Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements is false?
1)
A)
Because a corporation is a separate legal entity, when it fails to repay its debts, the people
who lent to the firm, the debt holders are entitled to seize the assets of the corporation in
compensation for the default.
B)
If the corporation fails to satisfy debt holders’ claims, debt holders may lose control of the
firm.
C)
In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate
with debt holders.
D)
As long as the corporation can satisfy the claims of the debt holders, ownership remains in the
hands of the equity holders.
2)
Which of the following is NOT an advantage of a sole proprietorship?
2)
A)
Ease of setup
B)
Single taxation
C)
Limited liability
D)
No separation of ownership and control
3)
An investment is said to be liquid if the investment
3)
A)
has a large bid–ask spread.
B)
can easily be converted into cash.
C)
is traded on a stock exchange.
D)
has large day to day fluctuations in price.
4)
A limited liability company is essentially
4)
A)
a limited partnership without limited partners.
B)
just another name for a limited partnership.
C)
a limited partnership without a general partner.
D)
just another name for a corporation.
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5)
Which of the following organization forms has the most revenue?
5)
A)
Limited Partnership
B)
“C” Corporation
C)
“S” Corporation
D)
Limited Liability Company
6)
What type of company trades on an organized stock exchange?
6)
A)
an “S” corporation.
B)
a public company.
C)
a private company.
D)
a limited liability company.
7)
The distinguishing feature of a corporation is that
7)
A)
it is a legally defined, artificial being, separate from its owners.
B)
it spreads liability for its corporate obligations to all shareholders.
C)
their is no legal difference between the corporation and its owners.
D)
provides limited liability only to small shareholders.
Use the table for the question(s) below.
Consider the following two quotes for XYZ stock:
November 11th November 18th
Ask: 25.25 Ask: 26.00
Bid: 25.20 Bid: 25.93
8)
How much would you receive if you sold 200 shares of XYZ stock on November 11th?
8)
A)
$5186
B)
$5200
C)
$5050
D)
$5040
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9)
The person charged with running the corporation by instituting the rules and policies set by the
board of directors is called
9)
A)
the Company President.
B)
the Chief Financial Officer.
C)
the Chief Executive Officer.
D)
the Chief Operating Officer.
10)
Which of the following is / are an advantage of incorporation?
10)
A)
Unlimited life
B)
Limited liability
C)
Access to capital markets
D)
All of the above
11)
Which of the following statements regarding limited partnerships is true?
11)
A)
There is no limit on a limited partner’s liability.
B)
A limited partner is not liable until all the assets of the general partners have been exhausted.
C)
A general partner’s liability is limited by the amount of their investment.
D)
A limited partner’s liability is limited by the amount of their investment.
12)
In a corporation, the ultimate decisions regarding business matters are made by
12)
A)
debt holders.
B)
investors.
C)
the Board of Directors.
D)
shareholders.
13)
Which of the following are subject to double taxation?
13)
A)
Sole proprietorship
B)
Corporation
C)
Partnership
D)
A and B
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14)
The Principal–Agent Problem arises
14)
A)
because of the separation of ownership and control in a corporation.
B)
because managers have little incentive to work in the interest of shareholders when this
means working against their own self–interest.
C)
Both A and B
D)
None of the above
15)
Which of the following organization forms accounts for the greatest number of firms?
15)
A)
Limited Partnership
B)
Sole Proprietorship
C)
“C” Corporation
D)
“S” Corporation
16)
You own 100 shares of a “C” Corporation. The corporation earns $5.00 per share before taxes. Once
the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to
its shareholders in the form of a dividend. If the corporate tax rate is 40% and your personal tax
rate on (both dividend and non–dividend) income is 30%, then how much money is left for you
after all taxes have been paid?
16)
A)
$210
B)
$300
C)
$350
D)
$500
17)
If shareholders are unhappy with a CEO’s performance, they are most likely to
17)
A)
replace the CEO through a grassroots shareholder uprising.
B)
buy more shares in an effort to gain control of the firm.
C)
file a shareholder resolution.
D)
sell their shares.
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18)
Which of the following organization forms for a business does not avoid double taxation?
18)
A)
Limited Liability Company
B)
“S” Corporation
C)
“C” Corporation
D)
Limited Partnership
19)
Which of the following statements is most correct?
19)
A)
An advantage of a corporation is that it is subject to double taxation.
B)
Unlike a partnership, a disadvantage of a corporation is that has limited liability.
C)
Corporations face more regulations when compared to partnerships.
D)
An advantage to incorporation is that it allows for less regulation of the business.
20)
A ________, is when a rich individual or organization purchases a large fraction of the stock of a
poorly performing firm and in doing so gets enough votes to replace the board of directors and the
CEO.
20)
A)
hostile takeover
B)
shareholder proposal
C)
shareholder action
D)
leveraged buyout
21)
The largest stock market in the world is
21)
A)
the London Stock Exchange.
B)
the New York Stock Exchange.
C)
NASDAQ.
D)
the American Stock Exchange.
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Use the table for the question(s) below.
Consider the following two quotes for XYZ stock:
November 11th November 18th
Ask: 25.25 Ask: 26.00
Bid: 25.20 Bid: 25.93
22)
How much would you have to pay to purchase 100 shares of XYZ stock on November 18th?
22)
A)
$2520
B)
$2525
C)
$2593
D)
$2600
23)
You are a shareholder in a “C” corporation. This corporation earns $4 per share before taxes. After
it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend
is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and
your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations
earnings is closest to:
23)
A)
15%
B)
35%
C)
45%
D)
50%
24)
A sole proprietorship is owned by:
24)
A)
Two of more persons
B)
Shareholders
C)
One person
D)
Bankers
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25)
You own 100 shares of a Sub Chapter “S” Corporation. The corporation earns $5.00 per share before
taxes. Once the corporation has paid any corporate taxes that are due, it will distribute the rest of
its earnings to its shareholders in the form of a dividend. If the corporate tax rate is 40% and your
personal tax rate on (both dividend and non–dividend) income is 30%, then how much money is
left for you after all taxes have been paid?
25)
A)
$210
B)
$300
C)
$350
D)
$500
26)
Which of the following statements is false?
26)
A)
Bid prices exceed ask prices.
B)
On Nasdaq, stocks can and do have multiple market makers who compete with each other.
Each market maker must post bid and ask prices in the Nasdaq network where they can be
viewed by all participants.
C)
On the floor of the NYSE, market makers (known on the NYSE as specialists) match buyers
and sellers.
D)
Because customers always buy at the ask and sell at the bid, the bid–ask spread is a
transaction cost investors have to pay in order to trade.
ESSAY. Write your answer in the space provided or on a separate sheet of paper.
Use the table for the question(s) below.
Consider the following two quotes for XYZ stock:
November 11th November 18th
Ask: 25.25 Ask: 26.00
Bid: 25.20 Bid: 25.93
27)
What are your net proceeds if you purchased 2500 shares of XYZ stock on November 11th and then sold them a
week later on November 18th?
28)
Explain the benefits of incorporation.
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29)
Explain the main differences between the NYSE and NASDAQ stock markets.
30)
What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of
the shareholders rather than their own interest?
31)
Explain the difference between a sub–chapter “S” corporation and a sub–chapter “C” corporation.
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Answer Key
Testname: C1
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