Analysis of Multiple Choice

1. Which of the following statements is CORRECT?
a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a partnership.
b. Corporations face fewer regulations than sole proprietorships.
c. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, at both the firm level and the owner level.
d. It is generally less expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.
e. If a partnership goes bankrupt, each partner is exposed to liabilities only up the amount of his or her investment in the business.

____ 2. 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. Relative to sole proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital.
c. Bondholders should generally be 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 should generally be 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. There is no good reason to expect its stockholders and bondholders to react differently to the types of assets that a firm invests in.

____ 3. Which of the following statements is CORRECT?
a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.
b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships.
c. Due to legal considerations related to ownership transfers and limited liability, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
d. Large corporations are taxed more favorably than sole proprietorships.
e. Corporate stockholders are exposed to unlimited liability.

4 . Which of the following statements is CORRECT?

a. The term "IPO" stand for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public.
b. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public.
c. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers will pay.
d. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In that case, the company is said to have "left money on the table."
e. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.

____ 5. You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?
a. This is an example of a direct transfer of capital.
b. This is an example of a primary market transaction.
c. This is an example of an exchange of physical assets.
d. This is an example of a money-market transaction.
e. This is an example of a derivative market transaction.

____6. Which of the following statements is CORRECT?
a. If the stock market is weak-form efficient, then information about recent trends in stock prices would be very useful when it comes to selecting stocks.
b. If the stock market is semistrong-form efficient, stocks and bonds should have the same expected return.
c. If the stock market is semistrong-form efficient, all stocks should have the same expected return.
d. Because of increased globalization, all of the world's stock markets are equally efficient.
e. Even if the stock market is semistrong-form efficient, insider information may not be reflected in current market prices.

Solution Summary

The solution explains some multiple choice questions relating to stock market