Spring 2012 Finance 3130
Sample Exam 1A Questions for Review
The form of organization for a business is an important issue, as this decision has very significant effect on the income and wealth of the firm's owners. a. b. True False
2. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size. a. b. True False
If an individual investor buys or sells a currently owned stock through a broker, this is a primary market transaction. a. True b. False One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance. a. b. True False
Which of the following statements is CORRECT? a. b. c. d. e. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. Corporations face fewer regulations than sole proprietorships. 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. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. 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.
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? Proprietorship, because of ease of entry. S corporation, to gain some tax advantages and also to obtain limited liability. c. Partnership, but only if she needs additional capital. d. Regular corporation, because of the limited liability. e. In this situation, the various forms of organization seem equally desirable. Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on short term bond prices and interest rates? Prices and interest rates would both rise. Prices would rise and interest rates would decline. Prices and interest rates would both decline. There would be no changes in either prices or interest rates. Prices would decline and interest rates would rise. a. b.
a. b. c. d. e.
a. b. c.
Which of the following statements is CORRECT? 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. Capital market transactions only include preferred stock and common stock transactions. 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. If the Federal Reserve completes an “open market” operation in which they buy government bonds from the public, the money supply will go up, short...
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