Chapter 6

Question 1

An unincorporated business owned by one individual.

Answer 1

proprietorship

Question 2

An unincorporated business owned by two or more persons.

Answer 2

partnership

Question 3

A legal entity created by a state, separate and distinct from its owners and managers, having unlimited life, easy transferability of ownership, and limited liability.

Answer 3

corporation

Question 4

A document filed with the secretary of the state in which a business is incorporated that provides information about the company, including its name, address, directors, and amount of capital stock.

Answer 4

corporate charter

Question 5

A set of rules drawn up by the founders of the corporation that indicate how the company is to be governed; includes procedures for electing directors, the rights of the stockholders, and how to change the bylaws when necessary.

Answer 5

bylaws

Question 6

A partnership wherein one (or more) partner is designated the general partner(s) with unlimited personal financial liability, and the other partners are limited partners whose liability is limited to amounts they invested in the firm.

Answer 6

limited liability partnership (LLP)

Question 7

A business structure that offers the limited personal liability associated with a corporation, but the company’s income is taxed like a partnership.

Answer 7

limited liability company (LLC)

Question 8

A corporation with no more than 100 stockholders that elects to be taxed the same as proprietorships and partnerships so that business income is taxed only once.

Answer 8

S corporation

Question 9

The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm’s common stock.

Answer 9

stockholder wealth maximization

Question 10

Decisions about how much and what types of debt and equity should be used to finance the firm.

Answer 10

capital structure decisions

Question 11

Decisions as to what types of assets should be purchased to help generate future cash flows.

Answer 11

capital budgeting decisions

Question 12

Decisions concerning how much of current earnings to pay out as dividends rather than retain the reinvestment in the firm.

Answer 12

dividend policy decisions

Question 13

The present, or current, value of the cash flows an asset is expected to generate in the future.

Answer 13

value

Question 14

Maximization of the firm’s net income each year.

Answer 14

profit maximization

Question 15

Net income divided by the number of shares of common stock outstanding.

Answer 15

earnings per share (EPS)

Question 16

A potential conflict of interest between outside shareholders (owners) and managers who make decisions about how to operate the firm.

Answer 16

agency problem

Question 17

A type of incentive plan in which managers are awarded shares of stock on the basis of the firm’s performance over given intervals with respect to earnings per share or other measures.

Answer 17

performance shares

Question 18

A type of incentive plan that allows managers to purchase stock at some future time at a given price.

Answer 18

executive stock options

Question 19

Stock is granted to employees based on the firm’s performance, but the stock is restricted in the sense that an employee is not vested– that is, does not have the right to ownership of the stock– until some period in the future.

Answer 19

restricted stock grants

Question 20

This acquisition of a company over the opposition of its management.

Answer 20

hostile takeover

Question 21

Those who are associated with a business; include managers, employees, customers, suppliers, creditors, stockholders, and other parties with an interest in the firm.

Answer 21

stakeholders

Question 22

A company’s attitude and conduct toward its stakeholders– employees, customers, stockholders, and so forth; requires fair and honest treatment of all parties.

Answer 22

business ethics

Question 23

The “set of rules” that a firm follows when conducting business; these rules identify who is accountable for major financial decisions.

Answer 23

corporate governance

Question 24

Voting power that is assigned to another party, such as another stockholder or institution.

Answer 24

proxy votes

Question 25

Organizations that consist of companies in different industries with common ownership interests, which include firms necessary to manufacture and sell products-- a network of manufacturers, suppliers, marketing organizations, distributors, retailers, and creditors.

Answer 25

industrial groups

Question 26

A firm that operates in two or more countries.

Answer 26

multinational corporation

Question 27

The prices at which the currency can by converted into the currency of another country.

Answer 27

exchange rates

Question 28

A tax that requires a higher percentage payment on higher incomes. The personal income tax in the United States is progressive.

Answer 28

progressive tax

Question 29

Gross income minus exemptions and allowable deductions as set forth in the Tax Code.

Answer 29

taxable income

Question 30

The percent tax applicable to the last unit (dollar) of income.

Answer 30

marginal tax rate

Question 31

Taxes paid divided by taxable income.

Answer 31

average tax rate

Question 32

The profit (loss) from the sale of a capital asset for more (less) than its purchase price.

Answer 32

capital gain (loss)

Question 33

Losses that can be carried backward (forward) in time to offset taxable income in a given year.

Answer 33

tax loss carry back (carryover)