1.Cheers Inc. operates as a partnership. Now the partners havedecided to convert the business into a corporation. Which of thefollowing statements is CORRECT?
a. Cheers? shareholders (theex-partners) will now be exposed to less liability.
b. Cheers will now be subjectto fewer regulations.
c. Assuming Cheers is profitable, of its income will be subject to federal income taxes.
d. Cheers? investors will be exposed to less liability,but they will find it more difficult to transfer their ownership.
e. Cheers will find it more difficult to raise additionalcapital.
2. Which of the following statements isCORRECT?
a. Corporations generally face fewer regulations than soleproprietor-ships.
b. Corporate shareholders are exposed to unlimitedliability.
c. It is usually easier to transfer ownership in acorporation than it is to transfer ownership in a soleproprietorship.
d. Corporate shareholders are exposed to unlimitedliability, but this factor is offset by the tax advantages ofincorporation.
e. There is a tax disadvantage to incorporation, and thereis no way any corporation can escape this disadvantage, even if itis very small.
3.The primary operating goal of apublicly-owned firm interested in serving its stockholders shouldbe to _____________.
a. Maximize its expected totalcorporate income.
b. Maximize its expectedEPS.
c. Minimize the chances of losses.
d. Maximize the stock price pershare over the long run, which is the stocks intrinsic value?
e. Maximize the stock price ona specific target date.
4. Which of the following actions would tendto reduce conflicts of interest between stockholders and bondholders?
a. Including restrictive covenants in the company?s bond indenture (which is thecontract between the company and its bondholders).
b. Compensating managers with more stock options and less cashincome.
c. The passage oflaws that make it harder for hostile takeovers tosucceed.
d. A governmentregulation that banned the use of convertible bonds.
e. Have the firmuse only long-term debt, e.g., debt that matures in 30 years ormore rather than in less than one year.
5. Which of the following mechanisms would bemost likely to help motivate managers to act in the best interest of shareholders?
a. Decrease the useof restrictive covenants in bond agreements.
b. Take actionsthat reduce the possibility of a hostile takeover.
c. Have the boardof directors allow managers greater freedom of action.
d. Increase theproportion of executive compensation that comes from stock optionsand reduce the proportion that is paid as cashsalaries.
e. Eliminate are quirement that members of the board of directors have a substantial investment in the firms stock?