Question 1
1. Which of the following statements is CORRECT?
Answer
A hostile takeover is the main method of transferring ownership interest in a corporation.
Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives
of its individual owners and managers.
Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble
raising money in financial markets because of the complexity of this form of organization.
Although its stockholders 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, even if the default is the result of poor economic conditions.
Question 2
Which of the following statements is CORRECT?
Answer
The New York Stock Exchange is an auction market with a physical location.
Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.
If an investor sells shares of stock through a broker, then this would be a primary market transaction.
Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are
traded in the money market.
While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks
generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
Question 3
Which of the following factors would be most likely to lead to an increase in interest rates in the economy?
Answer
Households reduce their consumption and increase their savings.
The Federal Reserve decides to try to stimulate the economy.
There is a decrease in expected inflation.
The economy falls into a recession.
Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.
Question 4
Which of the following statements is CORRECT?
Answer
It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.
Corporate shareholders are exposed to unlimited liability.
Corporations generally face fewer regulations than sole proprietorships.
Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.
Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.
Question 5
Which of the following statements is CORRECT?
Answer
One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm
goes bankrupt.
Sole proprietorships are subject to more regulations than corporations.
In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
Corporations of all types are subject to the corporate income tax.
Question 6
Which of the following statements is CORRECT?
Answer
While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks
generally help companies raise capital from other parties.
A liquid security is a security whose value is derived from the price of some other "underlying" asset.
Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
Money markets are markets for long-term debt and common stocks.
The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.
Question 7
Which of the following statements is CORRECT?
Answer
If expected inflation increases, interest rates are likely to increase.
If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.
If companies have fewer good investment opportunities, interest rates are likely to increase.
Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy,
hence the riskiness of all debt securities.
Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.
Question 8
Money markets are markets for
Answer
Foreign stocks.
Consumer automobile loans
Short-term debt securities.
Long-term bonds
Question 9
Which of the following statements is CORRECT?
Answer
The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.
The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws.
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.
Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.
Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.
The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.
Question 10
Which of the following statements is CORRECT?
Answer
In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business.
Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
A major disadvantage of all partnerships relative to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
Question 11
Which of the following is a primary market transaction?
Answer
You sell 200 shares of IBM stock on the NYSE through your broker.
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
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.
One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the
transaction.
You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.
Question 12
Which of the following statements is CORRECT?
Answer
Capital market instruments include both long-term debt and common stocks.
An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday
gift.
The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks
electronically.
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.
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.
Question 13
With which of the following statements would most people in business agree?
Answer
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.
Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on
hiring and firing employees.
Although people's moral characters are probably developed before they get into a business school, it is still useful for business
schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves,
their firms, and the nation.
It is not useful for a large corporation to develop a formal set of rules defining ethical and unethical behavior. Such rules
generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.
"Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other
employees.
Question 14
Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation.
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 plans to have the firm pay out all of its income as dividends to her once it is well established.
Which of the legal forms of business organization would probably best suit her needs?
Answer
Proprietorship, because of ease of entry.
S corporation, to gain some tax advantages and also to obtain limited liability.
Partnership, but only if she needs additional capital.
Regular corporation, because of the limited liability.
In this situation, the various forms of organization seem equally desirable.
Question 15
Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation.
Which of the following statements is CORRECT?
Answer
Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
Cheers will now be subject to fewer regulations.
Cheers' shareholders (the ex-partners) will now be exposed to less liability.
Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.
Cheers will find it more difficult to raise additional capital.