Chapter 1: An Overview of Financial Management Prof. Ravi Jain Practice problems 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 One of the disadvantages of incorporating your business is that you become subject to liabilities in the event of bankruptcy. Sole proprietorships are subject to more regulations than corporations. Sole proprietorships and partnerships generally have a tax advantage over corporations. It is easier to transfer one’s ownership interest in a partnership than in a corporation. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. Corporations face fewer regulations than sole proprietorships. Corporations generally find it easier to raise capital. The primary operating goal of a publicly‐owned firm interested in serving its stockholders should be to maximize its expected profit. The primary operating goal of a publicly‐owned firm interested in serving its stockholders should be to maximize the stock price per share over the long run, which is the stock’s intrinsic value. Compensating managers with stock options will do nothing to help eliminate potential conflicts between stockholders and managers. The passage of laws that make it harder for hostile takeovers to succeed will reduce agency problem between stockholders and managers Change the corporate charter so as to make it easier for outside investors to acquire a controlling interest in the firm will reduce agency problem between stockholders and managers. A requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock will reduce agency problem between stockholders and managers. The company’s outside auditing firm is offered a lucrative consulting contract with the company. This will reduce agency problem between stockholders and managers. The percentage of the firm’s stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 60%. This will reduce agency problem between stockholders and managers. True False True False True False True False True False True True True False False False True False True False True False True False True False True False True False