Fundamentals of Financial Management: Concise 11th Edition by Eugene F. Brigham test bank

 
a. 
True

 
b. 
False

 
ANSWER:  
True


 
30. If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
 
a. 
True

 
b. 
False

 
ANSWER:  
False


 
31. If someone deliberately understates costs and thereby increases profits, this can cause the stock price to rise above its intrinsic value. The stock price will probably fall in the future. Also, those who participated in the fraud can be prosecuted, and the firm itself can be penalized.
 
a. 
True

 
b. 
False

 
ANSWER:  
True


 
32. If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.
 
a. 
True

 
b. 
False

 
ANSWER:  
True


 
Multiple Choice: Conceptual
 
Please note that some of the answer choices, or answers that are very close, are used in different questions. This has caused us no difficulties, but please take this into account when you make up exams.
 

 
33. Which of the following statements is CORRECT?
 
a. 
One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.

 
b. 
Proprietorships are subject to more regulations than corporations.

 
c. 
In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

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

 
e. 
Proprietorships and partnerships generally have a tax advantage over corporations.

 
ANSWER:  
e


 
34. Which of the following statements is CORRECT?
 
a. 
One of the advantages of the corporate form of organization is that it avoids double taxation.

 
b. 
It is easier to transfer one's ownership interest in a partnership than in a corporation.

 
c. 
One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.

 
d. 
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."

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

 
ANSWER:  
c


 
35. Which of the following statements is CORRECT?
 
a. 
One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a partnership.

 
b. 
Corporations face fewer regulations than proprietorships.

 
c. 
One disadvantage of operating a business as a proprietor is that the firm is subject to double taxation, because taxes are levied at both the firm level and the owner level.

 
d. 
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.

 
e. 
If a partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

 
ANSWER:  
a


 
36. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?
 
a. 
Relaxant's shareholders (the ex-partners) will now be exposed to less liability.

 
b. 
The company will probably be subject to fewer regulations and required disclosures.

 
c. 
Assuming the firm is profitable, none of its income will be subject to federal income taxes.

 
d. 
The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.