Question

Which of the following statements is CORRECT? a. Relative to sole proprietorships, corporations generally face fewer regulations, and they also find it easier to raise capital. Stockholders should generally be happier than bondholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. There is no good reason to expect a firm's stockholders and bondholders to react differently to the types of assets in which it C. invests. Bondholders should generally be happier than stockholders to have managers invest in risky projects with high potential returns as opposed to safe projects with lower expected returns. One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more e. personal liability than are partners.

Answer 1

ANSWER NO. 1 - Option (b)

Yes, the stockholders are generally happy with projects having high potential returns.

the reason behind this is, a stockholder gets its dividend out of profits unlike the bondholders who get a fixed rate of interest in their investment. Thus, higher profits are beneficial to the stockholders only.

ANSWER NO. 2 - Option (c)

A bond covenant is a legally binding term of agreement between a bond issuer and a bondholder. Bond covenants are designed to protect the interests of both parties. Negative or restrictive covenants forbid the issuer from undertaking certain activities; positive or affirmative covenants require the issuer to meet specific requirements.

In this way, the interest of the stockholders is safeguarded and the chances of conflicts are minimised.

ANSWER NO. 3 - Option (a)

The basic characteristic of a proprietorship is UNLIMITED LIABILITY. Whereas, the liability of the stockholders in a corporation is limited to its share in the company.

Thus, in the case of bankruptcy, a proprietor may have to use its personal property to pay-off the debt, but a stockholders is liable to pay only the unpaid part of its share-holding.

ANSWER NO. 4 - Option  (b)

In a partnership firm, the profit is appropriated to the partners and the partners are liable to pay the income taxes separately along with their other incomes.

ANSWER NO. 5 - Option (e)

A publicly-owned firm is more interested in societal welfare rather than profit maximisation.

Out of all the options mentioned above, option (e) is the best match as it suggests proper compensation of managers to avoid conflicts.