Fin534 Quiz 1

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CHAPER 1
1.Which of the following statements is CORRECT?
Answer

One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.
There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset investments a firm makes.
Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.
Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise capital. 2 points
Question 2
1.
Which of the following is a primary market transaction?
Answer
You sell 200 shares of IBM stock on the NYSE through your broker. IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker. 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. One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction. You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE. 2 points

Question 3
1.
Money markets are markets for Answer
Foreign stocks. Consumer automobile loans. U.S. stocks. Short-term debt securities. Long-term bonds. 2 points

Question 4
1.
Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs? Answer

Proprietorship, because of ease of entry.

S corporation, to gain some tax advantages and also to obtain limited liability.
Partnership, but only if she needs additional capital.

Regular corporation, because of the limited liability.

In this situation, the various forms of organization seem equally desirable. 2 points

Question 5
1.
With which of the following statements would most people in business agree? Answer

A corporation’s short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
Firms and government agencies almost...
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