How Much You Know About Corporate Finance? Quiz

1. The shareholders elect ___ to protect their interest in a corporation.

Board of Directors

The CEO

The CFO

The senior managers

The shareholders elect the Board of Directors to protect their interest in a corporation. The Board of Directors is responsible for making important decisions on behalf of the shareholders, such as appointing and supervising top executives, setting company policies, and ensuring that the company operates in the best interest of its shareholders. They act as a governing body and provide oversight to ensure that the corporation is managed effectively and in line with the shareholders' interests.

Explanation

The shareholders elect the Board of Directors to protect their interest in a corporation. The Board of Directors is responsible for making important decisions on behalf of the shareholders, such as appointing and supervising top executives, setting company policies, and ensuring that the company operates in the best interest of its shareholders. They act as a governing body and provide oversight to ensure that the corporation is managed effectively and in line with the shareholders' interests.

2. Which legal form of business is best suited for an expanding business that is likely to need large amounts of funding?

Sole proprietorship

General partnership

Corporation

All forms are about the same

A corporation is the best legal form of business for an expanding business that requires large amounts of funding. Corporations have the ability to issue stocks and attract investors, making it easier to raise capital. Additionally, they offer limited liability protection to shareholders, separating personal and business assets. This structure allows for the potential for growth and expansion while minimizing individual risk. Sole proprietorships and general partnerships may struggle to secure significant funding and may not provide the same level of protection for the business owner's personal assets.

Explanation

A corporation is the best legal form of business for an expanding business that requires large amounts of funding. Corporations have the ability to issue stocks and attract investors, making it easier to raise capital. Additionally, they offer limited liability protection to shareholders, separating personal and business assets. This structure allows for the potential for growth and expansion while minimizing individual risk. Sole proprietorships and general partnerships may struggle to secure significant funding and may not provide the same level of protection for the business owner's personal assets.

3. The owners of a corporation can best be described as the ___ of the corporation.

Directors

Shareholders

Officers

Managers

The owners of a corporation are best described as the shareholders of the corporation. Shareholders are individuals or entities that hold shares of stock in a corporation, which represents their ownership interest in the company. They have the right to vote on corporate matters and receive dividends based on their shareholding. Shareholders have a financial stake in the corporation and can benefit from its profits and growth.

Explanation

The owners of a corporation are best described as the shareholders of the corporation. Shareholders are individuals or entities that hold shares of stock in a corporation, which represents their ownership interest in the company. They have the right to vote on corporate matters and receive dividends based on their shareholding. Shareholders have a financial stake in the corporation and can benefit from its profits and growth.

4. Which most accurately describes an inside director of a corporation?

One who has engaged in insider trading

One who also works inside the SEC

One who is also an officer of the corporation

One who is an officer of another corporation

An inside director of a corporation is someone who holds a position as an officer within the corporation. This means that they are not only a member of the board of directors, but they also have an executive role within the company. They are typically responsible for making important decisions and overseeing the day-to-day operations of the organization. Their position as an officer gives them insight into the internal workings of the corporation, allowing them to provide valuable expertise and guidance.

Explanation

An inside director of a corporation is someone who holds a position as an officer within the corporation. This means that they are not only a member of the board of directors, but they also have an executive role within the company. They are typically responsible for making important decisions and overseeing the day-to-day operations of the organization. Their position as an officer gives them insight into the internal workings of the corporation, allowing them to provide valuable expertise and guidance.

5. Investors invest in stocks of companies that do not pay dividends because

They hope to make money when the stock price rises

Not many companies pay dividends

Companies that do not pay dividends are almost always more profitable than those that pay dividends

Actually, every corporation is required by law to pay dividends

Investors may choose to invest in stocks of companies that do not pay dividends because they anticipate making a profit when the stock price increases. This strategy is based on the belief that the value of the stock will appreciate over time, allowing them to sell their shares at a higher price than what they initially paid. By relying on capital gains rather than dividend income, investors are speculating on the potential growth of the company and hoping to benefit from the increase in stock price.

Explanation

Investors may choose to invest in stocks of companies that do not pay dividends because they anticipate making a profit when the stock price increases. This strategy is based on the belief that the value of the stock will appreciate over time, allowing them to sell their shares at a higher price than what they initially paid. By relying on capital gains rather than dividend income, investors are speculating on the potential growth of the company and hoping to benefit from the increase in stock price.

6. Your friend is concerned that if she organizes her business as a corporation, she will have to share ownership of it with other shareholders and therefore give up control of her business. What should your friend know?

She is right

A corporation can have a single shareholder who owns all of the stock

A corporation needs to have at least 2,000 shareholders

Not only will she share ownership of the corporation, but her corporation will be obligated to pay dividends

Your friend should know that she is right. A corporation can indeed have a single shareholder who owns all of the stock. This means that she can maintain full control of her business even if she organizes it as a corporation. She does not necessarily have to share ownership with other shareholders.

Explanation

Your friend should know that she is right. A corporation can indeed have a single shareholder who owns all of the stock. This means that she can maintain full control of her business even if she organizes it as a corporation. She does not necessarily have to share ownership with other shareholders.

7. In a typical large public corporation, who manages the company on a day to day basis?

Board of directors

Only the outside directors

Officers of the corporation

The shareholders

The officers of the corporation manage the company on a day-to-day basis in a typical large public corporation. The officers, such as the CEO, CFO, and other executives, are responsible for making operational decisions, implementing strategies, and overseeing the daily operations of the company. The board of directors, on the other hand, provides guidance, sets policies, and makes major decisions for the corporation, but they are not involved in the day-to-day management of the company. The shareholders, while they have ownership in the company, do not have direct involvement in the daily management of the corporation.

Explanation

The officers of the corporation manage the company on a day-to-day basis in a typical large public corporation. The officers, such as the CEO, CFO, and other executives, are responsible for making operational decisions, implementing strategies, and overseeing the daily operations of the company. The board of directors, on the other hand, provides guidance, sets policies, and makes major decisions for the corporation, but they are not involved in the day-to-day management of the company. The shareholders, while they have ownership in the company, do not have direct involvement in the daily management of the corporation.

8. A shareholder wishes to sell shares to another investor. She should know that shares of stock in a corporation.

Can never be transferred from one investor to another

Can be freely transferred from one investor another

Can be transferred to another investor but only if all other existing shareholders agree to the transfer

Corporations do not have shares of stock, so the question is irrelevant

Shares of stock in a corporation can be freely transferred from one investor to another. This means that a shareholder is able to sell their shares to another investor without any restrictions or the need for approval from other shareholders. The transfer of shares is a common practice in the stock market, allowing investors to buy and sell shares based on their investment goals and market conditions.

Explanation

Shares of stock in a corporation can be freely transferred from one investor to another. This means that a shareholder is able to sell their shares to another investor without any restrictions or the need for approval from other shareholders. The transfer of shares is a common practice in the stock market, allowing investors to buy and sell shares based on their investment goals and market conditions.

9. In a typical corporation, for which function(s) is the CFO usually is responsible?

Accounting

Finance

Accounting and Finance

Accounting, Finance and Legal

The CFO in a typical corporation is usually responsible for both accounting and finance functions. This means that they oversee financial planning, budgeting, financial analysis, and financial reporting. Additionally, they are responsible for managing the company's financial records, ensuring compliance with accounting regulations, and making strategic financial decisions. The CFO plays a crucial role in managing the company's financial health and providing insights and recommendations to the executive team.

Explanation

The CFO in a typical corporation is usually responsible for both accounting and finance functions. This means that they oversee financial planning, budgeting, financial analysis, and financial reporting. Additionally, they are responsible for managing the company's financial records, ensuring compliance with accounting regulations, and making strategic financial decisions. The CFO plays a crucial role in managing the company's financial health and providing insights and recommendations to the executive team.

10. Owners of sole proprietorships are taxed at a rate of 30% on the profits of their businesses. Corporations are taxed at 21% of their profits. Dividends are taxed at a rate of 15%. If a business earns a profit of $300,000 for the year. If a business is organized as a corporation and pays out the maximum dividend it can pay, from the year's profits, how much of the dividend is available to the stockholders after all taxes are paid?

$210,000

$237,000

$255,000

$201,450

The business earns a profit of $300,000. As a corporation, it is taxed at a rate of 21%, resulting in a tax payment of $63,000. After taxes, the remaining profit is $237,000. From this amount, the business pays a dividend, which is taxed at a rate of 15%. The dividend tax payment is $35,550. Subtracting this amount from the remaining profit gives us $201,450, which is the amount available to the stockholders after all taxes are paid.

Explanation

The business earns a profit of $300,000. As a corporation, it is taxed at a rate of 21%, resulting in a tax payment of $63,000. After taxes, the remaining profit is $237,000. From this amount, the business pays a dividend, which is taxed at a rate of 15%. The dividend tax payment is $35,550. Subtracting this amount from the remaining profit gives us $201,450, which is the amount available to the stockholders after all taxes are paid.