10) 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?
A) $8,000
B) $18,000
C) $24,000
D) $32,000
11) 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 is his economic profit?
A) $14,000
B) $24,000
C) $32,000
D) $34,000
12) A firm’s accounting profit is also its
A) economic profit.
B) income statement.
C) net income.
D) statement of liabilities.
13) ________ is called an implicit cost, while ________ is called an explicit cost.
A) An accounting cost; an economic cost
B) A nonmonetary opportunity cost; a cost that involves spending money
C) A production cost; a sales cost
D) An actual cost; a hypothetical cost
14) Which of the following would be considered an implicit cost of operating a business?
A) advertising expenses
B) wages paid to workers
C) a normal rate of return for investors
D) any explicit cost
15) The financial statement that sums up a firm’s revenues, costs, and profit over a period of time
is its
A) income statement.
B) balance sheet.
C) dividend yield statement.
D) price-earnings statement.
16) A firm’s net worth is calculated as
A) the difference between a firm’s revenues and explicit costs.
B) the difference between a firm’s revenues and implicit costs.
C) the difference between a firm’s assets and liabilities.
D) the difference between a firm’s liabilities and outstanding equities.
17) Economic profit is the difference between a firm’s revenue and its opportunity costs.
18) An increase in liabilities will reduce a firm’s net worth.
19) What is a firm’s balance sheet?
20) How is economic profit found?
1) Firms disclose financial statements in ________ and in ________.
A) periodic filings to the federal government; annual reports to shareholders
B) daily filings to the federal government; daily reports to shareholders
C) monthly reports to shareholders; 5-year balance statements to the board of directors
D) weekly filings with the SEC; monthly reports to the Fed
2) The financial statements of firms generally are audited by
A) employees of the firm being audited.
B) employees of private accounting firms.
C) employees of the federal government.
D) the board of directors of the corporation being audited.
3) Two of the firms involved in the accounting scandals of the early 2000s were
A) Arthur Anderson and NBC.
B) Western Digital and General Motors.
C) WorldCom and Enron.
D) DuPont and Lehman Brothers.
4) 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.
A) higher; higher
B) lower; higher
C) lower; lower
D) higher; lower
5) Mortgages issued to borrowers who fail to document that their incomes are high enough to
afford their mortgage payments are known as ________ mortgages.
A) subprime
B) Alt-A
C) gray market
D) reciprocal
6) One result of the financial meltdown of the late 2000s was that mortgage institutions
________ and ________ were brought under direct control of the government.
A) Fannie Mae; Freddie Mac
B) Glass Steagall; Sarbanes Oxley
C) Goldman Sachs; Morgan Stanley
D) Lehman Brothers; FDIC
7) When someone takes out a mortgage loan to buy a house, the mortgage lender can take
possession of the house and sell it if the borrower defaults by failing to make payments on the
loan because the house is being pledged as ________ for the loan.
A) goodwill
B) a liability
C) insurance
D) collateral
8) The Sarbanes-Oxley Act of 2002 was passed in response to what event?
A) a series of accounting scandals
B) unexpected increases in dividend payments to stockholders at various corporations
C) volatility in NASDAQ indexes
D) historically low bond prices
9) Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000
they had converted to being publicly traded corporations. As partnerships, the principle-agent
problem is ________, but as publicly traded corporations, the principal-agent problem is often
________.
A) increased; more severe
B) increased; less severe
C) reduced; more severe
D) reduced; less severe
10) Normally, the principal-agent problem
A) occurs in publicly traded companies.
B) occurs in privately held companies.
C) occurs in sole proprietorships.
D) is equally severe in all of the above examples.
11) Compared to buying stock in a privately-held firm, investing in a public 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.
12) The Sarbanes-Oxley Act of 2002 requires that each member of the board of directors
personally certify the accuracy of financial reports.
13) What was the source of the problems encountered by many financial firms during the late
2000s?
8.6 Appendix: Tools to Analyze Firms’ Financial Information
1) The value you give today to money you will receive in the future is called the future
payment’s
A) time-sensitive value.
B) future value.
C) present value.
D) historical value.
2) Why is a dollar today more valuable than a dollar a year from now?
A) The dollar today can be immediately used to buy something.
B) A dollar a year from now will likely have less purchasing power because of inflation.
C) The unknown future is riskier than the known present.
D) all of these
3) What is the formula you should use to determine a bank account’s future value in one year?
A) Future value equals the present value plus the rate of interest.
B) Future value equals the present value minus the rate of interest.
C) Future value equals the present value multiplied by one plus the rate of interest in decimals.
D) Future value equals the present value divided by one plus the rate of interest in decimals.
4) If you want to know the present value of a future payment received in one year, what formula
can you use?
A) Present value equals future payment times the current market rate of interest.
B) Present value equals future payment divided by one plus the rate of interest.
C) Present value equals one plus the rate of interest in decimals divided by future payment.
D) Present value equals future payments times one plus the rate of interest.
5) The present value of $475 received 3 years in the future would be calculated as which of the
following when the interest rate is 6 percent?
A) 475/(1.6)3
B) 475/(1.06)3
C) 475 × 1.6 × 3
D) 3.06/475
6) What is the present value of $888 in a one year if the current rate of interest is five percent?
A) $4,440
B) $845.71
C) $177.60
D) none of these
7) If you own a $1,000 face value bond with one year remaining to maturity and a 3 percent
coupon rate and new bonds are paying 14 percent, what is the most you can get for your old
bond?
A) $903.51
B) $997.19
C) $1,000
D) $1,140
8) If a stock’s dividend is expected to grow at a constant rate of eight percent in the future and it
has just paid a dividend of $1.25 a share, and you have an alternative investment of equal risk
that will earn a 12 percent rate of return, what would you be willing to pay per share for this
stock?
A) $31.25
B) $1.40
C) $1.25
D) $1.12
9) On a balance sheet
A) total assets must equal total liabilities plus equity.
B) total assets plus equity must equal total liabilities.
C) total assets plus total liabilities must equal zero.
D) total assets plus total liabilities plus equity must equal zero.
10) The price of a financial asset should be equal to
A) the face value of the asset.
B) the present value of the sum of the coupon payments and the interest rate.
C) the face value of the asset divided by the interest rate.
D) the present value of payments to be received from owning that asset.
11) How much is a bond that pays $20 in coupon payments for 4 years and $1,000 at the end of
the fourth year worth if the interest rate is 5%?
A) $822.70
B) $893.62
C) $1,070.92
D) $1,080
12) Seth’s grandmother gave him a $50 savings bond for his birthday. The bond pays $50 at
maturity, which is in five years. If the interest rate is 5%, the bond has a present value of $43.19.
13) Goodwill is listed as an asset on a firm’s balance sheet.
14) With state and multistate lotteries, winners are typically given the choice between a lump
sum payment today or a 20 year series of annuities. How should a winner decide which is better?