Exam 1: An Overview of Financial Management

A) Maximize its expected total corporate income.
B) Maximize its expected EPS.
C) Minimize the chances of losses.
D) Maximize the stock price per share over the long run, which is the stock's intrinsic value.
E) Maximize the stock price on a specific target date.

Correct Answer

verified

Show Answer

A) A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
B) Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.
D) It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior.
E) Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.

Correct Answer

verified

Show Answer

A) Pay managers large cash salaries and give them no stock options.
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
C) Beef up the restrictive covenants in the firm's debt agreements.
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

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 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) Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
D) Large corporations are taxed more favorably than proprietorships.
E) Corporate stockholders are exposed to unlimited liability.

Correct Answer

verified

Show Answer

A) If a lower level person in a firm does something illegal, like "cooking the books," to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
B) There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
C) If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
D) Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
E) Ethics is not an important consideration in business and in business schools.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) Corporations generally face fewer regulations.
B) Less of a corporation's income is generally subject to federal taxes.
C) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally find it easier to raise large amounts of capital.

Correct Answer

verified

Show Answer

A) One of the ways in which firms can mitigate or reduce potential conflicts between bondholders and stockholders is by increasing the amount of debt in the firm's capital structure.
B) The threat of takeover generally increases potential conflicts between stockholders and managers.
C) Managerial compensation plans cannot be used to reduce potential conflicts between stockholders and managers.
D) The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
E) The creation of the Securities and Exchange Commission (SEC) has eliminated conflicts between managers and stockholders.

Correct Answer

verified

Show Answer

A) Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
B) The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
C) The managers of established, stable companies sometimes attempt to get their state legislatures to remove rules that make it more difficult for raiders to succeed with hostile takeovers.
D) In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.
E) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

Correct Answer

verified

Show Answer

A) One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
B) Corporations face fewer regulations than proprietorships.
C) One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.
D) It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
E) If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

Correct Answer

verified

Show Answer

A) Relaxant's shareholders (the ex-partners) will now be exposed to less liability.
B) The company will probably be subject to fewer regulations and required disclosures.
C) Assuming the firm is profitable, none of its income will be subject to federal income taxes.
D) The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
E) The firm will find it more difficult to raise additional capital to support its growth.

Correct Answer

verified

Show Answer

A) Compensating managers with stock options.
B) Financing risky projects with additional debt.
C) The threat of hostile takeovers.
D) The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions.
E) Abolishing the Security and Exchange Commission.

Correct Answer

verified

Show Answer