Question

‏____ 42. Which of the following statements is CORRECT?

a. If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.

b. Capital market transactions only include preferred stock and common stock transactions.

c. The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.

d. Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.

e. An electronic communications network (ECN) is a physical location exchange.

‏____ 43. Which of the following statements is CORRECT?

a. Corporations generally are subject to fewer regulations and more favorable tax treatment than sole proprietorships and partnerships. This is why corporations do most of the business in the United States.

b. Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.

c. One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.

d. Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.

e. Bond covenants are an effective way to resolve conflicts between shareholders and managers.

‏____ 44. Which of the following statements is CORRECT?

a. A good goal for a firm's management is 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. Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.

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. The potential exists for agency conflicts between stockholders and managers.

‏____ 45. 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 partners.

b. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of new asset investments a firm makes.

c. Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.

d. Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.

e. Relative to sole proprietorships, corporations generally face fewer regulations, and this makes it easier for corporations to raise capital.

Answer 1

Q42:

option D : Nasdaq dealers and NYSE specialist who are market makers holds inventories of stocks to facilitate easier transactions

Q43:

option C: Liability of a corporate share holder is limited to the invested amount of the share holder which means maximum loss for the shareholder can be the invested amount.

Q44:

option E: The potential exists for agency conflicts between stockholders and managers.

---Agency conflict is a conflict that can happen when one party is expected to act in the other partys best interest. Here Manager is expected to act in shareholders best interest and due to this conflicts can arise.

Q45:

option D; Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.

----Since bondholders doesnt own the company and needs a steady cashflow from the company, bond holders will not be willing to take high risk projects where as shareholders look for company growth and will be willing to go for riskier projects with higher returns.