26) The ________ has a role that focuses on budgeting, accounting, and tracking the
performance of a single business unit.
A) controller
B) treasurer
C) chief financial officer
D) director of risk management
27) When managers are trying to create value for shareholders, their primary focus should be on
earnings rather than cash flow.
1.3 Organization forms, taxation, and the principal-agent relationship.
1) Which of the following legal forms of organization is most expensive to organize?
A) sole proprietorships
B) partnerships
C) corporations
D) limited partnership
2) Which of the following legal forms of organization has the ease of dissolution?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
3) Under which of the following legal forms of organization is ownership readily transferable?
A) sole proprietorships
B) partnerships
C) limited partnerships
D) corporations
4) Which of the following forms of organizations is the easiest to form?
A) sole proprietorships
B) limited liability corporation
C) limited partnership
D) S-corporations
5) A major weakness of a partnership is ________.
A) the difficulty in maintaining owners’ control
B) the difficulty in liquidating or transferring ownership
C) the double taxation of income
D) its high organizational costs
6) Which of the following is a strength of a corporation?
A) low taxes
B) limited liability
C) low organization costs
D) less government regulation
7) Which of the following legal forms of organizations is characterized by unlimited liability?
A) sole proprietorship
B) limited partnership
C) corporation
D) C-corporation
8) Which of the following is TRUE of a partnership and a corporation?
A) In a corporation, income is taxed at the corporate level; whereas, in a partnership, income is
taxed twice.
B) In a partnership, income is taxed once at the individual level; whereas, in a corporation,
income is taxed twice.
C) Income from both forms of organizations are double-taxed.
D) In a partnership, income is exempted from tax up to $10 million; whereas, in a corporation,
income is taxed twice.
9) Which of the following is TRUE of sole proprietorships and corporations?
A) It is difficult to transfer ownership of corporations compared to that of sole proprietorships.
B) Income from both forms of organizations are taxed only at the corporate level.
C) Both sole proprietorships and corporations are equally scrutinized and regulated by
government bodies.
D) In sole proprietorships, owners have unlimited liability; whereas, in corporations, owners
have limited liability.
10) In partnerships, partners can readily transfer their wealth to other partners.
11) A sole proprietor has unlimited liability; his or her total investment in the business, but not
his or her personal assets, can be taken to satisfy creditors.
12) In a limited partnership, all partners’ liabilities are limited to their investment in the
partnership.
13) Under a progressive tax structure in which tax rates rise with income levels ________.
A) the marginal tax rate and the average tax rate are the same
B) the average tax rate is what really matters when an individual or business is making a
financial decision
C) the marginal tax rate is usually less than the average tax rate
D) the marginal tax rate is usually greater than the average tax rate
14) The term “double taxation” means that ________.
A) partnerships and sole proprietorships pay tax on the income that they earn, and then income
distributed from the business to the owner is taxed again at the individual level
B) the highest federal income tax rate faced by corporations is twice the highest tax rate faced by
individuals
C) corporations pay tax on the income they earn and then shareholders pay tax on income that
the corporation distributes to them
D) a corporation pays tax on the interest it pays to bondholders and then bondholders pay tax
again on the interest payments they receive from firms
15) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income
above $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the business
earns $50,000 in income this year. It’s marginal tax rate is ________.
A) 10%
B) 12%
C) 22%
D) greater than 22%
16) Corporate governance refers to ________.
A) the rules, processes, and laws by which companies are operated, controlled, and regulated
B) the fact that corporations heavily influence the actions of governments through their lobbying
efforts
C) the notion that corporations act like a democracy in the sense that every shareholder has an
equal vote on corporate decisions
D) the idea that a corporate CEO is really accountable to no one and must be constrained by
government action
17) Agency costs are ________.
A) costs that managers bear when they do not act in the interests of shareholders
B) costs that firms must pay to comply with the regulations imposed by federal government
agencies
C) costs that are exempt from taxation
D) costs that shareholders bear because managers pursue their own interests rather than acting in
the interests of shareholders
18) Firms are legally required to pay dividends to stockholders just as they must make interest
payments to lenders.
19) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income
above $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the business
earns $50,000 in income this year. Its average tax rate is closest to ________.
A) 22%
B) 14%
C) 10%
D) 17%
20) Dividends are periodic distributions of cash to the stockholders of a firm.
21) Suppose a certain business pays 10% tax on its first $10,000 in come, 12% tax on income
above $10,000 but below $40,000, and 22% tax on income above $40,000. Suppose the business
earns $50,000 in income this year. It tax liability is ________.
A) $6,800
B) $11,000
C) $9,800
D) $5,800
22) Under a flat tax structure, where the same tax rate applies to all income levels ________.
A) the marginal tax rate is greater than the average tax rate
B) the marginal tax rate is less than the average tax rate
C) the marginal tax rate is equal to the average tax rate
D) the marginal tax rate is irrelevant
23) In partnerships, owners have unlimited liability and may have to cover debts of other less
financially sound partners.
24) The board of directors is responsible for managing day-to-day operations and carrying out
the policies established by the chief executive officer.
25) Institutional investors are professional investors who work on behalf of individuals, business,
and government.
26) The major purpose of the Sarbanes-Oxley Act of 2002 was to place caps on the
compensation that could be paid to corporate executives.
27) The board of directors is typically responsible for ________.
A) approving strategic goals and plans
B) managing day-to-day operations
C) arranging finance for approved long-term investments
D) maintaining and controlling the firm’s daily cash balances
28) The responsibility for managing day-to-day operations and carrying out corporate policies
belongs to the ________.
A) board of directors
B) chief executive officer
C) stockholders
D) creditors
29) Which of the following is an example of agency cost?
A) costs incurred for setting up an agency
B) failure to make an investment that would make shareholders wealthier
C) payment of income tax
D) payment of interest
30) Which of the following is a routine way that boards try to align the interests of managers and
stockholders?
A) fire managers who are inefficient
B) remove management’s perquisites
C) tie management compensation to the performance of the company’s common stock price
D) tie management compensation to the level of dividend per share
31) The marginal tax rate paid on a firm’s ordinary income can be calculated by dividing its taxes
by its net income.
32) The average tax rate paid on the firm’s ordinary income can be calculated by dividing its
taxes by its taxable income.
33) The tax deductibility of various expenses such as general and administrative expenses
________.
A) increases their pretax cost
B) reduces their after-tax cost
C) has no effect on their after-tax cost
D) has an unpredictable effect on their after-tax cost
34) Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the
average tax rate for Jennings, Inc.?
A) 34 percent
B) 46 percent
C) 25 percent
D) 40 percent
35) The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of
$24,200 is ________.
A) 46 percent
B) 23 percent
C) 34 percent
D) 15 percent
36) If a corporation sells certain capital equipment for more than its initial purchase price, the
difference between the sale price and the purchase price is called a(n) ________.
A) ordinary gain
B) revenue gain
C) capital gain
D) abnormal gain
37) In general, most corporate capital gains are taxed at ________ tax rate.
A) the average
B) the regular corporate
C) the historic
D) a 30 percent
38) Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 6
percent, or preferred stock at an annual cost of 8 percent. If the corporation has a 21 percent tax
rate, the after-tax cost of each is ________.
A) debt: $60,000; preferred stock: $80,000
B) debt: $47,400; preferred stock: $63,200
C) debt: $47,400; preferred stock: $80,000
D) debt: $60,000; preferred stock: $63,200
39) The marginal tax rate represents the rate at which the next dollar of income is taxed.
40) All dividend income received by a corporation is exempted from taxation.
41) The tax liability of a sole proprietorship with ordinary income of $105,000 is closest to
________.
Range of taxable income Marginal rate
$ 0 to $ 9,525 10%
9,525 to 38,700 12
38,700 to 82,500 22
82,500 to 157,500 24
A) $25,200
B) $22,050
C) $32,090
D) $19,490
42) The tax liability of a sole proprietorship with ordinary income of $450,000 is closest to
________.
Range of taxable income Marginal rate
$ 0 to $ 9,525 10%
9,525 to 38,700 12
38,700 to 82,500 22
82,500 to 157,500 24
157,500 to 200,000 32
200,000 to 500,000 35
A) $157,500
B) $133,190
C) $94,500
D) $114,700
43) Prior to the Tax Cuts and Jobs Act, corporations faced a progressive tax rate schedule with
rates ranging from 15% to 39%. Under that old tax law, a firm with taxable income of $100
million would have owed taxes of $35 million. Under the Tax Cuts and Jobs Act, the corporate
tax rate is a flat 21%. For a firm that makes $100 million in taxable income, the size of the tax
reduction that the firm enjoys because of the new tax law is closest to ________.
A) $18 million
B) $21 million
C) $14 million
D) $35 million
44) Corporation A owns a small percentage of the stock of corporation B. Corporation B pays
corporation A $100,000 in dividends. Corporation A pays tax at a 21% rate and is allowed to
exclude from taxable income 50% of dividends received from other firms. The incremental taxes
that Corporation A must pay on the dividends received are ________.
A) $21,000
B) $10,500
C) $0
D) $1,050
45) Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected
to have earnings before interest and taxes of $100,000 during the coming year. In addition, Go
Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No
Debt will incur no interest expense because it does not use debt financing. Both firms are in the
21 percent tax bracket. Calculate the earnings after tax for both firms. Compare the difference in
after-tax earnings to the difference in interest expense. Can you reconcile that difference?
1.4 Developing skills for your career.
1) Communication skills are very important to financial and nonfinancial managers because
________.
A) they will be communicating with the investment community regularly
B) they work together in cross-functional teams and need to understand how members of their
teams think
C) they will write reports that are disclosed in the firm’s financial reports
D) they are all responsible for selling the firms goods and services to customers
2) Developing financial computing skills, such as expertise with software like Excel, is important
because ________.
A) everyone in the firm must be an Excel expert to have success
B) everyone in the firm needs to understand financial reports and models at some level, and
those are usually constructed and presented in Excel
C) there are no good alternatives to Excel
D) mistakes are more likely to occur when people do financial work by hand rather than using a
product like Excel