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

Question 1

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

A) The owner has complete control over the business.
B) A proprietorship has few government rules and regulations to comply with.
C) Business profits are only taxed once, not twice.
D) A proprietorship can easily attain additional funding.

Answer 1

A proprietorship can easily attain additional funding.

Question 2

How has organizing a successful firm in a market economy changed over the last century?

A) It has become easier as more and more firms discover how to do it.
B) As government intervention has decreased, firms now have more freedom.
C) There has been no change one way or the other over the last century.
D) It has become more difficult to organize an efficient and successful firm.

Answer 2

It has become more difficult to organize an efficient and successful firm.

Question 3

How do the owners of a partnership relate to the business?

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

Answer 3

The owners and the business are not separate legal entities.

Question 4

Who owns a corporation?

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

Question 5

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

A) By setting up the business as a corporation, Jeremy would not face double taxation.
B) By setting up the business as a corporation, Jeremy would have the ability to share risk with shareholders.
C) By setting up the business as a corporation, 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 corporation.

Question 6

Who controls a partnership?

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

Question 7

Which of the following statements is false?

A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face more taxes than do proprietorships.
D) Proprietorships have unlimited liability while corporations have limited liability.

Question 8

Assume you set up a sole proprietorship and your lawyer tells you that as the owner you will face unlimited liability.What does that mean?

A) You are liable for organizing the business.
B) You could stand to lose your personal wealth if the business goes bankrupt.
C) There is no legal responsibility of the business in case a customer sues, as the business is legally untouchable.
D) None of these explain what unlimited liability means.

Question 9

A corporation is

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

Question 10

Facebook is an example of a private firm.As a private firm,Facebook is

A) not subject to government regulations and taxation.
B) run by stockholders and a board of directors.
C) run by its founder, Mark Zuckerberg.
D) not legally allowed to raise funds through venture capital firms.

Question 11

What type of business is the easiest to set up?

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

Question 12

On average,jobs at small firms pay ________ wages than jobs at large firms and are ________ likely to offer fringe benefits such as health insurance and retirement accounts.

A) higher; more
B) lower; more
C) higher; less
D) lower; less

Question 13

How does the owner of a corporation relate to the business?

A) The owners of the business have a separate legal distinction from the business.
B) The owners of the business have no separate legal distinction from the business.
C) The personal assets are part of the corporation's assets.
D) None of these describe the legal relationship of corporate owners to the business.

Question 14

Anything of value owned by a person or a firm is

A) an asset.
B) a liability.
C) wealth.
D) owner's yield.

Question 15

What is the primary difference between a sole proprietorship and a partnership?

A) Proprietorships have unlimited liability while partnerships have limited liability.
B) Partnerships can issue stocks and bonds while proprietorships cannot.
C) Partnerships have more owners than do proprietorships.
D) There is no real difference between the two types of firms.

Question 16

Of the different types of businesses,a corporation has the ________ government rules and the ________ government regulations affecting it.

A) least; least
B) least; most
C) most; least
D) most; most

Question 17

If the personal assets of the owners cannot be claimed if the business is bankrupt,the owners are said to have

A) unlimited liability.
B) a proprietorship type of business.
C) limited liability.
D) a partnership type of business.

Question 18

Which type of business has the most 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 19

In a typical year,________ new firms open in the United States.

A) more than 600,000
B) more than 1 million
C) less than 200,000
D) approximately 125,000

Question 20

A firm in a market economy must do all of the following to succeed except

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) be organized as a corporation.

Question 21

The only type of business that faces unlimited liability is a sole proprietorship.

Question 22

Define a sole proprietorship.

Question 23

Who controls a sole proprietorship?

A) owner
B) stockholders
C) bondholders
D) employees

Question 24

A partnership is ________ type of business.

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

Question 25

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

A) double taxation
B) ease in setting up
C) low expenses of legally organizing
D) greater ability to raise funds

Question 26

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

Question 27

The way in which a corporation is structured and the impact a corporation's structure has on the firm's behavior is referred to as

A) corporate taxation.
B) structure composition theory.
C) structural behavior.
D) corporate governance.

Question 28

Stockholders

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

Question 29

Jeremy is thinking of starting up a small business selling NASCAR memorabilia.He asks his friend,Carmen,if she'd like to join him in setting up a partnership to start the business.What is one disadvantage in joining the partnership that Carmen should consider?

A) Carmen should realize that profits in the partnership will be reduced by dividend payments to shareholders.
B) Carmen should realize that, as an owner of the business, she will be personally responsible for the debts of the business.
C) Carmen should realize that the profits of the business will also be taxed as dividend income, so she faces the potential for double taxation of that business income.
D) Carmen should realize that the Jeremy will have complete control over the business because it was his idea.

Question 30

In the United States,corporate profits are taxed

A) only at the corporate level.
B) only when investors receive dividends.
C) at both the corporate level and when investors receive dividends.
D) neither at the corporate level nor when investors receive dividends.

Question 31

A corporation's management

A) owns the corporation.
B) hires the board of directors.
C) are liable for the corporation's debts.
D) operates and controls a corporation in its day-to-day activities.

Question 32

A member of a corporate board of directors that is also a manager of the business is known as

A) a shareholder.
B) an inside director.
C) a partner.
D) a corporate governor.

Question 33

In which types of business do owners have unlimited personal liability and in which do owners have limited personal liability?

Question 34

Who hires the managers of a corporation?

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

Question 35

What is the most common type of business?

A) corporation
B) partnership
C) sole proprietorship
D) They are equally represented because of Federal laws.

Question 36

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

Question 37

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

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

Question 38

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

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

Question 39

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

Question 40

Define a corporation.

Question 41

Members of management serving on the board of directors of a corporation are referred to as outside directors.

Question 42

Raising funds through financial intermediaries is called

A) direct finance.
B) corporate finance.
C) indirect finance.
D) dividend reinvestment.

Question 43

How can a corporation's board of directors and its managers try to reduce the principal-agent problem?

Question 44

What can be done to deal with the principal-agent problem?

A) threaten to liquidate the firm
B) link top manager salaries to the profits of the firm or the price of the firm's stock
C) have the CEO be a rotating position
D) forbid managers from owning any company stock

Question 45

Which of the following does not take place in the direct finance market?

A) Ownership in corporations is sold in the form of common stock.
B) Deposits from savers are accumulated and loans made to borrowers.
C) Ownership in corporations is sold in the form of preferred stock.
D) Corporate bonds are sold to savers.

Question 46

Some corporate governance experts believe that serving on a company's board of directors for an extended length of time diminishes that member's independence from the company's CEO. If this is true,it would tend to

A) reduce the principal-agent problem.
B) increase the principal-agent problem.
C) be in the best interest of shareholders.
D) have no impact on the company's performance, since the CEO is only one member of top management.

Question 47

In many corporations,there is "separation of ownership from control." What does this mean?

A) The shareholders control the corporation, although the board of directors owns the corporation.
B) The managers of the corporation run the corporation, although the shareholders own the corporation.
C) The board of directors controls corporate operations, although the managers of the corporation own the corporation.
D) Top corporate managers only make decisions that have been approved unanimously by shareholders.

Question 48

Economists refer to the conflict between the interests of shareholders and the interests of top management as

A) a stock-equity problem.
B) a liability problem.
C) a principal-agent problem.
D) a financial intermediary problem.

Question 49

Included on the board of directors of Microsoft are Reed hastings,the founder of Netflix,the president of Harvey Mudd college Maria M.Klawe,and the vice chairman of Bank of America Charles H.Noski.These three board members do not have a direct management role with Microsoft and are therefore referred to as

A) inside directors.
B) outside directors.
C) competitive directors.
D) honorary directors.

Question 50

A proprietorship or partnership can raise funds for expansion in all of the following ways except

A) borrowing from someone or an institution willing to lend the funds.
B) reinvesting profit back into the business.
C) taking on a partner or more partners.
D) issuing stock through financial markets.

Question 51

If Abercrombie & Fitch borrows $8 million from a bank to finance the construction of a new store,this is an example of

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

Question 52

What is the central role of financial intermediaries in a market economy?

A) the creation and printing of money
B) keeping the price level stable
C) bringing together savers and borrowers
D) providing safe deposit boxes for people and businesses

Question 53

How does the principal-agent problem extend to managers and employees?

Question 54

The existence of ________ increases the risk of buying stock in a corporation.

A) the principal-agent problem
B) corporate governance
C) unlimited personal liability
D) employee-owned corporations

Question 55

Corporate managers and shareholders always have the same goals.

Question 56

Who selects the board of directors of a corporation?

A) the state where the corporation is chartered
B) employees
C) stockholders
D) managers

Question 57

Who decides who controls a corporation?

Question 58

Abercrombie & Fitch wants to raise $8 million to finance the construction of a new store,and the company wishes to raise the funds through direct finance.Which of the following methods could it use?

A) It could sell $8 million in bonds.
B) It could borrow $8 million from a bank.
C) It could issue $8 million in stocks.
D) It could choose either A or C.

Question 59

What is corporate governance?

Question 60

Steve Ballmer is the Chief Executive Officer of Microsoft as well as a member of Microsoft's board of directors.Ballmer is therefore classified as an

A) inside director.
B) outside director.
C) independent director.
D) unbiased director.

Question 61

When an investor buys a corporate bond,the ________ the bond is a loan to the corporation.

A) interest on
B) face value of
C) coupon payment on
D) dividend payment on

Question 62

A stock's dividend yield is determined by

A) dividing the dividend payment by the stock's initial price.
B) dividing the dividend payment by the stock's closing market price.
C) dividing the stock's closing market price by the dividend payment.
D) subtracting the stock's initial purchase price from the stocks' closing market price on a given day.

Question 63

Which of the following is a characteristic of a bond?

A) A bond 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) All of these are characteristic of bonds.

Question 64

If a corporation goes bankrupt,bondholders have ________ on the firm's assets.

A) no claim
B) third claim, after the IRS and stockholders,
C) second claim, after stockholders,
D) first claim

Question 65

Owners of a corporation share in the profits of the firm

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

Question 66

If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50,what is the coupon rate?

A) 2.5%
B) 4%
C) 25%
D) 40%

Question 67

The volatility of a stock's market price is indicated by

A) the highest stock price and the lowest stock price over the previous year.
B) the price of newly issued shares compared to the price of previously issued shares.
C) the difference between the stock's selling price and its asking price.
D) the stock's price-earnings ratio.

Question 68

A financial security that represents a promise to repay a fixed amount of funds is a

A) share of stock.
B) coupon.
C) dividend.
D) bond.

Question 69

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

A) Coupon payments on newly-issued bonds fall to $40 per year.
B) The likelihood that the firm issuing your bond will default on debt decreases.
C) The price of a share of stock in the company rises.
D) Coupon payments on newly-issued bonds rise to $75 per year.

Question 70

Dividends are

A) financial securities which represent ownership in a corporation.
B) the yearly payments associated with bonds.
C) the interest rate paid on shares of stock.
D) payments by a corporation to its shareholders.

Question 71

What is a secondary market?

A) a market where factory seconds and damaged merchandise are sold
B) a market where newly issued bonds are sold to initial buyers by the borrowing firm
C) a market where a newly issued stocks 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 72

The coupon rate of a bond is equal to

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

Question 73

If a corporation retains all its profits and distributes none of the profit to owners,how can owners benefit?

A) If the retained earnings are expected to create future profits, the market price of the firm's stock will increase and create a capital gain for stockholders if the stock is sold.
B) Shares of stock can be converted into bonds so stockholders will be able to earn coupon payments.
C) Owners will only benefit if some profits are paid out in the form of dividends.
D) Owners will benefit by changing the board of directors.

Question 74

If a corporate bond with face value of $5,000 has an interest rate of 4 percent paid once a year for a term of 30 years,what is the size of the coupon payment?

A) $4
B) $200
C) $1,250
D) $5,000

Question 75

What happens in the primary market?

A) primary inputs like electricity are sold
B) a corporate financial manager will resell previously issued shares of stock
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 76

Securities dealers that trade stocks and bonds outside exchanges comprise the

A) foreign exchange market.
B) over-the-counter market.
C) NASDAQ market.
D) outlet market.

Question 77

All of the following represent differences between stocks and bonds except

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) bonds represent partial ownership in a firm but stocks do not.

Question 78

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

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

Question 79

The three most widely followed stock indexes in the United States include all of the following except

A) the Dow Jones Industrial Average.
B) the S&P 500.
C) the Fortune 500.
D) The NASDAQ.

Question 80

When the coupon rate on newly issued bonds increases 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 less than their face value.