A) $86,632
B) $88,400
C) $90,168
D) $91,971
E) $93,811
G) A) and E)
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B) False
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B) False
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A) If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby artificially increase profits because he or she was ordered to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
B) There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to outsiders. It is illegal to provide such information to federally regulated banks, but it is not illegal to provide it to stockholders because they are the owners of the firm.
C) The bankruptcy of Enron Corporation, and the fraud committed by some of its officers, was the focus of news stories, but it did not lead to any important changes in business practices.
D) If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the price of the stock to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
E) Ethical behavior is not influenced by training and auditing procedures. People are either ethical or they are not, and this is what determines ethical behavior in business.
G) A) and D)
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B) False
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B) False
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A) 20.4%
B) 20.8%
C) 21.2%
D) 21.7%
E) 22.1%
G) A) and B)
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A) One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than are partners.
B) Relative to sole proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.
C) There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it invests.
D) Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
E) Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns.
G) C) and D)
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A) Pay managers large cash salaries and give them no stock options.
B) Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.
C) Beef up the restrictive covenants in the firm's debt agreements.
D) Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm's stock.
E) For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.
G) C) and E)
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B) False
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A) 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.
B) Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
C) Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
D) Large corporations are taxed more favorably than sole proprietorships.
E) Corporate stockholders are exposed to unlimited liability.
G) A) and E)
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A) Corporations generally face fewer regulations.
B) Less of a corporation's income is generally subject to federal taxes.
C) Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.
D) Corporate investors are exposed to unlimited liability.
E) Corporations generally find it easier to raise large amounts of capital.
G) A) and D)
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B) False
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B) False
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A) Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth.
B) Maximize the firm's expected EPS, which must also maximize the firm's price per share.
C) Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price.
D) Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers.
E) Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value.
G) All of the above
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A) A good goal for a firm's management is the maximization of expected EPS.
B) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
D) Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.
G) A) and C)
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A) One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
B) One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities.
C) One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital.
D) One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes.
E) One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.
G) C) and D)
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A) Corporations face few regulations and more favorable tax treatment than do sole proprietorships and partnerships.
B) Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value compared to managers who do not face the threat of hostile takeovers.
C) Bond covenants are an effective way to resolve conflicts between shareholders and managers.
D) Because of their simplified organization, it is easier for sole proprietors and partnerships to raise large amounts of outside capital than it is for corporations.
E) One advantage to forming a corporation is that the owners of the firm have limited liability.
Multiple Choice: Problems
G) A) and B)
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B) False
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B) False
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