Ch 1 Practice Q's-Answers

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University of North Texas *

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3770

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Finance

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Jan 9, 2024

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Practice Questions for CHAPTER 1 1. List the major advantage corporations (C corp.) have over other business entities? No limit to # of owners, Limited liabilities, Easy to transfer ownership (infinite life) 2. A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount (per share) an individual would receive from the dividend? Personal tax = $4 × 15% = $0.60 After-tax amount = $4 – $0.6 = $3.4 3. Which of the following is NOT an advantage of a sole proprietorship? A. single taxation B. ease of setup C. unlimited liability D. no separation of ownership and control 4. Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT: A. private equity funds B. hedge funds C. venture capital funds D. mutual funds 5. John places a market order with her broker to buy 1,000 shares of Waste Management Corp. The broker buys 1,000 shares at $16.00 each, and sells them to Stella at $16.15 each. He also charges a commission of $12.00. What is the total dollar amount spent towards the bid-ask spread in this case? (16.15 - 16.00) × 1,000 = $150 6. An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend? A) $3.28 B) $3.93 C) $2.62 D) $4.59

1 7. Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership 8. What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation. 9. What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of the stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges

2 10. Use the figure for the question(s) below. a. Based on the information shown above, what would it cost to buy 1,000 shares of the above stock? A) $91,110 B) $91,300 C) $91,320 D) $91,650 b. What is the bid-ask spread on the stock shown above? 30cents

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