Deck 9: Securities: Business Finance and the Economy: the Tail That Wags the Dog

Question 1

Most American firms are corporations.

Answer 1

False

Question 2

Corporate profits are taxed twice.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Unlimited liability is a distinct advantage of the proprietorship.

Question 6

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

Question 7

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

Question 8

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

Question 9

The basic disadvantage of a proprietorship is unlimited liability.

Question 10

Corporations produce most of the output in the United States.

Question 11

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

Question 12

The sales of the 50 largest corporations in the U.S.economy amount to nearly 37 percent of GDP.

Question 13

A corporation is often financed through stocks and bonds.

Question 14

A corporation has legal status like an individual citizen.

Question 15

The special privileges and obligations of corporations are defined by law

Question 16

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

Question 17

Double taxation is a problem for corporations.

Question 18

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

Question 19

More than 80% of American firms are incorporated.

Question 20

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

Question 21

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

Question 22

An investor will diversify his portfolio to reduce risk.

Question 23

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 24

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

Question 25

Corporations must always pay dividends to their shareholders.

Question 26

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

Question 27

Purchasers of corporate bonds lend money to a corporation.

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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

Question 33

Retained earnings are the same thing as "plowback."

Question 34

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

Question 35

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

Question 36

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

Question 37

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 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

Speculators serve no useful function in a market.

Question 44

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

Question 45

Takeovers and takeover attempts waste valuable capital.

Question 46

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

Question 47

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

Question 48

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

Question 49

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

Question 50

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

Question 51

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

Question 52

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 53

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

Question 54

Corporations obtain funds when their previously issued stock is traded.

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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

A)Belgium 
B)Denmark 
C)Ireland 
D)all of these

Question 62

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 63

A corporation seeking to expand, and looking for the least risky financing option would choose:

A)stocks 
B)bonds 
C)retained earnings 
D)a bank loan

Question 64

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 65

The reason that some corporations grow so big is:

A)double taxation 
B)that they are a separate entity from their owners 
C)that they have limited liability 
D)none of these

Question 66

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

Question 67

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 68

Bonds differ from stocks in all of these ways except:

A)a purchase of corporate stock becomes a part owner of the corporation, while a bondholder does not 
B)a bondholder loans money to the corporation, which has priority for repayment, while a stockholder may lose her investment 
C)stockholders know with a high degree of certainty how much money they will get, while bondholders do not 
D)all of these are correct

Question 69

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

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

Question 70

The sole owner of a unincorporated business unable to pay its debts:

A)may be sued by the people to whom the business owes money 
B)may be forced to pay them out of his own bank account 
C)may be forced to sell his personal property to pay those debts 
D)all of these are correct

Question 71

​A stockholder who owns 1,000 shares of the corporation's 100,000 shares is entitled to what percentage of the vote in an election of corporate officers?

A)1% 
B)2% 
C)5% 
D)10%

Question 72

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 73

A corporation is legally owned by its

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

Question 74

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 75

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)limits the things in which corporations can invest. 
D)can generally avoid paying federal taxes but not state taxes.

Question 76

Almost 85% of American firms have less than

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

Question 77

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 78

When a corporation needs capital to expand, its choices are:

A)to sell stocks on a stock exchange 
B)to sell bonds 
C)to reinvest its own earnings 
D)all of these

Question 79

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.

Question 80

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.