Deck 9: Organizing a Business

Question 1

A _____ is a business that exists as a separate entity from its owners.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Answer 1

D

Question 2

A _____ is owned by one person.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Answer 2

A

Question 3

A _____ is owned by more than one person and is not incorporated.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Answer 3

B

Question 4

The most common legal structure is:

A) sole proprietorship.
B) partnership.
C) limited liability company.
D) corporation.

Question 5

A _____ is the legal structure that accounts for the majority of business revenues and profits.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Question 6

A _____ is the simplest and easiest type of business to establish.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Question 7

A _____ is the type of business structure that provides the greatest amount of flexibility in managing.

A) sole proprietorship
B) partnership
C) limited liability company
D) corporation

Question 8

A disadvantage of a sole proprietorship is that:

A) profits are taxed twice.
B) profits are taxed only once.
C) issuing stocks is expensive.
D) the owner has unlimited legal liability.

Question 9

A disadvantage of a sole proprietorship is that:

A) there is flexibility in decision making.
B) partners may not agree on decision making.
C) profits are taxed at a personal income level.
D) it is not a separate legal entity.

Question 10

A disadvantage of a sole proprietorship is that:

A) there is flexibility in decision making.
B) profits are taxed only once.
C) issuing stocks is expensive.
D) the business ends when the owner dies.

Question 11

A disadvantage of a sole proprietorship is that:

A) partners may not agree on decision making.
B) profits are taxed only once.
C) profits are taxed at a personal income level.
D) there is limited ability for expansion.

Question 12

A disadvantage of a sole proprietorship is that:

A) there is flexibility in decision making.
B) profits are taxed twic.
C) profits are taxed at a personal income level.
D) financing is limited to the owner's ability to borrow.

Question 13

Mandy wants to open a sewing alterations business. She will be working from home and will not incorporate. What is her business structure?

A) sole proprietorship
B) partnership
C) corporation
D) franchise

Question 14

A disadvantage of a partnership is that:

A) there is flexibility in decision making.
B) profits are taxed only once.
C) profits are taxed twice.
D) there are unlimited personal legal liabilities.

Question 15

A disadvantage of a partnership is that:

A) issuing stocks is expensive.
B) profits are taxed only once.
C) profits are taxed at a personal income level.
D) each partner is at risk for the actions of other partners.

Question 16

Kate and Lucy are opening a gift shop together. They do not want to incorporate and are not concerned about personal liability. What business structure will they choose?

A) sole proprietorship
B) partnership
C) limited liability company
D) franchise

Question 17

An advantage of a corporation is that:

A) there is flexibility in decision making.
B) partners may not agree on decision making.
C) issuing stocks is expensive.
D) there is limited liability for the owners.

Question 18

A _____ is a separate entity with the rights of an individual.

A) sole proprietorship
B) partnership
C) dual partnership
D) corporation

Question 19

The owners of a _____ cannot be sued individually.

A) sole proprietorship
B) partnership
C) dual partnership
D) corporation

Question 20

_____ can raise money by issuing stock.

A) Sole proprietorships
B) Partnerships
C) Dual partnerships
D) Corporations

Question 21

_____ can raise money by selling bonds.

A) Sole proprietorships
B) Partnerships
C) Dual partnerships
D) Corporations

Question 22

A disadvantage of a corporation is that:

A) there is limited legal liability.
B) profits may be taxed twice.
C) there is no ability to raise money.
D) it has a perpetual existence.

Question 23

A _____ is a business structure that has characteristics of both a corporation and a partnership.

A) sole proprietorship
B) partnership
C) corporation
D) limited liability company

Question 24

A _____ is a purchased right to operate under an established brand name.

A) sole proprietorship
B) partnership
C) franchise
D) limited liability company

Question 25

Ramon and Ralph are both attorneys and have decided to open the Ramon and Ralph Law firm. They do not want to incorporate but they do want to limit their liability. What business structure will they choose?

A) sole proprietorship
B) partnership
C) limited liability company
D) franchise

Question 26

Corporate _____ is the study of financial activities of a firm.

A) finance
B) monetary policy
C) accounting
D) budgeting

Question 27

Who owns a corporation?

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

Question 28

XYZ Corporation needs to raise money for an expansion into a new market. The company decides to borrow the money in the financial market. What does XYX likely do?

A) sell new shares of stock
B) issue new bonds
C) trade existing shares of stock
D) trade existing bonds

Question 29

XYZ Corporation needs to raise money for an expansion into a new market. The company does not want to borrow the money, so it will most likely:

A) sell new shares of stock.
B) issue new bonds.
C) trade existing shares of stock.
D) trade existing bonds.

Question 30

______ are the portion of profits paid to holders of a company's stock.

A) Bonds
B) Retained earnings
C) Dividends
D) Bitcoins

Question 31

Barry owns stock in XYX Corporation. It has a _____ yield of 4.9%, which makes it attractive as an income source.

A) bond
B) dividend
C) stock
D) buyback

Question 32

_____ occur when a corporation purchases some of its stock from the stockholders at the market price.

A) Bond sales
B) Dividends
C) Stock buybacks
D) Profits

Question 33

A corporation has 2 million shares of stock outstanding. It decides to buy back 500,000 shares. The market price is $8. What is the market dollar value of the stock buyback?

A) $500,000
B) $4 million
C) $8 million
D) $16 million

Question 34

A corporation has 2 million shares of stock outstanding. It decides to buy back 500,000 shares. The market price is $8. Assuming that the total market value of the company does not change, what is the new share price?

A) less than $6
B) $6 to $8
C) $8
D) more than $8

Question 35

Which of the following would probably cause a business's retained earnings to increase?

A) stock buybacks
B) the payment of dividends
C) an increase in profits
D) a decrease in profits

Question 36

Which of the following would probably cause a business's retained earnings to decrease?

A) a suspension of stock buybacks
B) a suspension of dividend payments
C) an increase in profits
D) a decrease in profits

Question 37

_____ are profits that a corporation does not immediately return to stockholders.

A) Stock buybacks
B) Dividend payments
C) Bond issuances
D) Retained earnings

Question 38

Retained earnings are often used to:

A) pay dividends.
B) pay for stock buybacks.
C) fund new investments.
D) increase the stock price.

Question 39

A _____ is a tradable, legally binding obligation to repay borrowed money and interest.

A) dividend
B) stock
C) bond
D) buyback

Question 40

Which of the following are sold in the financial markets?

A) dividends
B) bonds
C) retained earnings
D) buybacks

Question 41

One method for corporations to raise money is by:

A) paying dividends.
B) selling bonds.
C) retaining earnings.
D) buying back stock.

Question 42

Bonds differ from bank loans in that bondholders:

A) do not have an ownership claim on the corporation.
B) receive interest payments.
C) are paid before stockholders in the event of a bankruptcy.
D) may sell their bonds in the financial markets.

Question 43

_____ is when one party in a transaction knows more than another.

A) The principal-agent problem
B) Rational self-interest
C) Asymmetric information
D) Skin-in-the-game

Question 44

Enoch is applying for a personal loan. He tells the loan officer that it is to do home improvements. However, Enoch plans on taking a vacation with the money. This is an example of:

A) the principal problem.
B) the agent problem.
C) asymmetric information.
D) skin-in-the-game.

Question 45

The management of XYZ Corporation is considering acquiring another firm in an effort to expand the company. Stockholders of XYZ feel that the company is big enough and does not need to expand. This is an example of:

A) the principal-agent problem.
B) the principal problem.
C) asymmetric information.
D) skin-in-the-game.

Question 46

Ralph, the chief executive officer of XYZ Corporation, is attempting to convince the board of directors to expand the company. The owner and stockholders of XYZ feel that the company is big enough and does not need to expand. In this example:

A) Ralph is the agent, and the board of directors is the principal.
B) Ralph is the agent, and the stockholders are the principal.
C) the owner is the agent, and the board of directors is the principal.
D) the stockholders are the agent, and Ralph is the principal.

Question 47

One method that businesses use to overcome the principal-agent problem is to:

A) remove the board of directors' oversight of management.
B) reward management regardless of performance.
C) offer management stock options.
D) not give employees a stake in the business.

Question 48

One method that businesses use to overcome the principal-agent problem is to:

A) require the board of directors to provide oversight on management.
B) reward management regardless of performance.
C) deny management stock options.
D) not give employees a stake in the business.

Question 49

One method that businesses use to overcome the principal-agent problem is to:

A) not require the board of directors to oversee management.
B) not reward executives and managers who make poor decisions.
C) not give stock options to management.
D) not give employees a stake in the business.

Question 50

One method that businesses use to overcome the principal-agent problem is to:

A) not require the board of directors to oversee management.
B) reward executives and managers who make poor decisions.
C) incentivize management.
D) not give employees a stake in the business.

Question 51

One method that businesses use to overcome the principal-agent problem is to:

A) not require the board of directors to oversee management.
B) reward executives and managers who make poor decisions.
C) not give stock options to management.
D) give employees a stake in the business.

Question 52

_____ are part of a stakeholder group impacted by corporate policy decisions.

A) Stock exchanges
B) Employees
C) Foreign countries
D) People who live at least a thousand miles away

Question 53

_____ are part of a stakeholder group impacted by corporate policy decisions.

A) Stock exchanges
B) Foreign countries
C) Customers
D) People who live at least a thousand miles away

Question 54

_____ is the idea that firms have an obligation (duty) to support the community and environment in which they operate and not just to maximize profits.

A) Customer service
B) Outsourcing
C) Corporate social responsibility
D) Employee volunteerism

Question 55

Who noted that businesses often end up acting in society's best interests, even when pursuing the goal of reaping a profit?

A) Ben Bernanke
B) Adam Smith
C) Benjamin Franklin
D) Alexander Hamilton

Question 56

Skeptics of corporate social responsibility argue that corporations do the most amount of good when operating:

A) without restrictions.
B) on a voluntary basis.
C) within the rules established by society.
D) without oversight.

Question 57

______ risk is the probability that the business environment in a foreign country may unexpectedly change.

A) Currency
B) Foreign
C) Domestic
D) Country

Question 58

_____ risk is the probability that changes in exchange rates affect the value of a firm and its financial obligations.

A) Currency
B) Foreign
C) Domestic
D) Country

Question 59

A foreign firm operates in a country where the nation's president is removed from office during a coup. This is an example of _____ risk.

A) currency
B) foreign
C) domestic
D) country

Question 60

A country unexpectedly nationalizes a foreign firm. This is an example of _____ risk.

A) currency
B) foreign
C) domestic
D) country

Question 61

A U.S. automotive company purchases brake linings from a firm in Germany and promises to pay in euros in 30 days. Before the payment is made, the exchange rate between the dollar and the euro changes. This is an example of _____ risk.

A) currency
B) foreign
C) domestic
D) country

Question 62

A U.S. automotive company purchases brake linings from a firm in Germany and promises to pay in euros in 30 days. Before the payment is made, the euro appreciates relative to the dollar. The U.S. firm:

A) is not affected.
B) will need fewer U.S. dollars.
C) will need more U.S. dollars.
D) will pay in U.S. dollars.

Question 63

A U.S. automotive company purchases brake linings from a firm in Germany and promises to pay in euros in 30 days. Before the payment is made, the euro depreciates relative to the dollar. The U.S. firm:

A) is not affected.
B) will need fewer U.S. dollars.
C) will need more U.S. dollars.
D) will pay in U.S. dollars.

Question 64

A U.S. automotive company purchases brake linings from a firm in Germany and promises to pay in euros in 30 days. Before the payment is made, the euro appreciates relative to the dollar, and the U.S. firm must pay more dollars than originally planned. This is an example of _____ risk.

A) currency
B) foreign
C) domestic
D) country

Question 65

As a result of political unrests, a U.S. company is kicked out of another country and forced to leave behind all of its in-country assets. This is an example of _____ risk.

A) currency
B) foreign
C) domestic
D) country

Question 66

An advantage of global expansion may be:

A) quality concerns.
B) employee turnover.
C) new market opportunities.
D) increased debt.

Question 67

An advantage of global expansion may be:

A) diversification of consumer markets.
B) lower product quality.
C) employee turnover.
D) increased debt.

Question 68

An advantage of global expansion may be:

A) financial challenges.
B) lower product quality.
C) access to resources.
D) increased debt.

Question 69

An advantage of global expansion may be:

A) management issues.
B) lower product quality.
C) diversification of consumer markets.
D) increased debt.

Question 70

When a firm expands into a country with few competitors, it is attempting to:

A) avoid management issues.
B) sustain product quality.
C) earn above-normal profit.
D) reduce debt.

Question 71

When a firm expands into a country with highly competitive markets, it may be attempting to:

A) increase country risk.
B) sustain product quality.
C) prevent a rival from dominating the market.
D) reduce debt.

Question 72

When a firm expands into a country with highly competitive markets, it may be attempting to:

A) avoid management issues.
B) increase country risk.
C) increase sales to reach production capacity.
D) reduce debt.

Question 73

_____ is a benefit of diversification.

A) Avoiding management issues
B) Sustaining product quality
C) Increasing sales to reach production capacity
D) Reducing risk exposure

Question 74

A multinational firm that has poor sales in one region of the world but good sales in another, which allows it to remain profitable, is an example of:

A) diversification.
B) sustaining product quality.
C) increasing sales to reach production capacity.
D) increasing risk.

Question 75

When a multinational firm expands into a country because its currency has depreciated, the firm is attempting to:

A) diversify.
B) sustain product quality.
C) increase sales to reach production capacity.
D) take advantage of lower business operations costs.

Question 76

_____ risk can be reduced when a firm both produces and sells its products in the same country.

A) Diversification
B) Currency
C) Production capacity
D) Country

Question 77

When a multinational company has assets and liabilities denominated in the same currency, _____ risk is reduced.

A) diversification
B) currency
C) production capacity
D) country

Question 78

_____ is when a firm acquires products or services from another firm.

A) Diversification
B) Outsourcing
C) Increase in production capacity
D) Insourcing

Question 79

_____ is a tax on imports.

A) An excise tax
B) A sales tax
C) A tariff
D) An export duty

Question 80

XYZ Corporation is a U.S. fruit company. It purchases bananas from India and Brazil for distribution to U.S. grocery stores. The bananas are considered _____ good.

A) an exported
B) an imported
C) a domestic
D) a healthy