Question Solutions to Homework 1, Chapters 1, 2 & 3

29 Jun Question Solutions to Homework 1, Chapters 1, 2 & 3

Question
Solutions to Homework 1, Chapters 1, 2 & 3

1 The division of profits and losses among the members of a partnership is formalized in the:

A. indemnity clause.

B. indenture contract.

C. statement of purpose.

D. partnership agreement.

E. group charter.

2. Agency costs refer to:

A. corporate income subject to double taxation.

B. the costs of any conflicts of interest between stockholders and management.

C. the total dividends paid to stockholders over the lifetime of a firm.

D. the costs that result from default and bankruptcy of a firm.

E. the total interest paid to creditors over the lifetime of the firm.

3. Working capital management includes decisions concerning which of the following?

I. accounts payable

II. accounts receivable

III. long-term debt

IV. inventory

A. I and II only

B. I and III only

C. II and IV only

D. I, II, and IV only

E. I, III, and IV only

4. Working capital management:

A. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.

B. ensures that long-term debt is acquired at the lowest possible cost.

C. ensures that dividends are paid to all stockholders on an annual basis.

D. balances the amount of company debt to the amount of available equity.

E. is concerned with managing day to day cash flow.

5. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

A. No potential financial loss

B. Liability for firm debts limited to the capital invested

C. Entitlement to a larger portion of the partnership’s income

D. Greater management responsibility

E. Ability to manage the day-to-day affairs of the business

6. A general partner:

A. cannot lose more than the amount of his/her equity investment.

B. has less legal liability than a limited partner.

C. faces double taxation whereas a limited partner does not.

D. has more management responsibility than a limited partner.

E. is the term applied only to corporations which invest in partnerships.

7. A partnership:

A. has less of an ability to raise capital than a proprietorship.

B. agreement defines whether the business income will be taxed like a partnership or a corporation.

C. allows for easy transfer of interest from one general partner to another.

D. is taxed the same as a corporation.

E. terminates at the death of any general partner.

8. Which of the following are disadvantages of a partnership?

I. limited life of the firm

II. personal liability for firm debt

III. greater ability to raise capital than a sole proprietorship

IV. lack of ability to transfer partnership interest

A. I and II only

B. III and IV only

C. II and III only

D. I, II, and IV only

E. I, III, and IV only

9. Which of the following are advantages of the corporate form of business ownership?

I. limited liability for firm debt

II. double taxation

III. ability to raise capital

IV. unlimited firm life

A. I and II only

B. III and IV only

C. I, II, and III only

D. II, III, and IV only

E. I, III, and IV only

10. Which one of the following statements is correct?

A. All types of business formations have limited lives.

B. Partnerships are the most complicated type of business to form.

C. Both sole proprietorships and partnerships are taxed in a similar fashion.

D. Both partnerships and corporations have limited liability for general partners and shareholders.

E. Both partnerships and corporations incur double taxation.

11. The owners of a limited liability company prefer:

A. being taxed like a corporation.

B. having liability exposure similar to that of a sole proprietor.

C. being taxed personally on all business income.

D. having liability exposure similar to that of a general partner.

E. being taxed like a corporation with liability like a partnership.

12. Which type of business organization has all the respective rights and privileges of a legal person?

A. Sole proprietorship

B. Corporation

C. General partnership

D. Limited partnership

E. Limited liability company

13. Which one of the following actions by a financial manager creates an agency problem?

A. Increasing current costs in order to increase the market value of the stockholders’ equity

B. Agreeing to expand the company at the expense of stockholders’ value

C. Refusing to lower selling prices if doing so will reduce the net profits

D. Agreeing to pay bonuses based on the book value of the company stock

E. Refusing to borrow money when doing so will create losses for the firm

14. Which of the following help convince managers to work in the best interest of the stockholders?

I. compensation based on the value of the stock

II. stock option plans

III. threat of a proxy fight

IV. threat of conversion to a partnership

A. I and II only