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Chapter 05 - How to Form a Business
5-101
A few years back, your three U.S. born friends that live in the State of Wyoming inherited
a dude ranch that they plan to turn into a retirement haven for race horses. Peaceful
Pastures wants to open its doors by spring, 2011. After attending several small business
seminars, the three friends are certain they need limited liability. The high-risk, labor-
intensive business will require a sizeable investment including an air-conditioned barn,
several fenced-in pastures and loads of animal feed. You recently heard that one form of
business ownership requires owners to pay self-employment taxes on the entire amount of
earnings. You are fairly certain this is one tax loophole your friends would like to avoid.
You recommend:
A. Sole Proprietorship
B. General Partnership
C. Limited Liability Company
D. S-Corporation
Feedback: Unlike the Limited Liability Company, the S-Corporation form of business
ownership avoids paying self-employment taxes on total earnings and still provides limited
liability to business owners who are U.S. citizens.
277.
Chapter 05 - How to Form a Business
Double taxation is a phenomenon that occurs with corporations that pay dividends.
Which of the following scenarios is an accurate example of double taxation?
A. If Idle Time Gaming, Inc., distributes 20% of its net profit after taxes to its
stockholders; these funds will be taxed again, when each individual stockholder claims
his/her portion as earnings.
B. By law, Idle Time Gaming, Inc., is permitted to tax its executive employees twice on
their earnings, and then pass those funds on to its stockholders in the form of dividends.
C. Due to the fact that it is a corporation, the accountants of Idle Time Gaming, Inc. ,
calculate 35% of the company’s earnings, multiply it by 2, and then distribute that amount
to the federal government each year for taxes.
D. If Idle Time Gaming, Inc., fails to pay its taxes on time during any given year, it must
pay the current year and the delinquent year, in order to stay in business, similar to being
taxed two times.
Feedback: The corporation is a separate entity, and as such, it pays its own taxes on its
earnings. If there are earnings after taxes, the corporation may distribute these after-tax funds
to its stockholders (owners) in the form of dividends. However, the stockholders must then
claim the dividends as income on their individual tax returns. A portion of the firm’s earnings
(the dividend portion) may be taxed twice. This constitutes “double taxation.”
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279. In the Legal Briefcase box, "Virtual Companies,"
A. The box discusses the Vermont Teddy Bear Company and the difficulty the company
experienced when transitioning from an S-Corporation to a C-Corporation.
B. The box talks about a newly created LLC in Vermont called the Virtual Company,
where all official filing is electronic, and members contribute their skills through
electronic communication.
C. The box discusses how the state of Vermont wants to attract business, yet refuses to
permit the electronic submission of filing for any form of business ownership.
D. The box talks about the Vermont maple syrup industry and how due to the fact that it is
a seasonal business, it cannot exist virtually. The labor intensive business requires the
expertise of experienced tree tappers.
Feedback: The Virtual Company operates differently from traditional brick and mortar
operations. Rather than each member actively working in the business, this form of LLC
draws upon the expertise of members only when it is needed. The Vermont law permits the
members of virtual companies to identify themselves and their skills, and to contribute as they
choose. Members profit from the business in proportion to their contributions.
280.
Chapter 05 - How to Form a Business
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In the Legal Briefcase box, "Virtual Companies," the discussion is about:
A. A new form of LLC offered in the state of Vermont, where all members can operate
virtually.
B. The fact that it is difficult to ask firms to commit to one form of business ownership
since "global is now local".
C. A new law that says your firm can be a corporation in the U.S., an LLC in England,
and a sole proprietorship in China.
D. How states are competing for your business, particularly individuals who want to start
sole proprietorships.
Feedback: The Virtual Company operates differently from traditional bricks and mortar
operations. Rather than each member actively working in the business, this form of LLC
draws upon the expertise of members only when it is needed. Members profit from the
business in proportion to their contributions. All work, including meetings, is performed
electronically.
281.
Chapter 05 - How to Form a Business
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One reason that companies participate in mergers and acquisitions is:
A. To do the same thing as the competition because it makes for a highly leveraged
company.
B. To convert a sole proprietorship into a partnership.
C. To expand within their own field or enter new markets.
D. To take the first step toward a join venture.
282. In the late 1990s, firms found it easier to grow market share by:
A. Switching from the corporate form of ownership to the partnership form of ownership.
B. Merging with other companies or acquiring new companies.
C. Downsizing their operations.
D. Avoiding problems with antitrust regulations.
283. A ____________ is two firms combining to form one company.
A. joint tenancy
B. tenancy in common
C. merger
D. leveraged buyout
284.
Chapter 05 - How to Form a Business
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A(n) _________ occurs when one company buys the property and obligations of another
company.
A. cooperative
B. hostile takeover
C. leveraged buyout
D. acquisition
285. Three types of corporate mergers are:
A. Economic, geographic, and financial.
B. Vertical, horizontal, and conglomerate.
C. Flexible, differentiated, and conditional.
D. Explicit, implicit, and intrinsic.
286. A ______________ merger unites firms at different stages of related businesses.
A. vertical
B. horizontal
C. diagonal
D. conglomerate
287.
Chapter 05 - How to Form a Business
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When two companies in the same industry agree to become one firm, the result is called
a:
A. Vertical merger.
B. Joint venture.
C. Monopoly.
D. Horizontal merger.
288. When two companies in completely unrelated industries agree to become one firm, the
result is called a:
A. Vertical merger.
B. Joint venture.
C. Conglomerate merger.
D. Horizontal merger.
289. A conglomerate merger will:
A. Diversify business operations and investments.
B. Allow the firm to have a less dominant position in its market.
C. Enable the firm to enjoy a higher degree of specialization.
D. Give the firm a more secure access to needed materials and components and better
control over quality.
290.
Chapter 05 - How to Form a Business
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One result of taking a firm private is:
A. The firm's stock is no longer available for purchase on the open market.
B. Managers lose some control as the number of stockholders increases.
C. The public image of the firm will suffer.
D. The firm will have access to more capital.
291. An attempt by employees, management, or a group of investors to purchase an
organization primarily through borrowing is called a(n):
A. Golden parachute.
B. Arbitrage agreement.
C. Factor transaction.
D. Leveraged buyout.
292. If a group of stockholders or management obtain all the stock of a previously publicly
traded firm for themselves, this is referred to as:
A. Capitalizing.
B. Stock turning.
C. Turning the equity.
D. Taking the firm private.
293.
Chapter 05 - How to Form a Business
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The difference between a merger and an acquisition is:
A. A merger does not combine the assets and liabilities of firms, whereas an acquisition
combines assets and liabilities.
B. A merger combines the assets of the two firms, but each company continues to assume
its own liabilities, whereas an acquisition is a total buyout of one firm by another.
C. A merger is the joining of resources of two companies, whereas an acquisition is a
buyout of one firm by the other. The new company concerns itself with merging of
resources.
D. A merger is always something smaller tagging onto something larger, like a merging
lane onto an interstate, whereas an acquisition is two firms that are relatively the same size
agreeing to continue as one - more like two major interstates that come together and travel
as one for several miles.
Feedback: A merger is the result of two firms combining their resources and forming one
company. An acquisition is when one firm purchases the assets and obligations of another
firm.
294. When two firms who do not participate in the same industries, for example a software
company and a fast food restaurant company decide to merge, the result is called a
____________ merger.
A. vertical
B. horizontal
C. linear
D. conglomerate
Feedback: A conglomerate merger involves two firms from different industries.
295.
Chapter 05 - How to Form a Business
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A merger involving a commercial bakery and a grocery retailer would be an example of
a:
A. Vertical merger.
B. Horizontal merger.
C. Linear merger.
D. Conglomerate merger.
Feedback: A vertical merger involves two firms in different stages of related businesses. The
bakery would make bread and other items to be sold in the grocery.
296. A merger involving a software producer and a clothing manufacturer is an example of
a:
A. Vertical merger.
B. Horizontal merger.
C. Linear merger.
D. Conglomerate merger.
Feedback: A conglomerate merger is two firms from unrelated industries combining their
resources.
297.
Chapter 05 - How to Form a Business
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In a leveraged buyout, the managers of a firm, its employees, or other investors:
A. Move the company elsewhere and start over.
B. Obtain the assets of the company through bankruptcy proceedings.
C. Borrow funds to buy out the firm's stockholders.
D. Negotiate a merger with another firm to create a conglomerate.
Feedback: A leveraged buyout is an attempt by employees, management, or a group of
investors to use borrowed funds to buy out the existing owners of a firm.
298. When investors successfully take a firm private, the firm's stock is:
A. Converted into bonds.
B. Converted into cash.
C. No longer sold to investors on the open market.
D. Pledged as collateral to its bondholders.
Feedback: When investors take a firm private, they obtain all of the stock for themselves. The
stock is no longer traded on the open market.
299.
Chapter 05 - How to Form a Business
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Modern Screen Entertainment, Inc., recently bought Star Power Pictures, Inc., for an
undisclosed amount of money. It now owns all of Star Power Picture's properties and
obligations. This is an example of a(n):
A. Merger.
B. Combination.
C. Expropriation.
D. Acquisition.
Feedback: When one company buys out another firm's property and obligations, the result is
called an acquisition.
300. Continental Foods is considering a conglomerate merger with a company that makes
storage solutions. A likely reason is:
A. Expand its market share.
B. Develop spin-off companies.
C. Diversification.
D. Meet the requirements to convert to a limited liability company.
Feedback: A conglomerate merger is between firms in unrelated markets. One of the common
motivations for this type of merger is the desire to diversify business operations and
investments.
301.
Chapter 05 - How to Form a Business
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Trans Globe Airlines is in talks with Royal Blue Airlines, a financially troubled rival. The
firms believe the merger will create a stronger company that can offer travelers more
flights to a wider variety of destinations. This proposed merger is an example of a:
A. Conglomerate merger.
B. Leveraged buyout.
C. Horizontal merger.
D. Joint venture.
Feedback: A merger between firms in the same industry is called a horizontal merger.
302. Several years ago, Regis Corporation, a very large hair styling salon company
purchased 60 "Your Father's Mustache" salons. Although this was initially an acquisition,
the merging of these two businesses was a(n) ____________. Regis went on to purchase
several hair care product companies. Joining forces with hair care product companies
would represent a _____________.
A. conglomerate merger; horizontal merger
B. vertical merger; horizontal merger
C. horizontal merger; vertical merger
D. conglomerate merger; conglomerate merger
Feedback: A merger of two companies who compete in the same industry and for the same
market is a horizontal merger. A merger between two firms at different stages of related
businesses is a vertical merger.
303.
Chapter 05 - How to Form a Business
The strategy of investors who are attempting a leveraged buyout is to:
A. Shape up the company for quick resale.
B. Use debt to finance the buyout of the firm's stockholders and gain control of the firm
themselves.
C. Secure ownership of all of the existing stock in a company by issuing and selling large
amounts of new stock.
D. Use investment tax credits from the government to acquire all of the physical assets
owned by the firm.
Feedback: In a leveraged buyout, the objective of the investors is to use debt financing to gain
control of the firm's stock for themselves.
304. Foreign investment in U.S. companies continues to be strong. When Belgian-based,
In-Bev purchased the largest beer company in the U.S., Anheuser-Busch, this action
constituted a(n) _________________ with a negotiated selling price of $52 billion.
A. merger
B. aggregate
C. acquisition
D. unequivocal buy-in
Feedback: An outright buy-out or purchase is known as an acquisition. As noted in the
textbook, In-Bev bought the largest brewer of beer in the U.S., Anheuser-Busch. The
purchase included all of the company’s assets and all the companies it owned. This is known
as an acquisition.
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305. Adam is a major stockholder in Precision Transmission Services (PTS), a nationwide
network of transmission repair shops founded by his father. Currently, PTS stock is sold
on the open market, but Adam has talked to several relatives about his desire to get all of
the PTS stock back in his family's hands. Adam is interested in
_______________________________.
A. taking the firm private
B. a hostile takeover of the firm
C. converting the firm to a general partnership
D. forming a master limited partnership
Feedback: When a group of stockholders, such as a family, obtains all of the stock in a
company for themselves, they have taken the firm private.
306. Hidden Valley Communications, Inc., located in a remote area of Utah, made a special
device that was used in 4th generation cell phones. After three years of local operations,
the company that employed 4,000 people was planning to close its Utah operation and
move the assembly offshore. Under the direction of a financial services company that
financed the deal, the employees agreed to become owners of the company and continue
to operate the business. The business concept that describes this arrangement is:
A. IPO (initial public offering).
B. LBO (leveraged buyout).
C. EPO (equity public offering).
D. HM (horizontal merger).
Feedback: A leveraged buyout or LBO is an attempt by employees, management, or investors
to buy out the stockholders in a company. This action usually requires the buyers to borrow a
sizeable amount of funds.
307.
Chapter 05 - How to Form a Business
A ___________ is an arrangement whereby someone with proven idea for a business sells
the rights to use the business model, to sell a product or service to others in a given
territory.
A. conditional grant
B. franchise agreement
C. trade contract
D. extended ownership agreement
308. A(n) _____________ is a company that has a proven business model and is willing to
sell the rights to use the business model to others so that they can sell the same product or
service within a given territory.
A. intrapreneur
B. franchisee
C. limited partner
D. franchisor
309. A person who buys the right to use a business name and sell a product within a given
territory is called a:
A. Stockholder.
B. Franchisee.
C. Limited franchisor.
D. Venture capitalist.
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310.
Chapter 05 - How to Form a Business
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A franchise can be formed:
A. Only as a general partnership.
B. Only as a corporation.
C. As either a corporation or partnership, but not as a sole proprietorship.
D. As a corporation, partnership or sole proprietorship.
311. The most popular type of business for franchising is:
A. Consumer wholesale firms.
B. Restaurants.
C. Specialty steel manufacturing.
D. Medical services.
312. A ____________ is the share of profits or percentage of sales a franchisee pays to a
franchisor.
A. royalty
B. dividend
C. premium
D. co-pay
313.
Chapter 05 - How to Form a Business
Which of the following is an advantage of franchises?
A. Shared profit.
B. Management regulation.
C. Management and marketing assistance.
D. Coattail effects.
314. One reason franchises have become so popular is that this arrangement provides the
franchisee with:
A. A nationally recognized name and product.
B. A low cost way to start a business.
C. Limited liability.
D. The right to retain all profits earned by their franchise.
315. Global franchising offers:
A. Few opportunities for American investors.
B. Opportunities for large franchise systems, but not small ones.
C. Opportunities for both large and small franchises.
D. American firms the opportunity to market goods overseas without any need to adjust
for cultural differences.
316.
