FINA 3332 EXAM 1 COMPLETE STUDY GUIDE
AND CORPORATE FINANCE FUNDAMENTALS
REVIEW 2026
◉ What are the main disadvantages of organizing a firm as a
corporation?
Answer: 1. Income to a corporation is subject to double taxation,
once at the corporate level and again when received by the owners
in the form of a dividend.
2. The corporation is more complicated and more expensive to set
up than other business entities.
◉ Which organization forms give their owners limited liability? ****
Answer: Limited partnership for limited partners only.
Corporation.
◉ What is the most important difference between a corporation and
all other organizational forms?
Answer: 1. An important difference amount the types of corporate
organizational forms is the way they are taxed. Shareholders of a
corporation pay taxes twice.
,2. This system is sometimes referred to as double taxation
◉ What does the phrase limited liability mean in a corporate
context?
Answer: Owners' liability IS limited to the amount they invested in
the firm. Stockholders ARE NOT responsible for any encumbrances
of the firm; in particular, they CANNOT be required to pay back any
debts incurred by the firm.
◉ Explain the difference between an S and a C corporation.
Answer: The profits and losses of the S corporation are passed
directly to shareholders and are not subject to corporate taxes, while
the C corporation must first pay taxes on any profits before passing
the after-tax profits on to shareholders. In addition, the S
corporation can have no more than 100 shareholders, all of whom
must be US citizens or residents. The C corporation does not have
any such restrictions on its shareholders.
◉ What is the most important type of decision that the financial
manager makes?
Answer: The financial manager's most important job is to make the
firm's investment decisions.
, ◉ Why do all shareholders agree on the same goal for the financial
manager?
Answer: 1. All of the decisions by the financial manager are made
within the context of the overriding goal of financial management -
to maximize the wealth of the owners, the stockholders.
2. The stockholders have invested in the corporation, putting their
money at risk to become the owners of the corporation.
◉ Corporate managers work for the owners of the corporation.
Consequently, they should make decisions that are in the interests of
the owners,rather than in their own interests. What strategies are
available to shareholders to help ensure that managers are
motivated to act this way?
Answer: 1. Mount hostile takeovers.
2. Write contracts that ensure that the interests of the managers and
shareholders are closely aligned.
3. Ensure that employees are paid with company stock and/or stock
options.
4. Ensure that underperforming managers are fired.
AND CORPORATE FINANCE FUNDAMENTALS
REVIEW 2026
◉ What are the main disadvantages of organizing a firm as a
corporation?
Answer: 1. Income to a corporation is subject to double taxation,
once at the corporate level and again when received by the owners
in the form of a dividend.
2. The corporation is more complicated and more expensive to set
up than other business entities.
◉ Which organization forms give their owners limited liability? ****
Answer: Limited partnership for limited partners only.
Corporation.
◉ What is the most important difference between a corporation and
all other organizational forms?
Answer: 1. An important difference amount the types of corporate
organizational forms is the way they are taxed. Shareholders of a
corporation pay taxes twice.
,2. This system is sometimes referred to as double taxation
◉ What does the phrase limited liability mean in a corporate
context?
Answer: Owners' liability IS limited to the amount they invested in
the firm. Stockholders ARE NOT responsible for any encumbrances
of the firm; in particular, they CANNOT be required to pay back any
debts incurred by the firm.
◉ Explain the difference between an S and a C corporation.
Answer: The profits and losses of the S corporation are passed
directly to shareholders and are not subject to corporate taxes, while
the C corporation must first pay taxes on any profits before passing
the after-tax profits on to shareholders. In addition, the S
corporation can have no more than 100 shareholders, all of whom
must be US citizens or residents. The C corporation does not have
any such restrictions on its shareholders.
◉ What is the most important type of decision that the financial
manager makes?
Answer: The financial manager's most important job is to make the
firm's investment decisions.
, ◉ Why do all shareholders agree on the same goal for the financial
manager?
Answer: 1. All of the decisions by the financial manager are made
within the context of the overriding goal of financial management -
to maximize the wealth of the owners, the stockholders.
2. The stockholders have invested in the corporation, putting their
money at risk to become the owners of the corporation.
◉ Corporate managers work for the owners of the corporation.
Consequently, they should make decisions that are in the interests of
the owners,rather than in their own interests. What strategies are
available to shareholders to help ensure that managers are
motivated to act this way?
Answer: 1. Mount hostile takeovers.
2. Write contracts that ensure that the interests of the managers and
shareholders are closely aligned.
3. Ensure that employees are paid with company stock and/or stock
options.
4. Ensure that underperforming managers are fired.
