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Corporate Finance A Focused Approach 4th edition by Ehrhardt - Test Bank
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Corporate Finance A Focused Approach 4th edition by Ehrhardt - Test Bank
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, CHAPTER 1AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL
ENVIRONMENT
Please see the preface for information on the AACSB letter indicators (F, M,
etc.) on the subject lines.
True/False
Easy:
(1.2) Firm organization F M Answer: b EASY
1. The form of organization for a business is not an important issue, as
this decision has very little effect on the income and wealth of the
firm's owners.
a. True
b. False
(1.2) Firm organization F M Answer: b EASY
2. The major advantage of a regular partnership or a corporation as a form
of business organization is the fact that both offer their owners
limited liability, whereas proprietorships do not.
a. True
b. False
(1.2) Partnership F M Answer: a EASY
3. There are three primary disadvantages of a regular partnership: (1)
unlimited liability, (2) limited life of the organization, and (3)
difficulty of transferring ownership. These combine to make it
difficult for partnerships to attract large amounts of capital and thus
to grow to a very large size.
a. True
b. False
(1.2) Proprietorship F M Answer: a EASY
4. Two disadvantages of a proprietorship are (1) the relative difficulty of
raising new capital and (2) the owner's unlimited personal liability for
the business' debts.
a. True
b. False
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
, (1.2) Limited liability F M Answer: a EASY
5. One key value of limited liability is that it lowers owners' risks and
thereby enhances a firm's value.
a. True
b. False
(1.3) Value maximization F M Answer: b EASY
6. If a firm's goal is to maximize its earnings per share, this is the best
way to maximize the price of the common stock and thus shareholders'
wealth.
a. True
b. False
(1.4) Financial intermediaries F M Answer: a EASY
7. If Firm A's business is to obtain savings from individuals and then
invest them in financial assets issued by other firms or individuals,
Firm A is a financial intermediary.
a. True
b. False
(1.8) Financial markets F H Answer: b EASY
8. If an individual investor buys or sells a currently outstanding stock
through a broker, this is a primary market transaction.
a. True
b. False
(1.8) Financial markets F H Answer: a EASY
9. Recently, Hale Corporation announced the sale of 2.5 million newly
issued shares of its stock at a price of $21 per share. Hale sold the
stock to an investment banker, who in turn sold it to individual and
institutional investors. This is a primary market transaction.
a. True
b. False
(1.11) Stock market transactions F H Answer: a EASY
10. One of the functions of NYSE specialists is to facilitate trading by
keeping an inventory of shares of the stocks in which they specialize,
buying when investors want to sell and selling when they want to buy.
They change the bid and ask prices of the securities so as to keep
supply and demand in balance.
a. True
b. False
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Page 2 True/False Chapter 1: Overview
, Medium:
(1.2) Partnership F M Answer: b MEDIUM
11. The disadvantages associated with a proprietorship are similar to those
under a partnership. One exception relates to the more formal nature of
the partnership agreement and the commitment of all partners' personal
assets. As a result, partnerships do not have difficulty raising large
amounts of capital.
a. True
b. False
(1.2) Proprietorship F M Answer: a MEDIUM
12. The facts that a proprietorship, as a business, pays no corporate income
tax, and that it is easily and inexpensively formed, are two key
advantages to that form of business.
a. True
b. False
Multiple Choice: Conceptual
Easy:
(1.2) Firm organization C M Answer: d EASY
13. Which of the following statements is CORRECT?
a. One of the disadvantages of incorporating a business is that the
owners then become subject to liabilities in the event the firm
goes bankrupt.
b. Sole proprietorships are subject to more regulations than
corporations.
c. In any type of partnership, every partner has the same rights,
privileges, and liability exposure as every other partner.
d. Sole proprietorships and partnerships generally have a tax
advantage over many corporations, especially large ones.
e. Corporations of all types are subject to the corporate income tax.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Chapter 1: Overview Conceptual Questions Page 3
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