insicv alue.Thest ockwil
lprobablyfall
in
thef uture.Bot ht hosewhopar t i
ci
pat edi nthef raudandt hef i
rmi t
selfcanbepr osecuted.
d. Ethical behav i
orisnoti nfl
uencedbyt rainingandaudi ti
ngpr ocedures.Peopl eareei t
herethi
cal
ort heyar enot ,andt hisiswhatdet ermi neset hi
cal behav i
ori nbusi ness.

(
1-7)Busi
nesset
hics BFM Answer
:eMEDI
UM
49. Wi
thwhi
choft
hef
oll
owi
ngst
atement
swoul
dmostpeopl
einbusi
nessagr
ee?

a. Acor porati
on’sshort -
runpr ofit
swi llal
mostal waysi ncreaseifthefi
rmt akesactionsthatthe
gov ernmenthasdet ermi nedar ei nthebestinterestsoft henat i
on.
b. Fir
msandgov ernmentagenci esal mostalway sagr eewi thoneanotherr egardi
ngthe
restricti
onst hatshouldbepl acedonhi r
ingandf ir
ingempl oyees.
c. “Whi stleblowers,”becauseoft hecourageittakest oblowt hewhistl
e,aregenerall
ypromot ed
mor er apidlythanotherempl oy ees.
d. I
tisnotusef ulf
orlargecor por ati
onst odevelopaf or mal setofrul
esdef i
ningethi
caland
unet hicalbehav i
or.
e. Althoughpeopl e’
smor alchar actersareprobablydev el
opedbef oretheyareadmi tt
edtoa
businessschool ,i
tisst i
l
l useful forbusi
nessschool stocov erethi
cs,ifonlytogivest
udent san
i
deaaboutt headv erseconsequencesofunet hi
cal behaviortothemsel v
es, t
hei
rfir
ms, andthe
nation.

(
1-8)St
ockhol
der
svs.bondhol
der
s FM Answer
:dMEDI
UM
50. Whichoft
hefoll
owingacti
onswoul
dbemostl
i
kel
ytor
educepot
ent
ial
conf
li
ctsofi
nter
est
bet
weenstockhol
dersandbondhol
der
s?

a. Compensat i
ngmanager swi t
hst ockopti
ons.
b. Fi
nancingriskyprojectswithaddi ti
onal
debt.
c. Thethreatofhost i
l
et akeovers.
d. Theuseofcov enantsinbondagr eementst
hatli
mitt
hef
ir
m’suseofaddi
ti
onal
debtand
const
rainmanager s’actions.
e. Aboli
shingtheSecur i
tyandEx changeCommi ssi
on.

Page12 Concept
ual
M/C Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-8)St
ockhol
der
svs.bondhol
der
s FM Answer
:aMEDI
UM
51. Whichoft
hefoll
owingact
ionswoul
dbemostl
i
kel
ytor
educepot
ent
ial
conf
li
ctsbet
ween
st
ockhol
dersandbondhol
ders?

a. I
ncludingrestri
ctiv
ecov enantsint hecompany ’
sbondi ndenture(whi
chisthecont
ractbet
ween
thecompanyandi tsbondholders).
b. Compensat ingmanager swit
hmor estockopt i
onsandl esscashincome.
c. Thepassageofl awst hatmakei tharderforhosti
let
akeov erstosucceed.
d. Agov ernmentr egulati
onthatbannedt heuseofconv ertibl
ebonds.
e. Thefirm beginstouseonl ylong-term debt,
e.g.,
debtthatmat uresi
n30y ear
sormor e,
rat
her
thandebtthatmat uresinl
esst hanoney ear.

(
1-8)St
ockhol
der
svs.manager
s FM Answer
:bMEDI
UM
52. Whichoft
hefoll
owingacti
onswoul
dbemostl
i
kel
ytor
educepot
ent
ial
conf
li
ctsofi
nter
est
bet
weenstockhol
dersandmanager
s?

a. Paymanager slargecashsalari
esandgi vethem nostockopt i
ons.
b. Changet hecor porat
ion'
sformal documentstomakei teasierforoutsi
deinvestor
stoacqui r
ea
cont r
oll
i
ngi nterestinthefir
mt hroughahost i
letakeov
er.
c. Beefupt herest r
ict
ivecovenantsinthefi
rm’sdebtagreement s.
d. Eli
mi nat
ear equirementthatmember softheboardofdirectorsmustholdahi ghpercentageof
theirpersonal wealthinthefi
rm’sstock.
e. Foraf ir
mt hatcompensat esmanager swithstockoptions,r
educet heti
mebef oreoptionsare
vested,i.
e.,t
het i
mebef oreopti
onscanbeex erci
sedandt hesharesthatarerecei
vedcanbe
sold.

(
1-8)St
ockhol
der
svs.manager
s FM Answer
:eMEDI
UM
53. Whichoft
hefoll
owi
ngacti
onswoul
dbel
i
kel
ytor
educepot
ent
ial
conf
li
ctsofi
nter
estbet
ween
st
ockhol
dersandmanager
s?

a. Congresspassesal awt hatsever

elyrestri
ctshosti
letakeov ers.
b. Af i
rm'scompensationsy st
em ischangedsot hatmanager srecei vel
argercashsalar
iesbut
fewerlong-
ter
m opt i
onst obuystock.
c. Thecompanychangest hewayex ecut
ivestockopt i
onsar ehandl ed,withall
opti
onsv est
ing
aft
er2y earsr
atherthanhav i
ng20%oft heoptionsawar dedv estev ery2yearsovera10-year
peri
od.
d. Thecompany ’
sout sideaudit
ingfi
rmi sgivenal ucr
ativeyear-by -
yearconsult
ingcontr
actwith
thecompany .
e. Thecomposi t
ionoft heboardofdi r
ectorsischangedf rom allinsidedir
ectorst
oalloutsi
de
dir
ectors,
andthedi r
ectorsarecompensat edwi thstockrathert hancash.

(
1-8)St
ockhol
der
svs.manager
s FM Answer
:dMEDI
UM
54. Whichofthefol
lowi
ngmechani
smswoul
dbemostl
i
kel
ytohel
pmot
ivat
emanager
stoacti
nthe
besti
nter
estsofshar
ehol
der
s?

a. Decr easet heuseofr estr

icti
vecov enantsinbondagr eements.
b. Takeact ionst hatr educethepossi bi
li
tyofahost i
l
et akeover
.
c. Electaboar dofdi r
ector
st hatall
owsmanager sgreaterfr
eedom ofact
ion.
d. I
ncr easet hepr oport
ionofex ecuti
vecompensat i
ont hatcomesfrom st
ockoptionsandreduce
thepr oportiont hatispaidascashsal ar
ies.
e. Eli
mi natear equirementthatmember soft heboardofdirect
orshaveasubstanti
ali
nvest
ment
i
nt hef i
rm’ sst ock.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page13
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
Page14 Concept
ual
M/C Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-8)St
ockhol
der
svs.manager
s FM Answer
:cMEDI
UM
55. Whi
chofthefol
lowi
ngacti
onswoul
dbeli
kel
ytoencour
ageaf
ir
m’smanager
stomakedeci
si
ons
t
hatar
einthebesti
nter
est
sofshar
ehol
der
s?

a. Theper cent ageofex ecutivecompensat ionthatcomesi nt heform ofcashi si

ncreasedand
thepercent agecomi ngfrom long-t
erm stockoptionsisreduced.
b. Thestat elegislatur
epassesal awt hatmakesi tmor edif
ficul
ttosuccessf ullycompletea
hosti
letakeov er.
c. Theper cent ageoft hefir
m’ sstockthatisheldbyi nsti
tut
ionali
nv estorssuchasmut ualfunds,
pensi
onf unds, andhedgef undsratherthanbysmal li
ndi
v i
dualinvestorsrisesfrom 10%t o80%.
d. Thefirm’sf ounder ,
whoi sal sopresidentandchairmanoft heboar d,sel
ls90%ofhershar es.
e. Thefirm’sboar dofdi r
ectorsgivesthef i
rm’smanager sgr eat
erfreedom t otakewhat ever
acti
onst heyt hinkbestwi thoutobtaini
ngboar dappr oval
.

(
1-8)Conf
li
ctsofi
nter
est
s FM Answer
:dMEDI
UM
56. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Oneoft heway sinwhichfirmscanmi ti

gateorreducepotenti
alconfli
ctsbetweenbondholder
s
andst ockhol dersisbyincreasi
ngt heamountofdebti nthef i
rm'scapit
al str
uctur
e.
b. Thet hreatoft akeovergenerall
yincreasespotenti
alconfl
ictsbetweenst ockhol
dersand
manager s.
c. Manager ial
compensat i
onplanscannotbeusedt oreducepot enti
alconfli
ctsbetween
stockhol dersandmanager s.
d. Thet hreatoft akeoverstendstor educepotenti
alconfl
ict
sbet weenstockholdersand
manager s.
e. Thecr eat i
onoft heSecur i
ti
esandEx changeCommi ssi
on( SEC)hasel i
mi nat
edconfli
cts
betweenmanager sandst ockholders.

(
Comp.
)For
msofor
gani
zat
ion FM Answer
:eMEDI
UM
57. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Corporationsar et axedmor efavorablyt

hanpropr i
etorshi
ps.
b. Corporationshav eunlimit
edliabil
i
t y.
c. Becauseoft heirsize,lar
gecor porati
onsfacefewerr egul
ati
onst hansmall
ercorpor
ationsand
propri
etorships.
d. Reducingt hethr eatofcor por
atetakeoverincr
easest heli
keli
hoodt hatmanagerswil
lactin
shareholders’interests.
e. Bondcov enantsar edesignedt opr ot
ectbondholdersandtor educepotent
ialconf
li
ctsbetween
stockholdersandbondhol der
s.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page15
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:cMEDI
UM
58. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Agoodgoal foraf ir
m’ smanagementi sthemax i
mizati
onofex pect edEPS.
b. Mostbusi nessint heU. S.i
sconduct edbycor porati
ons,andcor porat i
ons’popular
it
yr esul
ts
pri
mar i
lyfrom theirfavorabl
et axtr eatment .
c. Confl
ictscanex i
stbetweenst ockhol dersandmanager s,butpot enti
al confl
ict
sarereducedby
thepossibili
tyofhost i
letakeov er
s.
d. Corporati
onsandpar t
nershipshav eanadv antageoverpropri
etor shipsbecauseapr opr i
etori
s
exposedt ounlimitedliabil
it
y,butt hel i
abili
tyofalli
nvestorsintheot hert ypesofbusinessesis
morelimited.
e. Forast ocktobei nequi li
bri
um, i
tsi ntr
insicvaluemustbegr eatert hant heactualmarketpr i
ce.

(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:dMEDI
UM
59. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Onedi sadvantageoforgani zingabusi nessasacor por ati

onr at
herthanapar t
ner shi
pi sthat
theequi t
yinvestor
sinacor por ati
onareex posedt ounl i
mi tedl i
abil
i
ty.
b. Usingr estr
ict
ivecovenant si ndebtagr eement sisanef fectiv
ewayt oreduceconf li
ctsbetween
stockholdersandmanager s.
c. Manager sgeneral
lywelcomehost i
letakeoverssincet he“ rai
der ”general
l
yof f
ersapr iceforthe
stockthatishigherthant hepr icebeforethetakeov eract ionst art
ed.
d. Themanager sofestablished, stablecompani essomet i
mesat t
emptt ogettheirstate
l
egislaturestoimposer ulest hatmakei tmor ediffi
cultforr aiderstosucceedwi thhost i
le
takeovers.
e. Themanager sofestablished, stablecompani essomet i
mesat t
emptt ogettheirstate
l
egislaturestoremov erulest hatmakei tmor ediffi
cultf orraiderstosucceedwi thhost i
le
takeovers.

(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:bMEDI
UM
60. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Wel ldesignedbondcov enant sareusefulforreduci ngpotent ial

conf l
i
ctsbet weenst ockholders
andmanager s.
b. Thebi dpr i
cei nahostil
et akeoverisgener al
lyabov et hepricebef orethetakeov erattemptis
announced, becauseother wisetherewoul dbenoi ncentiv
ef orthestockholderstosel lt
othe
hostilebidderandt hetakeov erattemptwoul dpr obabl yf
ail.
c. Stockholdersi ngeneralwoul dbebet t
erof fifmanager snev erdiscl
osedf avorableev ent
sand
thereforecausedt hepr i
ceoft hef i
rm'
sst ockt osell atapricebel owitsintr
insicv al
ue.
d. Takeov ersar emostlikelytobeat temptedi fthetargetf i
rm’sst ockpriceisabov ei t
sintr
insic
value.
e. Theef fi
ciencyoft heU.S.economywoul dpr obablybei ncreasedi fhosti
letakeov erswere
absolutelyforbidden.

Page16 Concept
ual
M/C Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:aMEDI
UM
61. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Host i
let akeov ersaremostlikel
ytooccurwhenaf i
rm’sstockissel l
ingbel owi t
sintri
nsicv al
ue
asar esul tofpoormanagement .
b. Theef ficiencyoft heU.S.economywoul dpr obabl
ybei ncr
easedi fhost i
letakeoverswer e
absolutel yforbidden.
c. Host i
let akeov ersaremostlikel
ytooccurwhenaf i
rm’sstocksel l
satapr iceabov eitsintrinsi
c
valuebecausei tsmanagementhasbeeni ssuingoverl
yoptimisti
cst atement sabouti tslikely
futureper formance.
d. I
ngener al,itismor einbondholders’int
ereststhanstockholders’i
nterestsf orafir
mt oshi ftit
s
i
nv estmentf ocusawayf r
om safe,stabl
ei nvestmentsandintor i
skyinv estments,especi all
y
thoset hatpr imar i
l
yinvolver
esearchanddev elopment.
e. Stockhol dersi ngeneralwouldbebet teroffifmanagersnev erdiscl
osedf avorabl
eev entsand
thereforecausedt hepriceofthefirm’sstockt osell
atapr i
cebel owi t
si ntri
nsicvalue.

(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:dMEDI
UM
62. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Onedi sadvantageofoper atingasacor porat

ionratherthanasapar tnershipisthatcorporate
sharehol dersareex posedt omor epersonal l
iabi
li
tythanarepartners.
b. Relativet opropri
etorships, cor porat
ionsgener al
l
yf acefewerregulati
ons, andtheyalsof i
ndit
easiert oraisecapital
.
c. Ther eisnogoodr easont oex pectaf i
rm'sstockholdersandbondhol derst oreactdif
ferentl
yto
thet ypesofasset sinwhi chi tinvests.
d. Stockhol dersshouldgener allybehappi erthanbondhol derstohavemanager si nv
estinr i
sky
projectswi t
hhi ghpot enti
al returnsasopposedt osaf eproject
swithl owerex pectedreturns.
e. Bondhol der
sshouldgener al l
ybehappi erthanstockholderstohavemanager si nv
estinr i
sky
projectswi t
hhi ghpot enti
al returnsasopposedt osaf eproject
swithl owerex pectedreturns.

(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:bMEDI
UM
63. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Becausebankr uptcyrequirest hatcor poratebondhol dersbepai di nful

lbef orestockhol ders
receiveany thing,bondholder sgener allyprefertoseecor poratemanager si nvestinhigh
ri
sk/ highr eturnpr oj
ectsrat hert hanl owr isk/lowreturnpr oj
ect s.
b. Sincebondhol dersreceivef ixedpay ment s,theydonotshar ei nt hegainsi friskyprojectsturn
outt obehi ghlysuccessf ul.Howev er ,t
heydoshar eint helossesi fri
skypr ojectsfailanddr i
ve
thef i
rmi ntobankr uptcy.Ther efore,bondhol dersgener al
lypref ertoseecor poratemanager s
i
nv esti nlowr i
sk/lowr et
urnpr ojectsr atherthanhi ghrisk/highr eturnprojects.
c. Oneadv antageofoper ati
ngabusi nessasacor por at
ioni sthatst ockholderscandeductt hei
r
pror atashar eoft hetaxest hef irm pay s,therebyel i
minat i
ngt hedoubl et axationinvestors
woul df acei napar t
nership.
d. Onedr awbackoff ormingacor porationi sthaty ouloset helimi tedli
abil
itythaty ouwoul d
other wiser eceiveasapr opr i
etor .
e. Pot entialconf li
ctsbetweenst ockhol der sandbondhol dersar ei ncreasedi faf i
rm'sbondsar e
conv ertibleintoitscommonst ock.

Chapt
er1:Ov
erv
iew Concept
ual
M/C Page17
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
(
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:eMEDI
UM
64. Whi
choft
hef
oll
owi
ngst
atement
sisCORRECT?

a. Corporationsf acefewr egul at

ionsandmor ef av
or abletaxtreat
mentt handopr opri
etor
ships
andpar t
ner ships.
b. Manager swhof acethet hr eatofhostil
etakeov ersar elessli
kelytopur suepoli
ciesthat
max i
mi z
eshar eholderval uecompar edtomanager swhodonotf acet hethreatofhostil
e
takeovers.
c. Bondcov enantsar eanef f ecti
v ewayt oresolveconf li
ctsbetweenshar eholdersandmanager s.
d. Becauseoft heirsimpli
fiedor gani
z at
ion,i
tiseasi erforpropriet
orsandpar tnershipstorai
se
l
argeamount sofout si
decapi talthaniti
sf orcorpor ati
ons.
e. Oneadv ant aget oformingacor porati
onist hattheowner softhefir
m hav elimitedli
abi
lit
y.

Mul
ti
pleChoi
ce:Pr
obl
ems

(
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:eEASY
65. NewBusi nessisjustbeingformedby10i nv estors,eachofwhom wi l
lown10%oft hebusiness.
Thefir
mi sexpectedt oearn$1,000,000bef oret axeseachyear.Thecor por
atetaxrateis34%and
thepersonalt
axr at
ef orthefi
rm'sinvestorsi s35%.Thef i
rm doesnotneedt or etai
nanyear ni
ngs,
soallofit
safter-
taxincomewi llbepai doutasdi vi
dendstoit
si nv
est ors.Theinvestorswil
lhaveto
paypersonaltaxesonwhat evertheyr ecei
ve.Howmuchaddi ti
onal spendabl
eincomewi l
leach
i
nvestorhaveifthebusinessisor gani
z edasapar tnershi
prat
hert hanasacor poration?

a. $20,
384
b. $20,
800
c. $21,
225
d. $21,
658
e. $22,
100

(
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:eEASY
66. Assumet hatthecor por
atet axr
ateis34%andt hepersonaltaxr at
eis35%.Thef oundersofa
newlyformedbusi nessaredebat i
ngbetweenset ti
ngupt hefir
m asapar t
nershipversusa
corporati
on.Thef i
rm willnotneedtoretainanyearnings,soallofitsaft
er-t
axincomewi l
lbepai
d
outtoitsinvest
ors,whowi llhavetopayper sonal
taxesonwhat evertheyrecei
ve.Whati sthe
di
fferenceinthepercentageoft hefi
rm'spre-taxi
ncomet hatinvestorsactuall
yrecei
v eandcan
spendundert hecorporateandpar t
nershipformsofor ganiz
ation?

a. 20.
4%
b. 20.
8%
c. 21.
2%
d. 21.
7%
e. 22.
1%

Page18 M/
CPr
obl
ems Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

(
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:bEASY
67. CharlestonCorporati
on( CC)nowoper atesasa“ r
egular”corporati
on,buti
tisconsider
ingaswi t
ch
toSCor por
ati
onst at
us.CCi sownedbyf i
vestockholderswhoeachhol d20%oft hestock,and
eachf acesaper sonaltaxrat
eof35%.Thef i
rm earns$2,000,000pery earbefor
etaxes,andsi nce
i
thasnoneedf orret
ainedearnings,
itpaysoutallofi
tsear ni
ngsasdi vi
dends.Assumet hatthe
corporatetaxrateis34%andt hepersonalt
axrateis35%.Howmuchmor e(orl
ess)spendabl e
i
ncomewoul deachst ockholderhaveifthefi
rm el
ectedSCor porat
ionstatus?

a. $86,
632
b. $88,
400
c. $90,
168
d. $91,
971
e. $93,
811

Chapt
er1:Ov
erv
iew M/
CPr
obl
ems Page19
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 CHAPTER1
ANSWERSANDSOLUTI
ONS

1. (
1-1)Rol
eoff
inance FM Answer
:aEASY

2. (
1-1)Rol
eoff
inance FM Answer
:bEASY

3. (
1-1)Rol
eoff
inance FM Answer
:aEASY

4. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

5. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

6. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

7. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

8. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

9. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

10. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

11. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

12. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

13. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

14. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

15. (
1-3)For
msofor
gani
zat
ion FM Answer
:bEASY

16. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

17. (
1-4)Shar
ehol
derv
alue FM Answer
:bEASY

18. (
1-4)Shar
ehol
derv
alue FM Answer
:bEASY

19. (
1-5)I
ntr
insi
cval
ues FGM Answer
:aEASY

20. (
1-5)I
ntr
insi
cval
ues FM Answer
:bEASY

21. (
1-6)I
mpor
tantt
rends EFM Answer
:aEASY

22. (
1-7)Busi
nesset
hics BFM Answer
:aEASY

23. (
1-7)Busi
nesset
hics BFM Answer
:bEASY

24. (
1-5)I
ntr
insi
cval
ues FG Answer
:aMEDI
UM

25. (
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM
Page20 Answer
s Chapt
er1:Ov
erv
iew
©2013CengageLear
ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

26. (
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM

27. (
1-5)I
ntr
insi
cval
ues FG Answer
:bMEDI
UM

28. (
1-5)I
ntr
insi
cval
ues FG Answer
:aMEDI
UM

29. (
1-7)Busi
nesset
hics BFM Answer
:bMEDI
UM

30. (
1-7)Busi
nesset
hics BFG Answer
:aMEDI
UM

31. (
1-8)Conf
li
cts BFM Answer
:bMEDI
UM

32. (
1-8)Conf
li
cts FM Answer
:aMEDI
UM

33. (
1-5)I
ntr
insi
cval
ues FM Answer
:aHARD

34. (
1-3)For
msofor
gani
zat
ion FM Answer
:eEASY

Somecor por
ati
ons(
Scorporat
ions)ar
eabletoavoi
dthecorpor
atei
ncometax.
Propr
iet
orshi
psandpar
tnershi
pspaypersonali
ncometax,
buttheyavoi
dthecor
por
ate
i
ncomet ax.

35. (
1-3)For
msofor
gani
zat
ion FM Answer
:cEASY

36. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

Corporat
ionshavel
imi
tedli
abil
it
y;however
,theyfacemoreregul
ati
onst
hant
heot
herf
orms
oforgani
zati
on.Propr
iet
orshi
psdonotpaycor porat
etaxes.

37. (
1-3)For
msofor
gani
zat
ion FM Answer
:aEASY

38. (
1-3)For
msofor
gani
zat
ion FM Answer
:cEASY

Ifownershi
pinapropri
etor
shi
porpar
tnershi
pistr
ansfer
red,
thebasi
cdocumentsunder
whichthefi
rm oper
atesmustber
ewri
tten,wher
easforacorpor
ati
onthesel
lersi
mplysel
ls
sharestoabuyer.

39. (
1-3)For
msofor
gani
zat
ion FM Answer
:eEASY

Outsiderst
hinkingaboutinvesti
ngi nabusinessaregeneral
lynotwil
lingtobesubject
edto
unli
mi t
edli
abili
ty,andtheyalsowantt obeabletosellthei
rsharesshouldtheychoosetodo
so.Cor por
ationsprovi
det heseadvantages;hence,fi
rmsthatneedlargeamount sofcapi
tal
thatmustber aisedincapitalmarketsgeneral
lychoosetoincor
porate.

40. (
1-4)Shar
ehol
derv
alue FM Answer
:dEASY

Thepr
imar
yoper
ati
nggoalshoul
dbet
omaxi
mizet
hel
ong-
runst
ockpr
ice,
ort
hei
ntr
insi
c
val
ue.

41. (
1-1)Rol
eoff
inance FM Answer
:cMEDI
UM

42. (
1-3)For
msofor
gani
zat
ion FM Answer
:aMEDI
UM

Cor
por
ati
onshavet
odomor
erepor
ti
ngt
ost
ateandf
eder
alagenci
est
hanot
herbusi
nesses.
Chapt
er1:Ov
erv
iew Answer
s Page21
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ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
43. (
1-3)For
msofor
gani
zat
ion FM Answer
:dMEDI
UM

44. (
1-3)For
msofor
gani
zat
ion FM Answer
:cMEDI
UM

45. (
1-3)Cor
por
atef
orm FM Answer
:bMEDI
UM

46. (
1-3)Par
tner
shi
pfor
m FM Answer
:dMEDI
UM

47. (
1-5)Val
ueandcompensat
ion FM Answer
:dMEDI
UM

48. (
1-7)Busi
nesset
hics BFGM Answer
:cMEDI
UM

49. (
1-7)Busi
nesset
hics BFM Answer
:eMEDI
UM

50. (
1-8)St
ock
hol
der
svs.
bondhol
der
s FM Answer
:dMEDI
UM

Stockopt i
onsandt hethreatoft akeover
sreduceconf l
ict
sbetweenmanagersand
shareholders.Financi
ngr i
skypr oject
swithaddit
ionaldebtincr
easest
hepotent
ialf
or
confli
ctsbetweenst ockholdersandbondholders.Addi ngcovenant
stobondagreement
swi
ll
reduceconf l
ict
sbet weenst ockholder
sandbondhol ders.

51. (
1-8)St
ockhol
der
svs.bondhol
der
s FM Answer
:aMEDI
UM

52. (
1-8)St
ockhol
der
svs.manager
s FM Answer
:bMEDI
UM

Corporatet
akeoversar
emostli
kel
ytooccurwhenafi
rmisunder
per
for
ming.Manager
swho
fearl
osingthei
rjobswil
ltr
ytomaxi
mizeshar
ehol
derweal
th.

53. (
1-8)St
ockhol
der
svs.manager
s FM Answer
:eMEDI
UM

54. (
1-8)St
ockhol
der
svs.manager
s FM Answer
:dMEDI
UM

55. (
1-8)St
ockhol
der
svs.manager
s FM Answer
:cMEDI
UM

Smallst
ockhol
dershavel
it
tl
ecloutwi
thmanagement
,whilelargeinst
it
uti
onali
nvest
orsar
e
bet
terablet
oforcemanagerst
ooperat
einst
ockhol
ders’
interests.

56. (
1-8)Conf
li
ctsofi
nter
est
s FM Answer
:dMEDI
UM

57. (
Comp.
)For
msofor
gani
zat
ion FM Answer
:eMEDI
UM

58. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:cMEDI
UM

59. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:dMEDI
UM

60. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:bMEDI
UM

61. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:aMEDI
UM

I
fafi
rm’sstocki
sunder
valuedr
elati
vetoit
spot
ent
ial
,thensomeonecanpr
ofi
tbyt
aki
ngt
he
f
ir
m overanddoi
ngabetterj
obrunningi
t.

62. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:dMEDI
UM
Page22 Answer
s Chapt
er1:Ov
erv
iew
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ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Ful
lfi
l
eatht
tps:
//t
est
banku.
eu/

63. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:bMEDI
UM

64. (
Comp.
)Mi
scel
l
aneousconcept
s FM Answer
:eMEDI
UM

65. (
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:eEASY

Busi
nessi
ncome: $1,
000,
000Cor
por
atet
axrat
e(TC)
: 34%
Numberofi
nvest
ors(
N): 10 Per
sonalt
axrate(
TP)
: 35%

Corporati
on:
Corporatetaxes $340,
000
I
ncomeaf t
ercorpor
atet
ax,pai
dtoi
nvest
ors(
stockhol
der
s)asdi
vi
dends $660,
000
Taxondi vi
dends $231,
000
Spendableincome $429,
000

Part
nershi
p:
Taxespaidbybusi
ness $ 0
I
ncomer ecei
vedbyinvest
ors(par
tner
s) 1,
000,
000
Taxespaidbypart
nersaspersonali
ncome 350,
000
Spendabl
eincome $ 650,
000

Di
ff
erencei
nspendabl
eincome:t
otal
gai
nfr
om bei
ngapar
tner
shi
p $221,
000

I
ndi
vi
dual
inv
est
orgai
n $22,
100

66. (
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:eEASY

Cor
por
atet
axr
ate(
TC)
: 34% Per
sonal
taxr
ate(
TP)
: 35%

Corporati
on:
Corporatenet=Businesspre-
taxi
ncome(
1−TC)
I
nvestors'net=Cor
poratenet(
1−TP) =Bus
ines
spr
e-t
axnet(
1−TC)
(1−TP)
=Businesspr e-
taxnet×66%×65% 42.
9%

Part
ner
ship:
Thebusi
nesspaysnotax,butinv
estorspayt
axonbusi
nessi
ncome.
I
nvest
ors'net=Busi
nesspre-
taxnet(1−TP) =Busi
nesspr
e-t
axnet(
1−TP)
65%

Di
ff
erence 22.
1%

67. (
1-3)Taxef
fect
sofor
gani
zat
ion CM Answer
:bEASY

Busi
nessi
ncome: $2,
000,
000 Cor
por
atet
axr
ate(
TC)
:
34%
Numberofi
nvest
ors(N)
: 5 Per
sonal
taxr
ate(
TP)
: 35%

Corporati
on:
Corporatetax
es $ 680,
000
I
ncomeaf t
ercor
por
atet
ax,pai
dtoi
nvest
ors(
stockhol
der
s)asdi
vi
dends 1,
320,
000
Taxondi vi
dends 462,
000

Chapt
er1:Ov
erv
iew Answer
s Page23
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ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
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nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.
 Spendabl
eincome,
tot
al $ 858,
000
Spendabl
eincome,
each $ 171,
600

SCorporati
on:
Taxespaidbybusi
ness $ 0
I
ncomer ecei
vedbyinvestor
s 2,
000,
000
Taxespaidbyinv
estorsaspersonal
income $ 700,
000
Spendabl
eincome,total $1,
300,
000
Spendabl
eincome,each $ 260,
000

Di
ff
erencei
nspendabl
eincome:gai
nfr
om bei
nganSCor
por
ati
on $88,
400

Page24 Answer
s Chapt
er1:Ov
erv
iew
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ning.AllRi
ghtsReserv
ed.Maynotbecopi
ed,scanned,ordupl
icat
ed,
inwhol
eori
npar t
,exceptf
oruseasper
mit
tedi
nal
i
cense
di
str
ibut
edwi
thacert
ainproductorser
viceorot
her
wiseonapassword-pr
otectedwebsi
tef
orcl
assr
oom use.