Which of the Following Statements Is Correct

question 82

Multiple Choice

Which of the following statements is correct?

• A) Other things held constant,it generally is safer to invest money in a proprietorship than in a partnership or a corporation.
• B) According to the text,law firms and accounting firms must be organized as proprietorships or partnerships;these businesses do not have the option of incorporating.
• C) If you are planning to start a business,which you will run as the sole employee,and if you expect the business to earn $1,000,000 per year before taxes,you can minimize federal income taxes by setting up the business as a corporation.
• D) According to the text,"agency problems" tend to increase as the percentage of a corporation's stock owned by its managers increases.
• E) Maximizing the income statement item "net income" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm's stockholders.

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Definitions:

Debt-Equity Ratio

A financial ratio that measures the relative proportion of shareholders' equity and debt used to finance a company's assets.

Financial Risk

The chance of incurring a loss in capital in an investment or business operation.

Business Risk

The potential for losses or less-than-expected profits within the operations of a company, not related to financial debt but to the business's environment and operations.

Levered Firms

Companies that have incurred debt. Leveraging amplifies both the potential returns and risks of investments.