business finance mcq all correct

A. a. It is generally more
expensive to form a proprietorship than a corporation because, with a
proprietorship, extensive legal documents are required.

B. b. Corporations face fewer
regulations than sole proprietorships.

C. c. One disadvantage of
operating a business as a sole proprietorship is that the firm is subject to
double taxation, at both the firm level and the owner level.

D. d. One advantage of forming a
corporation is that equity investors are usually exposed to less liability
than a regular partnership.

E. e. If a regular partnership
goes bankrupt, each partner is exposed to liabilities only up to the amount
of his or her investment in the business.

Question
2 of 20

A. a. Assuming Cheers is
profitable, less of its income will be subject to federal income taxes.

B. b. Cheers will now be subject
to fewer regulations.

C. c. Cheers’ shareholders (the
ex-partners) will now be exposed to less liability.

D. d. Cheers’ investors will be
exposed to less liability, but they will find it more difficult to transfer
their ownership.

E. e. Cheers will find it more
difficult to raise additional capital.

Question
3 of 20

A. a. It is usually easier to
transfer ownership in a corporation than it is to transfer ownership in a
sole proprietorship.

B. b. Corporate shareholders are
exposed to unlimited liability.

C. c. Corporations generally face
fewer regulations than sole proprietorships.

D. d. Corporate shareholders are
exposed to unlimited liability, and this factor may be compounded by the tax
advantage of incorporation.

E. e. There is a tax disadvantage
to incorporation, and there is no way any corporation can escape this
disadvantage, even if it is very small.

Question
4 of 20

A. a. Hedge funds are legal in
Europe and Asia, but they are not permitted to operate in the United States.

B. b. Hedge funds have more in
common with commercial banks than with any other type of financial institution.

C. c. Hedge funds have more in
common with investment banks than with any other type of financial
institution.

D. d. Hedge funds are not
permitted to operate in the United States, Europe, and Asia.

E. e. The justification for the “light”
regulation of hedge funds is that only “sophisticated” investors with high
net worth and high income are permitted to invest in these funds, and such
investors supposedly can do the necessary “due diligence” on their own rather
than have it done by the SEC or some other regulator.

Question
5 of 20

A. a. Foreign stocks.

B. b. Consumer automobile loans.

C. c. U.S. stocks.

D. d. Short-term debt securities.

E. e. Long-term bonds.

Question
6 of 20

A. a. You sell 200 shares of IBM
stock on the NYSE through your broker.

B. b. IBM issues 2,000,000 shares
of new stock and sells them to the public through an investment banker.

C. c. 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.

D. d. One financial institution
buys 200,000 shares of IBM stock from another institution. An investment
banker arranges the transaction.

E. e. You invest $10,000 in a
mutual fund, which then uses the money to buy $10,000 of IBM shares on the
NYSE.

Question
7 of 20

A. a. If Disney issues additional
shares of common stock through an investment banker, this would be a
secondary market transaction.

B. b. If you purchased 100 shares
of Disney stock from your brother-in-law, this would be an example of a
primary market transaction.

C. c. The IPO market is a subset
of the secondary market.

D. d. Only institutions, and not
individuals, can participate in derivative market transactions.

E. e. As they are generally
defined, money market transactions involve debt securities with maturities of
less than one year.

Question
8 of 20

1.0 Points

A. a. A futures market
transaction.

B. b. A primary market
transaction.

C. c. A secondary market
transaction.

D. d. A money market transaction.

E. e. An over-the-counter market
transaction.

Question
9 of 20

A. a. The New York Stock Exchange
is an auction market with a physical location.

B. b. Capital market transactions
involve only the purchase and sale of equity securities, i.e., common stocks.

C. c. If an investor sells shares
of stock through a broker, then this would be a primary market transaction.

D. d. Consumer automobile loans
are evidenced by legal documents called “promissory notes,” and these
individual notes are traded in the money market.

E. e. 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
10 of 20

A. a. Capital market instruments
include both long-term debt and common stocks.

B. b. An example of a primary
market transaction would be your uncle transferring 100 shares of Wal-Mart
stock to you as a birthday gift.

C. c. The NYSE does not exist as a
physical location; rather, it represents a loose collection of dealers who
trade stocks electronically.

D. d. 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.

E. e. While the two frequently
perform similar functions, investment banks generally specialize in lending
money, whereas commercial banks generally help companies raise blocks of
capital from investors.

Question
11 of 20

A. a. While the distinctions are
blurring, investment banks generally specialize in lending money, whereas
commercial banks generally help companies raise capital from other parties.

B. b. A liquid security is a
security whose value is derived from the price of some other “underlying”
asset.

C. c. Money market mutual funds
invest most of their money in a well-diversified portfolio of liquid common
stocks.

D. d. Money markets are markets
for long-term debt and common stocks.

E. e. The NYSE operates as an
auction market, whereas the Nasdaq is a dealer market.

A. a. It subjects the firm to
additional regulations.

B. b. It cannot affect the amount
of the firm’s operating income that goes to taxes.

C. c. It makes it more difficult
for the firm to raise additional capital.

D. d. It makes the firm’s
investors subject to greater potential personal liabilities.

E. e. It makes it more difficult
for the firm’s investors to transfer their ownership interests.

Question
13 of 20

A. a. A hostile takeover is the
main method of transferring ownership interest in a corporation.

B. b. Unlimited liability and
limited life are two key advantages of the corporate form over other forms of
business organization.

C. c. 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 mangers.

D. d. 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.

E. e. 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
14 of 20

A. a. In a regular partnership,
liability for other partners’ misdeeds is limited to the amount of a
particular partner’s investment in the business.

B. b. 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.

C. c. 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.

D. d. 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.

E. e. 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
15 of 20

A. a. Corporations are at a
disadvantage relative to partnerships because they have to file more reports
to state and federal agencies, including the Securities and Exchange
Administration, even if they are not publicly owned.

B. b. In a regular partnership, liability
for the firm’s debts is limited to the amount a particular partner has
invested in the business.

C. c. A fast-growth company would
be more likely to set up as a partnership for its business organization than
would a slow-growth company.

D. d. Partnerships have difficulty
attracting capital in part because of their unlimited liability, the lack of
permanence of the organization, and difficulty in transferring ownership.

E. e. A major disadvantage of a
partnership relative to a corporation as a form of business organization is
the high cost and practical difficulty of its formation.

Question
16 of 20

A. a. Most businesses (by number
and total dollar sales) are organized as proprietorships or partnerships
because it is easier to set up and operate in one of these forms rather than
as a corporation. However, if the business gets very large, it becomes
advantageous to convert to a corporation, primarily because corporations have
important tax advantages over proprietorships and partnerships.

B. b. Due to limited liability,
unlimited lives, and ease of ownership transfer, the vast majority of U.S.
businesses (in terms of number of businesses) are organized as corporations.

C. c. Due to legal considerations
related to ownership transfers and limited liability, most business (measured
by dollar sales) is conducted by corporations in spite of large corporations’
often less favorable tax treatment.

D. d. Large corporations are taxed
more favorably than sole proprietorships.

E. e. Corporate stockholders are
exposed to unlimited liability.

Question
17 of 20

A. a. Maximize the stock price per
share over the long run, which is the stock’s intrinsic value.

B. b. Maximize the firm’s expected
EPS.

C. c. Minimize the chances of
losses.

D. d. Maximize the firm’s expected
total income.

E. e. Maximize the stock price on
a specific target date.

Question
18 of 20

A. a. Households start saving a
larger percentage of their income.

B. b. The economy moves from a
boom to a recession.

C. c. The level of inflation
begins to decline.

D. d. Corporations step up their
expansion plans and thus increase their demand for capital.

E. e. The Federal Reserve uses
monetary policy in an attempt to stimulate the economy.

Question
19 of 20

A. a. If General Electric were to
issue new stock this year it would be considered a secondary market
transaction since the company already has stock outstanding.

B. b. Capital market transactions
only include preferred stock and common stock transactions.

C. c. The distinguishing feature
between spot markets versus futures markets transactions is the maturity of
the investments. That is, spot market transactions involve securities that
have maturities of less than one year, whereas futures markets transactions
involve securities with maturities greater than one year.

D. d. Both Nasdaq “dealers” and
NYSE “specialists” hold inventories of stocks.

E. e. An electronic communications
network (ENC) is a physical location exchange.

Question
20 of 20

Which of the following statements
is not correct?

A. a. When a corporation’s shares
are owned by a few individuals and are not traded on public markets, we say
that the firm is “closely, or privately, held.”

B. b. “Going public” establishes a
firm’s true intrinsic value, and it also insures that a highly liquid market
will always exist for the firm’s shares.

C. c. When stock in a closely held
corporation is offered to the public for the first time, the transaction is
called “going public,” and the market for such stock is called the primary
market.

D. d. Publicly owned companies
have shares owned by investors who are not associated with management, and
public companies must register with and report to a regulatory agency such as
the SEC.

E. e. It is possible for a firm to
go public and yet not raise any additional new capital at the time.