FIN 332 Chapter 1 Exam Questions With
Complete Answers
What is the most important difference between a corporation and all other organization
forms?
A. A corporation is a legal entity separate from its owners.
B. A corporation is the only legal entity that pays taxes.
C. A corporation is a legal entity managed by its owners.
D. A corporation is the only legal entity that can issue bonds to raise money. - ANSWER
A. A corporation is a legal entity separate from its owners.
What are the main advantages and disadvantages of organizing a firm as a corporation?
A. Disadvantages: Double taxation, separation of ownership and control.
B. Disadvantages: Double taxation, infinite life.
C. Advantages: Limited liability, liquidity, separation of ownership and control.
D. Advantages: Limited liability, liquidity, infinite life. - ANSWER A. Disadvantages:
Double taxation, separation of ownership and control.
D. Advantages: Limited liability, liquidity, infinite life.
You are the CEO of a company and you are considering entering into an agreement to
have your company buy another company. You think the price might be too high, but
you will be the CEO of the combined, much larger company. You know that when the
company gets bigger, your pay and prestige will increase. What is the nature of the
, agency conflict here and how is it related to ethical considerations?
A. There is an ethical dilemma when the CEO of a firm has incentives that are opposite to
those of the shareholders.
B. There is a legal issue when the CEO of a firm has incentives that are opposite to those
of the shareholders.
C. In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because the value of the
combined company will improve.
D. In this case, you (as the CEO) have an incentive to potentially overpay for another com
- ANSWER A. There is an ethical dilemma when the CEO of a firm has incentives that are
opposite to those of the shareholders.
D. In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because your pay and
prestige will improve.
Are hostile takeovers necessarily bad for firms or their investors? Explain.
A. Yes. They allow new investors to profit at the expense of employees and existing
investors. If existing investors and employees were better off being taken over, there
would be no reason for the takeover to be hostile.
B. No. They are a way to discipline managers who are not working in the interests of
shareholders.
C. Yes. They allow the entity taking over, the raider, to make a quick profit. This profit
must come from somewhere. The only place is existing shareholders and employees, so
hostile takeovers must be bad for existing shareholders.
Complete Answers
What is the most important difference between a corporation and all other organization
forms?
A. A corporation is a legal entity separate from its owners.
B. A corporation is the only legal entity that pays taxes.
C. A corporation is a legal entity managed by its owners.
D. A corporation is the only legal entity that can issue bonds to raise money. - ANSWER
A. A corporation is a legal entity separate from its owners.
What are the main advantages and disadvantages of organizing a firm as a corporation?
A. Disadvantages: Double taxation, separation of ownership and control.
B. Disadvantages: Double taxation, infinite life.
C. Advantages: Limited liability, liquidity, separation of ownership and control.
D. Advantages: Limited liability, liquidity, infinite life. - ANSWER A. Disadvantages:
Double taxation, separation of ownership and control.
D. Advantages: Limited liability, liquidity, infinite life.
You are the CEO of a company and you are considering entering into an agreement to
have your company buy another company. You think the price might be too high, but
you will be the CEO of the combined, much larger company. You know that when the
company gets bigger, your pay and prestige will increase. What is the nature of the
, agency conflict here and how is it related to ethical considerations?
A. There is an ethical dilemma when the CEO of a firm has incentives that are opposite to
those of the shareholders.
B. There is a legal issue when the CEO of a firm has incentives that are opposite to those
of the shareholders.
C. In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because the value of the
combined company will improve.
D. In this case, you (as the CEO) have an incentive to potentially overpay for another com
- ANSWER A. There is an ethical dilemma when the CEO of a firm has incentives that are
opposite to those of the shareholders.
D. In this case, you (as the CEO) have an incentive to potentially overpay for another
company (which would be damaging to your shareholders) because your pay and
prestige will improve.
Are hostile takeovers necessarily bad for firms or their investors? Explain.
A. Yes. They allow new investors to profit at the expense of employees and existing
investors. If existing investors and employees were better off being taken over, there
would be no reason for the takeover to be hostile.
B. No. They are a way to discipline managers who are not working in the interests of
shareholders.
C. Yes. They allow the entity taking over, the raider, to make a quick profit. This profit
must come from somewhere. The only place is existing shareholders and employees, so
hostile takeovers must be bad for existing shareholders.
