Question

61. Which of the following statements is CORRECT?

            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 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.         Stockholders in general would be better off if managers never disclosed favorable events and therefore caused the price of the firm's stock to sell at a price below its intrinsic value.

62. Which of the following statements is CORRECT?

            a.         Because bankruptcy requires that corporate bondholders be paid in full before stockholders receive anything, bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

            b.         Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.

            c.         One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.

            d.         One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a proprietor.

            e.         Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

63. Which of the following statements is CORRECT?

            a.         Corporations face few regulations and more favorable tax treatment than do 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 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.

64. New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $500,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

            a.         $11,050

            b.         $12,266

            c.         $10,056

            d.         $9,282

            e.         $11,713

65. Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization ?

            a.         22.61%

            b.         23.80%

            c.         21.90%

            d.         23.56%

            e.         28.56%

66. Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,800,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?

            a.         $6,436

            b.         $5,507

            c.         $6,188

            d.         $6,497

            e.         $6,250

67. Jose now has $500. How much would he have after 6 years if he leaves it invested at 7.0% with annual compounding?

            a.         $570.28

            b.         $892.93

            c.         $727.85

            d.         $750.37

            e.         $697.84

68. Suppose you have $850 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

            a.         $837.91

            b.         $1,009.53

            c.         $888.39

            d.         $858.10

            e.         $777.34

69. Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 11.1% interest, compounded annually. How much will you have when the CD matures?

            a.         $7,105.46

            b.         $5,730.21

            c.         $6,818.95

            d.         $6,303.23

            e.         $4,526.87

70. Last year Rocco Corporation's sales were $700 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

            a.         $974.23

            b.         $749.41

            c.         $1,133.48

            d.         $1,096.01

            e.         $936.76

Answer 1

61. Which of the following statements is CORRECT?

Ans :   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.

62. Which of the following statements is CORRECT?

Ans : c.         One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership

63. Which of the following statements is CORRECT?

Ans :   e.         One advantage to forming a corporation is that the owners of the firm have limited liability.

64. New Business is just being formed by 10 investors, each of whom will own 10% of the business. The firm is expected to earn $500,000 before taxes each year. The corporate tax rate is 34% and the personal tax rate for the firm's investors is 35%. The firm does not need to retain any earnings, so all of its after-tax income will be paid out as dividends to its investors. The investors will have to pay personal taxes on whatever they receive. How much additional spendable income will each investor have if the business is organized as a partnership rather than as a corporation?

Ans :

[$500000 x (1 - 34%) Corp. tax rate x (1 - 35%) personal tax rate] / 10 investors =

($500000 x 66% x 65%) / 10 = $21,450 is the amount each investor will earn after taxes as a corporation

If the company is taxed as a partnership, we multiply the expected earnings by the personal tax rate:

[$500000 x (1-35%) personal tax rate] / 10 investors =

($500000 x 65%) / 10 = $32,500

32500 - 21450

=11050

65. Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization ?

Ans :

= (1 - company tax rate)(1 - personal tax rate)

= (1 - 34%)(1 - 30%)

= 46.2%

firm's per-tax financial gain that investors will pay under the company and partnership sorts of organisation = 1 - 30 minutes  

= 70%

the distinction within the proportion of the firm's pre-tax financial gain that investors truly receive and may pay beneath the company and partnership sorts of organization = 70th - 46.2%

= 23.80%

66. Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,800,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status

Ans :

Total stockholder = 100
Total earning = $2,800,000
So, Earning before tax per stock holder = $2,800,000 ÷ 100 = $28,000
Now corporate tax rate = 34%
So Earning after deducting corporate tax = $28,000 - ($28,000 × 34%)
$28,000 - $9,520 = $18,480
Now personal tax = 35%
So, earning after deduction of personal tax = $18,480 - ($18,480 × 35%)
= $18,480 - $6,468 = $12,012
If only personal tax is made, then
Earning after only personal tax = $28,000 - ($28,000 × 35%)
= $28,000 - $9,800 = $18,200
So, each stockholder get = $18,200 - $12,012
= $6,188

67. Jose now has $500. How much would he have after 6 years if he leaves it invested at 7.0% with annual compounding?

Ans : 697.84

68. Suppose you have $850 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

Ans : 1009.53

69. Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 11.1% interest, compounded annually. How much will you have when the CD matures?

Ans :

FV = Future Value

PV = Present Value

r = rate of interest

n= no of period

Compound Interest

FV = PV (1 + r )n

FV = 2000*(1+11.1%)^10

FV = 5730.21

70. Last year Rocco Corporation's sales were $700 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

Ans :

r = 6

P = 700

N = 5 yrs

Amount p(1+r)ⁿ

= 700(1+0.6)⁵

​= 936.76