Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following is an example of an implicit cost a firm might incur?
1)
A)
the rental value of the office space the company owns and uses for itself
B)
the revenue a firm generates in using its resources
C)
taxes owed to the state and federal governments
D)
the out–of–pocket expense to hire resources
2)
Who controls a sole proprietorship?
2)
A)
bondholders
B)
the sole proprietor
C)
stockholders
D)
All of above
B
3)
When you buy previously–issued shares of Google stock, this transaction takes place in the
3)
A)
bear market.
B)
primary market.
C)
secondary market.
D)
bond market.
C
4)
If a corporate bond with a face value of $2,000 pays coupon payments yearly of $50, what is the
coupon rate?
4)
A)
4%
B)
40%
C)
2.5%
D)
25%
C
A
5)
What is a primary market?
5)
A)
a market where you can sell any bonds you own as a private investor
B)
a market where newly issued claims are sold to initial buyers by the borrowing firm
C)
a market where primary inputs such as steel are sold
D)
a market where you can sell any stocks you own as a private investor
6)
If a corporation retains all its profits and distributes none of the profit to owners, how can owners
benefit?
6)
A)
Shares of stock can be converted into bonds so stockholders will be able to earn coupon
payments.
B)
If the retained earnings are expected to create future profits, the market price of the firm’s
stock will increase and create a capital gain for stockholders if the stock is sold.
C)
The owners’ federal income tax liability is reduced by their share of the corporation’s retained
earnings.
D)
Owners will only benefit if some profits are paid out in the form of dividends.
7)
What do the highest stock price and the lowest stock price over the previous year indicate?
7)
A)
how volatile the stock’s market price has been
B)
they generate the dividend yield
C)
what the stock’s price–earnings ratio is
D)
add them together and divide by two to get the stock’s current market price
8)
In response to accounting scandals in 2002, the federal government passed what legislation
requiring that corporate directors have a certain level of expertise with financial information and
mandating that chief executive officers personally certify the accuracy of financial statements?
8)
A)
the 24th amendment to the Constitution
B)
Kennedy–Lott Act
C)
Sarbanes–Oxley Act
D)
The Accountant Reliability Act
9)
Which type of businesses earns the majority of revenues in the United States?
9)
A)
sole proprietorships
B)
corporations
C)
partnerships
D)
none of these
10)
What do economists call a situation where a hired manager does not have the same interests as the
owners of a business?
10)
A)
the financial problem
B)
a financial intermediary problem
C)
a principal–agent problem
D)
conquest and control
11)
Assume you set up a sole proprietorship and your lawyer tells you that as the owner you will face
unlimited liability. What does that mean?
11)
A)
You could stand to lose your personal wealth if the business goes bankrupt.
B)
You are liable for organizing the business.
C)
There is no legal responsibility of the business in case a customer sues, as the business is
legally untouchable.
D)
None of these explain what unlimited liability means.
12)
The existence of the principal–agent problem
12)
A)
implies that managers that have the same incentives as the board of directors.
B)
increases the risk of becoming the sole proprietor of a business.
C)
increases the risk of buying stock in a corporation.
D)
does all of the above.
13)
The financial statements of firms generally are audited by
13)
A)
the board of directors of the corporation being audited.
B)
employees of private accounting firms.
C)
employees of the firm being audited.
D)
employees of the federal government.
14)
Which of the following is not an advantage of starting a new business as a corporation?
14)
A)
possibility of double taxation
B)
enhanced ability to raise funds
C)
ability to share risks
D)
separation of ownership and business liability
15)
Why do corporations want to keep the price of their stock high?
15)
A)
Higher stock prices are correlated with lower expected profitability.
B)
A higher stock price increases the funds the firm can raise when it sells a given amount of
stock
C)
Corporations can pay their managers lower salaries and avoid principal–agent problems
when stock prices are higher.
D)
All of the above provide incentive for corporations to keep the price of their stock high.
16)
If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,
this is an example of
16)
A)
indirect finance.
B)
a bond market transaction.
C)
a stock market transaction.
D)
direct finance.
17)
In corporations, there is “separation of ownership from control.” What does this mean?
17)
A)
Top corporate managers only make decisions that have been approved unanimously by
shareholders.
B)
The board of directors controls corporate operations, although the managers of the
corporation own the corporation.
C)
The shareholders control the corporation, although the board of directors owns the
corporation.
D)
The managers of the corporation run the corporation, although the shareholders own the
corporation.
18)
Which types of businesses earn the majority of profits in the United States?
18)
A)
corporations
B)
sole proprietorships
C)
partnerships
D)
none of these
19)
What can be done to deal with the principal–agent problem?
19)
A)
threaten to liquidate the firm
B)
have the CEO be a rotating position
C)
forbid managers from owning any company stock
D)
link top manager salaries to the profits of the firm or the price of the firm‘s stock
20)
A nonmonetary opportunity cost is called a(n) ________, while a cost that involves spending money
is called a(n) ________.
20)
A)
accounting cost; explicit cost
B)
accounting profit; economic profit
C)
implicit cost; explicit cost
D)
normal rate of return; asset
21)
Who operates and controls a corporation in its day–to–day activities?
21)
A)
the employees
B)
the board of directors
C)
the corporation‘s management
D)
the stockholders
22)
Which of the following must a firm in a market economy do to succeed?
22)
A)
organize the factors of production into a functioning, efficient unit.
B)
produce the goods and services that consumers want at a lower cost than consumers
themselves can produce.
C)
have access to sufficient funds.
D)
market firms today must do all of these things.
23)
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He asks his
friend, Carmen, if she’d like to join him in setting up a partnership to start the business. What is
one disadvantage in joining the partnership that Carmen should consider?
23)
A)
Carmen should realize that, as an owner of the business, she will be personally responsible
for the business’ debts.
B)
Carmen should realize that the Jeremy will have complete control over the business because it
was his idea.
C)
Carmen should realize that the profits of the business will also be taxed as dividend income,
so she faces the potential for double taxation of that income.
D)
Carmen should realize that profits in the partnership will be reduced by dividend payments
to shareholders.
24)
How are corporate profits taxed in the United States?
24)
A)
Profits are taxed first as corporate profits, then as personal income after dividends are paid.
B)
Profits are taxed first by state sales taxes and then as corporate profits at the federal level.
C)
Profits are taxed first as personal income, then as corporate profits at the federal level.
D)
Corporate profits are not taxed at all.
25)
David Myers, former controller for WorldCom, pleaded guilty to falsely reported costs for
WorldCom that were ________ than they actually were, resulting in reported accounting profits for
WorldCom that were ________ than their actual level.
25)
A)
higher; higher
B)
lower; higher
C)
higher; lower
D)
lower; lower
26)
What is the most common type of business?
26)
A)
corporations
B)
sole proprietorships
C)
partnerships
D)
By law, there are an equal number of corporations, partnerships and sole proprietorships.
27)
The Sarbanes–Oxley Act of 2002 requires that firms maintain effective controls over financial
reporting. This requirement has increased costs for many corporations, and some economists
believe that this increased cost has resulted in
27)
A)
an increase in the benefits of uncovering dishonest accounting irregularities.
B)
a decrease in the number of stocks listed on the New York Stock Exchange relative to Nasdaq.
C)
an increase in the likelihood that firms will issue stock to raise finances.
D)
a decrease in the proportion of new stock listings in the United States relative to new stock
listings in foreign countries.
28)
What is an inside director?
28)
A)
a board of director chair who has been in the job for at least three years
B)
a movie director who also appears in the movie
C)
the CEO that is selected by the corporation’s board of directors
D)
member of a corporate board of directors that is also a manager of the business
29)
What takes place in the indirect finance market?
29)
A)
Part ownership of corporations is sold in the form of stocks.
B)
Deposits of savers are accepted and loans made to borrowers.
C)
Corporate and government bonds are sold to savers.
D)
Government purchases of buildings and equipment are sold to the highest bidder.
30)
Which type of business must follow the fewest number of government rules and regulations?
30)
A)
a sole proprietorship
B)
a corporation
C)
a partnership
D)
The number of rules and regulations for each business type has never been determined.
31)
Which of the following would explain why accounting profit might be greater than economic
profit?
31)
A)
A firm’s net income is less than its accounting profit.
B)
A firm’s net income is greater than its accounting profit.
C)
A firm has implicit costs as well as explicit costs.
D)
A firm has only explicit costs.
32)
What is the relationship of the owners of a corporation to the corporation?
32)
A)
The personal assets of the owners are part of the corporation’s assets.
B)
The owners of the corporation have no separate legal distinction from the corporation.
C)
The owners of the corporation have a separate legal distinction from the corporation.
D)
None of the above describes the relationship.
33)
By tying the salaries of top corporate managers to the price of the corporation‘s stock, corporations
hope to avoid
33)
A)
corporate governance.
B)
conflict between the CFO and the CEO.
C)
paying high salaries to their managers.
D)
the principal–agent problem.
34)
The minimum amount that investors must earn on the funds they invest in a firm, expressed as a
percentage of the amount invested, is referred to as
34)
A)
net income.
B)
a normal rate of return.
C)
net worth.
D)
the explicit costs of production.
B
35)
Which is the least common type of business?
35)
A)
partnerships
B)
corporations
C)
sole proprietorships
D)
impossible to determine without further information
A
36)
Because the company Lloyd’s of London was set up as a partnership, owners of the company face
36)
A)
limited liability.
B)
negative economic profits.
C)
unlimited liability.
D)
stockholder remorse.
C
37)
A stock’s dividend yield is determined by
37)
A)
subtracting the stock’s initial purchase price from the stocks’ closing market price on a given
day.
B)
dividing the stock’s closing market price by the dividend payment.
C)
dividing the dividend payment by the stock’s initial price.
D)
dividing the dividend payment by the stock’s closing market price.
D
D
38)
Which of the following is part of the secondary market?
38)
A)
NASDAQ
B)
the over–the–counter market
C)
New York Stock Exchange
D)
all of the above
39)
Which type of business has the most government rules and regulations affecting it?
39)
A)
a partnership
B)
a corporation
C)
a sole proprietorship
D)
All types of business have the same set of rules and regulations.
40)
How has organizing a successful firm in a market economy changed over the last century?
40)
A)
There has been no change over the last century.
B)
It has become more difficult to organize an efficient and successful firm.
C)
As government intervention has decreased, firms now have more freedom.
D)
It has become easier as more and more firms discover how to do it.
41)
Who owns a corporation?
41)
A)
the corporation’s stockholders
B)
the corporation’s board of directors
C)
the corporation’s hired managers
D)
none of the above
42)
If a corporate bond with face value of $1,000 has an interest rate of eight percent paid once a year
for a term of 30 years, what is the size of the coupon payment?
42)
A)
$1,000
B)
$80
C)
$8
D)
$300
43)
Which of the following does not take place in the direct finance market?
43)
A)
Corporate bonds are sold to savers.
B)
Ownership in corporations is sold in the form of preferred stock.
C)
Ownership in corporations is sold in the form of common stock.
D)
Deposits from savers are accumulated and loans made to borrowers.
44)
When an investor buys a corporate bond,
44)
A)
the principal of the bond is a loan to the corporation.
B)
the investor becomes part owner of the corporation.
C)
the interest made on the bond represents the bondholder’s limited liability in the company.
D)
the face value of the bond is equal to what the investor paid for the bond.
45)
Which of the following is a characteristic of a bond?
45)
A)
The face value or principal plus interest is repaid at a specified period of time.
B)
A promise to repay a fixed amount of funds.
C)
The length of coupon payments is fixed by the stated maturity period.
D)
All of the above are characteristic of bonds.
46)
Google CEO, Eric Schmidt, was paid $1 in annual salary during 2006. The bulk of his
compensation came from increases the value of Google stock he owned. As a result, Schmidt’s
incentive was to
46)
A)
reduce Google’s profits.
B)
take actions that increased Google’s stock price.
C)
reduce the number of shares of Google stock he owned.
D)
undertake all of the above actions.
47)
Although China’s savings rate is much higher than most other nations, the country’s financial
system is in trouble because
47)
A)
banks are not regulated by the Chinese government.
B)
loans are sometimes made for political reasons, not based on profit expectations.
C)
the percentage of nonperforming loans granted by the financial system has decreased over
time.
D)
the costs of government regulations that require accounting transparency have prohibited
banks from making profits on loans.
48)
What is shown on a firm’s income statement?
48)
A)
profits
B)
revenues
C)
costs
D)
All of these are shown on a firm’s income statement.
49)
What is economic profit?
49)
A)
the same as accounting profit
B)
gross revenue minus explicit costs
C)
gross revenue minus explicit and implicit costs
D)
gross revenue minus implicit costs
50)
What type of business is the easiest to set up?
50)
A)
a partnership
B)
a sole proprietorship
C)
a corporation
D)
all types of business require the same amount of effort and expense.