12) 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 economic profit?
A) $17,000
B) $25,000
C) $42,000
D) $47,000
13) A firm’s net income is also its
A) economic profit.
B) balance sheet.
C) accounting profit.
D) opportunity cost.
14) A nonmonetary opportunity cost is called a(n) ________, while a cost that involves spending
money is called a(n) ________.
A) accounting cost; explicit cost
B) implicit cost; explicit cost
C) accounting profit; economic profit
D) normal rate of return; asset
15) All of the following would be considered explicit costs of operating a business except
A) rent paid to a landlord.
B) bonuses paid to employees.
C) a normal rate of return for investors.
D) corporate income taxes.
16) What is shown on a firm’s income statement?
A) costs
B) profits
C) revenues
D) All of these are shown on a firm’s income statement.
17) The difference between a firm’s assets and liabilities is its
A) accounting profit.
B) economic profit.
C) net worth.
D) implicit costs.
18) Accounting profit is the difference between a firm’s revenue and its opportunity costs.
19) A decrease in liabilities will reduce a firm’s net worth.
20) What is the difference between explicit and implicit costs?
21) How is accounting profit found?
8.5 Corporate Governance Policy and the Financial Crisis of 2007-2009
1) Why do corporations want to keep the price of their stock high?
A) A higher stock price increases the funds the firm can raise when it sells a given amount of
stock.
B) Corporations can pay their managers lower salaries and avoid principal-agent problems when
stock prices are higher.
C) Higher stock prices are correlated with lower expected profitability.
D) All of the above provide incentive for corporations to keep the price of their stock high.
2) An investor is more likely to buy a firm’s stock if the firm’s income statement shows
________ and if its balance sheet shows ________.
A) a large net worth; a large price-earnings ratio
B) a large after-tax profit; a large net worth
C) a large price-earnings ratio; a large dividend yield
D) low opportunity costs; large liabilities
3) In 2002, the Enron corporation was accused of falsifying information regarding liabilities on
Enron’s balance sheets, thereby
A) increasing Enron’s assets on the balance sheet.
B) reducing Enron’s profit on the balance sheet.
C) increasing Enron’s net worth on the balance sheet.
D) reducing Enron’s net income on the income statement.
4) According to the article in the “An Inside Look” feature, Facebook is a
A) publicly traded company.
B) privately held company.
C) government owned company
D) sole proprietorship.
5) In response to accounting scandals in 2002, the federal government passed 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.
What is the name of this legislation?
A) the Accountant Reliability Act
B) the 24th amendment to the Constitution
C) the Kennedy-Lott Act
D) the Sarbanes-Oxley Act
6) Compared to buying stock in a publicly-held firm, investing in a private firm
A) is often considered safer because private firms are subject to stricter SEC regulations.
B) is often considered riskier because public firms are subject to stricter SEC regulations.
C) is often considered riskier because private firms are subject to stricter SEC regulations.
D) is often considered safer because public firms are subject to stricter SEC regulations.
7) In addition to requiring that CEO’s personally certify the accuracy of financial statements, the
Sarbanes-Oxley Act of 2002 also requires that
A) CEO’s conduct audits of their corporations themselves.
B) firms raise funds for expansion through the sale of bonds only, not stocks.
C) auditors disclose any potential conflicts of interest.
D) corporations issue financial statements monthly rather than quarterly.
8) When groups of mortgages are bundled together by financial institutions and sold to investors,
these institutions are said to be ________ mortgage loans.
A) securitizing
B) underwriting
C) liquidating
D) harvesting
9) Mortgages issued to borrowers whose credit histories include failures to make payments on
bills are known as ________ mortgages.
A) catastrophic
B) variable rate
C) subprime
D) Alt-A
10) Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000
they had converted to being publicly traded companies. As partnerships, the principal-agent
problem is ________ because there is ________ separation of ownership from control.
A) reduced; much
B) reduced; little
C) increased; much
D) increased; little
11) What is the Congressional act, enacted in 1933 and repealed in 1999, which prevented
financial firms from being both commercial banks and investment banks?
A) the Sarbanes-Oxley Act
B) the Glass-Steagall Act
C) the Taft-Hartley Act
D) the Cellar-Kefauver Act
12) The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of
financial reports.
13) Briefly describe the Sarbanes-Oxley Act and explain why it was passed.
14) During 2007, many “subprime” and “Alt-A” borrowers began to default on their mortgages.
Describe “subprime” and “Alt-A” borrowers.
1) Which of the following is operating income?
A) explicit plus implicit costs
B) stockholders’ equity
C) revenue minus operating expenses
D) net profit
2) If a dollar a year from now will likely have less purchasing power because of inflation, then a
dollar today ________ a dollar a year from now.
A) is more valuable than
B) is less valuable than
C) has the same value as
D) may be more valuable or less valuable than
3) If you put $100 into a bank account that earns five percent interest per year, what is the
formula you should use to determine the account’s future value in one year?
A) Future value equals the present value divided by the rate of interest.
B) Future value equals the present value multiplied by the rate of interest.
C) Future value equals the present value multiplied by one plus the rate of interest in decimals.
D) All of these yield the same answer.
4) If you want to know the present value of $10,000 received in one year, and the interest rate is
4 percent, what formula can you use?
A) Present value equals $10,000 times 0.04.
B) Present value equals $10,000 divided by 1.04
C) Present value equals 1.04 divided by $10,000.
D) Present value equals $10,000 times 1.04.
5) The present value of $300 received 5 years in the future would be calculated as which of the
following when the interest rate is 5%?
A) 300/(1.5)5
B) 300/(1.05)5
C) 300 × 1.5 × 5
D) 5.05/300
6) What is the present value of $575 in a one year if the current rate of interest is 4 percent?
A) $410.71
B) $552.88
C) $598
D) $805
7) If you own a $1,000 face value bond with one year remaining to maturity and a five percent
coupon rate and new bonds are paying 12 percent, what is the most you can get for your old
bond?
A) $1,120
B) $1,000
C) $937.50
D) impossible to determine without additional information
8) If a stock’s dividend is expected to grow at a constant rate of 6 percent in the future and it has
just paid a dividend of $3.00 per share, and you have an alternative investment of equal risk that
will earn a 9 percent rate of return, what would you be willing to pay per share for this stock?
A) $9
B) $20
C) $45
D) $106
9) What must balance on a balance sheet?
A) Total assets must equal total liabilities plus equity.
B) Revenues must equal costs.
C) Retained earnings plus dividends paid must equal earnings per share.
D) All of these must balance.
10) On a balance sheet, short-term debts such as accounts payable are listed as
A) current assets.
B) current liabilities.
C) stockholder’s equity.
D) goodwill.
11) How much is a bond that pays $50 in coupon payments for 3 years and $1,000 at the end of
the third year worth if the interest rate is 10%?
A) $876
B) $952
C) $1,045
D) $1,150
12) Roderick received a $100 savings bond for his graduation. The bond pays $100 at maturity,
which is in five years. If the interest rate is 6%, the bond has a present value of $90.09.
13) Net worth and stockholders’ equity are both equal to the difference between assets and
liabilities.
14) Suppose you hit a progressive jackpot on a slot machine in a casino in Atlantic City and are
given the choice of the following prizes:
Prize 1: $150,000 to be received right away, with three additional payments of $150,000 to be
received each year for the next three years.
Prize 2: $500,000 to be received right away.
If the interest rate is 5 percent, what is the present value of each prize?