13) When an investor buys a corporate bond,
A) the investor becomes part owner of the corporation.
B) the principal of the bond is a loan to 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.
14) The interest payment on a bond is called
A) the coupon payment.
B) principal.
C) the interest rate.
D) the face value.
15) If a corporation earns a profit, how do owners of the firm share in the profit?
A) through coupon payments on that firm’s bonds
B) through dividend payments on shares of that firm’s stock
C) by selling any bonds or stocks owned and realizing a capital gain
D) by raising the interest rate on bonds
16) The profits a corporation keeps to finance future expansion are known as
A) retained earnings.
B) preferred stock.
C) dividends.
D) capital gains.
17) If a corporation goes bankrupt, which of the following has first claim on the firm’s assets?
A) stockholders
B) the state where chartered
C) employees
D) bondholders
18) What is a primary market?
A) a market where primary inputs like steel are sold
B) a market where you can sell any bonds you own as a private investor
C) a market where a newly issued claims are sold to initial buyers by the borrowing firm
D) a market where you can sell any stocks you own as a private investor
19) What happens in the secondary market?
A) secondary inputs like electricity are sold
B) a corporate financial manager will raise funds for expansion of the firm
C) newly issued claims are sold by the borrowing firm to the initial buyer
D) already issued claims are sold from one investor to another
20) When you buy newly-issued shares of Google stock, this transaction takes place in the
A) primary market.
B) bond market.
C) secondary market.
D) bear market.
21) Which of the following is part of the secondary market?
A) New York Stock Exchange
B) the over-the-counter market
C) NASDAQ
D) all of these
22) One of the most widely followed stock indexes in the United States is the Dow Jones
Industrial Average. This index represents
A) the stock prices of 500 large U.S. firms.
B) an over-the-counter market.
C) the stock prices of more than 4,000 U.S. firms.
D) the stock prices of 30 large U.S. corporations.
23) When the coupon rate on newly issued bonds decreases relative to older, outstanding bonds,
what happens?
A) The market price of the older bond falls in the secondary market.
B) The market price of the older bond rises in the secondary market.
C) Older bonds can still be sold at their face value.
D) Older bonds will sell for more than their face value.
24) 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?
A) Coupon payments on newly-issued bonds rise to $80 per year.
B) The likelihood that the firm issuing your bond will default on debt increases.
C) The price of a share of stock in the company falls.
D) Coupon payments on newly-issued bonds fall to $50 per year.
25) Dividing the dividend payment by the stock’s closing market price determines the
A) coupon payment.
B) dividend yield.
C) price-earnings ratio.
D) selling price of the stock.
26) What do the highest stock price and the lowest stock price over the previous year indicate?
A) Add them together and divide by two to get the stock’s current market price.
B) what the stock’s price-earnings ratio is
C) how volatile the stock’s market price has been
D) They generate the dividend yield.
27) Dividing the current market price of a stock by the firm’s earnings per share gives the firm’s
A) price-earnings ratio.
B) year-to-date percentage change.
C) dividend yield.
D) stock coupon maturity yield.
28) In November 2011, General Motors (GM) posted a price-earnings ratio of 4.73. If the price
of the stock at that time was $23 per share, which of the following must have been true?
A) GM’s revenues that month were $250.2 million.
B) GM’s earnings per share was $4.86.
C) GM’s coupon payment was $23 per year.
D) GM’s dividend yield for the year was 20.6%.
29) Total dividend payments plus retained earnings divided by outstanding stock shares equals
A) the price-earnings ratio.
B) earnings per share.
C) the dividend yield.
D) the year-to-date percentage change.
30) In 2011, the dividend yield on Abercrombie & Fitch (ANF) stock fell from a high of 1.39%
in January to 0.96% in July. Which of the following would have generated that result?
A) The closing price of ANF stock fell.
B) ANF announced a decrease in the dividend it would pay per share.
C) The price-earnings ratio rose.
D) ANF issued bonds with a coupon rate equal to 1.39%.
31) When Internet coupon site Groupon sold stock to the public for the first time following its
IPO in November 2011, it did so through the NASDAQ market. This was an example of
Groupon raising funds through
A) reinvesting retained earnings.
B) a financial intermediary.
C) dividend reinvestment.
D) a financial market.
32) When Internet coupon site Groupon sold stock to the public for the first time following its
IPO in November 2011, it did so through the NASDAQ market. This was an example of
Groupon using ________ to raise funds.
A) indirect finance
B) direct finance
C) bonds
D) corporate governance
33) When Internet coupon site Groupon sold stock to the public for the first time, funds were
being raised in a ________ market, and when those newly issued shares are resold to other
buyers, the sales take place in a ________ market.
A) primary; primary
B) primary; secondary
C) secondary; primary
D) secondary; secondary
34) Generally with bond ratings, the higher the rating, the ________ the interest rate an investor
will receive and the ________ the the risk that the issuer of the bond will default.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
35) In August 2011, Standard & Poor’s (S&P) changed its rating on U.S. Treasury bonds from
________ based on the state of the federal government’s budget deficit.
A) “A” to “D”
B) “A” to “AAA”
C) “A+” to “B+”
D) “AAA” to “AA+”
36) 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 secondary financial market
37) Direct finance includes the sale by a corporation of stocks or bonds, but does not include
borrowing money from a bank.
38) How can a partnership raise funds needed for firm expansion?
39) What is a corporate bond and what does it specify?
40) How do firms raise external funds through indirect finance?
41) 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?
42) What is the difference between retained earnings and dividends?
8.4 Using Financial Statements to Evaluate a Corporation
1) What are liabilities?
A) anything of value owned by a person or a business
B) anything a person or a business owes to entities outside the business
C) the total cost of labor for a firm
D) only those unpaid expenses for which a business or person is making interest payments
2) An explicit cost is
A) a nonmonetary opportunity cost.
B) a cost specifically related to government rules and regulations.
C) a cost that involves spending money.
D) a cost unique to corporations.
3) An asset is
A) anything of value owned by a person or a firm.
B) a payment by a corporation to its shareholders.
C) a nonmonetary opportunity cost.
D) anything owed by a person or a firm.
4) Which of the following is an example of an implicit cost a firm might incur?
A) the out-of-pocket expense to hire resources
B) taxes owed to the state and Federal governments
C) the rental value of the office space the company owns and uses for itself
D) the revenue a firm generates in using its resources
5) What is accounting profit?
A) gross revenue minus explicit costs
B) gross revenue minus implicit costs
C) gross revenue minus explicit and implicit costs
D) the same as economic profit
6) Which of the following would explain why accounting profit might be greater than economic
profit?
A) A firm has implicit costs as well as explicit costs.
B) A firm has only explicit costs.
C) A firm’s net income is greater than its accounting profit.
D) A firm’s net income is less than its accounting profit.
7) A normal rate of return refers to the ________ that investors must earn on the funds they
invest in a firm, expressed as a percentage of the amount invested.
A) minimum amount
B) maximum amount
C) total amount
D) profit
8) 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?
A) $200,000
B) $400,000
C) $500,000
D) $2.8 million
9) 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. Based on this information, what is accounting
profit for Laura’s Pizza Place?
A) $200,000
B) $400,000
C) $500,000
D) $900,000
10) Tanesha sells homemade candles over the Internet. Her annual revenue is $64,000 per year,
the explicit costs of her business are $17,000, and the opportunity costs of her business are
$22,000. What is her accounting profit?
A) $17,000
B) $22,000
C) $47,000
D) $64,000
11) Tanesha sells homemade candles over the Internet. Her annual revenue is $64,000 per year,
the explicit costs of her business are $17,000, and the opportunity costs of her business are
$22,000. What are the implicit costs of her business?
A) $17,000
B) $22,000
C) $39,000
D) $47,000