FIN 221 Fall 2009 Exam 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. 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. E. The firm will find it more difficult to raise additional capital to support its growth. 2. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to A. Maximize its expected total corporate income. B. Maximize its expected EPS. C. Minimize the chances of losses. D. Maximize the stock price per share over the long run, which is the stock's intrinsic value. E. Maximize the stock price on a specific target date. 3. Which of the following statements is CORRECT? A. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. B. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. C. 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. D. Partnerships have more difficulty attracting large amounts of capital than 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. E. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself. 4. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers? 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.
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