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Powered by Cognero Page 1 Ch 01 An Overview of Financial Management and the Financial Environment Indicate whether the statement is true or false.

1.The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

• True
• False

2.The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

• True
• False

3.There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

• True
• False

4.Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

• True
• False

5.One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

• True
• False

6.The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.

• True
• False

7.The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

• True
• False

Indicate the answer choice that best completes the statement or answers the question.

8.Which of the following statements is CORRECT?

• One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the

event the firm goes bankrupt.

• Sole proprietorships are subject to more regulations than corporations.
• In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other

partner.

• Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large

Financial Management, Theory & Practice, 17e Eugene Brigham, Michael Ehrhardt (Test Bank All Chapters) Answers at the end of each chapter. 1 / 4

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ones.

• Corporations of all types are subject to the corporate income tax.

• Which of the following statements is CORRECT?
• One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.
• It is generally easier to transfer one's ownership interest in a partnership than in a corporation.
• One of the advantages of the corporate form of organization is that it avoids double taxation.
• One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting

rights, i.e., "one person, one vote."

• Corporations of all types are subject to the corporate income tax.

• Which of the following statements is CORRECT?
• It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship,

extensive legal documents are required.

• Corporations face fewer regulations than sole proprietorships.
• One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation,

at both the firm level and the owner level.

• One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a

regular partnership.

• If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her

investment in the business.

• Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular

corporation. Which of the following statements is CORRECT?

• Assuming Cheers is profitable, less of its income will be subject to federal income taxes.
• Cheers will now be subject to fewer regulations.
• Cheers' shareholders (the ex-partners) will now be exposed to less liability.
• Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their

ownership.

• Cheers will find it more difficult to raise additional capital.

• Which of the following statements is CORRECT?
• It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole

proprietorship.

• Corporate shareholders are exposed to unlimited liability.
• Corporations generally face fewer regulations than sole proprietorships.
• Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax

disadvantages of incorporation.

• Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise

identical proprietorship.

• Which of the following could explain why a business might choose to operate as a corporation rather than as a sole

proprietorship or a partnership?

• Corporations generally find it relatively difficult to raise large amounts of capital.
• Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership. 2 / 4

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• Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax

disadvantages of the corporate form of organization.

• Corporate investors are exposed to unlimited liability.
• Corporations generally face relatively few regulations.

• One drawback of switching from a partnership to the corporate form of organization is the following:
• It subjects the firm to additional regulations.
• It cannot affect the amount of the firm's operating income that goes to taxes.
• It makes it more difficult for the firm to raise additional capital.
• It makes the firm's investors subject to greater potential personal liabilities.
• It makes it more difficult for the firm's investors to transfer their ownership interests.

• Which of the following statements is CORRECT?
• The main method of transferring ownership interest in a corporation is by means of a hostile takeover.
• Two key advantages of the corporate form over other forms of business organization are unlimited liability

and limited life.

• A corporation is a legal entity that is generally created by a state; its life and existence is separate from the

lives of its individual owners and managers.

• Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations

have more trouble raising money in financial markets because of the complexity of this form of organization.

• Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect

the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

• Which of the following statements is CORRECT?
• In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's

investment in the business.

• Attracting large amounts of capital is more difficult for partnerships than for corporations because of such

factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

• A slow-growth company, with little need for new capital, would be more likely to organize as a corporation

than would a faster growing company.

• The limited partners in a limited partnership have voting control, while the general partner has operating

control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.

• A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes

must be paid by the partners rather than by the firm itself.

• Which of the following statements is CORRECT?
• Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and

federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.

• In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested

in the business.

• A fast-growth company would be more likely to set up as a partnership for its business organization than

would a slow-growth company.

• Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of 3 / 4

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impermanence of the organization, and difficulty in transferring ownership.

• A major disadvantage of a partnership relative to a corporation as a form of business organization is the high

cost and practical difficulty of its formation.

• Which of the following statements is CORRECT?
• Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it

is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.

• Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses

(in terms of number of businesses) are organized as corporations.

• Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less

favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.

• Large corporations are taxed more favorably than sole proprietorships.
• Corporate stockholders are exposed to unlimited liability.

• Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in

the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years.However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?

• Proprietorship, because of ease of entry.
• S corporation, to gain some tax advantages and also to obtain limited liability.
• Partnership, but only if she needs additional capital.
• Regular corporation, because of the limited liability.
• In this situation, the various forms of organization seem equally desirable.

• Which of the following statements is CORRECT?
• The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are

identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.

• The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to

ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.

• Companies must establish a home office, or domicile, in a particular state, and that state must be the one in

which most of their business (sales, manufacturing, and so forth) is conducted.

• Attorney fees are generally involved when a company develops its charter and bylaws, but since these

documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.

• The corporate charter is concerned with things like what business the company will engage in, whereas the

bylaws are concerned with things like procedures for electing the board of directors.

Indicate whether the statement is true or false.

• If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock
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