Ijaz Tahir
M.Com & M.A (Econ)
Chapter 2
The Business Tax and Financial Environments
Multiple choice questions
Q:1 In finance we refer to the market for short-term government and corporate debt
securities as the __________ market.
a. money
b. secondary
c. primary
d. capital
Q:2 Which of the following would generally have unlimited liability?
a. A limited partner in a partnership.
b. A member in a limited liability company (LLC).
c. The owner of a sole proprietorship.
d. A shareholder in a corporation.
Q:3 The Chance Dice Corporation had taxable income (excluding capital gains) of
$16 million. Under the Revenue Reconciliation Act of 1993, the firm's $10,000 of
realized capital gains will be taxed at __________.
a. 39 percent
b. 35 percent
c. the average tax rate of the firm
d. 34 percent
Q:4 The average tax rate is equal to the __________.
a. total tax liability divided by taxable income
b. rate that will be paid on the next dollar of taxable income
c. percentage increase in taxable income from the previous period
d. median marginal tax rate
Q:5 Accounting.com has purchased 3-year class equipment for $100,000. It uses the
MACRS method of depreciation. What is tax depreciation for the fourth year?
a. $0
b. $33,333
c. $25,000
d. $7,410
Q:6 In finance we refer to the market where existing securities are bought and sold
as the __________ market.
a. money
b. capital
c. secondary
d. primary
Q:7 Which of the following is not an example of a financial intermediary?
a. Wisconsin S&L, a savings and loan association.
b. College Credit, a credit union.
c. Microsoft Corporation, a software firm.
d. Strong Capital Appreciation, a mutual fund
Q:8 How are funds allocated efficiently in a market economy?
a. The economic unit that considers itself most in need of funds receives funds first
followed by those who are less in need.
b. The economic unit that is willing to pay the highest expected return for a given
risk level receives the funds.
c. The largest economic units receive the funds first followed by smaller firms if
sufficient funds are available.
d. Receipt of funds is rotated over time so that each economic unit can receive them
in turn.
Q:9 What mechanism ensures that large firms who benefit from tax laws pay some
minimum amount of tax?
a. Annual minimum tax.
b. Corpulent minimum tax.
c. Minimum tax law.
d. Alternative minimum tax
Ijaz Tahir
M.Com & M.A (Econ)
Ijaz Tahir
M.Com & M.A (Econ)
Q:10 A profitable firm would prefer to use which of the following methods of
depreciation -- for tax purpose -- for a given depreciable asset, all else equal?
a. Straight-line.
b. Double-declining-balance.
c. All of the above techniques are equally useful for a profitable firm because they
provide the same tax deductions over the life of the asset.
d. Modified accelerated cost recovery system.
Q:11 A major disadvantage of the corporate form of organization is the __________.
a. double taxation of dividends
b. inability of the firm to raise large sums of additional capital
c. limited life of the corporate form
d. limited liability of shareholders
Q:12 Which of the following examples would be deductible as an expense on the
corporation's income statement?
a. Interest paid on outstanding bonds.
b. All of the above
c. Cash dividends paid on outstanding preferred stock.
d. Cash dividends paid on outstanding common stock.
Q:13 A corporation that receives $1,000 in dividends from another corporation, of
which they have owned 10% for one full year, will be taxed on how much of those
dividends?
a. All $1,000 of the dividends.
b. None of the dividends since it is from another corporation.
c. $300 (30% of $1,000) since 70% of dividends is tax exempt.
d. $100 (10% of $1,000) since they owned a 10% position for at least 6 months.
Q:14 In finance we refer to the market where new securities are bought and sold for
the first time as the __________ market.
a. money
b. secondary
c. primary
d. capital
Q:15 Which of the following is an advantage of a corporation that is not an
advantage as a limited partner in a partnership?
a. Limited liability.
b. All of the above are advantages that the corporation has over the limited partner.
c. Double taxation.
d. Easy transfer of ownership position.
Q:16 Which of the following statements is correct for a sole proprietorship?
a. The sole proprietor has limited liability.
b. The owner of a sole proprietorship faces double taxation unlike the partners in a
partnership.
c. The sole proprietorship can be created more quickly than a corporation.
d. The sole proprietor can easily dispose of their ownership position relative to a
shareholder in a corporation.
Q:17 What is potentially the biggest advantage of a small partnership over a sole
proprietorship?
a. Unlimited liability.
b. Raising capital.
c. Difficult ownership resale.
d. Single tax filing.
Q:18 In finance we refer to the market for relatively long-term financial instruments
as the __________ market
a. money
b. secondary
c. primary
d. capital
True or false questions
Q:1 In a sole proprietorship, the owner is personally responsible for all financial
obligations of the firm.
False
Ijaz Tahir
M.Com & M.A (Econ)
Ijaz Tahir
M.Com & M.A (Econ)
True
Q:2 A mortgage banker is a financial institution that underwrites new securities for
resale.
False
True
Q:3 The purpose of financial markets is to facilitate savers depositing funds with
financial intermediaries.
False
True
Q:4 The New York Stock Exchange (NYSE) is part of the secondary market for longterm securities.
False
True
Q:5 U.S. Treasury securities are usually regarded as default free.
False
True
Answers Multiple choice questions: 1-a 2-c 3-b 4-a 5-d 6-c 7- c 8-b 9-d 10-d 11-a
12-a 13-c 14-c 15-d 16-c 17-b 18-d
Answers True or false questions: 1-T 2-F
3-F 4-T
5-T
Ijaz Tahir
M.Com & M.A (Econ)
