51)
Which of the following is an advantage of starting a new business as a corporation?
51)
A)
ability to share work
B)
double taxation of income
C)
low cost to organize
D)
greater ability to raise funds
52)
In 2002, the Enron corporation was accused of falsifying information regarding liabilities on
Enron’s balance sheets, thereby
52)
A)
increasing Enron’s assets on the balance sheet.
B)
reducing Enron’s profit on the balance sheet.
C)
reducing Enron’s net income on the income statement.
D)
increasing Enron’s net worth on the balance sheet.
53)
When the coupon rate on newly issued bonds increases relative to older, outstanding bonds, what
happens?
53)
A)
The market price of the older bond rises in the secondary market.
B)
Older bonds will sell for less than their face value.
C)
Older bonds can still be sold at their face value.
D)
The market price of the older bond falls in the secondary market.
54)
Net worth is calculated as
54)
A)
the difference between a firm’s revenues and implicit costs.
B)
the difference between a firm’s liabilities and outstanding equities.
C)
the difference between a firm’s revenues and explicit costs.
D)
the difference between a firm’s assets and liabilities.
55)
Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store, and the
company wishes to raise the funds through direct finance. Which of the following methods could it
use?
55)
A)
It could sell $8 million in bonds.
B)
It could borrow $8 million from a bank.
C)
It could issue $8 million in stocks.
D)
It could choose either A or C.
56)
In 2007, the dividend yield on General Motors (GM) stock fell from 8.6% to 4.4%. Which of the
following would have generated that result?
56)
A)
GM announced a decrease in the dividend it would pay per share.
B)
The closing price of GM stock fell.
C)
GM issued bonds with a coupon rate equal to 8%.
D)
The price–earnings ratio rose.
57)
Laura’s Pizza Place incurs $800,000 per year in explicit costs and $100,000 in implicit costs. The
restaurant earns $1.3 million in revenues and has $5 million in net worth. Based on this
information, what is economic profit for Laura’s Pizza Place?
57)
A)
$200,000
B)
$400,000
C)
$500,000
D)
$2.8 million
58)
In addition to requiring that CEO’s personally certify the accuracy of financial statements, the
Sarbanes–Oxley Act of 2002 also requires that
58)
A)
CEOs conduct audits of their corporations themselves.
B)
auditors disclose any potential conflicts of interest.
C)
corporations issue financial statements monthly rather than quarterly.
D)
firms raise funds for expansion through the sale of bonds only, not stocks.
59)
In June 2007 General Motors (GM) posted a price–earnings ratio of 9.84. If the price of the stock at
that time was $36 per share, which of the following must have been true?
59)
A)
GM’s coupon payment was $35 per year.
B)
GM’s revenues that month were $366 million.
C)
GM’s dividend yield for the year was 26%.
D)
GM’s earnings per share was 3.66.
60)
How can a corporation raise funds needed for expansion?
60)
A)
by borrowing from financial institutions
B)
by issuing stock
C)
by selling bonds
D)
All of the above allow corporations to raise funds needed for firm expansion.
61)
If a corporation earns a profit, how do owners of the firm share in the profit?
61)
A)
by selling any bonds or stocks owned and realizing a capital gain
B)
by raising the interest rate on bonds
C)
coupon payments on that firm’s bonds
D)
dividend payments on shares of that firm’s stock
62)
A firm’s accounting profit is also its
62)
A)
economic profit.
B)
net income.
C)
income statement.
D)
statement of liabilities.
63)
Who selects the board of directors of a corporation?
63)
A)
the corporation’s employees
B)
the corporation’s managers
C)
the state where the corporation is chartered.
D)
the corporation‘s stockholders
64)
The Sarbanes–Oxley Act of 2002 was passed in response to what event?
64)
A)
volatility in the Nasdaq indexes
B)
historically low bond prices
C)
unexpected increases in dividend payments to stockholders at various corporations
D)
a series of accounting scandals
D
65)
The way in which a corporation is structured and the impact a corporation’s structure has on the
firm’s behavior is referred to as
65)
A)
corporate taxation.
B)
structural behavior.
C)
corporate governance.
D)
structure composition theory.
C
66)
You have a bond that pays $60 per year in coupon payments. Which of the following would result
in an increase in the price of your bond?
66)
A)
The likelihood that the firm issuing your bond will default on debt increases.
B)
Coupon payments on newly–issued bonds fall to $50 per year.
C)
The price of a share of stock in the company falls.
D)
Coupon payments on newly–issued bonds rise to $80 per year.
B
D
67)
What is the primary difference between a sole proprietorship and a partnership?
67)
A)
Proprietorships have unlimited liability while partnerships have limited liability.
B)
Partnerships have more owners than do proprietorships.
C)
Partnerships can issue stocks and bonds while proprietorships cannot.
D)
There is no real difference between the two types of firms.
68)
Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, the explicit costs
of his business are $10,000, and the economic costs of his business are $18,000 per year. What is his
economic profit?
68)
A)
$14,000
B)
$32,000
C)
$34,000
D)
$24,000
69)
Which of the following is not an advantage of starting a new business as a sole proprietorship?
69)
A)
It is easy to obtain additional funding.
B)
The owner has complete control over the business.
C)
Business profits are only taxed once, not twice.
D)
There are no government rules and regulations to comply with.
70)
What is the central role of financial intermediaries in a market economy?
70)
A)
providing safe deposit boxes for people and businesses
B)
bringing together savers and borrowers
C)
keeping the price level stable
D)
the creation and printing of money
71)
The coupon rate of a bond is equal to
71)
A)
the interest rate.
B)
the face value.
C)
the coupon payment.
D)
the interest payment.
72)
Which of the following would be considered an implicit cost of operating a business?
72)
A)
a normal rate of return for investors
B)
wages paid to workers
C)
any explicit cost
D)
advertising expenses
73)
Which type of business is the most difficult to set up?
73)
A)
a partnership
B)
a corporation
C)
a sole proprietorship
D)
All types of business require the same amount of effort and expense.
74)
The world–famous insurance company, Lloyd’s of London, is an example of a company that is set
up as a(n)
74)
A)
corporation.
B)
partnership.
C)
individually owned business.
D)
sole proprietorship.
75)
Who controls a sole proprietorship?
75)
A)
employees
B)
stockholders
C)
bondholders
D)
the owner
76)
Who owns a corporation?
76)
A)
the corporation’s employees
B)
the corporation’s Chief Executive Owner (CEO)
C)
the corporation’s board of directors
D)
the corporation‘s stockholders
77)
How is a stock’s price–earnings ratio found?
77)
A)
by subtracting the firm’s earnings per share from the closing price of the stock
B)
by dividing current market price of the stock by the firm’s earnings per share
C)
by dividing the dividend by the closing price of the stock
D)
by dividing the dividend by the firm’s earnings per share
78)
Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering
setting up his business as a sole proprietorship. What is one advantage to Jeremy of setting up his
business as a sole proprietorship?
78)
A)
As a sole proprietor, Jeremy would face limited liability.
B)
As a sole proprietor, Jeremy would have both ownership and control over the business.
C)
As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
D)
All of the above would be advantages of setting up his business as a sole proprietorship.
79)
How do sole proprietorships and corporations differ?
79)
A)
Corporations face more taxes than do sole proprietorships.
B)
Sole proprietorships have unlimited liability while corporations have limited liability.
C)
Corporations can issue stocks and bonds, while sole proprietorships cannot.
D)
All of these are differences between the two types of businesses.
80)
What does limited liability mean?
80)
A)
There are legal limits placed on the amount of debt, or liability, a firm can acquire.
B)
Only employees can have a claim on the assets of a business.
C)
The owners of a business are personally responsible for paying expenses incurred by the
business.
D)
The personal assets of the owners cannot be claimed if a business goes bankrupt.
81)
How can a proprietorship or partnership raise funds for expansion?
81)
A)
take one or more partners
B)
reinvest profit back into the business
C)
borrow from someone or an institution willing to lend the funds
D)
Any of these would generate funds for expansion.
82)
Who hires the managers of a corporation?
82)
A)
the corporation’s managers
B)
the corporation’s stockholders
C)
the corporation’s employees
D)
the corporation’s board of directors
83)
Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, the explicit costs
of his business are $10,000, and the opportunity costs of his business are $18,000 per year. What are
the implicit costs of his business?
83)
A)
$18,000
B)
$32,000
C)
$8,000
D)
$24,000
84)
What are liabilities?
84)
A)
the total cost of labor for a firm
B)
anything of value owned by a person or a business
C)
anything a person or a business owes to entities outside the business
D)
only those unpaid expenses for which a business or person is making interest payments
85)
If a corporation goes bankrupt, which of the following has first claim on the firm’s assets?
85)
A)
the corporation‘s stockholders
B)
the state where the corporation was chartered
C)
the corporation‘s bondholders
D)
the corporation’s employees
86)
Larry Page and Sergey Brin sold shares of ownership in Google to the public in 2004. The price of
shares of stock in Google’s initial public offering was determined by
86)
A)
the Federal Reserve.
B)
an automated online auction.
C)
Google’s board of directors.
D)
the president of the New York Stock Exchange.
87)
What happens in a secondary market?
87)
A)
A corporate financial manager will raise funds for expansion of the firm.
B)
Already issued claims are sold from one investor to another.
C)
Secondary inputs like electricity are sold.
D)
Newly issued claims are sold by the borrowing firm to the initial buyer.
88)
Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, and the explicit
costs of his business are $10,000. What is his accounting profit?
88)
A)
$22,000
B)
$10,000
C)
$32,000
D)
$42,000
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
89)
What is the best mix of inside and outside members on a corporate board of directors?
89)
90)
How can a sole proprietorship raise funds needed for expansion?
90)
91)
Who decides who controls a corporation?
91)
92)
Why might it be good for members of a corporation’s board of directors to own the firm’s
stock?
92)
93)
Define a sole proprietorship.
93)
94)
How is economic profit found?
94)
95)
How do unlimited and limited liability differ?
95)
96)
What are the advantages of setting up a proprietorship or partnership as opposed to a
corporation?
96)
97)
How does the principal–agent problem extend to managers and employees?
97)
98)
What type of business has the potential for double taxation of profits and why?
98)
99)
Who is the seller in a primary market and who is the seller in a secondary market?
99)
100)
Scott is a manager at a pool cleaning business. He has hired 10 workers to clean pools for
him and is considering what type of payment scheme he should set up for his workers. He
can pay each of his workers $10 per hour to clean pools, or he can pay his workers $20 for
each pool a worker cleans. (It takes 2 hours, on average, for an employee to clean a pool
thoroughly.) If Scott wants to maximize the number of pools his workers clean in one day,
which payment scheme should he use? Explain.
100)
101)
Explain what potential conflict exists between shareholders in a corporation and the
corporation’s managers.
101)
Explanation:
102)
If you own a bond with a seven percent coupon rate and new bonds are paying five
percent, what will happen to your bond’s market price?
102)
Explanation:
103)
What is a corporate bond and what does it specify?
103)
Explanation:
104)
What role do well functioning financial markets play in a market economy?
104)
Explanation:
105)
What is the difference between explicit and implicit costs?
105)
Explanation:
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
106)
An increase in liabilities will reduce a firm’s net worth.
106)
Explanation:
107)
The Sarbanes–Oxley Act of 2002 requires that each member of the board of directors personally
certify the accuracy of financial reports.
107)
Explanation:
108)
Direct finance includes the sale by a corporation of stocks or bonds, but does not include borrowing
money from a bank.
108)
109)
Accounting profit is the difference between a firm’s revenue and its opportunity costs.
109)
110)
Corporate managers and shareholders always have the same goals.
110)
111)
The principal–agent problem that exists between shareholders and managers also exists between
managers and workers.
111)
112)
In the United States, corporate profits are taxed at the corporate level and then are taxed again as
personal income in the form of dividend payments.
112)
113)
The only type of business that faces unlimited liability is a sole proprietorship.
113)
114)
If you purchase a share of stock from your friend who initially purchased the stock three years ago,
your purchase of the stock represents a transaction in the primary financial market
114)
115)
When a business is set up as a sole proprietorship, the owner of the business faces limited liability.
115)