Deck 6: Firms, the Stock Market, and Corporate Governance

Question 1

A corporation is the type of business has ________ government rules and regulations affecting it.

A) no
B) the fewest
C) the most
D) only federal

Answer 1

the most

Question 2

Which of the following is an advantage of starting a new business as a proprietorship?

A) The owner has limited personal liability.
B) A proprietorship has few government rules and regulations to comply with.
C) Business profits are not taxed.
D) A proprietorship can easily attain additional funding.

Answer 2

A proprietorship has few government rules and regulations to comply with.

Question 3

What does limited liability mean?

A) The owners of the business are personally responsible for paying expenses incurred by the business.
B) Only employees can have a claim on the assets of the business.
C) The personal assets of the owners cannot be claimed if the business is bankrupt.
D) Anybody with a liability against a firm can claim only what their liability refers to.

Answer 3

The personal assets of the owners cannot be claimed if the business is bankrupt.

Question 4

Eighty-five percent of all firms employ ________ workers.

A) only one or two
B) fewer than 20
C) 50 or more
D) over 100

Question 5

Assume you set up a sole proprietorship and your lawyer tells you that as the owner,you could stand to lose your personal wealth if the business goes bankrupt.This means a sole proprietorship

A) faces limited liability.
B) faces unlimited liability.
C) has little chance of succeeding.
D) is not a good type of business to set up.

Question 6

In a typical year,________ of new jobs are created by small firms.

A) less than 5 percent
B) 10 percent
C) 40 percent
D) 75 percent

Question 7

Which of the following must a firm in a market economy do today to succeed?

A) Produce the goods and services that consumers want at a lower cost than consumers themselves can produce.
B) Organize the factors of production into a functioning, efficient unit.
C) Have access to sufficient funds.
D) Market firms today must do all of these things.

Question 8

A corporation is owned by its

A) board of directors.
B) stockholders.
C) employees.
D) CEO.

Question 9

Jeremy is thinking of starting up a small business selling NASCAR memorabilia.He is considering setting up his business as a sole proprietorship.What is one disadvantage to Jeremy of setting up his business as a sole proprietorship?

A) As a sole proprietor, Jeremy would be taxed twice.
B) As a sole proprietor, Jeremy would not have control of the business.
C) As a sole proprietor, Jeremy would face unlimited liability.
D) As a sole proprietor, Jeremy would be subject to significant rules and regulations.

Question 10

How does the owner of a sole proprietorship relate to the business?

A) The owner and the business are separate legal entities.
B) The owner and the business are not separate legal entities.
C) The assets of the owner are considered separate from the asset of the business.
D) None of these describe the legal relationship of the owner to the business.

Question 11

Organizing a successful firm in a market economy has become ________ over the last century.

A) legally impossible
B) politically impossible
C) less difficult
D) more difficult

Question 12

A sole proprietorship is

A) the easiest type of business to set up.
B) the most difficult type of business to set up.
C) the most expensive type of business to set up.
D) the least profitable type of business to set up.

Question 13

Which type of business has the least government rules and regulations affecting it?

A) sole proprietorship
B) partnership
C) corporation
D) They all have the same set of rules and regulations affecting them.

Question 14

Unlike firms that sell stock in financial markets,which are known as ________ firms,companies like Facebook which do not sell stock in financial markets are known as ________ firms.

A) public; private
B) open; closed
C) corporate; proprietary
D) stock market; bond market

Question 15

Jeremy is thinking of starting up a small business selling NASCAR memorabilia.He is considering setting up his business as a sole proprietorship.What is one advantage to Jeremy of setting up his business as a sole proprietorship?

A) As a sole proprietor, Jeremy would face limited liability.
B) As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
C) As a sole proprietor, Jeremy would have both ownership and control over the business.
D) All of the above would be advantages of setting up his business as a sole proprietorship.

Question 16

Which type of business is the most difficult to set up?

A) sole proprietorship
B) partnership
C) corporation
D) There is no difference in the difficulty of establishment.

Question 17

The owners of a ________ have a separate legal distinction from the business.

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

Question 18

As a form of business,a partnership

A) has limited liability.
B) has only one owner.
C) cannot issue stock.
D) has the most government rules and regulations affecting it.

Question 19

How do a sole proprietorship and a corporation differ?

A) Proprietorships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while proprietorships cannot.
C) Corporations face more taxes than do proprietorships.
D) All of these are differences between the two types of businesses.

Question 20

Who controls a sole proprietorship?

A) stockholders
B) bondholders
C) the owner
D) all of these

Question 21

What are the advantages of setting up a corporation as opposed to a proprietorship or partnership?

Question 22

As a business type,corporations ________ in the United States.

A) earn the majority of revenues
B) are the most common
C) are the least common
D) are subject to the fewest taxes

Question 23

What is an inside director?

A) a movie director who also appears in the movie
B) a member of a corporate board of directors that is also a manager of the business
C) the CEO that is selected by the corporation's board of directors
D) a board of director chair who has been in the job for at least three years

Question 24

A corporation's board of directors

A) hire the managers of the corporation.
B) control the day-to-day activities of the corporation.
C) are personally liable for the debts of the corporation.
D) are the sole owners of the corporation.

Question 25

When a business is set up as a sole proprietorship,the owner of the business faces limited liability.

Question 26

Which is the least common type of business?

A) corporation
B) partnership
C) sole proprietorship
D) impossible to determine without further information

Question 27

Which of the following is not an advantage of starting a new business as a corporation?

A) separation of ownership and business liability
B) enhanced ability to raise funds
C) ability to share risks
D) possibility of double taxation

Question 28

Which type of businesses earns the majority of profits in the United States?

A) corporations
B) partnerships
C) sole proprietorships
D) none of these

Question 29

In the United States,corporate profits are taxed at the corporate level and then are taxed again as personal income in the form of dividend payments.

Question 30

Who controls a partnership?

A) the owners
B) stockholders
C) bondholders
D) employees

Question 31

Stockholders

A) select the board of directors of a corporation.
B) select the employees of a corporation.
C) select the managers of a corporation.
D) all of the above

Question 32

The only type of business that faces limited liability is a corporation.

Question 33

Who operates and controls a corporation in its day-to-day activities?

A) the board of directors
B) stockholders
C) employees
D) management

Question 34

Define a partnership.

Question 35

What type of business has the potential for double taxation of profits and why?

Question 36

How do unlimited and limited liability differ?

Question 37

Corporate governance involves the way in which

A) the government nationalizes corporations.
B) the government licenses corporations.
C) a corporation is subject to government regulations.
D) a corporation is structured.

Question 38

What do economists call the situation where a hired manager does not have the same interests as the owners of the business?

A) conquest and control
B) a financial problem
C) a principal-agent problem
D) a financial intermediary problem

Question 39

How are corporate profits taxed in the United States?

A) Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level.
B) Earnings are taxed first as personal income then as corporate profits at the Federal level.
C) Earnings are taxed first as corporate profits then as personal income after dividends are paid.
D) Corporate profits are not taxed at all.

Question 40

Sole proprietorships are ________ type of business.

A) the most profitable
B) the least common
C) the most common
D) the least risky

Question 41

What is different about buying stocks and buying bonds?

A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments.
B) Differences of opinion about a stock's future may vary considerably but there is less difference about a bond's future.
C) The future growth of a stock is more uncertain than the payments of a bond.
D) All these are differences between stocks and bonds.

Question 42

The central role of ________ in a market economy is bringing together savers and borrowers.

A) corporations
B) sole proprietors
C) financial intermediaries
D) stock exchanges

Question 43

What takes place in the indirect finance market?

A) Part ownership of corporations is sold in the form of stocks.
B) Corporate and government bonds are sold to savers.
C) Deposits of savers are accepted and loans made to borrowers.
D) Government purchases of buildings and equipment are sold to the highest bidder.

Question 44

Explain what potential conflict exists between shareholders in a corporation and the corporation's managers.

Question 45

How can a proprietorship or partnership raise funds for expansion?

A) borrow from someone or an institution willing to lend the funds
B) reinvest profit back into the business
C) take on a partner or more partners
D) Any of these would generate funds for expansion.

Question 46

Corporations are legally owned by their shareholders.

Question 47

In a corporation,what are "inside directors" and "outside directors"?

Question 48

The person hired by a corporation's board of directors to run the day-to-day operations of the corporation is known as the

A) chairman of the board.
B) chief executive officer.
C) owner-manager.
D) corporate governor.

Question 49

The principal-agent problem that exists between shareholders and managers also exists between managers and workers.

Question 50

Scott is a manager at a pool cleaning business.He has hired 10 workers to clean pools for him and is considering what type of payment scheme he should set up for his workers.He can pay each of his workers $10 per hour to clean pools,or he can pay his workers $20 for each pool a worker cleans.(It takes 2 hours,on average,for an employee to clean a pool thoroughly.)If Scott wants to maximize the number of pools his workers clean in one day,which payment scheme should he use? Explain.

Question 51

Southwest Airlines wants to raise $20 million to finance the renovation of their corporate offices,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?

A) It could issue $20 million in stocks.
B) It could sell $20 million in bonds.
C) It could borrow $20 million from a bank.
D) It could choose either A or B.

Question 52

The existence of the principal-agent problem

A) increases the risk of buying stock in a corporation.
B) increases the risk of becoming the sole proprietor of a business.
C) implies that managers that have the same incentives as the board of directors.
D) does all of the above.

Question 53

Which of the following takes place in the direct finance market?

A) Firms borrow funds from banks.
B) Deposits from savers are accumulated and loans made to borrowers.
C) Ownership in corporations is sold in the form of preferred stock.
D) Banks offer savings accounts to customers.

Question 54

Payments by a corporation to its shareholders are known as

A) stocks.
B) bonds.
C) coupons.
D) dividends.

Question 55

A bond is a financial security that represents

A) ownership in a corporation.
B) the portion of profits paid to shareholders.
C) the interest rate paid on a share of stock.
D) a promise to repay a fixed amount of funds.

Question 56

Explain the relationships between a corporation's shareholders,its board of directors,and its top managers.

Question 57

By tying the salaries of top corporate managers to the price of the corporation's stock,corporations hope to avoid

A) corporate governance.
B) conflict between the CFO and the CEO.
C) the principal-agent problem.
D) paying high salaries to their managers.

Question 58

Which of the following is a characteristic of stock?

A) Stock represents a promise to repay a fixed amount of funds.
B) The face value or principal plus interest is repaid at a specified period of time.
C) The length of coupon payments is fixed by the stated maturity period.
D) Stock represents ownership in a firm

Question 59

If Southwest Airlines borrows $20 million from a bank to finance the renovation of their corporate offices,this is an example of

A) a bond market transaction.
B) indirect finance.
C) a stock market transaction.
D) direct finance.

Question 60

If a corporate bond with face value of $1,000 has an interest rate of eight percent paid once a year for a term of 30 years,what is the size of the coupon payment?

A) $1,000
B) $300
C) $80
D) $8

Question 61

The interest payment on a bond is called

A) the coupon payment.
B) principal.
C) the interest rate.
D) the face value.

Question 62

When you buy newly-issued shares of Google stock,this transaction takes place in the

A) primary market.
B) bond market.
C) secondary market.
D) bear market.

Question 63

When Internet coupon site Groupon sold stock to the public for the first time following its IPO in November 2011,it did so through the NASDAQ market.This was an example of Groupon raising funds through

A) reinvesting retained earnings.
B) a financial intermediary.
C) dividend reinvestment.
D) a financial market.

Question 64

What is a primary market?

A) a market where primary inputs like steel are sold
B) a market where you can sell any bonds you own as a private investor
C) a market where a newly issued claims are sold to initial buyers by the borrowing firm
D) a market where you can sell any stocks you own as a private investor

Question 65

Total dividend payments plus retained earnings divided by outstanding stock shares equals

A) the price-earnings ratio.
B) earnings per share.
C) the dividend yield.
D) the year-to-date percentage change.

Question 66

In 2011,the dividend yield on Abercrombie & Fitch (ANF)stock fell from a high of 1.39% in January to 0.96% in July.Which of the following would have generated that result?

A) The closing price of ANF stock fell.
B) ANF announced a decrease in the dividend it would pay per share.
C) The price-earnings ratio rose.
D) ANF issued bonds with a coupon rate equal to 1.39%.

Question 67

What do the highest stock price and the lowest stock price over the previous year indicate?

A) Add them together and divide by two to get the stock's current market price.
B) what the stock's price-earnings ratio is
C) how volatile the stock's market price has been
D) They generate the dividend yield.

Question 68

Dividing the dividend payment by the stock's closing market price determines the

A) coupon payment.
B) dividend yield.
C) price-earnings ratio.
D) selling price of the stock.

Question 69

If a corporate bond with a face value of $5,000 pays yearly coupon payments of $100,what is the coupon rate?

A) 2%
B) 5%
C) 10%
D) 20%

Question 70

When an investor buys a corporate bond,

A) the investor becomes part owner of the corporation.
B) the principal of the bond is a loan to the corporation.
C) the interest made on the bond represents the bondholder's limited liability in the company.
D) the face value of the bond is equal to what the investor paid for the bond.

Question 71

If a corporation earns a profit,how do owners of the firm share in the profit?

A) through coupon payments on that firm's bonds
B) through dividend payments on shares of that firm's stock
C) by selling any bonds or stocks owned and realizing a capital gain
D) by raising the interest rate on bonds

Question 72

If a corporation goes bankrupt,which of the following has first claim on the firm's assets?

A) stockholders
B) the state where chartered
C) employees
D) bondholders

Question 73

What happens in the secondary market?

A) secondary inputs like electricity are sold
B) a corporate financial manager will raise funds for expansion of the firm
C) newly issued claims are sold by the borrowing firm to the initial buyer
D) already issued claims are sold from one investor to another

Question 74

One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average.This index represents

A) the stock prices of 500 large U.S. firms.
B) an over-the-counter market.
C) the stock prices of more than 4,000 U.S. firms.
D) the stock prices of 30 large U.S. corporations.

Question 75

You have a bond that pays $60 per year in coupon payments.Which of the following would result in an increase in the price of your bond?

A) Coupon payments on newly-issued bonds rise to $80 per year.
B) The likelihood that the firm issuing your bond will default on debt increases.
C) The price of a share of stock in the company falls.
D) Coupon payments on newly-issued bonds fall to $50 per year.

Question 76

In November 2011,General Motors (GM)posted a price-earnings ratio of 4.73.If the price of the stock at that time was $23 per share,which of the following must have been true?

A) GM's revenues that month were $250.2 million.
B) GM's earnings per share was $4.86.
C) GM's coupon payment was $23 per year.
D) GM's dividend yield for the year was 20.6%.

Question 77

Dividing the current market price of a stock by the firm's earnings per share gives the firm's

A) price-earnings ratio.
B) year-to-date percentage change.
C) dividend yield.
D) stock coupon maturity yield.

Question 78

Which of the following is part of the secondary market?

A) New York Stock Exchange
B) the over-the-counter market
C) NASDAQ
D) all of these

Question 79

The profits a corporation keeps to finance future expansion are known as

A) retained earnings.
B) preferred stock.
C) dividends.
D) capital gains.

Question 80

When the coupon rate on newly issued bonds decreases relative to older,outstanding bonds,what happens?

A) The market price of the older bond falls in the secondary market.
B) The market price of the older bond rises in the secondary market.
C) Older bonds can still be sold at their face value.
D) Older bonds will sell for more than their face value.