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

Question 1

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

Answer 1

True

Question 2

A corporation has legal status like an individual citizen.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Corporate profits are taxed twice.

Question 5

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

Question 6

Unlimited liability is a distinct advantage of the proprietorship.

Question 7

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

Question 8

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

Question 9

The basic disadvantage of a proprietorship is unlimited liability.

Question 10

A corporation has greater access to capital than does a proprietorship or a partnership.

Question 11

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

Question 12

A corporation is dissolved upon the death of a major stockholder.

Question 13

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

Question 14

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

Question 15

A problem of corporate management is that it may not act in the best interests of the owners.

Question 16

Double taxation is a problem for partnerships and corporations.

Question 17

Corporations produce most of the output in the United States.

Question 18

Most American firms are corporations.

Question 19

The sales of the 50 largest corporations in the U.S.economy amount to nearly 35 percent of GDP.

Question 20

Most of the corporations listed among the Fortune 500 are monopolies.

Question 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

An investor will diversify his portfolio to reduce risk.

Question 29

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

Question 30

Corporations must always pay dividends to their shareholders.

Question 31

Purchasers of corporate bonds lend money to a corporation.

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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 37

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

Question 38

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

Question 39

A portfolio of stocks, bonds, and other investments helps reduce the risk of investment.

Question 40

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

Question 41

Investing in risky assets in the hope of earning profits is called speculation.

Question 42

Corporations obtain funds when their previously issued stock is traded.

Question 43

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

Question 44

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

Question 45

Takeovers and takeover attempts waste valuable capital.

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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

Question 53

Speculators serve no useful function in a market.

Question 54

One effect of speculators is to iron out price fluctuations because this is the way they make their profits.

Question 55

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 56

Corporations account for a ____ proportion of U.S.firms and a ____ proportion of sales by U.S.firms.

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

Question 57

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 58

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

Question 59

The activities of speculators often reduce the risk borne by other stock market participants.

Question 60

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

Question 61

For legal purposes, a corporation is treated as

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

Question 62

A major advantage of the corporation is

A) limited taxes.
B) preferential treatment by state governments.
C) limited liability of individual owners.
D) limited numbers of owners and ease of decision making.

Question 63

Double taxation of corporate profits

A) imposes losses on investors' incentives in corporate stock.
B) tends to keep corporations out of low-profit activities.
C) makes the allocation of resources more efficient.
D) makes issuing new stock prohibitively expensive.

Question 64

The tax treatment of corporate profit means that corporations

A) cannot profitably issue common stock.
B) choose investment opportunities more efficiently than do other types of firms.
C) turn down more low-paying investment opportunities than do other types of firms.
D) can generally avoid paying federal taxes but not state taxes.

Question 65

Double taxation of corporate earnings

A) tends to restrict the activities of corporate firms.
B) causes stockholders to earn a lower return than they would on other securities of comparable risk.
C) results in more investment in research and development.
D) All of the above are correct.

Question 66

A disadvantage of both proprietorships and partnerships is that

A) in each, profit is taxed twice, as the income of the firm and the income of the owners.
B) the owners cannot hire managers to help run the firms.
C) the firms cannot pay dividends.
D) the owners have unlimited liability for the debts of the firms.

Question 67

When compared to other forms of organization, an individual proprietorship has the advantage of (i) limited liability; (ii) lower taxes.

A) i and ii
B) i not ii
C) ii not i
D) neither i nor ii

Question 68

Most industries in which the giant firms in the United States are found are

A) perfectly competitive.
B) monopolies.
C) oligopolies.
D) monopolistically competitive.

Question 69

Almost 85% of American firms have less than

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

Question 70

A corporation is legally owned by its

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

Question 71

Advantages of the partnership form of organization are

A) access to more financial capital than proprietorships and no double taxation.
B) limited liability and continuity of the firm if one owner dies.
C) freedom from double taxation and limited liability.
D) limited liability and access to more financial capital than proprietorships.

Question 72

Corporations have the disadvantage of (i) double taxation; (ii) unlimited liability.

A) i and ii
B) i not ii
C) ii not i
D) neither i nor ii

Question 73

Small business firms in the United States

A) have a relatively small share of U.S.business.
B) are risky in the sense that the average new firm has a life span of less than 7 years.
C) generally have business receipts of less than $100,000.
D) All of the above are correct.

Question 74

The major advantage of the corporation is

A) limited liability for owners.
B) greater profit incentive than the other forms of business organization.
C) lower taxes for owners, who are taxed only once.
D) ability of owners to have hands-on management of the firm.

Question 75

A corporation's income is taxed

A) immediately after it is deposited in the bank.
B) only before it is distributed to its owners.
C) only after it is distributed to owners.
D) both before and after it is distributed to owners.

Question 76

Which of the following forms of business organization has continuity if an owner dies?

A) partnership
B) proprietorship
C) corporation
D) All of the above are correct.

Question 77

For tax purposes, a partnership is

A) exempt from any tax.
B) much like a corporation.
C) much like a proprietorship.
D) subject to double taxation of income.

Question 78

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 79

The income of an individual who owns a proprietorship is

A) exempt from taxation.
B) taxed only once, as personal income.
C) taxed twice, first as the income of the firm and second as personal income.
D) taxed only once, as "gift" income.

Question 80

Double taxation of corporate earnings means

A) for individuals who get dividends on personal income, tax rates are twice as high as for wage earners.
B) stockholders pay personal income taxes and corporation taxes on profits.
C) stockholders don't get the plowback but still pay taxes on it.
D) the corporation tax raises stock prices so individuals also pay a capital gains tax in addition to a tax on dividends.