A) In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.
B) In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.
C) A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
D) Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
E) A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.
G) A) and E)
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B) False
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A) Corporations generally face fewer regulations than proprietorships.
B) Corporate shareholders are exposed to unlimited liability.
C) It is usually easier to transfer ownership in a corporation than in a partnership.
D) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
E) There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small.
G) B) and E)
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B) False
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A) One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.
B) Proprietorships are subject to more regulations than corporations.
C) In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
D) Corporations of all types are subject to the corporate income tax.
E) Proprietorships and partnerships generally have a tax advantage over corporations.
G) D) and E)
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B) False
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A) A corporation's short-run profits will almost always increase if the firm takes actions that the government has determined are in the best interests of the nation.
B) Firms and government agencies almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.
C) "Whistle blowers," because of the courage it takes to blow the whistle, are generally promoted more rapidly than other employees.
D) It is not useful for large corporations to develop a formal set of rules defining ethical and unethical behavior.
E) Although people's moral characters are probably developed before they are admitted to a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
G) None of the above
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A) One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
B) One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities.
C) One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
D) One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes.
E) One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.
G) A) and E)
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A) Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.
B) Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.
C) One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.
D) One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.
E) Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.
G) C) and D)
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A) In most corporations, the CFO ranks above the CEO.
B) By law in most states, the chairman of the board must also be the CEO.
C) The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
D) The CFO generally reports to the firm's chief accounting officer, who is normally the controller.
E) The CFO is responsible for raising capital and for making sure that capital expenditures are desirable, but he or she is not responsible for the validity of the financial statements, as the controller and the auditors have that responsibility.
G) B) and D)
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B) False
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B) False
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B) False
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B) False
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B) False
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A) Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
B) The efficiency of the U.S. economy would probably be increased if hostile takeovers were absolutely forbidden.
C) Hostile takeovers are most likely to occur when a firm's stock sells at a price above its intrinsic value because its management has been issuing overly optimistic statements about its likely future performance.
D) In general, it is more in bondholders' interests than stockholders' interests for a firm to shift its investment focus away from safe, stable investments and into risky investments, especially those that primarily involve research and development.
E) Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.
G) B) and D)
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A) A good goal for a firm's management is the maximization of expected EPS.
B) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
D) Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.
G) C) and D)
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B) False
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A) Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
B) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
C) Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
D) Large corporations are taxed more favorably than proprietorships.
E) Corporate stockholders are exposed to unlimited liability.
G) C) and D)
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B) False
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