Deck 9: The Financial Markets and the Economy: the Tail That Wags the Dog

Question 1

Unlimited liability is a distinct advantage of the proprietorship.

Answer 1

False

Question 2

Corporations produce most of the output in the United States.

Answer 2

True

Question 3

Corporate profits are taxed twice.

Answer 3

True

Question 4

Most American firms are corporations.

Question 5

Unlike other business organizations, corporations are distinct entities that can continue operations even if the people who began that business are no longer around.

Question 6

The sales of the 50 largest corporations in the U.S.economy amount to nearly 31 percent of GDP in 2017.

Question 7

The primary disadvantage of the corporation is unlimited liability.

Question 8

Owners of a corporation have limited liability for the debts of the business.

Question 9

A corporation is the most preferable type of firm if the investor wants to limit liability.

Question 10

A corporation is often financed through stocks and bonds.

Question 11

The special privileges and obligations of corporations are defined by law.

Question 12

Double taxation is a problem for corporations.

Question 13

One of the advantages that corporations have as a business organization is that corporate profits are only taxed once.

Question 14

More than 80 percent of American firms are incorporated.

Question 15

When business is profitable, corporate managers will prefer plowback rather than other sources of funding.

Question 16

One disadvantage of corporations is the double taxation of income to the owners.

Question 17

A corporation has legal status like an individual citizen.

Question 18

Many individuals are reluctant to buy common stock is that as owners of a corporation they have unlimited liability for the debts of the business.

Question 19

The basic disadvantage of a proprietorship is unlimited liability.

Question 20

A partnership requires the agreement of most or all partners to any major decision.

Question 21

Whenever the interest rate goes up, the price of bonds will go down.

Question 22

Stocks are riskier for buyers because there is no commitment to pay dividends.

Question 23

Purchasers of corporate bonds lend money to a corporation.

Question 24

A corporation is an entity separate and distinct from its owners.

Question 25

If bond prices and interest rates are plotted on a graph, the curve has a positive slope.

Question 26

The sale of new stocks by a corporation is one source of investment funds.

Question 27

Corporations can finance their activities through the sale of new stocks but are legally prohibited from selling bonds.

Question 28

A bond and stock differ in that a stock is an IOU for a fixed amount and a bond is a portion of ownership.

Question 29

The price of bonds is tied to the interest rate; when one goes up, the other must fall.

Question 30

If a firm goes bankrupt and liquidates its assets, both stockholders and bondholders are responsible for any remaining debt.

Question 31

Bondholders have a "prior claim" over stockholders on a company's earnings or its assets.

Question 32

Corporations must always pay dividends to their shareholders.

Question 33

"Common stock" is the type only sold to small investors.

Question 34

For a corporation, issuing bonds is riskier than issuing stock.

Question 35

If a firm goes bankrupt, the bondholders will get paid back before the stockholders get any money.

Question 36

Corporations often raise funds for business activities by the sale of shares of existing common stock.

Question 37

Holders of shares of common stock in a corporation have a "prior claim" over the company's earnings or its assets.

Question 38

A stockholder's investment is usually riskier than a bondholder's.

Question 39

Issuing stock is riskier for corporations since there is a legal requirement to pay dividends.

Question 40

Business firms are prohibited by law from borrowing money from banks.

Question 41

An individual investor can reduce the risk of investing by selecting a bundle of different types of financial assets.

Question 42

The NASDAQ is the only stock exchange where corporations are able to sell stocks and raise money since other exchanges failed in the 2008-2009 Great Recession.

Question 43

Retained earnings may be a better source of funds than issuing stocks or bonds because management does not have to account for their effectiveness this way.

Question 44

The New York Stock Exchange handles only about 10 percent of all stock market transactions in the United States.

Question 45

A diversified portfolio represents a disadvantage to small investors since it requires large amounts of money to set up.

Question 46

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

Question 47

A diversified portfolio only makes sense for large institutional investors, not for small investors.

Question 48

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

Question 49

A private investment firm that holds a portfolio of securities is called a mutual fund.

Question 50

A portfolio's performance is its yield to the holder.

Question 51

An investor will choose to diversify the portfolio to reduce risk.

Question 52

When a firm's earnings rise, its stock prices will tend to fall.

Question 53

The New York Stock Exchange is the only place where a corporation can sell stocks and raise money.

Question 54

Derivatives can be used to reduce risk, but they also can be a source of risk in themselves.

Question 55

A portfolio of a range of stocks, bonds, and other investments helps an investor reduce the risk of investment.

Question 56

Investors must rely on stockbrokers to give detailed, day-to-day reports on stocks and bonds.

Question 57

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

Question 58

A futures contract is an agreement to buy a commodity at a specific future date, at a price set today.

Question 59

Retained earnings are the same thing as "plowback."

Question 60

The Securities and Exchange Commission (SEC) oversees the regulation of the securities market.

Question 61

Corporations account for a ____ proportion of the total number U.S.firms but a ____ proportion of sales by U.S.firms.

A)small; small
B)small; large
C)large; small
D)large; large

Question 62

The stock market provides two functions for corporate financing: reducing investors' risk and setting the prices of stocks.

Question 63

Derivatives are securities that derive their values from the values of underlying investments.

Question 64

The combined revenues of Walmart, ExxonMobil, and Chevron total more than the GDP of

A)Belgium.
B)Denmark.
C)Ireland.
D)All of these nations.

Question 65

In the context of stock markets, "the tail wags the dog" means that a failure of the stock market can drag down the entire economy.

Question 66

What percentage of American business firms are incorporated?

A)About 20 percent
B)About 40 percent
C)About 50 percent
D)Over 60 percent

Question 67

Professional securities analysts achieve high rate of investment success following a random walk strategy.

Question 68

The term "random walk" means that stock prices are fairly predictable.

Question 69

Futures and options contracts are examples of derivative securities.

Question 70

Overall, professional securities analysts have a 75 percent success rate in predicting winning stocks.

Question 71

Takeovers and takeover attempts waste valuable capital.

Question 72

Almost 85 percent of American firms have less than

A)20 employees.
B)100 employees.
C)500 employees.
D)1,000 employees.

Question 73

Using one day's stock price to predict the price for the next day is a good investment strategy, given that stock prices have been shown not to follow a "random walk."

Question 74

The takeover process dissipates capital, making it an inefficient market mechanism.

Question 75

A hostile takeover is one opposed by the firm's existing management.

Question 76

Corporations obtain funds when their previously issued stock is traded.

Question 77

Why is it that only a small percentage of American firms are incorporated?

A)Corporate debt as stockholder's liability
B)Small size of firms
C)Unlimited liability
D)Inability to outlast associated individuals

Question 78

Stock prices can be described as "random walks" if there is no relationship between one day's prices and the following day's prices.

Question 79

The three noteworthy features of corporations' legal status include all of these except

A)how they are taxed.
B)special limits are placed on the losses that may be incurred by those who invest in corporations.
C)the corporation is a distinct entity separate from its owners.
D)they may invest in the stock market and acquire financing.

Question 80

The takeover process does not use up capital; it merely redistributes it.