1. An Overview of Financial Management.
True / False
Note that there is an overlap between the T/F and multiple-choice questions, as some of the T/F statements are used in
multiple-choice questions.
Multiple Choice: True/False
1. In most corporations, the CFO ranks under the CEO.
a. True
b. False
ANSWER: True
2. The Chairman of the Board must also be the CEO.
a. True
b. False
ANSWER: False
3. 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.
a. True
b. False
ANSWER: True
4. Partnerships and proprietorships generally have a tax advantage over corporations.
a. True
b. False
ANSWER: True
5. A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal
liabilities in the event of bankruptcy than are investors in a typical partnership.
a. True
b. False
ANSWER: False
6. An advantage of the corporate form of organization is that corporations are generally less highly regulated than
proprietorships and partnerships.
a. True
b. False
ANSWER: False
7. Some partners in a partnership may have different rights, privileges, and responsibilities than other partners.
a. True
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1. An Overview of Financial Management.
b. False
ANSWER: True
8. One advantage of the corporate form of organization is that it avoids double taxation.
a. True
b. False
ANSWER: False
9. It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
a. True
b. False
ANSWER: True
10. One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt.
This problem would be avoided if you formed a corporation to operate the business.
a. True
b. False
ANSWER: True
11. If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders
will have to pay personal taxes on the firm's net income.
a. True
b. False
ANSWER: True
12. If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes.
This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
a. True
b. False
ANSWER: False
13. It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive
legal documents are required.
a. True
b. False
ANSWER: False
14. The more capital a firm is likely to require, the greater the probability that it will be organized as a corporation.
a. True
b. False
ANSWER: True
15. One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's
investors to transfer their ownership interests.
a. True
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1. An Overview of Financial Management.
b. False
ANSWER: False
16. Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are
not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than
partnership interests.
a. True
b. False
ANSWER: True
17. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the
long run, or the stock's "intrinsic value."
a. True
b. False
ANSWER: True
18. If management operates in a manner designed to maximize the firm's expected profits for the current year, this will
also maximize the stockholders' wealth as of the current year.
a. True
b. False
ANSWER: False
19. In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.
a. True
b. False
ANSWER: False
20. In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a
specific target date.
a. True
b. False
ANSWER: False
21. As a result of financial scandals occurring during the past decade, there has been a strong push to improve business
ethics.
a. True
b. False
ANSWER: True
22. There are many types of unethical business behavior. One example is where executives provide information that they
know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to
provide it to stockholders because they are the owners of the firm, not outsiders.
a. True
b. False
ANSWER: False
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