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Exam-type questions

Chapter 1

1.Which of the following statements is most correct?

a.One advantage of forming a corporation is that you have limited liability. *

b.Corporations face fewer regulations than sole proprietorships.

c.One disadvantage of being a sole proprietor is that you have to pay corporate taxes, even though you don’t realize the benefits of being a corporation.

d.Statements b and c are correct.

2.The primary goal of a publicly-owned firm interested in serving its stockholders should be to

a.Maximize expected total corporate profit.

b.Maximize expected EPS.

c.Minimize the chances of losses.

d.Maximize the stock price per share. *

3.Which of the following actions are likely to reduce agency conflicts between stockholders and managers?

a.Paying managers a large fixed salary.

b.Increasing the threat of corporate takeover.   *

c.Placing restrictive covenants in debt agreements.

d.All of the statements above are correct.

4.  Which of the following statements is most correct?

a.A good goal for a corporate manager is maximization of expected EPS.

b.Most business in the U.S. is conducted by corporations; corporations’ popularity results primarily from their favorable tax treatment.

c.A good example of an agency relationship is the one between stockholders and managers. *

d.Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not.

Chapter 4

5. All else being equal, which of the following will increase a company’s current ratio?

a.An increase in accounts receivable. *

b.An increase in accounts payable.

c.An increase in net fixed assets.

d.Statements a and b are correct.

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