B) False
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A) Corporations are taxed more favorably than sole proprietorships.
B) Corporations have unlimited liability.
C) Because of their size, large corporations face fewer regulations than smaller corporations and sole proprietorships.
D) Reducing the threat of corporate takeover increases the likelihood that managers will act in shareholders' interests.
E) Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.
G) A) and C)
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A) A good goal for a firm's management is the maximization of expected EPS.
B) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
D) Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) Firms in highly competitive industries are more likely to consciously exercise "social responsibility" than are firms in oligopolistic industries.
G) A) and E)
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B) False
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A) One disadvantage of organizing a business as a corporation rather than a partnership is that the equity investors in a corporation are exposed to unlimited liability.
B) Using restrictive covenants in debt agreements is an effective way to reduce conflicts between stockholders and managers.
C) Managers generally welcome hostile takeovers since the "raider" generally offers a price for the stock that is higher than the price before the takeover action started.
D) The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.
E) 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.
G) A) and E)
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A) If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
B) The more capital a firm is likely to require, the smaller the probability that it will be organized as a corporation.
C) It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
D) One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.
E) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
G) A) and E)
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A) Since in bankruptcy they must be paid in full before stockholders receive anything, corporate bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
B) Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor.
E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.
G) B) and C)
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B) False
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A) A hostile takeover is the main method of transferring ownership interest in a corporation.
B) A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.
C) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
D) Limited liability is an advantage of the corporate form of organization to its owners (stockholders) , but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.
E) Although the 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, i.e., bondholders can sue its managers if the firm defaults on its debt.
G) C) and D)
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A) In most corporations, the CFO ranks above the CEO.
B) By law in most states, the chairman of the board must also be the CEO.
C) The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
D) The CFO generally reports to the firm's chief accounting officer, who is normally the controller.
E) The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.
G) C) and D)
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A) Decrease the use of restrictive covenants in bond agreements.
B) Take actions that reduce the possibility of a hostile takeover.
C) Elect a board of directors that allows managers greater freedom of action.
D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.
G) A) and D)
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A) 20.0%
B) 20.4%
C) 20.8%
D) 21.3%
E) 21.7%
G) A) and D)
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B) False
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A) One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
B) Sole proprietorships are subject to more regulations than corporations.
C) In any partnership, epartner has the same rights, privileges, and liability exposure as eother partner.
D) Corporations of all types are subject to the corporate income tax.
E) Sole proprietorships and partnerships generally have a tax advantage over corporations.
G) B) and E)
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B) False
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A) $20,015
B) $20,424
C) $20,841
D) $21,266
E) $21,700
G) B) and D)
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A) One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
B) One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities.
C) One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
D) One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes.
E) One disadvantage of forming a corporation is that this makes it more difficult for the firm's investors to transfer their ownership interests.
G) C) and E)
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A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.
B) Relative to sole proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.
C) There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.
D) Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
E) Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
G) B) and E)
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B) False
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B) False
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