15)

A n i n s u r a n c e c o m p a n y .

A p e n s i o n f u n d .

A n e w s p a p e r p 1

ublisher. A n D

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18 The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ________ of funds, and businesses are net ________ of funds. demanders; suppliers users; providers suppliers; demanders purchasers; sellers A n C
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19 Most businesses raise money by selling their securities in a public offering. private placement. direct placement. stock exchange. A n A
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m o n e y m a r k e t

20 The ________ is created by a financial relationship between suppliers and demanders of shortterm funds. stock market capital market financial market

T o Financial Markets Q u Previous Edition

B y d e f i n i t i o n , t h e m o n e y m a r k e t i n v o l v e s t h e b u y i n g a n d s e l l 4

21 Government usually is a net supplier of funds. is a net demander of funds. borrows funds directly from financial institutions. maintains permanent deposits with financial institutions. A n B
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22

ing of stocks and bonds. short-term funds. funds that mature in more than one year. flows of funds. A n B

i n v e s t o r ' s m a r k e t .

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23 A competitive market that allocates funds to their most productive use is called a(n) liquid market. middleman's market. efficient market.

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M o s t m o n e y m a r k e t t r a n s a c t i o n s a r e m a d e i n

24 The over-the-counter (OTC) market is the New York Stock Exchange. an organized stock exchange. a place where securities are bought and sold. an intangible market for unlisted securities. A n D
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25

common stock. marketable securities. stocks and bonds. preferred stock. A n B

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p r i v a t e p l a c e m e n t .

26 Firms that require funds from external sources can obtain them in one of the following ways EXCEPT financial institution. financial markets. government.

T o Financial Institutions and Markets Q u Previous Edition

F i r m s t h a t r e q u i r e f u n d s f r o m e x t e r n a l s o u r c e s c a n o b t a i n t h 8

27 The ________ is created by a number of institutions and arrangements that allow the suppliers and demanders of long-term funds to make transactions. financial market capital market money market credit market A n B

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28

em from private placement. financial institutions. financial markets. all of the above. A n D

n o n e o f t h e a b o v e .

T o Financial Institutions and Markets Q u Previous Edition

29 The nonexclusive sale of either bonds or stocks to the general public is called private placement. public offering. organized selling.

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A l l o f t h e f o l l o w i n g a r e f u n c t i o n s o f s e c u r i t y e x c h a n g e s E X C 10

30 Trading is carried out on the floor of the New York Stock Exchange by the negotiation process. the auction process. a telecommunications network. investment bankers. A n B
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EPT allocating scarce capital. aiding in new financing. creating continuous markets. holding demand deposits. A n D
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t h e o v e r t h e c o u n t e r e x c h a n g e .

32 All of the following are examples of organized stock exchanges EXCEPT the New York Stock Exchange. the American Stock Exchange. the Pacific Stock Exchange.

11

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33 The major securities traded in the capital markets are commercial paper and Treasury bills. Treasury bills and certificates of deposit. stocks and bonds. bonds and commercial paper. A n C
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L o n g t e r m d e b t i n s t r u m e n t s u s e d b y b o t h g o v e r n m e n t a n d b u s i n 12

34

ess are known as stocks. bills. bonds. equities. A n C

c a p i t a l m a r k e t a n d s e c o n d a r y m a r k e t .

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35 The two key financial markets are primary market and secondary market. primary market and money market. money market and capital market.

13

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36 The ________ stock exchange is a primary market where new public issues are sold. regional American New York over-the-counter A n D
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T r a d i n g i s c a r r i e d o u t i n t h e O v e r t h e C o u n t e r ( O T C ) E x c h a n g 14

37

e by the competitive bid process. the competitive bid process and the negotiation process. the auction process. an investment banker. A n B

a l l o w t h e p r i c e t o b e d e t e r m i n e d b y s u p p l y a n d d e m a n d o f s e c 15

T o Financial Markets Q u Previous Edition

38 Securities exchanges create efficient markets that do all of the following EXCEPT ensure a market in which the price reflects the true value of the security. allocate funds to the most productive uses. control the supply and demand for securities through price.

urities. A n C

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P r e v i o u s E d i t i o n

L Discuss business taxes and their importance in financial decisions.

The ordinary income of a corporation is income earned through the sale of a firm's goods and services and is currently taxed subject to the individual income tax rates. A n FALSE
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The marginal tax rate represents the rate at which additional income is taxed. A n TRUE
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16

All dividend income received by one corporation from an investment in the common and preferred stock of another corporation is excluded from taxation. A n FALSE
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P r e v i o u s E d i t i o n

Because of the dividend exclusion only 70 percent of intercorporate dividend dividend income is included as ordinary income. A n FALSE
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Tax laws often are used to accomplish economic goals such as providing incentives for corporate investment in certain types of assets. A n TRUE
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17

With progressive tax rates, the average tax rate is always less than or equal to the marginal tax rate. A n TRUE
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18

T h e Dividends received by a corporation on an investment in the common and preferred stock of another corporation (where ownership in the dividend paying corporation is less than 20%) is subject to 70 percent exclusion for tax purposes. A n TRUE
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t a x l i a b i l i t y o f a c o r p o r a t i o n w i t h o r d i n a r y i n c o m e o f $ 19

The tax deductibility of various expenses such as general and administrative expenses ________ their after-tax cost. increases reduces has no effect on has an undetermined effect on A n B
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105,000 is ________. $42,000 $35,700 $23,950 $24,200 A n D

$ 6 9 0 , 0 0 0

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10 The tax liability of a corporation with ordinary income of $1,500,000 is ________. $498,250 $510,000 $585,000

20

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11 The tax liability of a corporation with ordinary income of $1,100,000 is ________. $362,250 $340,000 $374,000 $390,000 A n C

J e n n i n g s , I n c . h a s a t a x l i a b i l i t y o f $ 1 7 0 , 0 0 0 o n p r e t a x i n c 21

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12

ome of $500,000. What is the average tax rate for Jennings, Inc.? 34 percent 46 percent 25 percent 40 percent A n A

1 5 p e r c e n t .

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13 The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is 46 percent. 23 percent. 34 percent.

22

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I n g e n e r a l , m o s t c o r p o r a t e c a p i t a l g a i n s a r e t a x e d a t _ _ _ _ _ _ 23

14 If a corporation sells certain capital equipment for more than their initial purchase price, the difference between the sale price and the purchase price is called a(n) ordinary gain. capital loss. capital gain. ordinary loss. A n C

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15

__ tax rate. a 46 percent the ordinary a 28 percent a 30 percent A n B

l o w e r t h e c o s t o f e q u i t y f i n a n c i n g f o r c o r p o r a t i o n s .

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16 Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to encourage corporations to invest in each other. avoid double taxation on dividends. avoid triple taxation on dividends.

24

T o Business Taxes Q u Previous Edition

17 Corporation X needs $1,000,000 and can raise this through debt at an annual rate of 10 percent, or preferred stock at an annual cost of 7 percent. If the corporation has a 40 percent tax rate, the after-tax cost of each is debt: $100,000; preferred stock: $70,000. debt: $60,000; preferred stock: $42,000. debt: $60,000; preferred stock: $70,000. debt: $100,000; preferred stock: $42,000. A n C
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25

Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000 in dividends in 2002. Corporation A must pay tax on

$ 1 0 0 , 0 0 0 o f o r d i n a r y i n c o m e .

26

$ 30,000 of ordinary income. $ 70,000 of ordinary income. $ 70,000 of capital gain. A n B

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s t o c k i n v e s t m e n t s b e i n g r e l a t i v e l y m o r e a t t r a c t i v e r e l a t i v e 27

19 The dividend exclusion for corporations receiving dividends from another corporation has resulted in a lower cost of equity for the corporation paying the dividend. a higher relative cost of bond-financing for the corporation paying the dividend. stock investments being relatively less attractive, relative to bond investments made by one corporation in another corporation.

to bond investments made by one corporation in another corporation. A n D

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M e e s e P a p e r D i s t r i b u t o r s , I n c . h a s b e f o r e t a x e a r n i n g s o f $ 1 28

20 All of the following are true EXCEPT Interest income received by a corporation is taxed as ordinary income. Corporations pay taxes on all dividends received from other corporations, no matter their share of ownership. Corporations may pay taxes on only 30 percent of the dividends received from other corporations, depending on their percentage of ownership. Capital gains is taxed as ordinary income. A n B
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21

,900,000. Calculate the amount of the total tax liability. A n Meese Paper Distributors

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29

22 During 2002, a firm has sold 5 assets described below. Calculate the tax liability on the assets. The firm pays a 40 percent tax rate on ordinary income.

i n c o m e . B o t h f i r m s a r e i n t h e

A n

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4 0 p e r c e n t t a x b r a c k e t . C a l c u l 30

23 Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnings before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. However, No Debt will have to pay stockholders $40,000 in dividend

ate the Earnings after tax for both firms. Which firm has the higher after-tax earnings? Which firm appears to have the higher cash flow? How do you account for the difference? A n

Go Debt has lower earnings after taxes compared to No Debt. However, from a cash outflow perspective, Go Debt paid out a total of only $64,000 ($40,000 in interest expenses plus $24,000 in taxes) while No debt paid out a total of $80,000 ($40,000 in taxes and $40,000 in dividends). The difference between the two is $16,000 which is exactly the difference in taxes paid between the two firms ($24,000 compared to $40,000). This difference results from the fact that interest expense is a tax deductible expense.
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31