Question 1 Which of the following could explain why a business might choose to o

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Question 1

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?

Less of a corporation's income is generally subject to federal taxes.

Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

Corporations generally face fewer regulations.

Corporations generally find it easier to raise large amounts of capital.

Corporate investors are exposed to unlimited liability.

Question 2

You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

$14,626

$12,603

$11,973

$13,267

$13,930

Question 3

Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

The provision will increase the firm's operating income (EBIT).

The provision will reduce the company's cash flow.

The provision will increase the company's net income.

The provision will increase the company's tax payments.

Net fixed assets on the balance sheet will decrease.

Question 4

Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?

8.66%

8.24%

8.45%

8.88%

9.10%

Question 5

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?

Elect a board of directors that allows managers greater freedom of action.

Take actions that reduce the possibility of a hostile takeover.

Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

Decrease the use of restrictive covenants in bond agreements.

Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Less of a corporation's income is generally subject to federal taxes.

Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation.

Corporations generally face fewer regulations.

Corporations generally find it easier to raise large amounts of capital.

Corporate investors are exposed to unlimited liability.

Explanation / Answer

Answer 1: C Corporations generally find it easier to raise large amounts of capital., All other options are incorrect as corporations are not unlimited but are limited liabality entities. While raising of large sum of money is much easier for corporates through IPO's etc.

Answer 2: Answer is D 13267. As the investment is made at the end of year, first deposit will earn 2 years of interest, 2nd deposit will earn 1 year of interest and the 3rd one will not earn any interest. We can calculate FV as below:

4200* (1.052)^2 + 4200* (1.052)^1 + 4200 = 13267.

Answer 3: Answer is e:Net fixed assets on the balance sheet will decrease. Because of higher depreciation, net fixed assets (Gross fixed asset - depreciation) will reduce. All other statements are wrong as higher depreciation will reduce EBIT and even net income as tax impact will be lower. Casflows will increase due to higher tax savings.

Answer 4: Answer is b 8.24%. To covert the quarterly payment rate to the annual one, we can use the following formula: ((1+Rate/4)^4)-1

= ((1.02)^4)-1 = 8.2432%

Answer 5: Answer is C:Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

As the mangers interests will directly allign to those of shareholders, because stock performance will impact managers compensation directly.

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