Which of the following is the best measure of profit maximization

Question

1) Which of the following is the best measure of profit maximization goal?

A. risk of the investment

B. timing of the returns

C. retained earnings

D. earnings per share

2) The tax liability of a corporation with ordinary income of $105,000 is? ________.

Range of taxable income Marginal rate

 $ 0 to $  50,000 ?15%

50,000 to 75,000 25

75,000 to 100,000 34

100,000 to  335,000 39

335,000 to 10,000,000 34

10,000,000 to 15,000,000 35

A. $24,200

B. $23,950

C. $42,000

D. $35,700

3) The Sarbanesminus Oxley Act of 2002 resulted in? ________.

A. delayed disclosure of stock sales by corporate executives

B. toughened penalties against overcompensated executives

C. tightened audit regulations and controls

D. lenient penalties against executives who commit corporate fraud

4)Which of the following is an example of a firm’s stakeholder?

A. suppliers

B. media

C. Federal reserve

D. competitors

5) As the risk of a stock investment increases, investors’ ________.

A. return will increase

B. return will decrease

C. required rate of return will increase.

D. required rate of return will decrease

6) Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to? ________.

A. lower the cost of equity financing for corporations

B. encourage corporations to invest in each other

C. eliminate most of the potential tax liability from the dividends received by the second and any subsequent corporations

D. avoid double taxation on dividends

7) Government is typically a ________.

A. net demander of funds because it saves more than it borrows

B. net provider of funds because it borrows more than it saves

C. net provider of funds because it can print money at will

D. net demander of funds because it borrows more than it saves

8) Incentive plans usually tie management compensation to ________.

A. coupon payments

B. share price

C. inventory turnover

D. dividends

9) Which of the following is one of the positive benefits of an effective ethics program?

A. reduce potential litigation and judgment costs

B. making sure violations are penalized, while at the same time not subjecting the employee to publicity

C. gain the loyalty, commitment, and respect of the firm’s competitors

D. maintain and build competitor confidence

10) Corporate owners receive return? ________.

A. by realizing gains through increases in share price and cash dividends

B. through interest earnings and earnings per share

C. through capital appreciation and retained earnings

D. by realizing gains through increases in share price and interest earnings

11) Recently, some branches of Donut Shop, Inc., have dropped the practice of allowing employees to accept tips. Customers who once said, “Keep the change,” now have to get used to waiting for their nickels. Management even instituted a policy of requiring that the change be thrown out if a customer drives off without it. As a frequent customer who gets coffee and doughnuts for the office, you notice that the lines are longer and that more mistakes are being made in your order. Explain why tips could be viewed as similar to stock options and why the delays and incorrect orders could represent a case of agency costs. If tips are gone forever, how could Donut Shop reduce these agency costs?

Solution:

·         Agency costs – incurred by stockholders to ensure against dishonest acts and to give incentives to management

·         Banning tips reduced performance

·         Profit sharing plan

·         Unnecessary backlash

12) The key variables in the owner wealth maximization process are ________.

A. risk free rate and share price

B. market risk premium and risk

C. cash flows and risk

D. total assets and risk

13) Which of the following is true of sole proprietorships and  corporations?

A. Income from both forms of organizations are taxed only at the corporate level.

B. It is difficult to transfer ownership of corporations compared to that of sole proprietorships.

C. Both sole proprietorships and corporations are equally scrutinized and regulated by government bodies.

D. In sole  proprietorships, owners have unlimited  liability; whereas, in corporations, owners have limited liability.

14) A major weakness of a partnership is ________.

A. the double taxation of income

B. the difficulty in maintaining owners’ control

C. its high organizational costs

D. the difficulty in liquidating or transferring ownership

15) Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A? $100,000 in dividends in 2002. Corporation A must pay tax on ________.

A. $ 70,000 of capital gain

B. $ 70,000 of ordinary income

C.$ 30,000 of ordinary income

D. $100,000 of ordinary income

16) The conflict between the goals of a firm’s owners and the goals of its non owner managers is ________.

A. the agency problem

B. the window dressing

C. serious only when profits decline

D. incompatibility

17) Which of the following legal forms of organization is most expensive to organize?

A. limited partnership

B. sole proprietorships

C. partnerships

D. corporations

18) The  ________ has/have the ultimate responsibility in guiding corporate affairs and carrying out policies.

A. stockholders

B. creditors

C. board of directors

D. chief financial officer

19) Investment banks are institutions that ________.

A. are exempted from Securities and Exchange Commission regulations

B. are only limited to capital market activities

C. perform all activities of commercial banks and retail banks

D. engage in trading and market making activities