Q: A corporation distributes all its earnings as dividends. If you hold shares inside a TFSA, how much do you keep from $5.00 per share after a 35% corporate tax rate?

$$5.00 \times (1 - 0.35) = 3.25$

Question 1

Which of the following best describes the primary goal of a financial manager in a corporation?

Accepted Answer

To maximize the wealth of the stockholders.

Question 2

A corporation earns $5.00 per share before taxes. The corporate tax rate is 35%, and the personal tax rate on dividends is 24%. What is the total effective tax rate for shares held outside a TFSA?

Accepted Answer

$$\frac{1.75 + 0.78}{5.00} = 0.506 or$$ $$50.6\%$$

Question 3

Which of the following is NOT a characteristic of a sole proprietorship?

Accepted Answer

The owner has limited liability.

Question 4

Which of the following statements about limited partners in a limited partnership is TRUE?

Accepted Answer

Limited partners have no management authority.

Question 5

A corporation distributes all its earnings as dividends. If you hold shares inside a TFSA, how much do you keep from $5.00 per share after a 35% corporate tax rate?

Accepted Answer

$$5.00 	imes (1 - 0.35) = 3.25$

Question 6

Which of the following is a key disadvantage of organizing a business as a corporation?

Accepted Answer

Profits are subject to double taxation.

Question 7

Which of the following best describes a flow-through entity?

Accepted Answer

A business in which all income produced flows to the investors and virtually no earnings are retained within the business.

Question 8

Which of the following is NOT a main task of the financial manager?

Accepted Answer

Setting the listing standards for the stock exchange.

Question 9

In the context of the stock market, what is the bid-ask spread?

Accepted Answer

The difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

Question 10

Which of the following is a real-world example of a flow-through entity that is still exempt from business-level tax in Canada?

Accepted Answer

Real Estate Investment Trust (REIT)

Question 11

A financial manager must decide whether to raise funds by issuing new shares or by borrowing money. This is an example of which type of decision?

Accepted Answer

Financing decision

Question 12

Which of the following is a function of financial institutions in the financial cycle?

Accepted Answer

They move funds from savers to borrowers.

Question 13

Which of the following best describes the principal-agent problem in corporations?

Accepted Answer

Managers may act in their own self-interest rather than in the interests of shareholders.

Question 14

If a public corporation's stock performs poorly, which of the following actions might the board of directors take?

Accepted Answer

Replace the CEO.

Question 15

Which of the following is TRUE about the ownership of a corporation?

Accepted Answer

There is no limit on the number of owners.

Question 16

Which of the following is a distinguishing feature of a public corporation compared to a private corporation?

Accepted Answer

Its shares are traded on an organized stock market.

Question 17

A market order to buy shares will:

Accepted Answer

Automatically take the best ask price already posted.

Question 18

Which of the following is NOT a type of financial institution?

Accepted Answer

Sole proprietorship

Question 19

If a Real Estate Investment Trust (REIT) distributes $5.00 per unit and your personal tax rate is 46%, how much do you keep after taxes for units held outside your TFSA?

Accepted Answer

$$5.00 	imes (1 - 0.46) = 2.70$

Question 20

Which of the following is a key advantage of the corporate form of business organization?

Accepted Answer

Owners are not personally liable for the corporation's obligations.

Chapter 1: Corporate Finance and the Financial Manager – Study Notes

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