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

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

Corporations produce most of the output in the United States.

Answer 3

True

Question 4

The basic disadvantage of a proprietorship is unlimited liability.

Question 5

Double taxation is a problem for corporations.

Question 6

Most American firms are corporations.

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Corporate profits are taxed twice.

Question 12

The primary disadvantage of the corporation is unlimited liability.

Question 13

More than 80 percent of American firms are incorporated.

Question 14

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

Question 15

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 16

A corporation has legal status like an individual citizen.

Question 17

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

Question 18

Unlimited liability is a distinct advantage of the proprietorship.

Question 19

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

Question 20

A corporation is often financed through stocks and bonds.

Question 21

Corporations must always pay dividends to their shareholders.

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

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

Question 38

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

Question 39

Purchasers of corporate bonds lend money to a corporation.

Question 40

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

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

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

Question 47

Retained earnings are the same thing as "plowback."

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

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 54

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

Question 55

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

Question 56

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

Question 57

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 58

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

Question 59

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

Question 60

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

Question 61

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

Question 62

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 63

Almost 85 percent of American firms have less than

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

Question 64

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 65

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 66

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 67

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

Question 68

Corporations obtain funds when their previously issued stock is traded.

Question 69

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

Question 70

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

Question 71

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

Question 72

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 73

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

Question 74

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

Question 75

Takeovers and takeover attempts waste valuable capital.

Question 76

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 77

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 78

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

Question 79

Futures and options contracts are examples of derivative securities.

Question 80

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.