9) All of the following represent differences between stocks and bonds except
A) a stock can possibly pay dividends forever, but bonds have a fixed number of payments.
B) differences of opinion about a stock’s future may vary considerably but there is less difference
about a bond’s future.
C) the future growth of a stock is more uncertain than the payments of a bond.
D) bonds represent partial ownership in a firm but stocks do not.
10) Which of the following is a characteristic of a bond?
A) A bond represents a promise to repay a fixed amount of funds.
B) The face value or principal plus interest is repaid at a specified period of time.
C) The length of coupon payments is fixed by the stated maturity period.
D) All of these are characteristic of bonds.
11) If a corporate bond with face value of $5,000 has an interest rate of 4 percent paid once a
year for a term of 30 years, what is the size of the coupon payment?
A) $4
B) $200
C) $1,250
D) $5,000
12) If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50, what is
the coupon rate?
A) 2.5%
B) 4%
C) 25%
D) 40%
13) When an investor buys a corporate bond, the ________ the bond is a loan to the corporation.
A) interest on
B) face value of
C) coupon payment on
D) dividend payment on
14) The coupon rate of a bond is equal to
A) the coupon payment.
B) the interest payment.
C) the interest rate.
D) the face value.
15) Owners of a corporation share in the profits of the firm
A) by selling any bonds or stocks owned and realizing a capital gain.
B) through coupon payments on that firm’s bonds.
C) through dividend payments on shares of that firm’s stock.
D) by raising the interest rate on bonds.
16) If a corporation retains all its profits and distributes none of the profit to owners, how can
owners benefit?
A) 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.
B) Shares of stock can be converted into bonds so stockholders will be able to earn coupon
payments.
C) Owners will only benefit if some profits are paid out in the form of dividends.
D) Owners will benefit by changing the board of directors.
17) If a corporation goes bankrupt, bondholders have ________ on the firm’s assets.
A) no claim
B) third claim, after the IRS and stockholders,
C) second claim, after stockholders,
D) first claim
18) What is a secondary market?
A) a market where factory seconds and damaged merchandise are sold
B) a market where newly issued bonds are sold to initial buyers by the borrowing firm
C) a market where a newly issued stocks 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 primary market?
A) primary inputs like electricity are sold
B) a corporate financial manager will resell previously issued shares of stock
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) The three most widely followed stock indexes in the United States include all of the
following except
A) the Dow Jones Industrial Average.
B) the S&P 500.
C) the Fortune 500.
D) The NASDAQ.
21) When you buy previously-issued shares of Google stock, this transaction takes place in the
A) primary market.
B) bond market.
C) secondary market.
D) bear market.
22) Securities dealers that trade stocks and bonds outside exchanges comprise the
A) foreign exchange market.
B) over-the-counter market.
C) NASDAQ market.
D) outlet market.
23) When the coupon rate on newly issued bonds increases 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 less than their face value.
24) You have a bond that pays $60 per year in coupon payments. Which of the following would
result in a decrease in the price of your bond?
A) Coupon payments on newly-issued bonds fall to $40 per year.
B) The likelihood that the firm issuing your bond will default on debt decreases.
C) The price of a share of stock in the company rises.
D) Coupon payments on newly-issued bonds rise to $75 per year.
25) A stock’s dividend yield is determined by
A) dividing the dividend payment by the stock’s initial price.
B) dividing the dividend payment by the stock’s closing market price.
C) dividing the stock’s closing market price by the dividend payment.
D) subtracting the stock’s initial purchase price from the stocks’ closing market price on a given
day.
26) The volatility of a stock’s market price is indicated by
A) the highest stock price and the lowest stock price over the previous year.
B) the price of newly issued shares compared to the price of previously issued shares.
C) the difference between the stock’s selling price and its asking price.
D) the stock’s price-earnings ratio.
27) How is a stock’s price-earnings ratio found?
A) by dividing the dividend by the closing price of the stock
B) by dividing the dividend by the firm’s earnings per share
C) by dividing current market price of the stock by the firm’s earnings per share
D) by subtracting the firm’s earnings per share from the closing price of the stock
28) In August 2011, Abercrombie & Fitch (ANF) posted a price-earnings ratio of 37. If the price
of the stock at that time was $65 per share, which of the following must have been true?
A) ANF’s revenues that month were $2.405 million.
B) ANF’s earnings per share was $1.76.
C) ANF’s coupon payment was $17.57 per year.
D) ANF’s dividend yield for the year was 65%.
29) What are earnings per share equal to?
A) the last dividend payment made
B) total dividend payments plus retained earnings divided by outstanding stock shares
C) the amount by which the stock’s market price has increased in the last year
D) revenues divided by the number of stockholders
30) A bond’s coupon payment divided by the bond’s current price is equal to the bond’s
A) dividend yield.
B) current yield.
C) price-earnings ratio.
D) maturity value.
31) In 2011, the dividend yield on Microsoft (MSFT) stock rose from 1.97% to 3.10%. Which of
the following would have generated that result?
A) The closing price of Microsoft stock rose.
B) Microsoft announced an increase in the dividend it would pay per share.
C) The price-earnings ratio rose.
D) Microsoft issued bonds with a coupon rate equal to 3.10%.
32) When Zynga, the company behind the social games CityVille and Words With Friends, sold
stock to the public for the first time in December 2011, 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
33) Generally with bond ratings, the lower 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
34) 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
35) Indirect finance includes the sale by a corporation of stocks or bonds, but does not include
borrowing money from a bank.
36) How can a sole proprietorship raise funds needed for firm expansion?
37) How does a firm raise external funds through direct finance?
38) Who is the seller in a primary market and who is the seller in a secondary market?
39) If you own a bond with a 3 percent coupon rate and new bonds are paying 8 percent, what
will happen to your bond’s market price?
40) What role do well functioning financial markets play in a market economy?
8.4 Using Financial Statements to Evaluate a Corporation
1) Anything owed by a person or a firm is
A) an asset.
B) a liability.
C) a bond.
D) equity.
2) An implicit cost is
A) a nonmonetary opportunity cost.
B) a cost unique to sole proprietorships.
C) a cost that involves spending money.
D) a cost unique to corporations.
3) All of the following are examples of explicit cost a firm might incur except
A) the out-of-pocket expense to hire employees.
B) taxes owed to the state government.
C) the rental value of the warehouse space the company owns and uses for itself.
D) the revenue a firm generates in using its resources.
4) What is economic 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 accounting profit
5) Which of the following would explain why economic profit might be less than accounting
profit?
A) A firm’s net income is less than its accounting profit.
B) A firm has only explicit costs.
C) A firm’s net income is greater than its accounting profit.
D) A firm has implicit costs as well as explicit costs.
6) 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
A) the explicit costs of production.
B) net worth.
C) net income.
D) a normal rate of return.
7) Donnie’s Donuts incurs $450,000 per year in explicit costs and $200,000 in implicit costs.
The bakery earns $800,000 in revenues and has $2 million in net worth. Based on this
information, what is the economic profit for Donnie’s Donuts?
A) $150,000
B) $350,000
C) $600,000
D) $1.2 million
8) Donnie’s Donuts incurs $450,000 per year in explicit costs and $200,000 in implicit costs.
The bakery earns $800,000 in revenues and has $2 million in net worth. Based on this
information, what is the accounting profit for Donnie’s Donuts?
A) $150,000
B) $350,000
C) $600,000
D) $1.2 million
9) 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?
A) $10,000
B) $22,000
C) $32,000
D) $42,000