Question

Which of the following statements is CORRECT?

A) A good goal for a firm's management is the maximization of expected EPS.
B) Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.
C) Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers.
D) Corporations and partnerships have an advantage over proprietorships because a proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.
E) For a stock to be in equilibrium, its intrinsic value must be greater than the actual market price.

Answer 1

The correct answer is C) which states that conflicts can exist between stockholders and managers, but these are mitigated by mechanisms such as hostile takeovers.

Step-by-step explanation:

The correct statement is C), Conflicts can exist between stockholders and managers, but potential conflicts are reduced by the possibility of hostile takeovers. It acknowledges the agency problem within a firm while also recognizing a market mechanism that can align interests. Statement A) is incorrect because EPS maximization does not necessarily equate to shareholder wealth maximization, which is the broader goal. Statement B) is incorrect since corporations' popularity is not primarily attributed to their favorable tax treatment but to factors like limited liability, perpetual existence, and ease of raising capital. Statement D) is partially correct, but the comparison is not between corporations and partnerships, but rather between corporations and sole proprietorships, as partnerships do not offer limited liability for all partners. Finally, Statement E) is incorrect since for a stock to be in equilibrium, its intrinsic value must be equal to the actual market price.