FINAN303 Exam 1

Question 1

What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

Answer 1

Unlimited liability Correct
Limited life Correct
Difficulty in transferring ownership Correct
Hard to raise capital funds Correct

Question 2

What benefits are there to these types of business organization as opposed to the corporate form?

Answer 2

Simpler Correct
Less regulation Correct
The owners are also the managers Correct
Sometimes
Personal tax rates are better than corporate tax rates Correct

Question 3

What is the primary disadvantage of the corporate form of organization?

Answer 3

The double taxation to shareholders of distributed earnings and dividends

Question 4

What are some of the advantages of corporate organization?

Answer 4

Limited liability Correct
Ease of transferability Correct
Ability to raise capital Correct
Unlimited life

Question 5

What goal should always motivate the actions of the firm’s financial manager?

Answer 5

Current market value (share price) of the equity

Question 6

Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

Answer 6

In the corporate form of ownership, the shareholders Correct are the owners of the firm. The shareholders Correct elect the directors Correct of the corporation, who in turn appoint the firm’s management Correct . This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else’s best interests, rather than those of the shareholders Correct . If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

Question 7

Margie opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Margie own if she is personally liable for all the store’s debts?

Answer 7

sole proprietorship

Question 8

The potential conflict of interest between a firm’s owners and its managers is referred to as which type of conflict?

Answer 8

Agency

Question 9

If you accept a job as a domestic security analyst for a brokerage firm, you are most likely working in which one of the following financial areas?

Answer 9

investments

Question 10

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Answer 10

Corporate accounting and financial fraud