Finance Exam 1 REVIEW HOMEWORK!!!WITH
COMPLETE SOLUTION NEW EDITION
Which of the following statements is CORRECT?
A. One of the disadvantages of incorpora ng your business is that you could become subject to
the firm's liabili es in the event of bankruptcy.
B. Proprietorships are subject to more regula ons than corpora ons.
C. In any partnership, every partner has the same rights, privileges, and liability exposure as
every other partner.
D. Corpora ons of all types are subject to the corporate income tax.
E. Proprietorships and partnerships generally have a tax advantage over corpora ons. - Ans E.
Proprietorships and partnerships generally have a tax advantage over corpora ons.
Sammy's Pizza is a sole proprietorship. Sammy used this form of business organiza on because:
A. It lets him avoid paying all taxes.
B. It is simple to set up.
C. It is required for small businesses.
D. It allows him to be a non-profit organiza on. - Ans B. It is simple to set up.
Which of the following ac ons would be most likely to reduce poten al conflicts between
stockholders and bondholders?
A. Including restric ve covenants in the company's bond indenture (which is the contract
between the company and its bondholders).
B. Compensa ng managers with more stock op ons and less cash income.
C. The passage of laws that make it harder for hos le takeovers to succeed.
D. A government regula on that banned the use of conver ble bonds.
,E. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more,
rather than debt that matures in less than one year. - Ans A. Including restric ve covenants in
the company's bond indenture (which is the contract between the company and its
bondholders).
One advantage of the corporate form of organiza on is that it avoids double taxa on
TRUE/FALSE - Ans False
Disadvantages
- Double taxa on
- Cost of setup and report filing
Money markets are markets for
A. Foreign currencies.
B. Consumer automobile loans.
C. Common stocks.
D. Long-term bonds.
E. Short-term debt securi es such as Treasury bills. - Ans E. Short-term debt securi es such as
Treasury bills.
Which of the following could explain why a business might choose to operate as a corpora on
rather than as a proprietorship or a partnership?
A. Corpora ons generally face fewer regula ons.
B. Less of a corpora on'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 incorpora on.
D. Corporate investors are exposed to unlimited liability.
E. Corpora ons generally find it easier to raise large amounts of capital. - Ans E. Corpora ons
generally find it easier to raise large amounts of capital.
, You recently sold 200 shares of Disney stock, and the transfer was made through a broker (a
broker is someone who specialize on helping you to buy or sell stocks). This is an example of:
A. A money market transac on.
B. A primary market transac on.
C. A secondary market transac on.
D. A deriva ve market transac on. - Ans C. A secondary market transac on
If Bearkat autos uses a lot of aluminum in their produc on and is worried about the price of
aluminum increasing substan ally in the next 6 -12 months, they can purchase futures or
op ons on aluminum which will give them a fixed price and reduce their risk. This is called:
A. Hedging (if you buy homeowner's insurance, you are hedging yourself against fires, break-ins,
or other unforeseen disasters)
B. Specula ng (if a speculator thinks that a stock is overpriced, they may sell short the stock and
wait for the price to decline, at which point it can be bought back for a profit.)
C. Capitalizing (cost or expense on the balance sheet for the purposes of delaying full
recogni on of the expense.)
D. Marginalizing (the focus on the cost or benefit of the next unit or individual, the cost to
produce one more widget or the profit earned by adding one more worker. Companies use
marginal analysis as a decision-making too - Ans A. Hedging
Bearkat Autos is organized as a corpora on. Unfortunately, a number of people crashed their
Bearkat cars due to faulty brakes. It was determined that the assembly plant did a poor job
tes ng and installing the brakes. The individuals who had wrecks sued Sammy Bearkat who
owns Bearkat Autos. Sammy lives in a nice three-bedroom house over by Elkins Lake and drives
a Porsche. Is it possible that Sammy will lose his house and his car due to this lawsuit?
A. Yes, Sammy will lose his house
B. No, Sammy will not lose his house - Ans B. No, Sammy will not lose his house
COMPLETE SOLUTION NEW EDITION
Which of the following statements is CORRECT?
A. One of the disadvantages of incorpora ng your business is that you could become subject to
the firm's liabili es in the event of bankruptcy.
B. Proprietorships are subject to more regula ons than corpora ons.
C. In any partnership, every partner has the same rights, privileges, and liability exposure as
every other partner.
D. Corpora ons of all types are subject to the corporate income tax.
E. Proprietorships and partnerships generally have a tax advantage over corpora ons. - Ans E.
Proprietorships and partnerships generally have a tax advantage over corpora ons.
Sammy's Pizza is a sole proprietorship. Sammy used this form of business organiza on because:
A. It lets him avoid paying all taxes.
B. It is simple to set up.
C. It is required for small businesses.
D. It allows him to be a non-profit organiza on. - Ans B. It is simple to set up.
Which of the following ac ons would be most likely to reduce poten al conflicts between
stockholders and bondholders?
A. Including restric ve covenants in the company's bond indenture (which is the contract
between the company and its bondholders).
B. Compensa ng managers with more stock op ons and less cash income.
C. The passage of laws that make it harder for hos le takeovers to succeed.
D. A government regula on that banned the use of conver ble bonds.
,E. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more,
rather than debt that matures in less than one year. - Ans A. Including restric ve covenants in
the company's bond indenture (which is the contract between the company and its
bondholders).
One advantage of the corporate form of organiza on is that it avoids double taxa on
TRUE/FALSE - Ans False
Disadvantages
- Double taxa on
- Cost of setup and report filing
Money markets are markets for
A. Foreign currencies.
B. Consumer automobile loans.
C. Common stocks.
D. Long-term bonds.
E. Short-term debt securi es such as Treasury bills. - Ans E. Short-term debt securi es such as
Treasury bills.
Which of the following could explain why a business might choose to operate as a corpora on
rather than as a proprietorship or a partnership?
A. Corpora ons generally face fewer regula ons.
B. Less of a corpora on'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 incorpora on.
D. Corporate investors are exposed to unlimited liability.
E. Corpora ons generally find it easier to raise large amounts of capital. - Ans E. Corpora ons
generally find it easier to raise large amounts of capital.
, You recently sold 200 shares of Disney stock, and the transfer was made through a broker (a
broker is someone who specialize on helping you to buy or sell stocks). This is an example of:
A. A money market transac on.
B. A primary market transac on.
C. A secondary market transac on.
D. A deriva ve market transac on. - Ans C. A secondary market transac on
If Bearkat autos uses a lot of aluminum in their produc on and is worried about the price of
aluminum increasing substan ally in the next 6 -12 months, they can purchase futures or
op ons on aluminum which will give them a fixed price and reduce their risk. This is called:
A. Hedging (if you buy homeowner's insurance, you are hedging yourself against fires, break-ins,
or other unforeseen disasters)
B. Specula ng (if a speculator thinks that a stock is overpriced, they may sell short the stock and
wait for the price to decline, at which point it can be bought back for a profit.)
C. Capitalizing (cost or expense on the balance sheet for the purposes of delaying full
recogni on of the expense.)
D. Marginalizing (the focus on the cost or benefit of the next unit or individual, the cost to
produce one more widget or the profit earned by adding one more worker. Companies use
marginal analysis as a decision-making too - Ans A. Hedging
Bearkat Autos is organized as a corpora on. Unfortunately, a number of people crashed their
Bearkat cars due to faulty brakes. It was determined that the assembly plant did a poor job
tes ng and installing the brakes. The individuals who had wrecks sued Sammy Bearkat who
owns Bearkat Autos. Sammy lives in a nice three-bedroom house over by Elkins Lake and drives
a Porsche. Is it possible that Sammy will lose his house and his car due to this lawsuit?
A. Yes, Sammy will lose his house
B. No, Sammy will not lose his house - Ans B. No, Sammy will not lose his house
