Principles of Finance 6th Edition Besley Test Bank 1

Principles of Finance, 6e
Besley/Brigham
Chapter 06
Test Bank for Principles of Finance 6th Edition Besley

F.Brigham 1285429648 9781285429649
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1. Which of the following is not one of the things that causes a corporation to have a significant advantage over a
partnership or a proprietorship?
a. Limited liability.
b. Ease of transfer of ownership interest.
c. Unlimited life.
d. Elimination of double taxation.
e. Ability to retain earnings and thus convert income from personal income to capital gains.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
ACCREDITING STANDARDS: Blooms Taxonomy-5 - Knowledge
Business Program-6 - Reflective Thinking
DISC-FIN-07 - Finance Function
Time Estimate-a - 5 min.
TOPICS: Firm Organization
2. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Minimize the debt used by a firm.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
ANSWER: d
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POINTS: 1
DIFFICULTY: Easy
TOPICS: Goal of Firm
3. Which of the following does not need to be considered when assessing the impact of financial decisions?
a. Projected earnings.
b. Financial market conditions.
c. Timing of the earnings flow.
d. Riskiness of the firm.
e. All of the above must be considered.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
TOPICS: Financial Decisions
4. Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?
a. Threat of firing.
b. Managerial compensation.
c. Performance shares.
d. Threat of takeover.
e. Answers b and c above.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
TOPICS: Managerial Incentives
5. Taking poison pills and offering greenmail are

a. Ways stockholders protect themselves and their interest from management's conflicting interests.
b. Tactics used by creditors to make their position more favorable when resolving agency problems between
stockholders and creditors.
c. Two actions managers might take to ward off hostile takeovers.
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d. Both commonly practiced methods used by firms' managers to increase stockholders' wealth.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
TOPICS: Takeover Tactics
6. Which of the following statements is correct?

a. A good goal for a corporate manager is maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations; corporations' popularity results primarily from their
favorable tax treatment.
c. A good example of an agency relationship is the one between stockholders and managers.
d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to
unlimited liability, but investors in the other types of businesses are not.
e. Firms in highly competitive industries find it easier to exercise "social responsibility" than do firms in
oligopolistic industries.
ANSWER: c
RATIONALE: This is the only correct statement; the others are simply false.
POINTS: 1
DIFFICULTY: Easy
TOPICS: Miscellaneous

a. The major disadvantage of organizing as a corporation is that it does not provide its owners with limited
liability.
b. Bond covenants, or restrictions on debt, are an important device to reduce agency conflicts between
stockholders and bondholders.
c. The threat of a hostile takeover serves to reduce agency conflicts between stockholders and bondholders.
d. Compensation packages are designed, in part, to reduce agency conflicts between shareholders and managers.
e. Both answers b and d are correct.
ANSWER: e
RATIONALE: Both statements b and d are correct; therefore, statement e is the correct choice. The
major advantage of organizing as a corporation is that it provides its owners with limited
liability. The threat of a hostile takeover serves to reduce agency conflicts between
stockholders and managers.
POINTS: 1
DIFFICULTY: Easy
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TOPICS: Miscellaneous
8. Current tax laws have which of the following effects?

a. Favor dividends because there are no capital gains taxes on dividends.
b. Do not favor capital gains because the tax must be paid as the value of the stock increases, whether or not the
stock is sold.
c. Favor capital gains because the tax does not have to be paid until the stock is sold.
d. Do not favor dividends or capital gains for most people because different people are in different tax brackets.
e. Favor dividends since dividends are tax-deductible for the paying corporation whereas retained earnings,
which produce capital gains, are not tax-deductible.
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
TOPICS: Personal Taxes

a. For the most part, our federal tax rates are progressive, because higher incomes are taxed at higher average
rates.
b. Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the
same risk and maturity issued by a private corporation such as Florida Power & Light.
c. Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities.
d. Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than
in bonds. However, other factors may offset tax considerations.
e. All of the above statements are true.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
TOPICS: Taxes and Financing
10. A loss incurred by a corporation

a. Must be carried forward unless the company has had 2 loss years in a row.
b. Can be carried back 2 years, then carried forward up to 20 years following the loss.
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c. Can be carried back 5 years and forward 3 years.
d. Cannot be used to reduce taxes in other years except with special permission from the IRS.
e. Can be carried back 3 years or forward 15 years, whichever is more advantageous to the firm.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
TOPICS: Carryback, Carryover
11. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
TOPICS: International Operations Motivation
12. Multinational managerial finance requires that

a. The effects of changing currency values be included in financial analyses.
b. Legal and economic differences be considered in financial decisions.
c. Political risk be excluded from multinational corporate financial analyses.
d. All of the above.
e. Only a and b above.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
TOPICS: Multinational Managerial Finance

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a. Given the multi-owner nature of most large corporations, agency costs associated with perquisite consumption
are not really a problem.
b. Managers may operate in the stockholders' best interests, but they may also operate in their own personal best
interests. As long as managers stay within the law, there simply are not any effective controls that stockholders
can implement to control managerial decision making.
c. Shareholder agency costs include the opportunity costs associated with constraining managerial freedom but
do not include managerial salaries.
d. An agency relationship exists when one or more persons hire another person to perform some service but
withhold decision-making authority from that person.
e. All of the above statements are false.
ANSWER: c
POINTS: 1
DIFFICULTY: Moderate
TOPICS: Agency Costs
14. Which of the following is an example of an area of business where use of "questionable" ethics is considered a
necessity?
a. Attracting and sustaining new customers.
b. Hiring and keeping skilled employees.
c. Keeping up with competition.
d. Dealing with firms who use "questionable" ethics.
e. None of the above.
ANSWER: e
POINTS: 1
TOPICS: Business Ethics
15. Which of the following actions is consistent with social responsibility but is necessarily inconsistent with stockholder
wealth maximization?
a. Investing in a smokestack "scrubber" to reduce the firm's air pollution as mandated by law.
b. Voluntarily installing expensive machinery to treat effluent discharge which currently is being dumped into a
river where it is ruining the drinking water of the community where the plant is located.
c. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being
levied on the firm by the state for its pollution.
d. Making a large corporate donation to the local community in order to fund a recreation complex that will be
used by the community and the firm's employees.
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e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with
stockholder wealth maximization.
ANSWER: e
POINTS: 1
TOPICS: Social Responsibility

a. The ability of firms to engage in socially beneficial projects that involve voluntary costs is constrained by
competition and the need of firms to attract capital at low cost.
b. The actions that maximize a firm's stock price are inconsistent with maximizing social welfare.
c. The concepts of social responsibility and ethical responsibility on the part of corporations are completely
different and neither is relevant in maximizing stock price.
d. In a competitive market, if a group of firms do not spend resources making social welfare improvements, but
another group does, in general, this will not affect the second group's ability to attract capital.
e. If government did not mandate socially responsible corporate actions, such as those relating to product safety
and fair hiring practices, most firms in competitive markets would still pursue such policies voluntarily.
ANSWER: a
POINTS: 1
TOPICS: Social Welfare

a. The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in
accordance with state laws.
b. 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. Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
d. Although most companies design a charter, only the bylaws are legally required to be filed with the secretary
of state in order for a corporation to be in official existence.
ANSWER: b
POINTS: 1
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TOPICS: Corporate Charter and Bylaws

a. A hostile takeover is a primary method of transferring ownership interest in a corporation.
b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners
and managers, that is, the owners and managers are the corporation.
c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business
organization.
d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in
financial markets than other organizational forms.
e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the
corporation does not protect the firm's managers in the same way.
ANSWER: d
POINTS: 1
TOPICS: Corporate Form

a. In a partnership, liability for other partners' misdeeds includes but is limited to the amount a particular partner
has invested in the business.
b. Partnerships must be formed according to specific rules which include the filing of a formal written agreement
with state authorities where the partnership does business.
c. A fast growth company would be more likely to set up a partnership for its business organization than would a
slow-growth company.
d. Partnerships have difficulties attracting capital in part because of the other disadvantages of the partnership
form of business, including impermanence of the organization.
e. A major disadvantage of a partnership as a form of business organization is the high cost and practical
difficulties of its formation.
ANSWER: d
POINTS: 1
TOPICS: Partnership
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a. Other things held constant, it generally is safer to invest money in a proprietorship than in a partnership or a
corporation.
b. According to the text, law firms and accounting firms must be organized as proprietorships or partnerships;
these businesses do not have the option of incorporating.
c. If you are planning to start a business, which you will run as the sole employee, and if you expect the business
to earn $1,000,000 per year before taxes, you can minimize federal income taxes by setting up the business as
a corporation.
d. According to the text, "agency problems" tend to increase as the percentage of a corporation's stock owned by
its managers increases.
e. Maximizing the income statement item "net income" is not the best goal for a corporation whose managers are
interested in maximizing the economic welfare of the firm's stockholders.
ANSWER: e
POINTS: 1

a. A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not
offer their owners limited liability, whereas proprietorships do.
b. An advantage of the corporate form for many businesses is the fact that the corporate tax rate always exceeds
the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.
c. There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce
more goods and services than do other forms of business.
d. Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest,
unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large
businesses choose to incorporate.
e. Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the
necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.
ANSWER: c
POINTS: 1
ACCREDITING STANDARDS: Blooms Taxonomy-2 - Application

a. The optimal dividend policy is the one that satisfies the shareholders because they supply the firm's capital.
b. The use of debt financing has no effect on earnings per share (EPS) or stock price.
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c. The riskiness of projected EPS depends upon how the firm is financed.
d. Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream.
e. Dividend policy is one aspect of the firm's financial policy that is determined directly by the shareholders.
ANSWER: c
POINTS: 1
TOPICS: Financial Policy and Earnings

a. The proper goal of the financial manager should be to maximize the firm's expected cash flow, because this
will add the most wealth to each of the individual shareholders (owners) of the firm.
b. One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The
financial manager should seek that combination of assets, liabilities, and capital which will generate the largest
expected projected after-tax income over the relevant time horizon."
c. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the
firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which
those assets are financed.
d. Because large, publicly-owned firms are controlled by their management teams, and typically, ownership is
widely dispersed, managers have great freedom in managing the firm. Managers may operate in the
stockholders' best interest, but they may also operate in their own personal best interests. As long as managers
stay within the law, there simply aren't any effective controls over managerial decisions in such situations.
e. Agency problems exist between stockholders and managers, and between stockholders and creditors.
ANSWER: e
POINTS: 1
TOPICS: Corporate Goals and Control
24. Jane Doe, who has substantial personal wealth and income, is considering the possibility of opening a new business in
the chemical waste management field. She will be the sole owner. 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 expects to realize substantial cash flows from dividends the firm will eventually pay
out. Which of the legal forms of business organization would probably best suit her needs?
a. Proprietorship, because of ease of entry.
b. Regular corporation, because of the limited liability.
c. Partnership, if she needs additional capital.
d. S corporation, to enjoy tax advantages and gain limited liability.
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e. In this situation, the various forms of organization seem equally desirable.
ANSWER: d
POINTS: 1
TOPICS: Business Organization
25. Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the
same funds in the preferred stock of FPL, which should provide Allen with a before-tax return of 9%, all in the form of
dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded
from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky,
what combination of these two possibilities will maximize Allen's effective return on the money invested?
a. All in the plant project.
b. All in FPL preferred stock.
c. 60% in the project; 40% in FPL.
d. 60% in FPL; 40% in the project.
e. 50% in each.
ANSWER: b
RATIONALE: After-tax return on the new project: 0.11(1 − T) = 0.11(0.75) = 0.0825 = 8.25%. After-tax
return on the preferred stock: 0.09[1 − 0.25(0.30)] = 0.0835 = 8.35%. Therefore, invest
100 percent in the preferred stock.
POINTS: 1
Business Program-3 - Analytic
DISC-FIN-08 - Risk and Return
TOPICS: After-Tax Returns

a. 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.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships 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, primarily because corporations have
important tax advantages over proprietorships and partnerships.
c. For a large company (taxable income over $1 million), the tax situation would, generally, favor organization
as a partnership or proprietorship, or possibly as an S corporation, rather than as a regular corporation.
However, legal considerations related to ownership transfers and liability offset the tax situation, with the
result that most business (measured by dollar sales) is conducted by corporations.
d. In the typical situation, a taxpayer's average tax rate is below his or her marginal rate. However, there is an
income range within which the average rate exceeds the marginal rate.
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e. Statements c and d are both correct.
ANSWER: c
POINTS: 1
27. Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds
and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6
percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make
Carter's treasurer indifferent between the two?
a. 2.40%
b. 3.60%
c. 4.50%
d. 5.25%
e. 6.00%
ANSWER: b
RATIONALE: Chicago municipal bonds = Tax Exempt; BT yield = AT yield. U.S. Treasury bonds = AT
yield = 6%(1 − 0.4) = 3.60%. 3.60% = yield where indifferent between the two.
POINTS: 1
DIFFICULTY: Easy
TOPICS: After-Tax Yield
28. Weston Corporation has some money to invest, and its treasurer is choosing between General Motors bonds and State
of Illinois bonds. Both have the same maturity, and they are equally risky and liquid. If the Illinois bonds, which are tax-
exempt, yield 6 percent, and Weston's marginal income tax rate is 40 percent, what yield on GM bonds would make
Weston's treasurer indifferent between the two?
a. 6.0%
b. 7.5%
c. 10.0%
d. 12.5%
e. 15.0%
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
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29. As a corporate investor paying a marginal tax rate of 34 percent, if 70 percent of dividends are excludable, what would
be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield?
a. 6.36%
b. 7.36%
c. 12.19%
d. 13.01%
e. 14.37%
ANSWER: e
RATIONALE: 16%[1 − 0.34(0.30)] = 14.368% = 14.37%.
POINTS: 1
DIFFICULTY: Easy
30. A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent
coupon rate preferred stock bought at par, assuming a 70 percent dividend exclusion?
a. 11.03%
b. 10.78%
c. 6.48%
d. 7.31%
e. 5.52%
ANSWER: b
RATIONALE: 12%[1 − 0.34(0.30)] = 10.776% = 10.78%.
POINTS: 1
DIFFICULTY: Easy
31. Your corporation has the following cash flows:

Operating income $250,000
Interest received 10,000
Interest paid 45,000
Dividends received 20,000
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Dividends paid 50,000
If the applicable income tax rate is 40 percent, and if 70 percent of dividends received are exempt from taxes, what is the
corporation's tax liability?
a. $74,000
b. $88,400
c. $91,600
d. $100,000
e. $106,500
ANSWER: b
RATIONALE: Operating income $250,000
Interest paid (45,000)
Dividends received (taxable) 6,000*
Taxable income $221,000
*$20,000(0.30) = $6,000. Taxes = 0.4($221,000) = $88,400.
POINTS: 1
DIFFICULTY: Easy
TOPICS: Corporate Taxes
32. Solarcell Corporation has $20,000 which it plans to invest in marketable securities. It is choosing between AT&T
bonds which yield 11%, State of Florida municipal bonds which yield 8%, and AT&T preferred stock with a dividend
yield of 9%. Solarcell's corporate tax rate is 40%, and 70% of the preferred stock dividends it receives are tax exempt.
Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which
security should be selected? Answer by giving the after-tax rate of return on the highest yielding security.
a. 8.46%
b. 8.00%
c. 7.92%
d. 9.00%
e. 9.16%
ANSWER: b
RATIONALE: Florida muni bond After-tax yield on FLA bond = 8%. (The munis are tax exempt.) AT&T
bond After-tax yield on AT&T bond = 11% − Taxes = 11% − 11%(0.4) = 6.6%. Alternate
solution: AT&T bond Invest $20,000 @ 11% = $2,200 interest. Pay 40% tax, so after-tax
income = $2,200(1 − T) = $2,200(0.6) = $1,320. After-tax rate of return = $1,320/$20,000
= 6.6%. AT&T preferred stock After-tax yield = 9% − Taxes = 9% − 0.3(9%)(0.4) = 9% −
1.08% = 7.92%. Therefore, invest in the Florida muni bonds which yield 8% after taxes.
Note: this problem can be made harder by asking for the tax rate that would cause the
company to prefer the AT&T bonds or the preferred stock.
POINTS: 1
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33. A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to
maturity. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax
rate of return to an investor in the 28 percent tax bracket?
a. 12.50%
b. 17.50%
c. 7.00%
d. 14.00%
e. 9.00%
ANSWER: a
RATIONALE: Before-tax return(1 − T) = 9%
Before-tax return(0.72) = 9%
Before-tax return = 9%/0.72 = 12.50%.
POINTS: 1
34. Your corporation has the following cash flows:

Interest paid 45,000
Dividends received 20,000
Dividends paid 50,000
If 70 percent of dividends received are excludable, and if the applicable tax table is as follows,
Taxable Income Rate
$0 −$50,000 15%
50,000 − 75,000 25
75,000 −100,000 34
100,000 −335,000 39
over $335,000 34
What is the corporation's tax liability?
a. $57,530
b. $65,350
c. $69,440
d. $88,350
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e. $100,280
ANSWER: c
RATIONALE: Corporate taxes
Interest paid (45,000)
Dividends received (taxable) 6,000*
Taxable income $221,000
*$20,000(0.30) = $6,000.
Taxes: $50,000(0.15)
$ 7,500 =
$25,000(0.25)
6,250 =
$25,000(0.34)
8,500 =
$121,000(0.39)
47,190 =
$69,440
Note: A corporate tax table and an individual tax rate table for 2014 are necessary to
solve the following problem. Our answers are based on 2014 tax rates.
POINTS: 1
TOPICS: Corporate Taxes
35. In 2014, Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name. They
were thinking of incorporating if that would lower their total tax liability. The Koehlers expected the company to earn
$100,000 before taxes next year. They planned to take out salaries of $45,000, and to reinvest the rest in the business.
Their personal deductions total $8,150 and they will file a joint return for their personal income. (1) What is their
expected total tax liability as a proprietorship? (2) As a corporation? (3) Based on current taxes, should they incorporate?
a. $23,304.50; $14,675.00; Yes
b. $14,675.00; $13,427.50; Yes
c. $23,304.50; $13,427.50; Yes
d. $15,212.50; $23,450.00; No
e. $20,778.00; $23,450.00; No
ANSWER: b
RATIONALE: As a sole proprietorship:
Taxable income
EBT $100,000
Personal deductions (8,150)
$ 91,850
Tax liability = $10,162.50 + (0.25)($91,850 − $73,800)
= $10,162.50 + $4,512.50 = $14,675.00
As a corporation:
Taxable income
Salary $45,000
Personal deductions (8,150)
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1) Personal taxable income $36,850
2) Company EBT $55,000
1) Personal tax liability = $1,700 + (0.15)($36,850 – $17,000) = $4,677.50
2) Corporate tax liability + $7,500 + 0.25($55,000 − $50,000) = $8,750
Total tax liability = $8,750 + $4,677.50 = $13,427.50
Yes, the Koehlers should incorporate.
POINTS: 1
DIFFICULTY: Hard
TOPICS: Business Organization and Taxes
36. Which of the following is not a limitation of the proprietorship form of business?
a. Unlimited personal liability
b. Difficulty raising capital
c. Double taxation
d. Difficulty in transferring ownership
e. Limited life
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
37. Which of the following is not a disadvantage of forming a business as a partnership?

a. Unlimited liability for the owners.
b. Limited life of the organization.
c. Difficulty of transferring ownership.
d. Difficulty in raising capital.
e. Business is taxed like an individual.
ANSWER: e
POINTS: 1
DIFFICULTY: Easy
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38. The corporate charter of a firm includes all of the following information except
a. the initial price of the stock to be issued.
b. the types of activities it will pursue.
c. the name of the proposed corporation.
d. the amount of capital stock.
e. the number of directors.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
TOPICS: Corporate Charter and Bylaws
39. ____ decisions are decisions about how much and what types of debt and equity should be used to finance the firm.
a. Capital structure
b. Capital budgeting
c. Dividend policy
d. Risk tolerance
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
TOPICS: Managerial Actions
40. ____ decisions are decisions as to what types of assets should be purchased to help generate cash flows.
c. Dividend policy
d. Repurchase
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
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41. ____ decisions are decisions as to how much of current earnings to pay out as dividends rather than to retain for
reinvestment in the firm.
c. Dividend policy
d. Investment
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
42. Managers can increase the value of a firm by making decisions that
a. increase the future cash flows of the firm.
b. increase the amount of time required to generate future cash flows.
c. increase the riskiness of future cash flows.
d. decrease the liquidity of the firm's securities.
ANSWER: a
POINTS: 1
DISC-FIN-05 - Financial Analysis and Cash Flows
43. Which of the following are important in determining the value of the firm?
a. Expected future cash flows.
b. Timing of future cash flows.
c. Riskiness of future cash flows.
d. All of the above.
ANSWER: a
POINTS: 1
DIFFICULTY: Easy
DISC-FIN-05 - Financial Analysis and Cash Flows
TOPICS: Value Maximization
Besley/Brigham
Chapter 06
44. Which of the following is not an advantage of a proprietorship?
a. Inexpensive to form
b. Not regulated heavily
c. Unlimited liability
d. Taxed like an individual
ANSWER: c
POINTS: 1
DIFFICULTY: Easy
TOPICS: Proprietorship
45. All of the following are advantages of a corporation except

a. unlimited life
b. limited liability
c. easy transfer of ownership
d. All of the above are advantages
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
TOPICS: Corporations
46. Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical
behavior does all of the following except
a. avoids fines and legal expenses.
b. reduces corporate taxes
c. attracts business from customers who appreciate and support ethical policies.
d. attracts and keeps employees of the highest caliber.
ANSWER: b
POINTS: 1
DIFFICULTY: Easy
TOPICS: Business Ethics
Besley/Brigham
Chapter 06
47. Managers of a firm can increase the value of a firm by
a. increasing the size of the cash inflows.
b. reducing the riskiness of the cash flows.
c. speeding up the timing of the cash flows.
d. all of the above will increase the value of the firm.
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
TOPICS: Wealth Maximization
48. Profit maximization does not always lead to wealth maximization because
a. it does not consider the riskiness of the cash flows.
b. it does not consider the timing of the cash flows.
c. it does not consider the size of the cash flows.
d. two of the above are correct.
e. all of the above are correct
ANSWER: d
POINTS: 1
DIFFICULTY: Easy
TOPICS: Profit Maximization
49. Deciding upon the form of organization for a business is an important financial decision with potentially significant
consequences for the future wealth of the owners.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
50. Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital and the
presence of unlimited personal liability for business debts.
Besley/Brigham
Chapter 06
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
51. The key value of limited liability is that it lowers the firm's risk thereby enhancing its value.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Limited Liability
52. A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order
to put a new management team into place and is usually motivated by low stock price.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Hostile Takeover
53. The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most
socially beneficial but cost increasing actions will have to be made mandatory by government.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
54. No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to
compete, even if those cost-increasing actions yield significant benefits to the firm.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
55. Four of the disadvantages of a partnership are (1) unlimited liability, (2) limited life of the organization, (3) difficulty
of transferring ownership, and (4) difficulty in attracting large amounts of capital.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Partnership
56. The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their
owners limited liability, whereas proprietorships do not.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
57. The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the
most wealth to each of the individual shareholders (owners) of the firm.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Goal of the Firm
58. If a firm has a single owner, we can say that the proper goal of a financial manager would be to maximize the firm's
earnings per share.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Goal of the Firm
59. One way to state the decision framework most useful for carrying out the firm's objective is that the financial
managers should seek that combination of assets, liabilities, and capital which will generate the largest expected projected
income over the relevant time horizon.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Objective of the Firm
60. A financial decision which results in an increase in net income is necessarily consistent with the firm's objective of
maximizing its stock price.
a. True
b. False
Besley/Brigham
Chapter 06
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
61. By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence
shareholders' wealth also will be maximized.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
62. If management is maximizing the firm's net income, this is necessarily identical to maximizing earnings per share and
stock price.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Profit Maximization
63. The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on and
the manner in which the projects are financed.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
TOPICS: Risk and Earnings
64. Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in
the best interests of stockholders.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
65. Performance shares are dollar bonuses awarded to managers on the basis of corporate performance.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
66. If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in the shareholders'
best interest.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Agency Problems
67. An agency problem exists between stockholders and managers. A second agency problem arises between stockholders
and creditors.
Besley/Brigham
Chapter 06
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Agency Problems
68. Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial markets.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Normal Profits
69. The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of
stock price also benefit society.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
70. If a firm's managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants,
develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors,
and the communities in which they operate.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
71. Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a
form of double taxation.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Dividend Income
72. The fact that a percentage of the interest income received by one corporation is excluded from taxable income has
encouraged firms to use more debt financing relative to equity financing.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Interest Income
73. If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible
expense, it would probably encourage companies to use more debt financing than they presently do, other things held
constant.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
TOPICS: Interest Expense
74. 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
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Interest Expense and Dividends
75. The fact that a proprietorship, as a business, pays no corporate income tax and that it is easily and inexpensively
formed are often cited as key advantages to that form of business.
a. True
b. False
ANSWER: True
POINTS: 1
76. In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder
wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken
over by groups who are more aligned with stockholder interests.
a. True
b. False
ANSWER: True
POINTS: 1
77. Multinational managerial finance requires that financial analyses consider the effects of changing currency values.
a. True
Besley/Brigham
Chapter 06
b. False
ANSWER: True
POINTS: 1
78. Legal and economic differences among countries, although important, do not pose significant problems for most
multinational corporations when they coordinate and control worldwide operations of subsidiaries.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
79. Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial
analysis.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Political Risk
80. When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk
while lower risk might result from international diversification.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
TOPICS: Risk and International Investment
81. Although firms have ethical responsibilities to their employees and customers, they do not have a parallel social
responsibility because socially responsible actions involve costs without corresponding benefits which are not wealth
maximizing.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
82. The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this is
due to the formal nature of the partnership agreement and the commitment of the partners' personal assets. As a result,
partnerships do not have difficulty raising large amounts of capital.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Partnership
83. 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
ANSWER: True
POINTS: 1
Besley/Brigham
Chapter 06
TOPICS: Interest Expense and Dividends
84. In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders
generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the
business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it
from external sources.
a. True
b. False
ANSWER: False
POINTS: 1
TOPICS: Capital Gains
85. Individual taxpayers can itemize allowed expenses if they have income of over $250,000, but they must take the
standard deduction if their income is below $250,000.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Taxes
86. The U.S. corporate tax rate is lower than most industrialized nations.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
TOPICS: Taxes
Besley/Brigham
Chapter 06
87. Most legal experts would recommend that partnership agreements should be written formal agreements filed with the
secretary of state in which the partnership does business.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
88. In a limited partnership, the liability of the limited partners generally is restricted to the amount of funds that they have
invested in the company but the general partners have unlimited liability.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
89. A firm's current value is related to its future growth opportunities, and corporations can attract funds more easily than
unincorporated businesses to take advantage of growth opportunities.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
90. Although over half of all corporations select the S corporation status when filing taxes, these firms generate only
around 25 percent of the total revenues provided by corporations.
a. True
b. False
ANSWER: True
Besley/Brigham
Chapter 06
POINTS: 1
DIFFICULTY: Easy
91. Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries.
a. True
b. False
ANSWER: False
POINTS: 1
92. Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock.
a. True
b. False
ANSWER: False
POINTS: 1
DIFFICULTY: Easy
93. Although corporations only represent 18% of the number of businesses they account for about 82% of the dollar value
of sales.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
Besley/Brigham
Chapter 06
94. In a limited liability partnership only the general partner can participate in the management of the business.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Limited Liability Partnership
95. The two major advantages of a limited liability company are flexibility of ownership structure and the ability to elect
to be taxed either as a corporation or as a partnership while maintaining limited liability for the owners.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy
TOPICS: Limited Liability Company
96. Stock price maximization should be the most important goal for the managers of a corporation.
a. True
b. False
ANSWER: True
POINTS: 1
DIFFICULTY: Easy

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Principles of Finance, 6e

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5. Taking poison pills and offering greenmail are

6. Which of the following statements is correct?

7. Which of the following statements is correct?

8. Current tax laws have which of the following effects?

9. Which of the following statements is correct?

10. A loss incurred by a corporation

12. Multinational managerial finance requires that

13. Which of the following statements is correct?

16. Which of the following statements is correct?

17. Which of the following statements is correct?

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18. Which of the following statements is correct?

19. Which of the following statements is correct?

20. Which of the following statements is correct?

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21. Which of the following statements is correct?

22. Which of the following statements is correct?

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23. Which of the following statements is correct?

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26. Which of the following statements is correct?

31. Your corporation has the following cash flows:

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34. Your corporation has the following cash flows:

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37. Which of the following is not a disadvantage of forming a business as a partnership?

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45. All of the following are advantages of a corporation except

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