Test Bank all Chapter, Answer at the end of

Corporate Finance A Focused Approach, 7e Michael Ehrhardt, Eugene Brigham

(Test Bank all Chapter, Answer at the end of each Chapter)

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Indicate whether the statement is true or false.

• 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

• 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

• 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

• 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

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

• 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

• 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.

• 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 2 / 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. 3 / 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
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