Question 1

Plowback refers to the profits management decides to keep and reinvest in the firm's operations.

Accepted Answer

A) True 
 B)False  True

Question 2

Define the following terms and explain their importance to the study of economics.
a.partnership
b.corporation
c.limited liability
d.plowback

Accepted Answer

a.A partnership is a firm whose ownership is shared by a fixed number of proprietors.The advantages of partnerships are access to larger quantities of capital than a proprietorship and protection from double taxation of income.The disadvantages are the need to obtain agreement of many, if not all, partners to major decisions, unlimited liability of the partners for the debts of the company, and legal complications resulting from any change in ownership.
b.A corporation is a firm that has the legal status of a fictional person.The firm is owned by stockholders and is run by a set of elected officers and a board of directors.The advantages of a corporation to the owners are limited liability, access to great quantities of capital, ease of operation with hired management, and permanence of the firm when an owner joins or leaves.The disadvantages are double taxation of income and the possibility that managers do not pursue the interests of the owners.
c.Limited liability refers to the protection from risk that corporate investors have.They cannot be asked to pay more than they have invested in the firm in the event of large debts incurred by the firm.This feature makes financial investment in corporate stock relatively more attractive than the proprietorship or partnership.
d.Plowback is the portion of corporate earnings retained by the firm and put back into the company.As a source of funds for U.S.corporations, plowback represents over 80 percent of the total funds.

Question 3

If stock prices follow a random walk,

Accepted Answer

A)  speculation in the stock market destabilizes prices. 
B)  a stock's past performance is not a good indicator of its future performance. 
C)  rumors, news, and other "signals" have no effect on stock prices. 
D)  the stock market does not participate in channeling resources toward firms with high stock prices. 
A)  speculation in the stock market destabilizes prices. 
B)  a stock's past performance is not a good indicator of its future performance. 
C)  rumors, news, and other "signals" have no effect on stock prices. 
D)  the stock market does not participate in channeling resources toward firms with high stock prices. B

Question 4

Corporations must always pay dividends to their shareholders.

Accepted Answer

A) True 
 B)False

Question 5

If stocks are more risky than bonds, why would a rational investor ever buy stocks?

Accepted Answer

Although stocks are more risky than bond

Question 6

Corporations are able to pursue opportunities that pay lower profit rates than those pursued by proprietorships and partnerships.

Accepted Answer

A) True 
 B)False

Question 7

If a person owns 2,000 shares in a corporation which has issued 200,000 shares of stock, that person owns ____ of the company and is entitled to ____ of the dividends.

Accepted Answer

A)  1 percent; 1 percent 
B)  2 percent; 2 percent 
C)  10 percent; 10 percent 
D)  20 percent; 20 percent 
A)  1 percent; 1 percent 
B)  2 percent; 2 percent 
C)  10 percent; 10 percent 
D)  20 percent; 20 percent

Question 8

For legal purposes, a corporation is treated as

Accepted Answer

A)  an individual. 
B)  a nonprofit organization. 
C)  a partnership. 
D)  a limited partner in a partnership. 
A)  an individual. 
B)  a nonprofit organization. 
C)  a partnership. 
D)  a limited partner in a partnership.

Question 9

New stock issues are typically handled by

Accepted Answer

A)  commercial banks. 
B)  insurance companies. 
C)  investment banks. 
D)  stock exchanges. 
A)  commercial banks. 
B)  insurance companies. 
C)  investment banks. 
D)  stock exchanges.

Question 10

An agreement to buy a given amount of stock at the best price the market offers is called a market order.

Accepted Answer

A) True 
 B)False

Question 11

Why is there need for regulation of the issuing of stocks and bonds? What market imperfection is addressed in this regulation?

Accepted Answer

The imperfection is information asymmetr

Question 12

A corporation is legally owned by its

Accepted Answer

A)  chief executive officer. 
B)  board of directors. 
C)  bondholders. 
D)  stockholders. 
A)  chief executive officer. 
B)  board of directors. 
C)  bondholders. 
D)  stockholders.

Question 13

Issuing stocks with little or nothing to back them up is described as "plowing back."

Accepted Answer

A) True 
 B)False

Question 14

From the viewpoint of the individual investor, are stocks or bonds riskier? Explain.

Accepted Answer

Stocks are riskier in the sense that the

Question 15

Stockholders normally obtain higher expected payments than bondholders because

Accepted Answer

A)  they are required by law to obtain a higher return. 
B)  they face higher risk. 
C)  the profit share declared as stock dividends is not taxable. 
D)  they vote themselves higher returns. 
A)  they are required by law to obtain a higher return. 
B)  they face higher risk. 
C)  the profit share declared as stock dividends is not taxable. 
D)  they vote themselves higher returns.

Question 16

A person's portfolio of investments is the package of all the stocks, bonds, and other assets the person owns.

Accepted Answer

A) True 
 B)False

Question 17

Bond prices in the marketplace will fall when

Accepted Answer

A)  interest rates fall. 
B)  the company is losing money. 
C)  interest rates rise. 
D)  the company is making money. 
A)  interest rates fall. 
B)  the company is losing money. 
C)  interest rates rise. 
D)  the company is making money.

Question 18

Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is experiencing contractions and expansions.

Accepted Answer

If an investor divides her holdings amon

Question 19

One justification given for the leveraged buyouts of the 1980s was the "discipline of debt." It was thought that the firms, after leveraging, would perform in a superior manner, thus increasing economic efficiency.Explain this reasoning.

Accepted Answer

A bondholder lends money to the corporat

Question 20

The concept of "random walk" applies most closely to predictions of

Accepted Answer

A)  consumer demand for a product after a price increase. 
B)  the effects of a tax on the supply of oil. 
C)  the effects of transfer payments on labor supply. 
D)  the price of a particular stock one year from now. 
A)  consumer demand for a product after a price increase. 
B)  the effects of a tax on the supply of oil. 
C)  the effects of transfer payments on labor supply. 
D)  the price of a particular stock one year from now.

Exam 9: Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

Plowback refers to the profits management decides to keep and reinvest in the firm's operations.

Define the following terms and explain their importance to the study of economics. a.partnership b.corporation c.limited liability d.plowback

If stock prices follow a random walk,

Corporations must always pay dividends to their shareholders.

If stocks are more risky than bonds, why would a rational investor ever buy stocks?

Corporations are able to pursue opportunities that pay lower profit rates than those pursued by proprietorships and partnerships.

If a person owns 2,000 shares in a corporation which has issued 200,000 shares of stock, that person owns ____ of the company and is entitled to ____ of the dividends.

For legal purposes, a corporation is treated as

New stock issues are typically handled by

An agreement to buy a given amount of stock at the best price the market offers is called a market order.

Why is there need for regulation of the issuing of stocks and bonds? What market imperfection is addressed in this regulation?

A corporation is legally owned by its

Issuing stocks with little or nothing to back them up is described as "plowing back."

From the viewpoint of the individual investor, are stocks or bonds riskier? Explain.

Stockholders normally obtain higher expected payments than bondholders because

A person's portfolio of investments is the package of all the stocks, bonds, and other assets the person owns.

Bond prices in the marketplace will fall when

Explain how a diversified portfolio can reduce fluctuations in returns even when the economy as a whole is experiencing contractions and expansions.

One justification given for the leveraged buyouts of the 1980s was the "discipline of debt." It was thought that the firms, after leveraging, would perform in a superior manner, thus increasing economic efficiency.Explain this reasoning.

The concept of "random walk" applies most closely to predictions of

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

The Debate over Monetary and Fiscal Policy

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

Filters

If a person owns 2,000 shares in a corporation which has issued 200,000 shares of stock, that person owns of the company and is entitled to of the dividends.