FINS1612 Chapter Notes - Chapter 4: Legal Personality, Sole Proprietorship, Corporate Law

71 views46 pages

ceruleantrout402

15 May 2018

School

Department

Course

Professor

For unlimited access to Textbook Notes, a Class+ subscription is required.

Chapter 04 - Test Bank

Multiple Choice Questions

A business organisation that is a separate legal entity, can buy property in its own name and can enter into

contracts with other entities is a:

sole proprietorship.

partnership.

special partnership.

corporation.

A publicly listed corporation:

has its shares listed on a formal exchange.

is a legal entity (as part of the Corporations law of a nation-state).

has to comply with the rules of the exchange where it is listed.

is all of the given choices.

A corporation:

has a widely dispersed ownership amongst its shareholders.

has its objectives and policies decided by a board of directors.

has an executive management group responsible for day-to-day management of the corporation.

is all of the given choices.

The actual owners of a company is/are the:

board of directors.

executive management group.

shareholders.

creditors.

The _______ is/are responsible for conducting the day-to-day financial and operational affairs of the

company.

board of directors

executive management group

shareholders

creditors

find more resources at oneclass.com

Unlock document

This preview shows pages 1-3 of the document.
Unlock all 46 pages and 3 million more documents.

Already have an account? Log in

The _______ is/are responsible for the objectives and policies of the company, but not its day-to-day

affairs.

board of directors

executive management group

shareholders

creditors

Which of the following forms of business organisation is characterised by limited liability?

Sole partnership

Partnership

General partnership

Corporation

If a sole proprietorship fails to meet its obligations to its creditors, then:

the creditors have a legal right to take possession of the personal assets of the owner(s).

the creditors are restricted in what rights they have over the personal assets of the owner(s).

the liability of the sole proprietorship is restricted to the value of the original issue price.

the rights of the creditors are restricted to the financial assets of the owner(s).

If a growing organisation wanted to set itself up so it had greater access to a wider range of capital, it would

become a:

sole proprietorship.

partnership.

general partnership.

listed corporation.

10.

The owners of _______ face unlimited liability.

sole proprietorships only

sole proprietorships and partnerships only

corporations only

partnerships and corporations only

11.

The liability of shareholders in ‘limited liability' companies means:

creditors of a company can call upon the shareholders in the case of company default to contribute an

amount based only on the current market price of the shares.

shareholders are only liable for any amount that is unpaid on the shares of a company.

in the event of company default, the creditors have no claim on the shareholders for any contribution.

shareholders do not have a right to participate directly in the day-to-day management of a company.

find more resources at oneclass.com

Unlock document

This preview shows pages 1-3 of the document.
Unlock all 46 pages and 3 million more documents.

Already have an account? Log in

12.

Because of their _____ liability, corporate stockholders are more interested in chances of _____.

limited; failure than success

limited; success than failure

unlimited; success than failure

unlimited; failure than success

13.

Which of the following about a corporation is incorrect?

The executive management group of a corporation is responsible to its board of directors.

Under corporation law the board of directors of a corporation must report to its shareholders.

The directors of a corporation have a legal responsibility to make sure the corporation acts in the

shareholders' best interests.

The shareholders of a publicly listed small corporation have the right to participate in the day-to-day

management of the business.

14.

When a no-liability company defaults on its loans with its creditors, this means the:

creditors have a legal claim against the directors only.

creditors have a legal claim against the CEO only.

creditors have a legal claim against the chairman of the company.

shareholders do not have to meet any remaining payment on shares.

15.

When the owners of a company hire full-time executives to be responsible for the day-to-day decisions, this

_____ the _____ problem.

lessens, shareholder-lender

lessens, managers-shareholders

brings on, managers-shareholders

brings on, shareholder-lender

16.

All of the following are advantages of a corporation except:

freely transferable ownership.

limited liability.

access to capital markets.

low management costs.

17.

Which of the following statements regarding companies is incorrect?

A company is a discrete legal entity.

Since shares represent ownership in a company, ownership cannot be readily transferred to new owners.

A company has a potentially unlimited life.

The shareholders' liability is limited.

find more resources at oneclass.com

Unlock document

This preview shows pages 1-3 of the document.
Unlock all 46 pages and 3 million more documents.

Already have an account? Log in

Document Summary

True / false questions: shareholders of a public corporation have the right to participate in the profits and receive annual dividends. True false: the shareholders of a public corporation do not participate directly in the day-to-day operation of a company but appoint the executive management group to do so at the shareholders" general meeting. True false: for a limited liability company the liability is restricted to the debt holders of the company and not the shareholders. True false: the corporate entity means that if a major shareholder is declared bankrupt it does not necessarily impact on the firm"s operations. True false: a growth maximisation strategy by management always results in wealth maximisation for the shareholders. True false: when a shareholder first sells their shares on a stock exchange this involves the secondary role of the share market. True false: a common measure of market liquidity is the ratio of turnover to market capitalisation.

Related Questions

) A bond issue sells for $950. The coupon rate is 7%, face value $1,000, the bonds mature in 20 years, and interest is paid semiannually. The tax rate is 35%. What is the after-tax cost of debt?

A) 3.18%

B) 4.86%

C) 8.29%

D) 7.49%

E) 3.74%

17) Which one of the following parties has ultimate control of a corporation?

A) Shareholders

B) Chairman of the Board

C) Board of Directors

D) CEO

E) None of the above

18) Arthur Corporation has 500,000 shares of common stock outstanding, its net income is $1,750,000, and its P/E is 8. What is the company's stock price?

A) $28.00

B) $39.00

C) $45.00

D) $58.00

E) $63.00

19) A stock has an expected return of 14.4% and a beta of 1.8. The expected return on the market is 11%. What is the implied risk free rate of return?

A) 2%

B) 2.47%

C) 3.87%

D) 4.76%

E) 6.75%

20) The Bag Company has an hour long meeting to decide that they are going to pursue a new project. They want to expand into the production of umbrellas and are going to begin expanding into this sector ASAP with factories, employees, marketing, etc. Which type of decision has just been made?

A) Capital Structure decision.

B) Capital Budgeting decision.

C) Net Working Capital decision.

D) Expansion decision.

E) Executive decision.

The answers are bold but i need to know how ou got these answers

1) The subarea of finance where you need to value uncertain cash flows occurring at different points in time is:

a. investments

b. corporate finance

c. capital markets

d. bank management.

e. all of the above subareas

2) Which of the following statements is correct?

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 sole proprietorships.

c. One disadvantage of operating a business as a sole 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 ace 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.

3) Which of the following statements is correct?

a. Corporations generally face fewer regulations than sole proprietorships.

b. Corporate shareholders are exposed to unlimited liability.

c. It is usually easier to transfer ownership in a corporation than in a partnership.

d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

e. Less of a corporation's income is generally subject to federal taxes.

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

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 stockâs intrinsic value.

e. Maximize the stock price on a specific target date.

5) Which of the following is correct?

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. 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.

6) The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to

a. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth.

b. Maximize the firmâs expected EPS, which must also maximize the firmâs price per share.

c. Minimize the firmâs risks because most stockholders dislike risk in turn, this will maximize the firmâs stock price.

d. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.

e. Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.

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

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 firmâs use of additional debt and constrain managers' actions.

e. Abolishing the Security and Exchange Commission.

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

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 firmâs debt agreements.

d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firmâs 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.

9) Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

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 tlta.t 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 firmâs stock.

10) Which of the following is correct?

a. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

b. Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

c. There is no good reason to expect a firmâs 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 titan stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.

11) You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?

a. This is an example of a direct transfer of capital

b. This is an example of a primary market transaction.

c. This is an example of an exchange of physical assets.

d. This is an example of a money market transaction.

e. This is an example of a derivative market transaction.

12) Which of the following statements is correct?

a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.

b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

c. Capital market instruments include both long-term debt and common stocks.

d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

13) Which of the following is a primary market transaction?

a. You sell 200 shares of IBM stock on the NYSE through your broker.

b. You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock.

c. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.

d. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.

e. IBM sells 2,000.000 shares of treasury stock to its employees when they exercise options that were granted in prior years.

14) Money Markets are markets for:

a. Foreign currencies.

b. Consumer automobile loans.

c. Common stocks.

d. Long-term bonds.

e. Short-term debt securities such as Treasury bills and commercial paper.

15) You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of:

a. A money market transaction.

b. A primary market transaction.

c. A secondary market transaction.

d. A futures market transaction.

e. An over-the-counter market transaction.

16) Which of the following statements is correct?

a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.

b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

c. Hedge funds have more in common with investment banks than with any other type of financial institution.

d. Hedge funds have more in common with commercial banks than with any other type of financial institution.

e. Hedge funds are not as highly regulated as most other types of financial institutions.

17) Which of the following factors statements is correct?

a. The New York Stock Exchange is an auction market, and it has a physical location.

b. Home mortgage loans are traded in the money market.

c. If an investor sells shares of stock through a broker, then it would be a primary market transaction.

d. Capital markets deal only with common stocks and other equity securities.

e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

18) Which of the following statements is correct?

a. The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.

b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.

c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.

d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed.

e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

19) The stock market is thought to be efficient because:

a. There are many brokers working the exchange floors

b. Computers can make very fast calculations these days

c. There are many stock analysts following the same stocks

d. Stocks are available and are very inexpensive

e. Speed trading is now an acceptable trading technique

20) If the stock is priced correctly but with better management the firm could be worth even more, then the firm would be:

a. A potential target for a stock investor

b. A potential target for a private equity firm

c. A potential target for a bond fund

d. A potential target for the SEC

e. A potential target for share repurchases

Jane Smith, CFA, has recently joined Zero Asset Management, Inc. (Zero) as a board member. Since Smith is also outside council for Zero, she is already very familiar with Zeroâs operations and expects to begin contributing good ideas right away. Zero is a publicly traded investment management firm that historically focused on mutual fund management. Although there is current market opportunity to add a new type of mutual fund, the board recently decided against adding the fund. Instead, the board decided to expand its business to include a hedge fund operation within the existing corporation. Bill Week, CEO of Zero, has publicly stated that he is willing to bet the companyâs future on hedge fund management. Week is the founder of Zero, as well as chairman of the board, and maintains a controlling interest in the company. Like the rest of Zero, the firmâs new hedge fund is quantitatively driven and index based. The fund has been set up in a separate office with new systems so that the analysts and managers can create a unique hedge fund culture. Trading and execution are the only operations that remain with Zero. The fund is run by one of Zeroâs most successful portfolio managers. Smith learns that although none of the board members sit on other companiesâ boards, most have at one point or another worked at Zero and so they are very familiar with Zeroâs operations. A board member has attempted to make the health insurance and retirement concerns of the board members an agenda item, without success to date. Smith eagerly anticipates the next board meeting as they are always in a luxurious setting. At the board meeting, Smith asks a number of questions about Zeroâs corporate gov- ernance system. The board becomes concerned by Smithâs questions and decides to hire an independent consultant to review their corporate governance responsibilities. The consultant starts his analysis by stating that a corporate governance systetem relies upon checks and bal- ances among managers, directors, and investors. Smith asks if Zero has the proper systems in place. The consultant says that he has looked at conflicts of interest and has one more area to review in order to verify that the board is meeting its major objectives. Concerned about the companyâs stock price, Smith asks the consultant what work he has done concerning Zeroâs corporate disclosures for investment professionals. The consultant indicates that he has reviewed Zeroâs regulatory filings for clear and complete information, as well as the com-panyâs policies regarding related party transactions.

9. All of the following indicate Zeroâs boardâs lack of independence except:

A. personal relationships.

B. service of the outside counsel as a board member.

C. lack of interlocking directorships.

10. Which of the following is the most effective action for the board to take to address their oversight responsibilities concerning the hedge fundâs proxy voting?

A. Establish corporate values and governance structure for the company.

B. Establish long-term strategic objectives that are met and fully complied with.

C. Perform adequate training so that employees are able to perform their duties.

11. Which of the following omissions best describes a corporate governance shortcoming of Zeroâs board of directors? The boardâs failure to:

A. address the potential conflicts of interest between managing the firmâs hedge fund and its mutual fund business.

B. meet the market opportunity for a new kind of mutual fund.

C. establish the hedge fund operation in a separate corporation.

12. Given that Zeroâs directors all previously worked at the company, which of the following would you recommend for a more effective system of corporate governance?

A. Ensure that assets are used efficiently and productively and in the best interests of investors and stakeholders.

B. Eliminate or mitigate conflicts of interest among stakeholders, particulularly between managers and shareholders

. C. Identify and measure accountabilities for the performance of the boardâs responsibilities.

13. Which of the following best describes the objectives of Zeroâs board that the consultant has not yet reviewed? The board should ensure:

A. that the assets of the company are used efficiently and productively and in the best interests of the investors and other stakeholders.

B. that material foreseeable risk factors are addressed and considered.

C. compliance with applicable laws and take into account the interest of stakeholders.

14. Which of the following is the most critical activity that an analyst can engage in to assess the quality of the corporate governance system at Zero, among those that the consultant did not review?

A. Look for vague references to off-balance-sheet or insider information.

B. Identify the responsiveness of the board to shareholder proxy votes.

C. Evaluate the quality and extent of financial information provided to investors.

rubyrhinoceros419

FINS1612 Chapter Notes - Chapter 4: Legal Personality, Sole Proprietorship, Corporate Law

Document Summary

Get access

Related Documents

FINS1612 Chapter Notes - Chapter 3: Market Participant, Cash Flow, Consumer Protection

FINS1612 Study Guide - Final Guide: Initial Public Offering, Market Capitalization, Investment Fund

FINS1612 Chapter 4: Viney8e_IRM_ch04

Related Questions