Chapter11—TheFirmandFinancialMarkets
TRUE/FALSE
1. Proprietorshipstendtoberelativelysmallfirmsbecauseindividualsoftenlackthefinancialcapitalnecessarytofinancelarge-scaleoperations.
ANS: T PTS: 1
2. Proprietorshipsarecommoninretailandserviceindustries.
ANS: T PTS: 1
3. Proprietorshipsfaceunlimitedliabilityforthedebtsofthefirm.
ANS: T PTS: 1
4. Onedisadvantageofproprietorshipisthatownersaresolelyresponsibleforthedebtsofthefirm.
ANS: T PTS: 1
5. Onedisadvantageofproprietorshipsisthatownersaresubjecttodoubletaxation.
ANS: F PTS: 1
6. Apartnershipallowstwoormorepersonstopoolresourcestooperatealargerbusinessthancanasoleproprietor.
ANS: T PTS: 1
7. Partnershipsarerelativelyeasytosetupandhavelimitedliability.
ANS: F PTS: 1
8. CorporationsaccountforthemajorityofallbusinessrevenuesintheUnitedStates.
ANS: T PTS: 1
9. ThemostcommonformofbusinessorganizationintheUnitedStatesisthecorporation.
ANS: F PTS: 1
10. Scorporationsfacelimitedliabilityandavoiddoubletaxation.
ANS: T PTS: 1
11. Oneadvantageofcorporationsisthatownersaresubjecttolimitedliabilityforthedebtsofthefirm.
ANS: T PTS: 1
12. Preferredstockholdershaveahigherprioritythanbondholdersandcommonstockholderswhendebtsofthefirmaresettled.
ANS: F PTS: 1
13. Corporationscanacquireadditionalfinancialresourcesbyissuingnewsharesofstockandreinvestingprofits.
ANS: T PTS: 1
14. Firmsaremorelikelytoissuenewsharesofstockandincreaseexpendituresonnewcapitalequipmentinperiodsofoptimism.
ANS: T PTS: 1
MULTIPLECHOICE
1. Soleproprietorshipsare
a. listedonmajorstockexchanges,suchastheNewYorkStockExchange. b. businessesownedbyonlyoneperson. c. theleastcommonformofbusinessorganizationintheUnitedStates. d. subjecttodoubletaxation.
ANS: B PTS: 1
2. Proprietorshipsare
a. subjecttodoubletaxation. b. subjecttolimitedliabilityforthedebtsofthecompany. c. themostcommonformofbusinessorganizationintheUnitedStates. d. typicallylargecompanieswithsignificantreservesoffinancialcapital.
ANS: C PTS: 1
3. Proprietorshipsarecommonin
a. retailindustries. b. serviceindustries. c. theelectricgeneratorindustry. d. bothaandb.
ANS: D PTS: 1
4. Limitedliabilityisacharacteristicof
a. proprietorships. b. partnerships. c. corporations. d. alloftheabove. e. bothaandb.
ANS: C PTS: 1
5. Responsibilityforthedebtsofasoleproprietorshipfallonthe
a. shareholders. b. partners. c. bondholders. d. owner.
ANS: D PTS: 1
6. Theadvantagesofaproprietorshipinclude
a. fewertaxesthanownersofcorporations. b. fewerlegalobligationsthancorporations. c. completecontrolofthebusiness. d. alloftheabove.
ANS: D PTS: 1
7. Thedisadvantagesofaproprietorshipinclude
a. completecontrolofthebusiness. b. unlimitedliabilityforthedebtsofthebusiness. c. ahighertaxratethanpaidbycorporations. d. fewerlegalobligationsthanacorporation.
ANS: B PTS: 1
8. Whichofthefollowingisnotcharacteristicofproprietorships?
a. Theyfaceunlimitedliability. b. TheygeneratemostprivatesectorbusinessrevenuesintheUnitedStates. c. TheyarethemostcommonformsofbusinessorganizationintheUnitedStates. d. Theirownershavecompletecontroloverthebusiness.
ANS: B PTS: 1
9. Oneadvantageofapartnershipisthat
a. itfaceslimitedliability. b. itfacesnolegalcomplicationswhenachangeinownershipoccurs. c. itisrelativelyeasytosetup. d. itfacesunlimitedliability.
ANS: C PTS: 1
10. Adisadvantageofapartnershipisthat
a. theownersofthefirmfacelimitedliability. b. ownersaresubjecttodoubletaxation. c. apartnershipisdifficulttosetup. d. theownersofthefirmfaceunlimitedliability.
ANS: D PTS: 1
11. Akeydifferencebetweenapartnershipandasoleproprietorshipisthat
a. partnershipspaycorporatetaxesandsoleproprietorshipsaretaxedaspersonalincome. b. partnershipsaresubjecttolimitedliabilityandsoleproprietorshipsaresubjecttounlimitedliability. c. partnershipshavemultipleowners,whilesoleproprietorshipsareownedbyasingleindividualorhousehold. d. partnershipsaresubjecttounlimitedliabilityandsoleproprietorshipsaresubjecttolimitedliability.
ANS: C PTS: 1
12. Akeydifferencebetweenapartnershipandacorporationisthat
a. corporationshavemultipleowners,whilepartnershipsdonot. b. partnershipsfaceunlimitedliability,whileownersofcorporationsfacelimitedliability. c. partnershipsfacelimitedliability,whileownersofcorporationsfaceunlimitedliability. d. thelegalstatusofapartnershipisrelativelyunaffectedbyachangeinownership,whilethelegalstatusofacorporationissignificantlyaffectedbyachangeinownership.
ANS: B PTS: 1
13. Akeydifferencebetweenaproprietorshipandacorporationisthat
a. proprietorshipsfacelimitedliability,whileownersofacorporationfaceunlimitedliability. b. ownersofproprietorshipsaresubjecttodoubletaxation,whileownersofcorporationsarenot. c. ownersofcorporationsaresubjecttodoubletaxation,whileownersofproprietorshipsarenot. d. ownershipandcontrolareusuallyseparatedinproprietorships,butnotincorporations.
ANS: C PTS: 1
14. Whichofthefollowingisnotcharacteristicofcorporations?
a. TheygeneratemostU.S.privatesectorbusinessrevenues. b. TheyarethemostcommonformofbusinessorganizationintheUnitedStates. c. Theyhavemanyshareholders. d. Theyaresubjecttodoubletaxation.
ANS: B PTS: 1
15. Acorporation’sstockholders
a. arepersonallyliableforallofthedebtsincurredbythecorporation. b. mayreceiveprofitsintheformofdividends. c. mayreceiveprofitsintheformofcapitalgainswhensellingsharesofstock. d. arecharacterizedbyalloftheabove. e. arecharacterizedbybandconly.
ANS: E PTS: 1
16. Whensomeseparationbetweenownershipandthemanagementofafirmisinplace,
a. managersmayhaveintereststhatdivergefromthatofowners. b. managersmaystriveforpowerratherthanprofitmaximization. c. atypicalshareholderhaslittlevoiceinthemakingofdecisions. d. alloftheabovemayoccur.
ANS: D PTS: 1
17. “Doubletaxation”meansthat
a. corporationspaytaxesonfirmprofitsattwicetheratethatproprietorshipsdo. b. shareholderincomeistaxedfirstascorporateprofitsandthenwhenpaidasdividendsorcapitalgains. c. afirm’sproductsaretaxedatboththewholesaleandretaillevel. d. corporationspaytaxesonprofitsandcustomerspaysalestaxeswhenafirm’sproductsarepurchased.
ANS: B PTS: 1
18. OwnersofstockinU.S.corporationsinclude
a. pensionfunds. b. insurancecompanies. c. mutualfunds. d. alloftheabove.
ANS: D PTS: 1
19. Preferredstockholders
a. assumegreaterrisksthandocommonstockholders. b. receivepaymentbeforecommonstockholdersintheeventofliquidation. c. receivepaymentbeforebondholdersintheeventofliquidation. d. arecharacterizedbyalloftheabove.
ANS: B PTS: 1
20. Ownershipofashareofstockinacorporationisdifferentfromownershipofacorporatebondinthat
a. theownerofashareofstockreceivespaymentbeforeabondholderintheeventofacorporation’sliquidation. b. abondholderreceivesafixedinterestpaymentplusalumpsumpaymentatmaturity,whereasastockholdermayreceiveincomeintheformofdividendsandcapitalgains. c. abondholderhasvotingrights,ashareholderdoesnot. d. abondholderbearsgreaterbusinessriskthandoesashareholder.
ANS: B PTS: 1
21. Corporationscanfinancetheirgrowth
a. byissuingbonds. b. byissuingnewsharesofstock. c. throughplowbacks. d. byalloftheabove. e. byeitheraorb.
ANS: D PTS: 1
22. Stockpricesareinfluencedby
a. concernoverinflation. b. theeconomicpoliciesofthegovernment. c. businessconditionsinforeigneconomies. d. expectationsaboutcorporateearnings. e. alloftheabove.
ANS: E PTS: 1
23. Therandomwalktheorysuggests
a. thatstockpricesfluctuateinhighlypredictableways. b. thatitisextremelydifficultwithoutinsideinformationtoconsistentlypickwinnersinthestockmarket. c. thatifstockpricefluctuationsarescrutinizedcarefully,onecanconsistentlypickwinnersinthestockmarket. d. thatinformationfilterssufficientlyslowlythatonecanconsistentlyprofitbytradingonnewlyreleasedinformation.
ANS: B PTS: 1
24. ArelativelyhighP/Eratio
a. mayindicatethatinvestorsexpectfutureearningstorise. b. mayindicatethatinvestorsexpectfutureearningstofall. c. indicatesthatastockisundervalued. d. indicatesthatthestockistradingatapricethatislowrelativetoearnings.
ANS: A PTS: 1
25. Astock’sP/Eratio
a. iscalculatedbydividingthe52-weekhighpricebytheearningspershareofthefirmoverthepastyear. b. iscalculatedbydividingthe52-weeklowpricebytheearningspershareoverthepastyear. c. indicatesthatthestockisovervaluediftheP/Eratioisrelativelylow. d. indicatesthatinvestorsmayexpectfutureearningstofalliftheP/Eratioisrelativelylow.
ANS: D PTS: 1
Usethefollowingstocktabletoanswerthefollowingquestion(s).
52-week PreviousDay High Low Company Symbol Div. Yield P/E High Low Close Change 60.50 36.42 GeneralElec. GE .64 1.5 33 44.10 43.20 43.50 -.10 63.22 23.45 Hewlett-Pack HWP .32 1.3 19 25.25 24.20 24.66 +.45
26. IfatypicalP/EratioforcompaniesthatsupplyservicesandproductscomparabletoGeneralElectricis20,then
a. purchasingGeneralElectricstockatthistimecannotpossiblybeawisedecision. b. GE’sP/Eratiosuggeststhatitsstockmaybeovervaluedatthistime. c. GE’sP/Eratiosuggeststhatitsstockmaybeundervaluedatthistime. d. GE’sP/Eratiosuggeststhatinvestorsmayexpectthestockpricetoriseinthenearfuture. e. eitherbordcouldbeindicatedbytheinformationinthetable.
ANS: E PTS: 1
27. IfatypicalP/EratioforcompaniesthatsupplyservicesandproductscomparabletoHewlett-Packardis40,then
a. purchasingHewlett-Packardstockatthistimecannotpossiblybeawisedecision. b. Hewlett-Packard’sP/Eratiosuggeststhatitsstockmaybeovervaluedatthistime. c. Hewlett-Packard’sP/Eratiosuggeststhatitsstockmaybeundervaluedatthistime. d. Hewlett-Packard’sP/Eratiosuggeststhatinvestorsmayexpectthestockpricetoriseinthenearfuture. e. eithercordisindicatedbytheinformationinthetable.
ANS: C PTS: 1
28. Basedontheinformationintheprecedingtable,whichofthefollowingistrue?
a. BothGeneralElectricandHewlett-Packardstocksincreasedinpricecomparedtothepreviousday’sclose. b. BothGeneralElectricandHewlett-Packardstocksdecreasedinpricecomparedtothepreviousday’sclose. c. GeneralElectricstockdecreasedinpricefromthepreviousday’sclose,whileHewlett-Packard’sstockincreasedinpricefromthepreviousday’sclose. d. BothGeneralElectricandHewlett-Packardstocksaretradingneartheir52-weekhighs.
ANS: C PTS: 1
PROBLEM
1. Whichofthefollowingcharacteristicsbelongtosoleproprietorships?Partnerships?Corporations?
a.Doubletaxation
b.Relativeeaseoftransferringownership
c.Unlimitedliability
d.Limitedliability
e.Sharedownershipamongmultipleindividuals
ANS:
a.Corporations
b.Corporations
c.Soleproprietorships,Partnerships
d.Corporations
e.Partnerships,Corporations
PTS: 1
2. Explainhowownersofacorporationaresubjecttodoubletaxation.
ANS:
Corporationsmustpaycorporateprofitstaxes.Afterthosetaxesarepaid,whenearningsarepaidoutasdividendsorkeptasretainedearnings,increasingthevalueofstocks,ownersmustalsopayindividualincometaxesonthedividendsorcapitalgains(whentheyselltheirstocks).
PTS: 1
3. Theseparationofownershipandmanagementincorporationscreateswhatisknownasaprincipal-agentproblem(becausemanagement’sinterestsmaydivergefromthatofowners).Suggestwaystoensurethatmanagementwillactinthebestinterestofshareholders.
ANS:
Thereareseveralwaystomitigatetheprincipal-agentproblem,whichincludemonitoringtheagentsmorecarefullyandaligningtheirinterestsmorecloselywithowners,bygivingperformance-basedincome,aswithstockoptions.
PTS: 1
4. Withwhichformofbusinessorganizationisiteasiesttoraiselargesumsoffinancialcapital?How?
ANS:
Corporationscanmorereadilyraiselargesumsofcapitalbyissuingnewsharesofstock,issuingbonds,orretainingcorporationprofitstofinanceeconomicgrowth.
PTS: 1
5. Whyarefirmslesslikelytoissuenewsharesofstockwhenconsumersorbusinessesarepessimisticabouteconomicconditions?
ANS:
Wheneconomicconditionsresultinconsumerand/orproducerpessimism,sharepricesarelikelytofall.Firmsmustissueamuchlargernumberofnewsharesofstocktoraiseaparticularsumofmoneyundertheseconditions.Additionally,wheneconomicconditionsarenotideal,firmsarelesslikelytoinvestinnewcapitalandthereforelessinneedoffinancing.
PTS: 1
6. Intheeventofacorporatebankruptcy,wouldyouratherbeabondholder,apreferredstockholder,orastockholderintheailingcorporation?Explain.
ANS:
Itwouldbebettertobeabondholderintheeventofcorporatebankruptcy,followedbyapreferredstockholder.Whenafirmgoesbankrupt,bondholdersarepaidbeforepreferredstockholders,whoarepaidbeforestockholders.
PTS: 1
7. Obtainthebusinesssectionofarecentnewspaper.LookupcurrentstockinformationforChevronundertheNYSElistings.Findthe52-weekhigh,52-weeklow,yield,price-earningsratio,dividend,closingprice,andthedollarchangefromthepreviousday’sclosingprice.
ANS:
Answerswillvary.
PTS: 1
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