Exam
Name___________________________________

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

1) 

A sole proprietorship is owned by 

1) 

_______ 

A) 

Bankers 

B) 

Two of more persons 

C) 

Shareholders 

D) 

One person 

2) 

Which of the following organization forms for a business does not avoid double taxation? 

2) 

_______ 

A) 

"S" Corporation 

B) 

Limited Partnership 

C) 

"C" Corporation 

D) 

Limited Liability Company 

3) 

Which of the following organization forms has the most revenue? 

3) 

_______ 

A) 

Limited Liability Company 

B) 

"S" Corporation 

C) 

Limited Partnership 

D) 

"C" Corporation 

4) 

Which of the following organization forms accounts for the greatest number of firms? 

4) 

_______ 

A) 

"S" Corporation 

B) 

Sole Proprietorship 

C) 

Limited Partnership 

D) 

"C" Corporation 

5) 

Which of the following is NOT an advantage of a sole proprietorship? 

5) 

_______ 

A) 

No separation of ownership and control 

B) 

Ease of setup 

C) 

Limited liability 

D) 

Single taxation 

6) 

Which of the following statements regarding limited partnerships is true? 

6) 

_______ 

A) 

A limited partner is not liable until all the assets of the general partners have been exhausted. 

B) 

There is no limit on a limited partner's liability. 

C) 

A limited partner's liability is limited by the amount of their investment. 

D) 

A general partner's liability is limited by the amount of their investment. 

7) 

Which of the following is / are an advantage of incorporation? 

7) 

_______ 

A) 

Unlimited life 

B) 

Access to capital markets 

C) 

Limited liability 

D) 

All of the above 

8) 

Which of the following statements is most correct? 

8) 

_______ 

A) 

Unlike a partnership, a disadvantage of a corporation is that has limited liability. 

B) 

An advantage to incorporation is that it allows for less regulation of the business. 

C) 

Corporations face more regulations when compared to partnerships. 

D) 

An advantage of a corporation is that it is subject to double taxation. 

9) 

A limited liability company is essentially 

9) 

_______ 

A) 

a limited partnership without a general partner. 

B) 

just another name for a limited partnership. 

C) 

a limited partnership without limited partners. 

D) 

just another name for a corporation. 

10) 

The distinguishing feature of a corporation is that 

10) 

______ 

A) 

it spreads liability for its corporate obligations to all shareholders. 

B) 

it is a legally defined, artificial being, separate from its owners. 

C) 

their is no legal difference between the corporation and its owners. 

D) 

provides limited liability only to small shareholders. 

11) 

Which of the following are subject to double taxation? 

11) 

______ 

A) 

Partnership 

B) 

Corporation 

C) 

Sole proprietorship 

D) 

A and B 

12) 

You own 100 shares of a "C" Corporation.  The corporation earns $5.00 per share before taxes.  Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend.  If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? 

12) 

______ 

A) 

$210 

B) 

$300 

C) 

$350 

D) 

$500 

13) 

You own 100 shares of a Sub Chapter "S" Corporation.  The corporation earns $5.00 per share before taxes.  Once the corporation has paid any corporate taxes that are due, it will distribute the rest of its earnings to its shareholders in the form of a dividend.  If the corporate tax rate is 40% and your personal tax rate on (both dividend and non-dividend) income is 30%, then how much money is left for you after all taxes have been paid? 

13) 

______ 

A) 

$210 

B) 

$300 

C) 

$350 

D) 

$500 

14) 

You are a shareholder in a "C" corporation.  This corporation earns $4 per share before taxes.  After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend.  The dividend is income to you, so you will then pay taxes on these earnings.  The corporate tax rate is 35% and your tax rate on dividend income is 15%.  The effective tax rate on your share of the corporations earnings is closest to 

14) 

______ 

A) 

15% 

B) 

35% 

C) 

45% 

D) 

50% 

ESSAY.  Write your answer in the space provided or on a separate sheet of paper. 

15) 

Explain the benefits of incorporation. 

16) 

Explain the difference between a sub-chapter "S" corporation and a sub-chapter "C" corporation. 

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

17) 

In a corporation, the ultimate decisions regarding business matters are made by 

17) 

______ 

A) 

the Board of Directors. 

B) 

shareholders. 

C) 

debt holders. 

D) 

investors. 

18) 

The person charged with running the corporation by instituting the rules and policies set by the board of directors is called 

18) 

______ 

A) 

the Chief Operating Officer. 

B) 

the Company President. 

C) 

the Chief Financial Officer. 

D) 

the Chief Executive Officer. 

19) 

The Principal-Agent Problem arises  

19) 

______ 

A) 

because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. 

B) 

because of the separation of ownership and control in a corporation. 

C) 

Both A and B 

D) 

None of the above 

20) 

If shareholders are unhappy with a CEO's performance, they are most likely to 

20) 

______ 

A) 

sell their shares. 

B) 

replace the CEO through a grassroots shareholder uprising. 

C) 

buy more shares in an effort to gain control of the firm. 

D) 

file a shareholder resolution. 

21) 

A ________, is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. 

21) 

______ 

A) 

leveraged buyout 

B) 

shareholder proposal 

C) 

hostile takeover 

D) 

shareholder action 

22) 

Which of the following statements is false? 

22) 

______ 

A) 

Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. 

B) 

In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. 

C) 

As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. 

D) 

If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm. 

ESSAY.  Write your answer in the space provided or on a separate sheet of paper. 

23) 

What strategies are available to shareholders to help ensure that managers are motivated to act in the interest of the shareholders rather than their own interest? 

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question. 

Use the table for the question(s) below.

Consider the following two quotes for XYZ stock

November 11th	November 18th	
Ask	25.25	Ask	26.00	
Bid	25.20	Bid	25.93	

24) 

How much would you have to pay to purchase 100 shares of XYZ stock on November 18th? 

24) 

______ 

A) 

$2520 

B) 

$2525 

C) 

$2593 

D) 

$2600 

25) 

How much would you receive if you sold 200 shares of XYZ stock on November 11th? 

25) 

______ 

A) 

$5050 

B) 

$5186 

C) 

$5040 

D) 

$5200 

26) 

The largest stock market in the world is 

26) 

______ 

A) 

the New York Stock Exchange. 

B) 

the London Stock Exchange. 

C) 

NASDAQ. 

D) 

the American Stock Exchange. 

27) 

An investment is said to be liquid if the investment 

27) 

______ 

A) 

has a large bid-ask spread. 

B) 

can easily be converted into cash. 

C) 

is traded on a stock exchange. 

D) 

has large day to day fluctuations in price. 

28) 

What type of company trades on an organized stock exchange? 

28) 

______ 

A) 

a limited liability company. 

B) 

a public company. 

C) 

a private company. 

D) 

an "S" corporation. 

29) 

Which of the following statements is false? 

29) 

______ 

A) 

On Nasdaq, stocks can and do have multiple market makers who compete with each other. Each market maker must post bid and ask prices in the Nasdaq network where they can be viewed by all participants. 

B) 

Because customers always buy at the ask and sell at the bid, the bid-ask spread is a transaction cost investors have to pay in order to trade. 

C) 

Bid prices exceed ask prices. 

D) 

On the floor of the NYSE, market makers (known on the NYSE as specialists) match buyers and sellers. 

ESSAY.  Write your answer in the space provided or on a separate sheet of paper. 

Use the table for the question(s) below.

Consider the following two quotes for XYZ stock

November 11th	November 18th	
Ask	25.25	Ask	26.00	
Bid	25.20	Bid	25.93	

30) 

What are your net proceeds if you purchased 2500 shares of XYZ stock on November 11th and then sold them a week later on November 18th? 

31) 

Explain the main differences between the NYSE and NASDAQ stock markets. 

 

1) 

D 

2) 

C 

3) 

D 

4) 

B 

5) 

C 

6) 

C 

7) 

D 

8) 

C 

9) 

A 

10) 

B 

11) 

B 

12) 

A 

13) 

C 

14) 

C 

15) 

1.	Limited liability
2.	Unlimited life
3.	Access to capital markets / availability of outside funding 

16) 

"C" Corporation	"S" Corporation	
Publicly traded stock	Privately traded stock	
Unlimited shareholders	No more than 75 shareholders	
Double taxation	Taxed like a partnership	

17) 

A 

18) 

D 

19) 

C 

20) 

A 

21) 

C 

22) 

D 

23) 

1.	The threat of a hostile takeover
2.	Shareholder initiatives
3.	Performance based compensation 

24) 

D 

25) 

C 

26) 

A 

27) 

B 

28) 

B 

29) 

C 

30) 

sell at bid price 11/18 = 2500 × $25.93 = $64,825
now subtract the price paid for the shares
buy at ask price 11/11 = 2500 × $25.25 = $63,125
so net proceeds = 64,825 - 63,125 = $1700 

31) 

Key points
NYSE has physical location—NASDAQ is an electronic market.
NYSE has one specialist  in each stock and his role is to match buyers and sellers.
NASDAQ has multiple market makers (dealers) in each stock who stand ready to trade on their own accounts.