Business In Action 6Th Ed By Courtland L. Bovee - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Business in Action, 6e (Bovee/Thill) Chapter 5 Forms of Ownership 1) Owner has limited personal liability for the business's financial obligations in sole proprietorships. Answer: …
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Business In Action 6Th Ed By Courtland L. Bovee – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Business in Action, 6e (Bovee/Thill)
Chapter 5 Forms of Ownership
1) Owner has limited personal liability for the business’s financial obligations in sole proprietorships.
Answer: FALSE
Explanation: Owner has unlimited personal liability for the business’s financial obligations in sole proprietorships. In corporations investors have limited liability.
Page Ref: 95
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
2) Establishing a corporation is more complicated and expensive compared to establishing a sole proprietorship.
Answer: TRUE
Explanation: Establishing a corporation is more complicated and expensive compared to establishing a sole proprietorship. Requirements for establishing a corporation vary from state to state.
Page Ref: 95
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
3) The federal government recognizes a sole proprietorship as an independent taxable entity.
Answer: FALSE
Explanation: Income tax is a straightforward matter for sole proprietorships. The federal government doesn’t recognize the company as a taxable entity.
Page Ref: 96
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
4) Unlimited liability is a legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility.
Answer: TRUE
Explanation: Unlimited liability is a legal condition under which any damages or debts incurred by a business are the owner’s personal responsibility.
Page Ref: 96
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
5) A partnership is a company that is owned by two or more people but is not a corporation.
Answer: TRUE
Explanation: A partnership is a company that is owned by two or more people but is not a corporation.
Page Ref: 97
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
6) All partners have joint authority to make decisions for the firm in a general partnership.
Answer: TRUE
Explanation: In a general partnership, all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
7) A master limited partnership is not allowed to raise money by selling units of ownership to the general public.
Answer: FALSE
Explanation: A master limited partnership (MLP) is allowed to raise money by selling units of ownership to the general public, in the same way corporations sell shares of stock to the public.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
8) Partners are responsible for each other’s action in a limited liability partnership.
Answer: FALSE
Explanation: The limited liability partnership (LLP) form of business was created to help protect individual partners in certain professions from major mistakes (such as errors that trigger malpractice lawsuits) by other partners in the firm.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
9) Partnerships are subject to double taxation of income.
Answer: FALSE
Explanation: Income tax is straightforward for partnerships. Each owner’s income is treated as his or her share as personal income. This helps investors avoid double taxation.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
10) All owners in a general partnership and the general partners in a limited partnership face the same unlimited liability as sole proprietors.
Answer: TRUE
Explanation: All owners in a general partnership and the general partners in a limited partnership face the same unlimited liability as sole proprietors.
Page Ref: 99
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
11) A corporation is a legal entity distinct from the persons running the corporation.
Answer: TRUE
Explanation: A corporation is a legal entity, distinct from any individual persons, that has the power to own property and conduct business.
Page Ref: 100
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
12) The stock of a private corporation is made available for purchase by the public.
Answer: FALSE
Explanation: The stock of a private corporation is owned by only a few individuals or companies and is not made available for purchase by the public.
Page Ref: 100
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
13) Liquidity is a measure of how easily and quickly an asset can be converted into cash.
Answer: TRUE
Explanation: Liquidity is a measure of how easily and quickly an asset such as corporate stock can be converted into cash by selling it.
Page Ref: 100
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
14) A corporation itself has limited liability on its transactions.
Answer: FALSE
Explanation: A corporation itself has unlimited liability, but the various shareholders who own the corporation face only limited liability.
Page Ref: 101
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
15) Government agencies require publicly traded companies to publish extensive and detailed financial reports.
Answer: TRUE
Explanation: To help investors make informed decisions about stocks, government agencies require publicly traded companies to publish extensive and detailed financial reports.
Page Ref: 101
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
16) An S corporation has the federal taxation advantages of a partnership.
Answer: TRUE
Explanation: S corporation is a type of corporation that combines the capital-raising options and limited liability of a corporation with the federal taxation advantages of a partnership.
Page Ref: 101
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
17) The number of shareholders is limited to fifty in a limited liability company.
Answer: FALSE
Explanation: A limited liability company (LLC) is a structure that combines limited liability with the pass-through taxation benefits of a partnership. The number of shareholders is not restricted, nor is members’ participation in management.
Page Ref: 102
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
18) A benefit corporation must pursue a stated non-financial goal.
Answer: TRUE
Explanation: A benefit corporation has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal, such as hiring workers whose life histories make employment difficult to attain or reducing the environmental impact of particular products.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
19) Board of directors has the responsibility for the overall direction of the company and the selection of top executives.
Answer: TRUE
Explanation: Board of directors is a group of professionals elected by shareholders as their representatives, with responsibility for the overall direction of the company and the selection of top executives.
Page Ref: 103
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
20) Corporate officers of an organization are elected directly by the shareholders of a corporation.
Answer: FALSE
Explanation: Corporate officers of an organization are hired by the board of directors.
Page Ref: 103
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
21) Proxy is a document that authorizes another person to vote on behalf of a shareholder in a corporation.
Answer: TRUE
Explanation: Proxy is a document that authorizes another person to vote on behalf of a shareholder in a corporation.
Page Ref: 104
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
22) The chief operating officer is the highest-ranking officer of a corporation.
Answer: FALSE
Explanation: Corporate officers are the top executives who run a corporation. Of them, the highest-ranking officer is the chief executive officer (CEO).
Page Ref: 105
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
23) One company buys a controlling interest in the voting stock of another company in a merger.
Answer: FALSE
Explanation: In a merger, two companies join to form a single entity. In an acquisition, one company buys a controlling interest in the voting stock of another company.
Page Ref: 106
Difficulty: Moderate
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
24) A horizontal merger occurs when different companies at the same stage or level merge.
Answer: TRUE
Explanation: A horizontal merger occurs when different companies at the same stage or level merge. Example: Merger between a lumber supplier and a leather supplier.
Page Ref: 107
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
25) A joint venture does not result in a separate legal entity.
Answer: FALSE
Explanation: A joint venture is a separate legal entity established by two or more companies to pursue shared business objectives.
Page Ref: 109
Difficulty: Moderate
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
26) A sole proprietorship ________.
Answer: D
Explanation: D) A sole proprietorship is a business owned by one person. However, it may have many employees.
Page Ref: 95
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
27) Robert owns three restaurants in Atlanta. He pays taxes for the income from the restaurants as his personal income. Robert’s business is an example of a ________.
Answer: B
Explanation: B) A sole proprietorship is a business owned by one person.The restaurant is owned by Robert alone although its has three branches.
Page Ref: 95
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
28) Profits of sole proprietorships ________.
Answer: B
Explanation: B) Profits and losses of sole proprietorships flow directly to the owners and are taxed at individual rates.
Page Ref: 95
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
29) Which of the following statements is true of the liability of investors in a corporation?
Answer: C
Explanation: C) Investor’s liability is limited to the amount of his or her investment in a corporation.
Page Ref: 95
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
30) Which of the following business structures is the most complicated and expensive?
Answer: B
Explanation: B) Corporations are more complicated and expensive to establish than other structures. It involves more documentation and other requirements.
Page Ref: 95
Difficulty: Easy
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
31) Edwin runs an antique retail shop that is registered as a sole proprietorship. The liability exposure of Edwin’s business ________.
Answer: E
Explanation: E) The owner has unlimited personal liability for the business’s financial obligations in a sole proprietorship. Edwin’s business is a sole proprietorship in this case.
Page Ref: 95
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
32) Which of the following is a key difference between a corporation and a sole proprietorship?
Answer: D
Explanation: D) In a sole proprietorship, the owner has unlimited personal liability for the business’s financial obligations. In a corporation, the investors’ liability is limited to the amount of their investment.
Page Ref: 95
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
33) Which of the following is a key advantage of incorporating a business as a sole proprietorship?
Answer: C
Explanation: C) A sole proprietorship is easy to establish and requires far less paperwork than other structures. The only legal requirement for establishing a sole proprietorship is obtaining the necessary business licenses and permits required by the city, county, and state.
Page Ref: 96
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
34) In a sole proprietorship, the owner ________.
Answer: C
Explanation: C) In a sole proprietorship, the owner and the business are legally inseparable, which gives the proprietor unlimited liability. Any legal damages or debts incurred by the business are the owner’s personal responsibility.
Page Ref: 96
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
35) A ________ is an unincorporated company owned by two or more people.
Answer: B
Explanation: B) Partnership is an unincorporated company owned by two or more people. The partnership structure is appropriate for firms that need more resources and leadership talent than a sole proprietorship but don’t need the fundraising capabilities or other advantages of a corporation.
Page Ref: 97
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
36) In a general partnership, ________.
Answer: A
Explanation: A) In a general partnership, all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations.
Page Ref: 98
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
37) A ________ is allowed to raise money by selling units of ownership to the general public in the same way corporations sell shares of stock to the public.
Answer: A
Explanation: A) A master limited partnership (MLP) is allowed to raise money by selling units of ownership to the general public in the same way corporations sell shares of stock to the public. This gives MLPs the fundraising capabilities of corporations without the double-taxation disadvantage.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
38) A ________ is a partnership in which each partner has unrestricted accountability only for his or her own actions and at least some degree of responsibility for the partnership as a whole.
Answer: E
Explanation: E) A limited liability partnership is a partnership in which each partner has unlimited liability only for his or her own actions and at least some degree of limited liability for the partnership as a whole.
Page Ref: 98
Difficulty: Easy
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
39) Which of the following is a key difference between a master limited partnership (MLP) and other forms of partnerships?
Answer: A
Explanation: A) A master limited partnership (MLP) is allowed to raise money by selling units of ownership to the general public in the same way corporations sell shares of stock to the public. This gives MLPs the fundraising capabilities of corporations without the double-taxation disadvantage.
Page Ref: 98
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
40) A major advantage of partnerships is that they ________.
Answer: C
Explanation: C) Income tax is straightforward for partnerships. Profit is split between or among the owners based on whatever percentages they have agreed to.
Page Ref: 98
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
41) A potentially significant disadvantage of a partnership is that ________.
Answer: C
Explanation: C) Partners can disagree over business strategy, the division of profits (or the liability for losses), hiring and firing of employees, and other significant matters. This attracts more conflicts in the business.
Page Ref: 99
Difficulty: Moderate
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
42) Which of the following is a valid observation of corporations?
Answer: D
Explanation: D) A corporation is a legal entity, distinct from any individual persons, that has the power to own property and conduct business.
Page Ref: 100
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
43) Which of the following is a key difference between private corporations and public corporations?
Answer: E
Explanation: E) The stock of a private corporation is owned by only a few individuals or companies, whereas the stock of a public corporation is sold to anyone who has the means to buy it.
Page Ref: 100
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
44) Which of the following is a key advantage that corporations have over sole proprietorships and partnerships?
Answer: D
Explanation: D) The stock of publicly-traded companies has a high degree of liquidity, which means that investors can easily and quickly convert their stock into cash by selling it on the open market. In contrast, liquidating (selling) the assets of a sole proprietorship or a partnership can be slow and difficult.
Page Ref: 100
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
45) A disadvantage of the corporate structure is that it ________.
Answer: D
Explanation: D) To help investors make informed decisions about stocks, government agencies require publicly-traded companies to publish extensive and detailed financial reports. These reports can eat up a lot of staff and management time, and they can expose strategic information that might benefit competitors or discourage investors unwilling to wait for long-term results.
Page Ref: 101
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
46) S corporation is a type of corporation that ________.
Answer: A
Explanation: A) S corporation is a type of corporation that combines the capital-raising options and limited liability of a corporation with the federal taxation advantages of a partnership.
Page Ref: 101; 102
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
47) A group of college graduates starts a business. They want to give their business a structure such that their risk is limited to the amount they have invested in the business. They also want to avoid double taxation of the income that they generate from the business. Which of the following structures is most suitable to satisfy these wants?
Answer: D
Explanation: D) S corporation is a type of corporation that combines the capital-raising options and limited liability of a corporation with the federal taxation advantages of a partnership. The owners can incorporate their business as an S corporation in order to satisfy their requirements.
Page Ref: 101; 102
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
48) A(n) ________ has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal.
Answer: E
Explanation: E) A benefit corporation has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal, such as hiring workers whose life histories make employment difficult to attain, or reducing the environmental impact of particular products.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
49) RSS Bank is registered as a corporation in Maryland. Apart from its financial objectives, the company has also formed a legal requirement to work for the welfare of the elderly citizens in the state. The bank is obligated to work for the cause even if there is a change in ownership. Based on this information, it can be concluded that RSS bank is a(n) ________.
Answer: B
Explanation: B) A benefit corporation has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal, such as hiring workers whose life histories make employment difficult to attain, or reducing the environmental impact of particular products. Using the given information, we can conclude that RSS bank is such a corporation.
Page Ref: 102
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
50) A public corporation refers to a corporation ________.
Answer: B
Explanation: B) A public corporation refers to a corporation whose stock is sold to the general public. It is also known as publicly held or publicly traded corporation.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
51) A corporation primarily or wholly owned by another company is known as a(n) ________.
Answer: C
Explanation: C) A corporation primarily or wholly owned by another company is known as a subsidiary.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
52) Pacific Electronics is a Swiss corporation doing business in the U.S. It was incorporated in Switzerland, in the year 1997. The company sells products such as electronic measuring devices, microprocessors, and microcontrollers. Pacific Electronics is called a(n) ________.
Answer: A
Explanation: A) A corporation that operates in the United States but is incorporated in another country is called an alien corporation. Pacific Electronics is such a corporation.
Page Ref: 102
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
53) A company that is incorporated in one state (frequently the state of Delaware, where incorporation laws are more lenient) but that does business in several other states where it is registered is called a(n) ________.
Answer: A
Explanation: A) A company that is incorporated in one state (frequently the state of Delaware, where incorporation laws are more lenient) but that does business in several other states where it is registered is called a foreign corporation.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
54) RK Associates is a firm incorporated in the state of Delaware. The company has operations in thirteen states. However, the company does not have any facilities in countries other than the United States. RK Associates is a(n) ________.
Answer: E
Explanation: E) A company that is incorporated in one state but that does business in several other states where it is registered is called a foreign corporation. RK Associates is such a firm.
Page Ref: 102
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
55) In the United States, a corporation is called a domestic corporation if it ________.
Answer: A
Explanation: A) A domestic corporation is a corporation that does business only in the state where it is chartered or incorporated.
Page Ref: 102
Difficulty: Easy
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
56) The board of directors are ________.
Answer: C
Explanation: C) The board of directors are a group of professionals elected by shareholders as their representatives, with responsibility for the overall direction of the company and the selection of top executives.
Page Ref: 103
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
57) Which of the following is a document that authorizes another person to vote on behalf of a shareholder in a corporation?
Answer: B
Explanation: B) A proxy is a document that authorizes another person to vote on behalf of a shareholder in a corporation.
Page Ref: 104
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
58) Robex Retail is a retail chain that has more than 390 stores in the United States. The directors of the company decide to launch operations in Italy to increase the company’s market reach. Many of the shareholders think that this decision is not appropriate in light of the economic slowdown in Europe. A group of shareholders unite to pressurize the board of directors to change their decision. This is an example of ________.
Answer: B
Explanation: B) Shareholder activism refers to activities taken by shareholders (individually or in groups) to influence executive decision making in areas ranging from strategic planning to social responsibility.
Page Ref: 104
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
59) Corporate officers are the ________.
Answer: C
Explanation: C) Corporate officers are the top executives who run the company. Executives such as CEO and CFO are corporate officers.
Page Ref: 105
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
60) Who is the highest-ranked officer of a corporation?
Answer: D
Explanation: D) The highest-ranking officer is the chief executive officer (CEO), and that person is aided by a team of other “C-level” executives, such as the chief financial officer (CFO), chief information officer (CIO), chief technology officer (CTO), and chief operating officer (COO).
Page Ref: 105
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
61) Corporate officers of a company ________.
Answer: A
Explanation: A) Corporate officers are hired by the board and generally have legal authority to conduct the company’s business, in everything from hiring the rest of the employees to launching new products.
Page Ref: 105
Difficulty: Easy
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
62) In a(n) ________, two companies join to form a single entity either by pooling their resources or by one company purchasing the assets of the other.
Answer: C
Explanation: C) In a merger, two companies join to form a single entity. Companies can merge either by pooling their resources or by one company purchasing the assets of the other.
Page Ref: 106
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
63) In a(n) ________, two companies create a new, third entity that then purchases the two original companies.
Answer: B
Explanation: B) Consolidation is an arrangement in which two companies create a new, third entity that then purchases the two original companies. It is often lumped together with the other merger approaches.
Page Ref: 106
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
64) In a(n) ________, one company simply buys a controlling interest in the voting stock of another company.
Answer: C
Explanation: C) In an acquisition, one company simply buys a controlling interest in the voting stock of another company. In most acquisitions, the selling parties agree to be purchased.
Page Ref: 106
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
65) RDS Bank has been making losses for many years now. The company’s management wants to continue with the same style of operations, whereas many shareholders demand a change in management. A majority of shareholders unite and vote against the management’s wish to sell the company to a larger counterpart subject to pressures from an external buyer. This is an example of a(n) ________.
Answer: B
Explanation: B) In some situations, a buyer attempts to acquire a company against the wishes of management. In such a situation, the buyer tries to convince enough shareholders to go against management and vote to sell. This situation is known as a hostile takeover.
Page Ref: 106
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
66) A ________ occurs when someone purchases a company’s publicly-traded stock primarily by using borrowed funds, sometimes using the target company’s assets as collateral for these loans.
Answer: A
Explanation: A) A leveraged buyout (LBO) occurs when someone purchases a company’s publicly-traded stock primarily by using borrowed funds, sometimes using the target company’s assets as collateral for these loans.
Page Ref: 106
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
67) A vertical merger occurs when ________.
Answer: B
Explanation: B) Vertical Merger occurs when different stages or levels of the same industry merge.
Page Ref: 107
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
68) An electronic appliance marketing company merges with one of its suppliers to form a larger company. This is an example of a ________ merger.
Answer: D
Explanation: D) Vertical Merger occurs when different stages or levels of the same industry merge. Here the vertical merger has occurred because both companies are in the same market.
Page Ref: 107
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
69) A product-extension merger occurs when ________.
Answer: D
Explanation: D) A product-extension merger occurs when a merger expands the mix of goods and services that a company has available for sale.
Page Ref: 107
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
70) A ________ merger occurs when different companies at the same stage or level merge.
Answer: B
Explanation: B) A horizontal merger occurs when different companies at the same stage or level merge.
Page Ref: 107
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
71) Eurotec, a manufacturer of security systems in Italy, merges with a company in China to expand its reach. This is an example of a ________ merger.
Answer: E
Explanation: E) Market-extension merger occurs when a merger expands the geographic range of markets that a company can serve. In this case two companies are merging to extend the geographic range.
Page Ref: 107
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
72) A ________ merger occurs when companies in unrelated industries join to form a single entity.
Answer: C
Explanation: C) A conglomerate merger occurs when companies in unrelated industries join to form a single entity.
Page Ref: 107
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
73) Froxer Electronics is an electronic appliance manufacturer. The company merges with a food manufacturer to form a larger company. This is an example of a ________ merger.
Answer: E
Explanation: E) A conglomerate merger occurs when companies in unrelated industries join to form a single entity. Two unrelated companies are merging in this case.
Page Ref: 107
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
74) Which of the following is a key disadvantage of mergers and acquisitions?
Answer: D
Explanation: D) The organizational cultures of the two firms engaging in a merger must be harmonized somehow after a merger. It can result in clashes between different values, management styles, communication practices, workplace atmosphere, and approaches to managing the changes required to implement the merger.
Page Ref: 108
Difficulty: Moderate
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
75) In a ________, the raider launches a public relations battle for shareholder votes, hoping to enlist enough votes to oust the board and management.
Answer: B
Explanation: B) In a proxy fight, the raider launches a public relations battle for shareholder votes, hoping to enlist enough votes to oust the board and management.
Page Ref: 108
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
76) With a ________, a targeted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover.
Answer: E
Explanation: E) With a poison pill defense, a targeted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover.
Page Ref: 108
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
77) Integral Solutions is a firm that offers open source enterprise software services to small and medium companies. The company had a public issue two years ago and the company has shown significant growth in the current financial year. A major rival is silently amassing the company’s shares to acquire majority stake in the company. In order to prevent this, the company issues shares to current shareholders at prices below the market value. This tactic used by Integral Solutions to prevent a takeover is an example of a ________.
Answer: A
Explanation: A) With a poison pill defense, a targeted company invokes some move that makes it less valuable to the potential raider, with the hope of discouraging the takeover. Integral Solutions is using a poison pill defense in the given case.
Page Ref: 108
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
78) With the ________, a third company is invited to acquire a company that is in danger of being swallowed up in a hostile takeover.
Answer: E
Explanation: E) With the white knight tactic, a third company is invited to acquire a company that is in danger of being swallowed up in a hostile takeover.
Page Ref: 108
Difficulty: Easy
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
79) Albama Associates is a consulting firm owned by a few entrepreneurs. Rogo Consulting, a large consulting firm, tries to buy shares from some of the shareholders of Albama to obtain control of the company without making a formal acquisition proposal with the management. Albama’s management invites a third party to acquire the company to prevent a hostile takeover by Rogo Consulting. This approach used by Albama to prevent hostile takeover is an example of a ________.
Answer: A
Explanation: A) With the white knight tactic, a third company is invited to acquire a company that is in danger of being swallowed up in a hostile takeover. The given situation exemplifies a white knight tactic.
Page Ref: 108
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
80) Which of the following is an action that allows the companies to collaborate without formally combining?
Answer: A
Explanation: A) Strategic alliances can accomplish many of the same goals as a merger or acquisition with less risk and work than permanently integrating two companies. Strategic partnership allows the companies to collaborate without formally combining.
Page Ref: 109
Difficulty: Easy
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
81) Strategic alliances are ________.
Answer: D
Explanation: D) Strategic alliances can accomplish many of the same goals as a merger or acquisition with less risk and work than permanently integrating two companies. Strategic partnership allows the companies to collaborate without formally combining.
Page Ref: 109
Difficulty: Easy
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
82) Carton Life is an insurance firm. The firm wants to enter an Asian country that recently removed protectionist barriers in the insurance industry. The company wants to enter the country with the help of a local firm. However, the company does not want to permanently integrate with another firm. Which of the following arrangements is most suited for this company?
Answer: E
Explanation: E) Strategic alliances can accomplish many of the same goals as a merger or acquisition with less risk and work than permanently integrating two companies. Strategic partnership allows the companies to collaborate without formally combining.
Page Ref: 109
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
83) Which of the following statements is true of strategic alliances?
Answer: E
Explanation: E) While strategic alliances avoid much of the work and risk of formal mergers, they don’t create a unified entity that functions with a single management structure, information system, and other organizational elements.
Page Ref: 109
Difficulty: Moderate
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
84) Joint ventures ________.
Answer: A
Explanation: A) A joint venture lets companies create an operation that is more tightly integrated than a strategic alliance but without disrupting the original companies to the extent that a merger or acquisition does.
Page Ref: 110
Difficulty: Easy
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
85) A company decides to establish a relationship with a local company in order to better its business in a foreign country. The company must choose joint ventures ahead of mergers and acquisitions if it wants to ________.
Answer: E
Explanation: E) A joint venture lets companies create an operation that is more tightly integrated than a strategic alliance but without disrupting the original companies to the extent that a merger or acquisition does. In fact, after the spotty record of mergers and acquisitions in recent years, more companies are now considering joint ventures as a more attractive way to collaborate.
Page Ref: 110
Difficulty: Difficult
AACSB: Analytic Skills
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Application
86) Compare and contrast sole proprietorships and general partnerships.
Answer: A sole proprietorship has only one owner and the owner has complete control over the business. A general partnership must have at least two owners. Each partner is entitled to equal control unless agreement specifies otherwise. Profits are taxed at individual levels in both structures. The owner is responsible for only his mistakes and he has unlimited liability in a sole proprietorship. In a partnership, all partners have unlimited liability. This means that their personal assets are at risk to mistakes made by other partners.
Page Ref: 95
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
87) Explain the advantages of operating as a sole proprietorship.
Answer: Operating as a sole proprietorship offers six key advantages:
(1) Simplicity: A sole proprietorship is easy to establish and requires far less paperwork than other structures. About the only legal requirement for establishing a sole proprietorship is obtaining the necessary business licenses and permits required by the city, county, and state.
(2) Single layer of taxation: Income tax is a straightforward matter for sole proprietorships. The federal government doesn’t recognize the company as a taxable entity; all profit “flows through” to the owner, where it is treated as personal income and taxed accordingly.
(3)Privacy: Beyond filing tax returns and certain other government reports that may apply to specific businesses, sole proprietors generally aren’t required to report anything to anyone. Your business is your business. Of course, if you apply for a loan or solicit investors, you will need to provide detailed financial information to these parties.
(4) Flexibility and control: As a sole proprietor, you aren’t required to get approval from a business partner, your boss, or a board of directors to change any aspect of your business strategy or tactics. You can make your own decisions, from setting your own hours to deciding how much of the work you’ll do yourself and how much you’ll assign to employees.
(5) Fewer limitations on personal income: As a partner in a partnership or an employee in a corporation, your income is established by various agreements and compensation policies. As a sole proprietor, you keep all the after-tax profits the business generates.
(6) Personal satisfaction: For many sole proprietors, the main advantage is the satisfaction of working for themselves – of taking the risks and enjoying the rewards. If you work hard, make smart decisions, and have a little bit of luck, you get to see and enjoy the fruits of your labor.
Page Ref: 96
Difficulty: Moderate
Chapter LO: 1
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
88) Compare and contrast a general partnership and a limited partnership.
Answer: In a general partnership, all partners have joint authority to make decisions for the firm and joint liability for the firm’s financial obligations. If the partnership gets sued or goes bankrupt, all the partners have to dig into their own pockets to pay the bills, just as sole proprietors must.
To minimize personal liability exposure, some organizations opt instead for a limited partnership. Under this type of partnership, one or more persons act as general partners who run the business and have the same unlimited liability as sole proprietors. The remaining owners are limited partners who do not participate in running the business and who have limited liability – the maximum amount they are liable for is whatever amount each invested in the business.
Page Ref: 98
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
89) Compare and contrast a master limited partnership and a limited liability partnership.
Answer: A master limited partnership (MLP) is allowed to raise money by selling units of ownership to the general public, in the same way corporations sell shares of stock to the public. This gives MLPs the fundraising capabilities of corporations without the double-taxation disadvantage. Strict rules limit the types of companies that qualify for MLP status in the U.S.
The limited liability partnership (LLP) form of business was created to help protect individual partners in certain professions from major mistakes (such as errors that trigger malpractice lawsuits) by other partners in the firm. In an LLP, each partner has unlimited liability only for his or her own actions and at least some degree of limited liability for the partnership as a whole. Restrictions on who can form an LLP – and how much liability protection is offered under this structure – vary from state to state.
Page Ref: 98
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
90) A group of friends is planning to start a business. Should they form a formal contract to establish themselves as a partnership? Elucidate the legal and practical aspects of this issue.
Answer: A carefully written partnership agreement can maximize the advantages of the partnership structure and minimize the potential disadvantages. Although state laws (everywhere except Louisiana) specify some basic agreements about business partnerships, these laws are generic and therefore not ideal for many partnerships. At a minimum, a partnership agreement should address investment percentages, profit-sharing percentages, management responsibilities and other expectations of each owner, decision-making strategies, and succession and exit strategies. So it is necessary to have all these aspects in the agreement from a legal standpoint.
A clear and complete agreement is important for every partnership, but it can be particularly important when you are going into business with a friend, a spouse, or anyone else with whom you have a personal relationship. While you might have a great personal partnership, the dynamics of that relationship could get in the way of a successful business partnership. In order to keep their personal relationship and business separate, the partners must form a clear agreement.
Page Ref: 99
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 2
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
91) Compare and contrast private corporations and public corporations.
Answer: The stock of a private corporation, also known as a closely held corporation, is owned by only a few individuals or companies and is not made available for purchase by the public. In contrast, the stock of a public corporation is sold to anyone who has the means to buy it – individuals, investment companies such as mutual funds, not-for-profit organizations, and other companies. These companies are said to be publicly held or publicly traded.
Page Ref: 100
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
92) You work for a European company that is planning to launch business in the United States. The firm is planning to incorporate the new business as a partnership with a domestic firm in the U.S. Present the arguments for changing the company’s decision and incorporating the business as a corporation.
Answer: The students should present arguments for registering a business as a corporation. It has such advantages as increased ability to raise capital, increased liquidity, longevity, and limited liability. The arguments should be presented consistent with the context described here. Student answers will vary due to the nature of this question.
Page Ref: 100-101
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
93) Explain the major disadvantages of incorporating a business as a corporation.
Answer: The major disadvantages of incorporating a business as a corporation are the following:
(1) Cost and complexity: Starting a corporation is more expensive and more complicated than starting a sole proprietorship or a partnership, and “taking a company public” (selling shares to the public) can be extremely expensive for a firm and time consuming for upper managers.
(2) Reporting requirements: To help investors make informed decisions about stocks, government agencies require publicly-traded companies to publish extensive and detailed financial reports. These reports can eat up a lot of staff and management time, and they can expose strategic information that might benefit competitors or discourage investors unwilling to wait for long-term results.
(3) Managerial demands: Top executives must devote considerable time and energy to meeting with shareholders, financial analysts, and the news media.
(4) Possible loss of control: Outside investors who acquire enough of a company’s stock can gain seats on the board of directors and therefore begin exerting their influence on company management. In extreme cases, outsiders can take complete control and even replace the company founders if they believe a change in leadership is needed.
(5) Double taxation. A corporation must pay federal and state corporate income tax on its profits, and individual shareholders must pay income taxes on their share of the company’s profits received as dividends (periodic payments that some corporations opt to make to shareholders).
(6) Short-term orientation of the stock market. Publicly held corporations release their financial results once every quarter, and this seemingly simple requirement can have a damaging impact on the way companies are managed. The problem is that executives feel the pressure to constantly show earnings growth from quarter to quarter so that the stock price keeps increasing.
Page Ref: 101
Difficulty: Moderate
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
94) Compare and contrast a limited liability company and a benefit corporation.
Answer: The limited liability company (LLC) structure offers the advantages of limited liability, along with the pass-through taxation benefits of a partnership. Furthermore, LLCs are not restricted in the number of shareholders they can have, and members’ participation in management is not restricted as it is in limited partnerships. Given these advantages, the LLC structure is recommended for most small companies that aren’t sole proprietorships.
A benefit corporation has most of the attributes of a regular corporation but adds the legal requirement that the company must also pursue a stated non-financial goal, such as hiring workers whose life histories make employment difficult to attain or reducing the environmental impact of particular products. The corporation’s performance toward meeting that goal must be independently verified as well. These requirements offer key advantages to founders and other stakeholders.
Page Ref: 102
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 3
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
95) Select an organization of your choice. Construct a model that shows the corporate governance structure of the organization.
Answer: The students should identify a company and draw the corporate governance structure. The students should include such details as the number of members in the board and the corporate officers working under the board. Student answers will vary due to the nature of this question.
Page Ref: 103
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
96) What is shareholder activism?
Answer: Shareholder activism refers to activities taken by shareholders (individually or in groups) to influence executive decision making in areas ranging from strategic planning to social responsibility. Activist shareholders are becoming better organized and more sophisticated in proposals they present, forcing boards to pay more attention to the concerns they raise. At the same time, more boards seem to recognize the benefits to be gained by engaging activists and listening to their concerns.
Page Ref: 104
Difficulty: Moderate
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
97) Explain the role of corporate officers in corporate governance.
Answer: Corporate officers play a key role in corporate governance. They are the top executives who run the company. Because they implement major board decisions, make numerous other business decisions, ensure compliance with a dizzying range of government regulations, and perform other essential tasks, the executive team is the major influence on a company’s performance and financial health. The highest-ranking officer is the chief executive officer (CEO), and that person is aided by a team of other “C-level” executives, such as the chief financial officer (CFO), chief information officer (CIO), chief technology officer (CTO), and chief operating officer (COO) – titles vary from one corporation to the next.
Page Ref: 105
Difficulty: Moderate
Chapter LO: 4
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
98) Compare and contrast mergers and acquisitions.
Answer: In a merger, two companies join to form a single entity. Companies can merge either by pooling their resources or by one company purchasing the assets of the other. Although not strictly a merger, a consolidation, in which two companies create a new, third entity that then purchases the two original companies, is often lumped together with the other two merger approaches.
In an acquisition, one company buys a controlling interest in the voting stock of another company. In most acquisitions, the selling parties agree to be purchased; management is in favor of the deal and encourages shareholders to vote in favor of it as well. Because buyers frequently offer shareholders more than their shares are currently worth, sellers are oft en motivated to sell.
Page Ref: 106
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
99) Compare the three common types of mergers.
Answer: Vertical Merger occurs between different stages or levels of the same industry. A merger between lumber supplier and furniture maker is an example of a vertical merger. Horizontal Merger occurs between different companies at the same stage or level. A merger between a lumber supplier and a leather supplier is an example of a horizontal merger. Conglomerate Merger occurs between companies in unrelated industries.
Page Ref: 107
Difficulty: Difficult
AACSB: Reflective Thinking Skills
Chapter LO: 5
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Synthesis
100) Distinguish between strategic alliances and joint ventures.
Answer: While strategic alliances avoid much of the work and risk of formal mergers, they don’t create a unified entity that functions with a single management structure, information system, and other organizational elements. In contrast, a joint venture lets companies create an operation that is more tightly integrated than a strategic alliance but without disrupting the original companies to the extent that a merger or acquisition does.
Page Ref: 109;110
Difficulty: Moderate
Chapter LO: 6
Course LO: Discuss the factors that influence decisions about organizational structure
Classification: Concept
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Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
