Fin 221 Fall 2010 Exam 1
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. Which of the following statements is CORRECT?
A. One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.
B. Corporations face fewer regulations than sole proprietorships.
C. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.
D. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
E. If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.
2. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?
A. Pay managers large cash salaries and give them no stock options.
B. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
C. Beef up the restrictive covenants in the firm's debt agreements.
D. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.
3. Which of the following items cannot be found on a firm’s balance sheet under current liabilities?
A. Accounts payable.
B. Short-term notes payable to the bank.
C. Accrued wages.
D. Cost of goods sold.
E. Accrued payroll taxes.
4. Analysts who follow Howe