Macroeconomics 6th Edition Hubbard Test Bank

Macroeconomics 6th Edition Hubbard
Test Bank
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Macroeconomics 2017 (Hubbard)
Chapter 6 Firms, the Stock Market, and Corporate Governance
6.1 Types of Firms
1) Which of the following must a firm in a market economy do today to succeed?

A) produce new or better goods or services
B) efficiently organize production
C) produce existing goods and services at a lower cost
D) Market firms today must do all of these things.
Answer: D
Diff: 1 Page Ref: 252/182
Topic: Firms
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Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms.
AACSB: Analytical thinking
2) The typical firm in many industries has become ________ over the past 100 years, and efficiently
organizing production has become ________.
A) larger; more difficult
B) smaller; more difficult
C) larger; easier
D) smaller; easier
Answer: A
Topic: Firms
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3) Public companies ________ and private companies ________.

A) sell stock in financial markets; also sell stock in financial markets
B) sell stock in financial markets; do not sell stock in financial markets
C) do not sell stock in financial markets; also do not sell stock in financial markets
D) do not sell stock in financial markets; sell stock in financial markets
Answer: B
Topic: Corporations
Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment
decision.
Special Feature: Chapter Opener: Is Twitter the Next Facebook?
1
Copyright © 2017 Pearson Education, Inc.
4) Damian wants to start a business where he is the only owner and the company does not issue stock.
The type of business Damian wants to start is a
A) sole proprietorship.
B) partnership.
C) corporation.
D) Any of the above could be correct.
Answer: A
Topic: Proprietorships and Partnerships
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5) Juliana, Gabrielle, and Marcela want to start a business they are the only owners and the company
does not issue stock. The type of business they want to start is a
B) partnership.
C) corporation.
Answer: B
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6) Arturo wants to start a business where he is the chief executive officer and the company does issue
stock. The type of business Arturo wants to start is a
B) partnership.
C) corporation.
Answer: C
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7) A sole proprietorship is the type of business that has ________ government rules and regulations
affecting it.
A) no
B) the fewest
C) the most
D) only federal
Answer: B
Topic: Corporations
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2
8) As a form of business, a sole proprietorship
A) has limited liability.
B) has more than one owner.
C) cannot issue stock.
D) has the most government rules and regulations affecting it.
Answer: C
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9) How do a partnership and a corporation differ?

A) Partnerships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while partnerships cannot.
C) Corporations face more taxes than do partnerships.
D) All of these are differences between the two types of businesses.
Answer: D
Topic: Types of Firms
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10) Assume you and your best friend set up a partnership and your lawyer tells you that as the owners,
you could each stand to lose your personal wealth if the business goes bankrupt. This means a
partnership
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.
Answer: B
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11) The owner or owners control the day-to-day activities of which of the following types of business?
A) corporations and partnerships
B) partnerships and sole proprietorships
C) sole proprietorships and corporations
D) only corporations
Answer: B
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3
12) A ________ is owned by its stockholders.
A) sole proprietorship
B) corporation
C) partnership
D) All of the above are correct.
Answer: B
Topic: Corporations
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13) In a partnership, the owners of the business and the business are ________, and in a sole
proprietorship, the owner of the business and the business are ________.
A) separate legal entities; also separate legal entities
B) not separate legal entities; also not separate legal entities
C) not separate legal entities; separate legal entities
D) separate legal entities; not separate legal entities
Answer: B
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14) ________ of people work at firms that have 50 or more employees.

A) Less than 25 percent
B) About 50 percent
C) More than 75 percent
D) Close to 97 percent
Answer: C
Diff: 1 Page Ref: 254-255/184-185
Topic: Firms
Special Feature: Making the Connection: Why Are Fewer Young People Starting Businesses?
15) In a typical year, new small firms create ________ jobs.

A) 250,000
B) 1.1 million
C) 1.8 million
D) 3.3 million
Answer: D
Diff: 1 Page Ref: 254-255/184-185
Topic: Firms
4
16) A sole proprietorship is limited to how many owners?
A) 1
B) 2
C) 10
D) There is no limit to the number of owners.
Answer: A
Topic: Corporations
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17) A partnership is limited to how many owners?

A) 2
B) 5
C) less than 10
Answer: D
Topic: Corporations
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18) A corporation is limited to how many owners?

A) 1
B) 2
C) less than 10
Answer: D
Topic: Corporations
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19) What does unlimited 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 up to three times their liability.
Answer: A
Topic: Liabilities
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5
20) Which of the following is an advantage of starting a new business as a partnership?
A) The owners have limited personal liability.
B) A partnership has few government rules and regulations to comply with.
C) Business profits are not taxed.
D) A partnership can easily attain additional funding.
Answer: B
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21) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She is
considering setting up her business as a sole proprietorship. What is one advantage to Torrie of setting
up her business as a sole proprietorship?
A) As a sole proprietor, Torrie would face limited liability.
B) As a sole proprietor, Torrie would have the ability to share risk with shareholders.
C) As a sole proprietor, Torrie would have both ownership and control over the business.
D) All of the above would be advantages of setting up her business as a sole proprietorship.
Answer: C
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considering setting up her business as a sole proprietorship. What is one disadvantage to Torrie of
setting up her business as a sole proprietorship?
A) As a sole proprietor, Torrie would be taxed twice.
B) As a sole proprietor, Torrie would not have control of the business.
C) As a sole proprietor, Torrie would face unlimited liability.
D) As a sole proprietor, Torrie would be subject to significant rules and regulations.
Answer: C
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23) Which of the following is not an advantage of starting a new business as a sole proprietorship?
A) separation of ownership and business liability
B) limited control over the operation of the business
C) the initial cost in setting up the business
D) possibility of double taxation
Answer: A
Topic: Corporations
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6
24) In the United States, ________ percent of all firms are sole proprietorships.
A) 4
B) 14
C) 72
D) 82
Answer: C
Topic: Corporations
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25) In the United States, ________ percent of all firms are partnerships.
A) 4
B) 10
C) 14
D) 26
Answer: B
Topic: Corporations
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26) In the United States, ________ percent of all firms are corporations.
A) 18
B) 60
C) 72
D) 82
Answer: A
Topic: Corporations
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27) From the highest percentage to the lowest percentage, the number of firms by business type in the
United States is represented by which of the following?
A) sole proprietorships, corporations, partnerships
B) sole proprietorships, partnerships, corporations
C) corporations, partnerships, sole proprietorships
D) corporations, sole proprietorships, partnerships
Answer: A
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7
28) From the highest percentage to the lowest percentage, the percentage of revenues earned by
businesses in the United States is represented by which of the following?
A) sole proprietorships, partnerships, corporations
B) partnerships, corporations, sole proprietorships
Answer: C
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29) From the highest percentage to the lowest percentage, the percentage of profits earned by businesses
in the United States is represented by which of the following?
A) sole proprietorships, partnerships, corporations
B) partnerships, corporations, sole proprietorships
Answer: C
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30) Before its IPO, Twitter was an example of a private firm. As a private firm, Twitter was
A) not subject to government regulations and taxation.
B) run by stockholders and a board of directors.
C) run by its founders, Evan Williams, Noah Glass, Jack Dorsey, and Biz Stone.
D) not legally allowed to raise funds through venture capital firms.
Answer: C
Topic: Firms
Special Feature: Chapter Opener: Is Twitter the Next Facebook?
31) The limited ability to raise funds is a disadvantage for

A) sole proprietorships and partnerships.
B) partnerships and corporations.
D) corporations.
Answer: A
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32) Unlimited personal liability is a disadvantage for
D) corporations.
Answer: A
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33) The possible double taxation of income is a disadvantage for

D) corporations.
Answer: D
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34) Limited personal liability is an advantage for

D) corporations.
Answer: D
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35) The ability to share work and share risk is an advantage for
B) sole proprietorships.
C) sole proprietorships and corporations.
D) partnerships.
Answer: D
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36) Anything owed by a person or a firm is
A) an asset.
B) a liability.
C) wealth.
D) owner's yield.
Answer: B
Topic: Firms
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37) Of the different types of businesses, a ________ has the most government rules and the most
government regulations affecting it.
A) corporation
B) partnership
C) sole proprietorship
D) All of the above are subject to the same amount of rules and regulations.
Answer: A
Topic: Corporations
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38) Which of the following statements is true?

A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face fewer taxes than do proprietorships.
D) Proprietorships have limited liability while corporations have unlimited liability.
Answer: A
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39) Assume you and your cousin Vinny set up a partnership and your lawyer tells you that as the
owners you will each face unlimited liability. What does that mean?
A) You are each liable for organizing the business.
B) Each of 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.
Answer: B
Topic: Liabilities
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10
40) How do the owners of a corporation 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 the same as the assets of the business.
D) None of these describe the legal relationship of the owners to the business.
Answer: B
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41) The decline in starting new businesses

A) is not concentrated in one industry.
B) is concentrated primarily in high-tech industries.
C) is concentrated primarily in health care industries.
D) is concentrated primarily in public service industries.
Answer: A
Diff: 1 Page Ref: 254-255/184-185
Topic: Firms
42) The decline in starting new businesses

A) is not concentrated in one geographic area.
B) is concentrated in the Northeast states.
C) is concentrated in the Gulf Coast states.
D) is concentrated in the Rust Belt.
Answer: A
Diff: 1 Page Ref: 254-255/184-185
Topic: Firms
43) In the early 1800s, many state legislatures began to pass general incorporation laws, which
A) allowed firms to more easily be organized as corporations.
B) made it harder for firms to organize as corporations.
C) granted sole proprietorships and partnerships limited personal liability.
D) allowed sole proprietorships and partnerships to issue stock.
Answer: A
Topic: Corporations
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11
44) If the personal assets of the owners can be claimed if the business is bankrupt, the owners are said to
have
A) unlimited liability.
B) a corporation type of business.
C) limited liability.
D) separation of ownership from control.
Answer: A
Topic: Liabilities
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45) Which of the following is not an advantage of starting a new business as a partnership?
A) The owners have complete control over the business.
B) A partnership has few government rules and regulations to comply with.
C) Business profits are only taxed once, not twice.
D) A partnership can easily attain additional funding.
Answer: D
Diff: 2 Page Ref: 252-253/182-183
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considering setting up her business as a corporation. What is one advantage to Torrie of setting up her
business as a corporation?
A) By setting up the business as a corporation, Torrie would not face double taxation.
B) By setting up the business as a corporation, Torrie would have the ability to share risk with
shareholders.
C) By setting up the business as a corporation, Torrie would have both ownership and control over the
business.
D) All of the above would be advantages of setting up her business as a corporation.
Answer: B
Diff: 2 Page Ref: 252-253/182-183
Topic: Corporations
*: Recurring
12
47) Torrie is thinking of starting up a small business selling hand-painted wine glasses. She asks her
sister, Lisette, if she'd like to join her in setting up a partnership to start the business. What is one
disadvantage in joining the partnership that Lisette should consider?
A) Lisette should realize that her profits in the partnership will always be less than Torrie's profits, since
Torrie had the idea to start the business.
B) Lisette should realize that, as an owner of the business, she will be personally responsible for the
debts of the business.
C) Lisette should realize that only Torrie will be allowed to own stock in the business as the founding
partner.
D) Lisette should realize that Torrie will have complete control over the business because it was her
idea.
Answer: B
Diff: 2 Page Ref: 252-253/182-183
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48) Which of the following is an advantage of starting a new business as a sole proprietorship?
A) double taxation
B) ease in setting up
C) limited liability
D) greater ability to raise funds
Answer: B
Diff: 2 Page Ref: 252-253/182-183
Topic: Corporations
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49) In the United States, ________ profits are taxed at both the corporate level and when investors
receive dividends.
A) a sole proprietor's
B) a partnership's
C) corporate
D) all of the above
Answer: C
Diff: 1 Page Ref: 252-253/182-183
Topic: Corporations
*: Recurring
Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system.
13
50) Of the types of business organizations in the United States, sole proprietorships account for the
________ percentage of firms and the ________ percentage of profits.
A) smallest; smallest
B) smallest; largest
C) largest; smallest
D) largest; largest
Answer: C
*: Recurring
51) Of the types of business organizations in the United States, partnerships account for the ________
percentage of firms and ________ percentage of profits.
A) smallest; the smallest
B) smallest; neither the largest nor smallest
C) largest; the smallest
D) largest; neither the largest nor smallest
Answer: B
*: Recurring
52) Of the types of business organizations in the United States, corporations account for ________
percentage of firms and ________ percentage of profits.
A) the smallest; the largest
B) smallest; neither the largest nor smallest
C) neither the largest nor smallest; the largest
D) the largest; the largest
Answer: C
*: Recurring
53) Of the types of business organizations in the United States, corporations account for ________
percentage of revenues and ________ percentage of profits.
A) the smallest; the largest
B) largest; neither the largest nor smallest
C) neither the largest nor smallest; the largest
D) the largest; the largest
Answer: D
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14
54) Most app developers have adopted the business model of
A) charging a small fee for their apps to be downloaded.
B) allowing their apps to be downloaded and used for free, while trying to still earn money from users.
C) charging a between $1.99 and $2.99 for their apps to be downloaded.
D) allowing their apps to be downloaded to one device for free, but charging a high price for the apps to
be downloaded to additional devices.
Answer: B
Topic: Corporations
Special Feature: Economics in Your Life: Would You Pay to Use Facebook or Twitter?
55) What is an outside director?

A) a member of the board of directors who does not have a direct management role in the firm
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 less than one year
Answer: A
Topic: Corporate Structure
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56) Julie is the chief executive officer (CEO) of the Black Gold Corporation and is also on the company's
board of directors. Julie is considered ________ of the corporation.
A) a stockholder
B) an inside director
C) an owner
D) an outside director
Answer: B
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57) Garrison is the chief financial officer (CFO) of the Colorado Drone manufacturing company and is
also on the company's board of directors. Garrison is considered ________ of the company.
A) a bondholder
C) a financier
Answer: B
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15
58) Anita is the retired president of Claddagh College and currently serves on the board of directors of
the Patrician Pharmaceutical Company. Anita is considered ________ of the company.
A) a managing director
C) a silent partner
Answer: D
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59) Humberto is the chief operational officer (COO) of the SodaSopa Company and currently serves on
the board of directors of the Helium Company of America. Humberto is considered ________ of the
Helium Company of America.
A) a managing director
C) an unpaid advisor
Answer: D
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60) Who selects the board of directors of a corporation?

A) stockholders
B) bondholders
C) upper management
D) all of the above
Answer: A
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61) The person hired by a corporation's board of directors to ________ is known as the chief executive
officer.
A) chair the board of directors
B) run the day-to-day operations of the corporation
C) audit the financial records of the corporation
D) hire additional members for the board of directors
Answer: B
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16
62) Unlike a sole proprietorship, a corporation's shareholders
A) own the firm and directly manage it as well.
B) own the firm but do not directly manage it.
C) do not own the firm but directly manage it.
D) do not own the firm and do not directly manage it.
Answer: B
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63) A member of a corporate board of directors that does not have a direct management role in the firm
is known as
A) a shareholder.
B) an inside director.
C) an outside director.
D) a corporate governor.
Answer: C
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64) The shareholders of a corporation

A) are inside directors of the corporation.
B) are only comprised of top management for a large corporation.
C) directly manage the corporation.
D) elect a board of directors to represent their interests.
Answer: D
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65) ________ are the owners of a corporation.

A) The board of directors
B) Stockholders
C) Top management
D) Bondholders
Answer: B
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17
66) The CEO of Dynadyne corporation has been more concerned with enhancing his lifestyle by having
the company pay for expensive corporate retreats than he has been with increasing the value of the
company's stock. In this situation, the CEO is ________ and the stockholders are ________.
A) the principal; the agents
B) the agent; the principals
C) an agent; also agents
D) a principal; also principals
Answer: B
Topic: Principal-Agent
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67) In many corporations, the managers of the corporation run the corporation, although the
shareholders own the corporation. In this situation,
A) there are no inside directors on the board of directors.
B) there is separation of ownership from control.
C) there are no outside directors on the board of directors.
D) there is no corporate governance.
Answer: B
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68) Jack Dorsey is the Chief Executive Officer of Twitter as well as a member of Twitter's board of
directors. Dorsey is therefore classified as an
A) inside director.
B) outside director.
C) independent director.
D) unbiased director.
Answer: A
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18
69) Included on the board of directors of Twitter are Peter Currie, president of Currie Capital LLC, the
CEO of 1stdibs.com David Rosenblatt, and PureTech Health senior independent director Marjorie
Scardino. These three board members do not have a direct management role with Twitter and are
therefore referred to as
A) inside directors.
B) outside directors.
C) competitive directors.
D) honorary directors.
Answer: B
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70) Some corporate governance experts believe that serving on a company's board of directors for an
extended length of time ________that member's independence from the company's CEO. If this is true,
it would tend to ________ the principal-agent problem.
A) enhances; increase
B) diminishes; increase
C) has no impact on; increase
D) diminishes; decrease
Answer: B
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71) When a business is set up as a partnership, the owners of the business face limited liability.
Answer: FALSE
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72) The only type of business that faces unlimited liability is a corporation.
Answer: FALSE
Topic: Liabilities
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19
73) In the United States, corporate profits are taxed at the corporate level but are not taxed as personal
income in the form of dividend payments.
Answer: FALSE
Topic: Corporations
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74) An asset is anything of value owned by a person or firm.

Answer: TRUE
Topic: Assets
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75) The only type of business that faces limited liability is a partnership.
Answer: FALSE
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76) In the United States, sole proprietorship profits are taxed at the business level and then are taxed
again as personal income in the form of dividend payments.
Answer: FALSE
Diff: 1 Page Ref: 252-253/182-183
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77) Corporations are legally owned by their board of directors.

Answer: FALSE
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78) Corporate governance refers to the way in which a corporation is structured and the effect that
structure has on the corporation's behavior.
Answer: TRUE
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20
79) Corporate managers and shareholders do not always have the same goals.
Answer: TRUE
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80) Tying salaries of top managers to the profits of the firm is a way to reduce the effect of the principal-
agent problem.
Answer: TRUE
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81) Javier wants to start a microbrewery business and is thinking of setting it up as a sole
proprietorship. What are the advantages and disadvantages he will face by setting up the business as a
sole proprietorship as opposed to a partnership or a corporation?
Answer: As a sole proprietorship, Javier has the advantages of having complete control of the business
and would not face layers of management, as well as facing the easiest type of business to set up. The
disadvantages include unlimited personal liability and the limited ability to raise funds (as are true with
a partnership as well).
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82) Shontae wants to start a pet hotel and is thinking of setting it up as a partnership with her sister
Victoria. What are the advantages and disadvantages she will face by setting up the business as a
partnership as opposed to a sole proprietorship or a corporation?
Answer: As a partnership, Shontae has the advantages of being able to share the work and risks
involved with the business. The disadvantages include unlimited personal liability and the limited
ability to raise funds (as are true with a sole proprietorship as well).
*: Recurring
21
83) Angelica wants to open a restaurant and is thinking of setting it up as a corporation. What are the
advantages and disadvantages she will face by setting up the business as a corporation as opposed to a
sole proprietorship or a partnership?
Answer: As a corporation, Angelica has the advantages of limited personal liability and a greater
ability to raise funds. The disadvantages include the cost to organize the business as well as the possible
double taxation of income at both the corporate level and at the income level for shareholders who earn
dividends.
Topic: Corporations
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84) By the percentage of each type of business organization in the United States, rank sole
proprietorships, partnerships, and corporations in terms of the number of firms, revenue, and profits.
Answer: In terms of the number of firms, sole proprietorships comprise 72% of U.S. businesses,
corporations comprise 18%, and partnerships 10%. In terms of revenue, corporations earn 82%,
partnerships 14%, and sole proprietorships 4%. In terms of profits, corporations earn 60%, partnerships
26%, and sole proprietorships 14%.
*: Recurring
85) Explain the difference between a sole proprietorship and a partnership.

Answer: A sole proprietorship is a firm owned by one person, whereas a partnership is a firm owned
by two or more persons.
*: Recurring
86) With respect to business types, what does the term 'limited liability' mean?
Answer: Limited liability is a legal provision that shields owners of a corporation from losing more
than they have invested in the firm. Corporations face limited liability. Sole proprietorships and
partnerships face unlimited liability.
*: Recurring
22
87) Describe the three main categories of firms.
Answer: The three main types of firms are sole proprietorships, where the firm is owned by a single
person, partnerships, where the firm is owned by two or more persons, and corporations, where the
firm is a legal form of business that provides owners with protection from losing more that their
investment in the firm should the business fail.
Diff: 2 Page Ref: 252-253/182-183
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88) In the eyes of the law, a corporation is a legal "person," separate from its owners. Explain what this
means.
Answer: This means that the firm is a separate legal entity from its owners. Under the corporate form of
business, the owners of a firm have limited liability, which means that if the firm fails, the owners can
never lose more than the amount they have invested in the firm. The personal assets of the owners of
the firm are not affected by the failure of the firm.
Topic: Corporations
*: Recurring
89) What does it mean to say there is a separation of ownership from control in large corporations?
Answer: Shares of stock represent partial ownership in large corporations, so that each of those who
own stock own part of the corporation and share in the company's profits. Control of the corporation is
possessed by members of its board of directors who select managers responsible for the day-to-day
operations of the firm. Members of the board of directors and managers may also own shares of the
corporation's stock.
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90) How is the separation of ownership from control related to the principal-agent problem?
Answer: The principal-agent problem results when an agent pursues his own interests rather than the
interests of the principal who hired him. This can be a problem for a corporation because the managers
of a firm (the agents) may choose to pursue policies that benefit themselves rather than the firm's
stockholders (the principals). Stockholders would benefit from a policy that yields higher profits but
managers may consider the policy too risky and prefer to take fewer risks even at the expense of
possible future profits. Because most shareholders are divorced from the daily operation of the firm
they may be unaware of the choices managers make.
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23
91) In a public corporation, asymmetric information often results in a principal-agent problem between
top management and ownership. What information would help to prevent this principal-agent
problem?
Answer: Top managers know more about how the company is run than do the firm's shareholders. The
principal-agent problem might be overcome if shareholders had all the information about the company
and about the consequences of the actions taken by the firm's managers that the managers themselves
possess.
Topic: Principal-Agent Problem
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92) Pietro is a manager at a carwash. He has hired 10 workers to wash and detail cars for him and is
considering what type of payment scheme he should set up for his workers. He can pay each of his
workers $9 per hour to wash and detail cars, or he can pay his workers $12 for each car a worker washes
and details. (It takes 75 minutes, on average, for an employee to wash and detail a car.) If Pietro wants
to maximize the number of cars his workers wash and detail in one day, which payment scheme should
he use? Explain.
Answer: If Pietro wants to maximize the number of cars his workers wash and detail in one day, he
should pay them $12 for each car so that workers also will have an incentive to wash and detail as many
cars as possible. However, if the workers are rushing through their work, it is likely that the cars will
not be washed and detailed properly.
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24
6.2 How Firms Raise Funds
1) It is the role of ________ to transfer funds from savers to borrowers.

A) the Federal Reserve
B) the federal government
C) an economy's financial system
D) corporate governance
Answer: C
Topic: Financial Intermediaries
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2) Profits that are reinvested in a firm rather than paid to the firm's owners are called
A) dividends.
B) stock options.
C) retained earnings.
D) corporate bonds.
Answer: C
*: Recurring
Learning Outcome: Macro-5: Describe the key components and functions of a financial system.
3) If a firm raises funds by recruiting additional owners to invest in the firm,

A) the firm's financial capital would increase.
B) the firm's financial capital would decrease.
C) the firm's stock price would decrease.
D) the firm's net worth would decrease.
Answer: A
*: Recurring
4) Which of the following takes place in the direct finance market?

A) Firms borrow funds from their retained earnings.
B) Borrowers take out loans from banks.
C) Loans to corporations are made from the sale of corporate bonds.
D) Savers make funds available to borrowers by making deposits to savings accounts.
Answer: C
Topic: Financial Markets
*: Recurring
25
5) If Walmart issues $250 million in new stock to finance the renovation of their retail stores, this is an
example of
A) a bond market transaction.
B) indirect finance.
C) a stock market transaction.
D) direct finance.
Answer: D
*: Recurring
6) Walmart wants to raise $250 million to finance the renovation of their retail stores, and the company
wishes to raise the funds through indirect finance. Which of the following methods could it use?
A) It could issue $250 million in stock.
B) It could sell $250 million in bonds.
C) It could borrow $250 million from a bank.
D) It could choose either A or B.
Answer: C
*: Recurring
7) A bond is a financial security that represents a promise to repay

A) a yearly interest payment only.
B) a yearly principal payment only.
C) a yearly interest payment and a principal payment.
D) Bonds are investments that do not promise any kind of repayment.
Answer: C
Topic: Bonds
*: Recurring
8) Bonds ________ and stocks ________.

A) always pay interest payments forever; always pay dividends forever
B) have a fixed number of interest payments; may pay dividends forever
C) may pay interest payments forever; have a fixed number of dividend payments
D) have a fixed number of interest payments; have a fixed number of dividend payments
Answer: B
Diff: 2 Page Ref: 256-258/186-188
Topic: Stocks versus Bonds
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26
9) All of the following are characteristics of stock except
A) stock does not represent a promise to repay a fixed amount of funds.
B) dividends paid to owners of stock represent a firm's profits.
C) stock promises to repay a fixed amount to of funds to stock owners.
D) stock represents ownership in a firm.
Answer: C
Topic: Stocks
*: Recurring
10) Dividends are

A) the interest payments on bonds.
B) the principal payments on bonds.
C) fixed payments to bondholders.
D) payments by a corporation to its shareholders.
Answer: D
Topic: Stocks
*: Recurring
11) If a corporate bond with face value of $1,000 has an interest rate of seven percent paid once a year
for a term of 10 years, what is the size of the coupon payment?
A) $1,000
B) $700
C) $70
D) $7
Answer: C
Topic: Bonds
*: Recurring
Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment
decision.
12) If a corporate bond with a face value of $20,000 pays yearly coupon payments of $500, what is the
coupon rate?
A) 2.5%
B) 4%
C) 25%
D) 40%
Answer: A
Topic: Bonds
*: Recurring
27
13) When an investor buys a corporate bond, the ________ is a loan to the corporation.
A) interest on the bond
B) principal of the bond
C) bond's dividend payments
D) coupon payment
Answer: B
Topic: Bonds
*: Recurring
14) The interest rate on a bond is calculated as

A) the coupon divided by the face value.
B) the coupon times the face value.
C) the face value divided by the coupon.
D) the face value divided by the coupon plus the face value.
Answer: A
Topic: Bonds
*: Recurring
15) Mutual funds sell shares to investors and use the funds to
A) purchase Treasury bonds.
B) invest in a portfolio of financial assets.
C) purchase newly issued shares of a particular company's stock.
D) pay dividends.
Answer: B
*: Recurring
16) The ________ a corporation keeps to finance future expansion are known as retained earnings.
A) profits
B) stock
C) dividends
D) bonds
Answer: A
Topic: Corporations
*: Recurring
28
17) Small savers who only have enough money to buy a few individual financial assets can use
________ to diversify.
A) one company's stock
B) one company's bonds
C) Treasury securities
D) mutual funds
Answer: D
*: Recurring
18) Which of the following can only be sold back to the firm that issued them?
A) stocks
B) bonds
C) mutual funds
D) exchange-traded funds
Answer: C
*: Recurring
19) When Twitter sells newly issued shares of stock this is an example of
A) direct finance in a primary market.
B) direct finance in a secondary market.
C) indirect finance in a primary market.
D) indirect finance in a secondary market.
Answer: A
Topic: Primary Market
Special Feature: Don't Let This Happen to You: When Twitter Shares Are Sold, Twitter Doesn't Get the Money
20) If you borrow $5,000 from your bank to purchase shares of Twitter from your cousin Vinny, this is
an example of obtaining ________ financing and purchasing the stock in a ________ market.
A) direct; primary
B) direct; secondary
C) indirect; primary
D) indirect; secondary
Answer: B
Topic: Secondary Market
29
21) Which of the following is the most important of the over-the-counter markets?
A) New York Stock Exchange
B) the S&P 500
C) the NASDAQ
D) the Chicago Mercantile Exchange
Answer: C
*: Recurring
22) One of the most widely followed stock indexes in the United States is the S&P 500. This index
represents
A) the stock prices of 500 large U.S. firms.
B) the stock prices of the 500 most valuable firms worldwide.
C) the stock prices of more than 4,000 U.S. firms.
D) the stock prices of 30 large U.S. corporations.
Answer: A
*: Recurring
23) When the coupon rate on newly issued bonds ________ relative to older, outstanding bonds, the
market price of the older bond ________
A) decreases; rises in the secondary market
B) decreases; falls in the secondary market
C) increases; falls in the secondary market
D) increases; falls in the primary market
Answer: B
Topic: Bonds
*: Recurring
24) You have a bond that pays $125 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 $140 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 $75 per year.
Answer: D
Topic: Bonds
*: Recurring
30
25) Dividing the dividend payment by the stock's ________ determines the dividend yield.
A) coupon payment
B) closing market price
C) highest yearly price
D) price/earnings ratio
Answer: B
Topic: Dividend Yield
*: Recurring
26) Generally with bond ratings, the ________ the rating, the lower the interest rate an investor will
receive and the ________ the risk that the issuer of the bond will default.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Answer: B
Diff: 2 Page Ref: 257-258/187-188
Topic: Current Yield
Special Feature: Making the Connection: The Rating Game: Is the U.S. Treasury Likely to Default on Its Bonds?
27) In August 2011, Standard & Poor's (S&P) changed its rating on U.S. Treasury bonds from "AAA" to
"AA+" based on the state of the federal government's budget deficit. This was the ________ a rating
agency had given Treasury bonds less than a rating of "AAA".
A) first time ever
B) second time since the year 2000
C) first time since the Great Depression
D) fifth time in history
Answer: D
Diff: 1 Page Ref: 257-258/187-188
28) A partnership can raise funds for expansion in which of the following ways?
A) issuing stock through financial markets
B) issuing stock through secondary markets
C) taking on more partners
D) all of the above
Answer: C
*: Recurring
31
29) Raising funds through ________ is called indirect finance.
A) issuing stock
B) issuing bonds
C) financial intermediaries
D) retaining earnings
Answer: C
*: Recurring
30) All of the following take place in the direct finance market except
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.
Answer: B
*: Recurring
31) If Urban Outfitters borrows $25 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.
Answer: D
*: Recurring
32) Urban Outfitters wants to raise $25 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 $25 million in bonds.
B) It could borrow $25 million from a bank.
C) It could issue $25 million in stock.
D) It could choose either A or C.
Answer: D
*: Recurring
32
33) If you purchased a newly issued 30-year bond from Google with a face value of $3,000 and a coupon
payment of 6 percent, Google would pay you
A) $100 per year for 30 years plus $3,000 at the end of the 30th year.
B) $180 per year for 30 years.
C) $180 per year for 30 years plus $3,000 at the end of the 30th year.
D) $100 per year plus 6 percent per year for 30 years.
Answer: C
Topic: Bonds
*: Recurring
34) If you purchased a newly issued 30-year bond from American Airlines with a face value of $1,000
and a coupon payment of 3 percent, American Airlines would pay you
A) $33.33 per year for 30 years plus $1,000 at the end of the 30th year.
B) $30 per year for 30 years.
C) $30 per year for 30 years plus $1,000 at the end of the 30th year.
D) $33.33 per year plus 3 percent per year for 30 years.
Answer: C
Topic: Bonds
*: Recurring
35) Which of the following statements is true?

A) A stock can possibly pay dividends forever, but bonds have a fixed number of payments.
B) Differences of opinion about a bond's future may vary considerably but there is less difference about
a stock's future.
C) The future growth of a stock is more certain than the payments of a bond.
D) Bonds represent partial ownership in a firm but stocks do not.
Answer: A
Diff: 2 Page Ref: 256-258/186-188
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36) All of the following are characteristics of a bond except

A) a bond represents a promise to repay a fixed amount of funds.
B) the face value is repaid when the bond matures.
C) the coupon payment is the interest payment on the bond.
D) bonds generally pay dividends each year.
Answer: D
Topic: Bonds
*: Recurring
33
37) If a corporate bond with face value of $8,000 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) $320
B) $2,000
C) $8,000
D) $9,600
Answer: A
Topic: Bonds
*: Recurring
38) If a corporate bond with a face value of $1,000 pays yearly coupon payments of $40, what is the
coupon rate?
A) 2.5%
B) 4%
C) 25%
D) 40%
Answer: B
Topic: Bonds
*: Recurring
39) When an investor buys a corporate bond, the face value of the bond is
A) a measure of ownership in the corporation.
B) a loan to the corporation.
C) the coupon rate of the bond.
D) a dividend payment on the bond.
Answer: B
Topic: Bonds
*: Recurring
40) Owners of a corporation ________ through dividend payments on shares of that firm's stock.
A) retain earnings of the firm
B) issue bonds for the firm
C) share in the profits of the firm
D) indirectly finance the firm
Answer: C
Topic: Stocks
*: Recurring
34
41) If a corporation's retained earnings are expected to create future profits, the market price of the
firm's stock will ________ and create a ________ for stockholders if the stock is sold.
A) increase; capital gain
B) decrease; capital gain
C) increase; loss of wealth
D) decrease; loss of wealth
Answer: A
Topic: Corporations
*: Recurring
42) Kendrick wants to start a tax preparation company and is going to his bank to borrow $50,000. This
is an example of
A) direct finance.
B) indirect finance.
C) a primary market transaction.
D) a secondary market transaction.
Answer: B
Topic: Fund Raising
*: Recurring
43) Sylvia wants to expand her taxidermy business and is going to use profits from the business to do
so. This is an example of using ________ for her expansion.
A) direct finance
B) indirect finance
C) retained earnings
D) dividends
Answer: C
Topic: Fund Raising
*: Recurring
44) Giorgio wants to build a new distribution warehouse for his sporting goods business and is going to
issue new shares of stock to do so. This is an example of using ________ for his building project.
A) direct finance
B) indirect finance
C) retained earnings
D) dividends
Answer: A
Topic: Fund Raising
*: Recurring
35
45) Yolanda wants to expand her microbrewery business by buying out a competitor and is going to sell
newly-issued corporate bonds to do so. This is an example of using ________ for her expansion plans.
A) direct finance
B) indirect finance
C) coupon payments
D) retained earnings
Answer: A
Topic: Fund Raising
*: Recurring
46) Which of the following is one of the most widely followed stock indexes in the United States?
A) the Dow Jones Industrial Average
B) the Chicago Mercantile Exchange
C) the Fortune 500
D) the Securities and Exchange Commission
Answer: A
*: Recurring
47) Securities dealers that trade stocks and bonds ________ comprise the over-the-counter market.
A) directly instead of electronically
B) outside exchanges
C) that have previously been sold
D) valued at less than $1 each
Answer: B
*: Recurring
48) When the coupon rate on newly issued bonds ________ relative to older, outstanding bonds, the
market price of the older bond ________.
A) increases; falls in the secondary market
B) increases; rises in the secondary market
C) decreases; falls in the secondary market
D) decreases; falls in the primary market
Answer: A
Topic: Bonds
*: Recurring
36
49) You have a bond that pays $18 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 $15 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 $22 per year.
Answer: D
Topic: Bonds
*: Recurring
50) A bond's coupon payment divided by the bond's ________ is equal to the bond's current yield.
A) face value
B) current price
C) principal
D) interest rate
Answer: B
Topic: Bonds
*: Recurring
51) When Electronic Arts, the company behind the games Zuma and Plants vs. Zombies, sold stock to the
public for the first time in September 1989, funds were being raised in a ________ market, and when
those newly issued shares are resold to other buyers, the sales take place in a ________ market.
A) primary; primary
B) primary; secondary
C) secondary; primary
D) secondary; secondary
Answer: B
Topic: Fund Raising
37
Article Summary
In an effort to raise funds to cut debt, Fiat Chrysler is selling a stake in Ferrari through an initial
public offering (IPO) to be valued at as much as $9.8 billion. 17.2 million shares of stock in the
company are to be sold, and the stock will be traded on the New York Stock Exchange under the
symbol RACE. One analyst speculates that requests for shares in Ferrari may be ten times less than
the number available. Including debt, Ferrari will have a value of about $12 billion, and chairman
Piero Ferrari will keep a 10 percent stake in the new company and receive about €280 million in cash.
Before taxes and interest, Ferrari's 2014 earnings were €389 million, with revenue of €2.8 billion.
Source: Tommaso Ebhardt, "Ferrari to Be Valued at Up to $9.82 Billion in IPO," Bloomberg.com,
October 9, 2015.
52) When Ferrari sells stock to the public in its IPO, it will do so through the New York Stock Exchange.
People who buy the shares will
A) be promised to be repaid their investment plus interest.
B) do so in the indirect finance market.
C) own part of the company.
D) All of the above are true.
Answer: C
Topic: Stocks
Special Feature: Making the Connection: Ferrari to Be Valued at Up to $9.82 Billion in IPO
53) Stock prices start to rise

A) when investors are confident that the economy is more than 6 months into an economic recovery.
B) when investors begin to expect an economic recovery will soon begin.
C) when investors believe an economic recovery has already begun.
D) when the unemployment rate begins to decline following a recession.
Answer: B
Diff: 2 Page Ref: 261-262/191-192
Topic: Stocks
Special Feature: Making the Connection: Why Are Many People Poor Stock Market Investors?
54) Generally with bond ratings, the ________ the rating, the higher the interest rate an investor will
receive and the ________ the risk that the issuer of the bond will default.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Answer: C
Diff: 2 Page Ref: 257-258/187-188
38
55) Indirect finance refers to the flow of funds from savers to borrowers through financial
intermediaries.
Answer: TRUE
Topic: Fund Raising
*: Recurring
56) Direct finance refers to the flow of funds from savers to borrowers through financial markets.
Answer: TRUE
Topic: Fund Raising
*: Recurring
57) The interest payment on a bond is called a face value payment.

Answer: FALSE
Topic: Bonds
*: Recurring
58) The higher the default risk on a bond, the higher the interest rate will be.
Answer: TRUE
Topic: Bonds
*: Recurring
59) Stocks represent partial ownership of a firm.

Answer: TRUE
Topic: Stocks
*: Recurring
60) Dividends are the interest rates paid on stocks.

Answer: FALSE
Topic: Stocks
*: Recurring
39
61) Both stocks and bonds have maturity dates.
Answer: FALSE
Diff: 1 Page Ref: 257-259/187-189
*: Recurring
62) A higher bond price indicates a lower cost of new external funds.
Answer: TRUE
Topic: Bonds
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63) Mutual funds are a good and relatively inexpensive way for individual investors to diversify.
Answer: TRUE
Diff: 1 Page Ref: 262-263/192-193
Special Feature: Solved Problem: Why Does Warren Buffett Like Mutual Funds?
64) If a partnership raised funds by recruiting additional owners to invest in the firm, what would
happen to the firm's financial capital?
Answer: The firm's financial capital would increase.
*: Recurring
65) How is the interest rate on a bond calculated?

Answer: The interest rate, or coupon rate, on a bond is calculated by dividing the coupon by the face
value of the bond.
Topic: Bonds
*: Recurring
66) If the face value of a bond is $5,000 and the coupon is $200, what is the interest rate?
Answer: The interest rate, or coupon rate, on a bond is calculated by dividing the coupon by the face
value of the bond. In this case, the interest rate is $200 / $5,000 = 4%.
Topic: Bonds
*: Recurring
40
67) If you own a bond with a six percent coupon rate and new bonds are paying six percent, what will
happen to your bond's market price?
Answer: It will not change.
Topic: Bonds
*: Recurring
68) Explain the relationship between the interest rate on a bond and the default risk on a bond.
Answer: With bonds, the higher the default risk, the higher the interest rate, and the lower the default
risk, the lower the interest rate.
Topic: Bonds
*: Recurring
69) Why might a small investor be interested in buying a mutual fund as opposed to stock in an
individual company?
Answer: By buying shares in a mutual fund, small investors reduce the costs they would pay to buy
many individual stocks and bonds. Small savers who have only enough money to buy a few individual
stocks and bonds can use mutual funds to diversify, which lowers their investment risk because most
mutual funds hold a large number of stocks and bonds. If a firm issuing a stock or bond declares
bankruptcy, causing the stock or bond to lose all of its value, the effect on a mutual fund's portfolio is
likely to be small. The effect might be devastating, though, to a small investor who invested most of his
or her savings in the stock or bond. Because mutual funds are willing to buy back their shares at any
time, they also provide savers with easy access to their money.
Diff: 2 Page Ref: 258-259/188-189
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70) Explain what information that changes in the value of a firm's stocks provide for a firm's managers
and for investors.
Answer: Changes in the value of a firm's stocks provide important information for a firm's managers,
as well as for investors. An increase in the stock price means that investors are more optimistic about
the firm's profit prospects, and the firm's managers might want to expand the firm's operations as a
result. By contrast, a decrease in the firm's stock price indicates that investors are less optimistic about
the firm's profit prospects, so management may want to shrink the firm's operations.
Topic: Stocks
*: Recurring
41
71) Briefly describe the three most widely followed stock indexes in the United States.
Answer:
1. The Dow Jones Industrial Average, which is an index of the stock prices of 30 large U.S. corporations.
2. The S&P 500, which is an index prepared by Standard & Poor's Corporation and includes the stock
prices of 500 large U.S. firms.
3. The NASDAQ Composite Index, which includes the stock prices of more than 4,000 firms whose
shares are traded in the NASDAQ stock market. NASDAQ is an over-the-counter market, meaning that
buying and selling on NASDAQ is carried out between dealers who are linked together by computer.
The listings on NASDAQ are dominated by high-tech firms such as Apple, Facebook, and Twitter.
*: Recurring
72) Why is a bond considered to be a loan but a share of stock is not?

Answer: A bond is a loan because the firm promises to pay back the principal and interest to the
bondholder. Rather than a loan, a share of stock is the purchase of part ownership of the company itself.
The firm isn't obliged to return the investor's funds at any particular date; instead, the investor owns a
share of the firm's assets and has a claim on the firm's profits.
Diff: 2 Page Ref: 256-259/186-189
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42
6.3 Using Financial Statements to Evaluate a Corporation
1) A firm's managers need information on the firm's revenue and costs as well as information on the
value of a firm's assets and the amount of the firm's debts to answer three basic questions. Which of the
following is not one of those three basic questions?
A) what to produce?
B) how to produce it?
C) what price to charge?
D) where to produce?
Answer: D
Topic: Production
*: Recurring
2) A cost that involves spending money is

A) an implicit cost.
B) an explicit cost.
C) an opportunity cost.
D) an indirect cost.
Answer: B
Topic: Costs
*: Recurring
3) Anything of value owned by a person or a firm is

A) an asset.
B) a liability.
C) an entitlement.
D) a durable good.
Answer: A
Topic: Assets
*: Recurring
43
4) Which of the following is an example of an implicit cost a firm might incur?
A) the wages paid to employees
B) the payment for medical insurance coverage
C) the opportunity cost to investors of the funds invested in the firm
D) utility payments
Answer: C
Topic: Costs
*: Recurring
5) Gross revenue minus explicit costs equals

A) accounting profit.
B) economic profit.
C) opportunity cost.
D) implicit cost.
Answer: A
Topic: Profit
*: Recurring
6) If a firm has implicit costs as well as explicit costs,

A) accounting profit might be greater than economic profit.
B) economic profit will always be greater than accounting profit.
C) accounting profit will be equal to economic profit.
D) the firm has no economic profit.
Answer: A
Topic: Profit
*: Recurring
7) If a firm fails to provide investors with at least a normal rate of return,

A) it will not be able to remain in business in the long run.
B) it will not be able to remain in business in the short run.
C) it will shut down in the short run but will be able to remain in business in the long run.
D) it will have a positive economic profit but a negative accounting profit.
Answer: A
Topic: Profit
*: Recurring
44
8) Tommy's Teddy Bears incurs $300,000 per year in explicit costs and $50,000 in implicit costs. The
shop earns $600,000 in revenues and has $1.1 million in net worth. Based on this information, what is
economic profit for Tommy's Teddy Bears?
A) $250,000
B) $300,000
C) $500,000
D) $1.35 million
Answer: A
Topic: Profit
*: Recurring
9) Tommy's Teddy Bears incurs $300,000 per year in explicit costs and $50,000 in implicit costs. The
shop earns $600,000 in revenues and has $1.1 million in net worth. Based on this information, what is
accounting profit for Tommy's Teddy Bears?
A) $250,000
B) $300,000
C) $500,000
D) $1.35 million
Answer: B
Topic: Profit
*: Recurring
10) Aimee sells hand-embroidered dog apparel over the Internet. Her annual revenue is $128,000 per
year, the explicit costs of her business are $42,000, and the opportunity costs of her business are $30,000.
What is her accounting profit?
A) $12,000
B) $56,000
C) $86,000
D) $98,000
Answer: C
Topic: Profit
*: Recurring
45
What are the implicit costs of her business?
A) $12,000
B) $30,000
C) $72,000
D) $86,000
Answer: B
Topic: Costs
*: Recurring
What is her economic profit?
A) $12,000
B) $56,000
C) $86,000
D) $98,000
Answer: B
Topic: Profit
*: Recurring
13) Which of the following is true?

A) A firm's accounting profit is equal to its economic profit.
B) Opportunity costs are the same as explicit costs.
C) A firm's net income is the same as its accounting profit.
D) If a firm's accounting profits are positive, its economic profits must also be positive.
Answer: C
Topic: Profit
*: Recurring
14) The rules of accounting generally require that ________ be included in a firm's financial records.
A) only implicit costs
B) only explicit costs
C) both explicit costs and implicit costs
D) neither explicit costs nor implicit costs
Answer: B
Topic: Costs
*: Recurring
46
15) All of the following would be considered explicit costs of operating a business except
A) utility expenses.
B) the cost of raw materials used in production.
C) the rental value of equipment the company owns and uses for its own production.
D) advertising expenses.
Answer: C
Topic: Costs
*: Recurring
16) All of the following are shown on a firm's income statement except
A) costs
B) profits
C) revenues
D) rate of return for investors
Answer: D
Topic: Income Statement
*: Recurring
17) Assets minus liabilities equals

B) economic profit.
C) net worth.
D) implicit costs.
Answer: C
Topic: Balance Sheet
*: Recurring
18) The Aristocrat Corporation has taken out a loan to buy manufacturing equipment. The loan
represents ________ for the company.
A) an asset
B) a liability
C) a bond
D) equity
Answer: B
Topic: Liabilities
*: Recurring
47
19) A nonmonetary opportunity cost is
A) an implicit cost.
B) an explicit cost.
C) a direct cost.
D) an accounting cost.
Answer: A
Topic: Costs
*: Recurring
20) Which of the following are examples of explicit costs a firm might incur?
A) rent paid to the landlord
B) taxes owed to the IRS
C) wages earned by delivery drivers
D) All of the above are examples of explicit costs.
Answer: D
Topic: Costs
*: Recurring
21) Gross revenue minus explicit and implicit costs is equal to

B) opportunity cost.
C) economic profit.
D) net worth.
Answer: C
Topic: Profit
*: Recurring
22) If a firm has implicit costs as well as explicit costs,

A) net income will always be less than accounting profit.
B) accounting profit will be zero.
C) net income will always be greater than accounting profit.
D) economic profit will be less than accounting profit.
Answer: D
Topic: Profit
*: Recurring
48
23) Harry's Hookahs incurs $700,000 per year in explicit costs and $500,000 in implicit costs. The
company earns $1.4 million in revenues and has $3.7 million in net worth. Based on this information,
what is the economic profit for Harry's Hookas?
A) $200,000
B) $700,000
C) $900,000
D) $1.1 million
Answer: A
Topic: Profit
*: Recurring
24) Harry's Hookahs incurs $700,000 per year in explicit costs and $500,000 in implicit costs. The
company earns $1.4 million in revenues and has $3.7 million in net worth. Based on this information,
what is the accounting profit for Harry's Hookas?
A) $200,000
B) $700,000
C) $900,000
D) $1.1 million
Answer: B
Topic: Profit
*: Recurring
25) Veruca sells therapeutic bath salts on the Internet. Her annual revenue is $52,000 per year, the
explicit costs of her business are $14,000, and the opportunity costs of her business are $17,000 per year.
What is her accounting profit?
A) $14,000
B) $21,000
C) $31,000
D) $38,000
Answer: D
Topic: Profit
*: Recurring
49
What are the implicit costs of her business?
A) $14,000
B) $17,000
C) $21,000
D) $31,000
Answer: B
Topic: Costs
*: Recurring
What is her economic profit?
A) $14,000
B) $21,000
C) $31,000
D) $38,000
Answer: B
Topic: Profit
*: Recurring
28) A firm's accounting profit is measured as

A) revenue plus operating expenses minus taxes paid.
B) operating expenses minus revenue.
C) revenue minus operating expenses and taxes paid.
D) net worth minus economic profit.
Answer: C
Topic: Profit
*: Recurring
29) Implicit costs are ________ and explicit costs are ________.
A) nonmonetary costs; also nonmonetary costs
B) nonmonetary costs; costs that involve spending money
C) costs that involve spending money; nonmonetary costs
D) costs that involve spending money; also costs that involve spending money
Answer: B
Topic: Costs
*: Recurring
50
30) Which of the following would be considered an implicit cost of operating a business?
A) shipping expenses
B) Social Security contributions for employees
C) the resale value of delivery vans the company owns and uses for its deliveries
D) interest payments on a loan
Answer: C
Topic: Costs
*: Recurring
31) An income statement shows a firm's revenue, costs, and profit

A) for the firm's fiscal year.
B) since the firm has been in operation.
C) for a particular day.
D) only if the firm is earning an accounting profit.
Answer: A
*: Recurring
32) A financial statement that sums up a firm's financial position on a particular day is
A) a balance sheet.
B) an income statement.
C) statement of cash flow.
D) an equity report.
Answer: A
*: Recurring
33) Explicit costs are nonmonetary costs.

Answer: FALSE
Topic: Costs
*: Recurring
51
34) An increase in liabilities will reduce a firm's net worth.
Answer: TRUE
Topic: Liabilities
*: Recurring
35) A firm's net income is also its accounting profit.

Answer: TRUE
Topic: Profit
*: Recurring
36) Opportunity costs are implicit costs.

Answer: TRUE
Topic: Costs
*: Recurring
37) What is the difference between economic profit and accounting profit?
Answer: Economic profits equal total revenue minus explicit and implicit costs. Accounting profit
equals total revenue minus explicit costs only. The difference between economic profit and accounting
profit is therefore implicit costs.
Diff: 2 Page Ref: 264-265/194-195
Topic: Profit
*: Recurring
38) What is an income statement?

Answer: An income statement is a financial statement that shows a firm's revenues, costs, and profit
over a period of time.
*: Recurring
39) What is the difference between a firm's assets and its liabilities?
Answer: An asset is anything of value that a firm owns. A liability is a debt or obligation owed by a
firm.
*: Recurring
52
40) Explain if a business would be expected to survive in the long run if it earned a positive accounting
profit but a negative economic profit.
Answer: Regardless of its accounting profit, a firm making a negative economic profit is not likely to
survive in the long run because it is not covering all of its implicit costs, such as the minimum amount
that investors must earn on the funds they have invested in the firm.
Diff: 2 Page Ref: 264-265/194-195
Topic: Profit
*: Recurring
6.4 Corporate Governance Policy and the Financial Crisis of 2007-2009
1) Information in a firm's financial statements

A) helps the firm's managers make decisions.
B) assists investors who are considering buying the firm's stock.
C) guide resource allocation in the economy.
D) all of the above
Answer: D
*: Recurring
2) Tying the salaries of top managers to the firm's stock price or to the profitability of the firm allows a
firm's board of directors to
A) increase asymmetric information.
B) reduce the principal-agent problem.
C) eliminate moral hazard.
D) avoid disclosing financial statements to investors.
Answer: B
*: Recurring
3) In 2002, WorldCom was accused of falsifying information regarding liabilities on WorldCom's

balance sheets, thereby
A) increasing WorldCom's assets on the balance sheet.
B) reducing WorldCom's profit on the balance sheet.
C) increasing WorldCom's net worth on the balance sheet.
D) reducing WorldCom's net income on the income statement.
Answer: C
*: Recurring
53
4) In response to accounting scandals in 2002, the federal government passed legislation requiring
among other things that auditors disclose any potential conflicts of interest. What is the name of this
legislation?
A) the Accountant Reliability Act
B) the 24th amendment to the Constitution
C) the Kennedy-Lott Act
D) the Sarbanes-Oxley Act
Answer: D
Topic: Financial Legislation
*: Recurring
5) The Sarbanes-Oxley Act of 2002

A) created the Consumer Financial Protection Bureau to be housed in the Federal Reserve.
B) mandates that firms raise funds for expansion only through the sale of stock or from bank loans, but
not from the sale of corporate bonds.
C) requires that CEO's personally certify the accuracy of financial statements.
D) established the Financial Stability Oversight Council to identify risks to the financial system.
Answer: C
*: Recurring
6) When mortgage loans are securitized, they are

A) bundled together by financial institutions and sold to investors.
B) issued to borrowers with flawed credit histories.
C) issued to borrowers who fail to document their income.
D) guaranteed by the federal government.
Answer: A
*: Recurring
7) Subprime mortgages are

A) mortgages issued to borrowers who fail to document that their incomes are high enough to afford
their mortgages.
B) mortgages which are bundled together by financial institutions and sold to investors.
C) mortgages issued to borrowers with flawed credit histories.
D) government-backed mortgages issued by Fannie Mae and Freddie Mac.
Answer: C
*: Recurring
54
8) Traditionally, Wall Street investment banks had been organized as ________, but by 2000 they had
converted to being ________.
A) partnerships; publicly-traded companies
B) sole proprietorships; partnerships
C) corporations; partnerships
D) partnerships; sole proprietorships
Answer: A
*: Recurring
9) The Glass-Steagall Act

A) requires that CEO's personally certify the accuracy of financial statements.
B) prevented financial firms from being both commercial banks and investment banks.
C) was passed in response to the financial crisis of 2007-2009.
D) all of the above
Answer: B
*: Recurring
10) To reduce the principal-agent problem,

A) boards-of-directors can tie the salaries of top management to the profitability of the firm.
B) managers can take on more risk than they disclose to investors.
C) managers can inflate profits on financial statements.
D) managers can hide liabilities by not disclosing them on financial statements.
Answer: A
*: Recurring
11) If top managers make good decisions, the firm's profits will be ________, and the firms assets will be
________.
A) high; small relative to its liabilities
B) high; large relative to its liabilities
C) equal to its revenues; small relative to its liabilities
D) low; large relative to its liabilities
Answer: B
Topic: Financial Statements
*: Recurring
55
12) As a result of the 2007-2009 financial crisis, which two firms became bank holding companies,
allowing them to engage in commercial banking activities?
A) Enron and WorldCom
B) Freddie Mac and Fannie Mae
C) Morgan Stanley and Goldman Sachs
D) Lehman Brothers and Merrill Lynch
Answer: C
Topic: Financial Crisis
*: Recurring
13) Richard Causey, former chief accounting officer for Enron, pleaded guilty to falsely reported costs
for Enron that were ________ than they actually were, resulting in reported accounting profits for Enron
that were ________ than their actual level. The financial statements were falsified to mislead investors
about the profitability of the firm.
A) higher; higher
B) lower; higher
C) lower; lower
D) higher; lower
Answer: B
*: Recurring
14) Alt-A mortgages are

A) mortgages issued to borrowers who fail to document that their incomes are high enough to afford
their mortgages.
B) mortgages which are bundled together by financial institutions and sold to investors.
C) mortgages issued to borrowers with flawed credit histories.
D) government-backed mortgages issued by Fannie Mae and Freddie Mac.
Answer: A
*: Recurring
56
15) The securitization of mortgages was first carried out by
A) Fannie Mae and Freddie Mac.
B) WorldCom and Enron.
C) Sarbanes-Oxley.
D) the Federal Deposit Insurance Corporation (FDIC).
Answer: A
*: Recurring
16) Mortgage-backed securities are similar to bonds in that the investor who buys one receives
A) federal insurance to cover the value of the security.
B) partial ownership of the company that issued the security.
C) dividend payments.
D) regular interest payments.
Answer: D
*: Recurring
17) The legislation passed in 2010 that was intended to reform regulation of the financial system was the
A) Wall Street Reform and Consumer Protection Act.
B) Sarbanes-Oxley Act.
C) Glass-Steagall Act.
D) Federal National Mortgage Act.
Answer: A
*: Recurring
18) The principal-agent problem is

A) often more severe for partnerships than for corporations.
B) often less severe for partnerships than for corporations.
C) severe for corporations but nonexistent for partnerships.
D) most severe for sole proprietorships.
Answer: B
Diff: 1 Page Ref: 267-268/197-198
*: Recurring
57
19) Some economists believe that one factor that caused the financial crisis of 2007-2009 was top
managers of large financial services firms making riskier investments than were in the best interests of
the firms' shareholders.
Answer: TRUE
Special Feature: Solved Problem: Will Dodd-Frank Improve Corporate Governance?
20) The Sarbanes-Oxley Act was passed in response to the 2007-2009 financial crisis.
Answer: FALSE
*: Recurring
21) The Dodd-Frank Act requires that each member of the board of directors personally certify the
accuracy of financial reports.
Answer: FALSE
*: Recurring
22) Mortgage-backed securities are groups of mortgages that are bundled together and sold to investors.
Answer: TRUE
*: Recurring
23) As a result of the financial crisis of 2007-2009, Freddie Mac and Fannie Mae were brought under the
direct control of the government.
Answer: TRUE
*: Recurring
58
24) Why did the principal-agent problem for investment banks become more severe following the
repeal of the Glass-Steagall Act in 1999?
Answer: Congress repealed the Glass-Steagall Act in 1999, after which some commercial banks began
engaging in investment banking. Traditionally, large Wall Street investment banks had been organized
as partnerships, but by 2000 they had all converted to being publicly traded corporations. In a
partnership, the funds of the relatively small group of owners are put directly at risk, and the principal-
agent problem is reduced because there is little separation of ownership from control. With a publicly
traded corporation, on the other hand, the principal-agent problem can be severe due to the separation
of ownership from control.
Diff: 2 Page Ref: 267-268/197-198
*: Recurring
25) Why do financial markets depend on accurate accounting and disclosure practices?
Answer: Investors in primary and secondary markets make decisions on which firms to invest in, when
to invest, how much to invest, and when to sell based on information about firms. If the information is
misleading, investors will invest less or, possibly, stop investing. Capital markets depend on accurate
information and can function poorly when information is misleading.
*: Recurring
26) Why do corporate boards of directors sometimes link top managers' compensation to the
corporations' stock prices? How might tying compensation too closely to stock prices create an incentive
for corporate fraud.
Answer: Corporate boards of directors sometimes link top managers' compensation to the corporations'
stock price to lessen the principal-agent problem caused by the separation of ownership from control.
Linking compensation to stock prices provides managers with an additional incentive to maximize
shareholder profits. But tying compensation too closely to stock prices can cause management to
maximize short-run profits over long-run profits and to commit corporate fraud to make the firm
appear to be more profitable than it is with the intention of increasing the firm's stock price.
Diff: 3 Page Ref: 267-268/197-198
*: Recurring
59
6.5 Appendix: Tools to Analyze Firms' Financial Information
1) A future payment's present value is

A) the value in today's dollars of funds to be paid or received today.
B) the value in a future date's dollars of funds to be paid or received in the future.
C) the value in today's dollars of funds to be paid or received in the future.
D) the value in a future date's dollars of funds to be paid or received today.
Answer: C
Topic: Present Value
*: Recurring
Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns.
2) If a dollar today will likely have more purchasing power because of inflation, then a dollar a year
from now ________ a dollar today.
A) will be more valuable than
B) will be less valuable than
C) will have the same value as
D) may be more valuable or less valuable than
Answer: B
Topic: Future Value
*: Recurring
3) If a company pays a dividend of $5 to be received one year from now, dividends are expected to
grow at a rate of 8 percent per year for the indefinite future, and the interest rate is 14 percent, the price
of the company's stock should be ________ per share.
A) $8.00
B) $83.33
C) $227.27
D) $610.00
Answer: B
*: Recurring
60
4) If you want to know the present value of $5,000 received in one year, and the interest rate is 2 percent,
what formula can you use?
A) Present value equals $5,000 times 0.02.
B) Present value equals $5,000 divided by 1.02
C) Present value equals 1.02 divided by $5,000.
D) Present value equals $5,000 times 1.02.
Answer: B
*: Recurring
Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make
decisions.
5) The present value of $1,500 received 8 years in the future would be calculated as which of the
following when the interest rate is 3%?
A) 1,500/(1.3)8
B) 1,500/(1.03)8
C) 1,500 × 1.3 × 8
D) 8.03/1,500
Answer: B
*: Recurring
decisions.
6) What is the present value of $960 in one year if the current rate of interest is 6 percent?
A) $676.76
B) $905.66
C) $1,017.60
D) $1,449.46
Answer: B
*: Recurring
decisions.
61
7) If you own a $1,000 face value bond with one year remaining to maturity and a 7 percent coupon rate
and new bonds are paying 11 percent, what is the most you can get for your old bond?
A) $1,028.85
B) $1,000.00
C) $963.96
D) $952.30
Answer: C
*: Recurring
8) If a stock's dividend is expected to grow at a constant rate of 4 percent in the future and it has just
paid a dividend of $6.00 per share, and you have an alternative investment of equal risk that will earn a
7 percent rate of return, what would you be willing to pay per share for this stock?
A) $6.66
B) $54.55
C) $200.00
D) $208.00
Answer: D
Topic: Stocks
*: Recurring
9) On a balance sheet, stockholder's equity is equal to

A) assets minus liabilities.
B) the total value of outstanding shares of stock.
C) long-term liabilities minus current liabilities.
D) total assets minus goodwill.
Answer: A
*: Recurring
10) On a balance sheet, a company's accounts receivable are listed as

A) current assets.
B) current liabilities.
C) stockholder's equity.
D) goodwill.
Answer: A
*: Recurring
62
11) How much is a bond that pays $80 in coupon payments for 4 years and $1,000 at the end of the
fourth year worth if the interest rate is 6%?
A) $855.46
B) $1,045.56
C) $1,069.30
D) $1,140.00
Answer: C
*: Recurring
12) The longer you have to wait to receive a payment,

A) the greater value it will have to you.
B) the less value it will have to you.
C) the lower the interest rate you will charge on the payment.
D) the more you are willing to discount the payment.
Answer: B
*: Recurring
13) Using present value to calculate stock prices is ________ than using present value to calculate bond
prices because ________.
A) less accurate; dividend payments for stocks are known with certainty but coupon payments for
bonds are not
B) less accurate; coupon payments for bonds are known with certainty but dividend payments for
stocks are not
C) more accurate; dividend payments for stocks are known with certainty but coupon payments for
bonds are not
D) more accurate; coupon payments for bonds are known with certainty but dividend payments for
stocks are not
Answer: B
Diff: 2 Page Ref: 278-279/208-209
*: Recurring
63
14) If the final expressions in a present value equation used to calculate the price of a bond you are
considering buying are "[$50 / (1 + .08)3] + [$500 / (1 + .08)3]", which of the following is correct?
A) The face value is $500, the coupon is $50, and the coupon will mature in 3 years.
B) The face value is $50, the interest rate you need is 8 percent, and the coupon will mature in 3 years.
C) The face value is $500, the interest rate you need is 3 percent, and the coupon will mature in 8 years.
D) The coupon is $50, the interest rate you need is 1.08 percent, and the coupon will mature in 3 years.
Answer: A
*: Recurring
decisions.
15) If the final expressions in a present value equation used to calculate the price of a bond you are
considering buying are "[$75 / (1 + .04)6] + [$2,500 / (1 + .04)6]", which of the following is correct?
A) The face value is $2,500, the coupon is $75, and the coupon will mature in 4 years.
B) The face value is $75, the interest rate you need is 1.04 percent, and the coupon will mature in 6 years.
C) The face value is $2,500, the interest rate you need is 6 percent, and the coupon will mature in 4
years.
D) The coupon is $75, the interest rate you need is 4 percent, and the coupon will mature in 6 years.
Answer: D
*: Recurring
decisions.
16) If the present value equation used to calculate the price of a stock you are considering buying is
"[$12 / (0.05 - 0.02)], which of the following is correct, assuming that dividends will grow at a constant
rate?
A) The stock price is $12, the dividend growth rate is 2 percent, and the interest rate is 5 percent.
B) The dividend is $12 per share, the dividend growth rate is 2 percent, and the interest rate is 5 percent.
C) The stock price is $12, the dividend growth rate is 5 percent, and the interest rate is 3 percent.
D) The dividend is $12 per share, the dividend growth rate is 5 percent, and the interest rate is 2
percent.
Answer: D
*: Recurring
decisions.
64
17) If the present value equation used to calculate the price of a stock you are considering buying is "[$7
/ (0.04 - 0.03)], which of the following is correct, assuming that dividends will grow at a constant rate?
A) The stock price is $7, the dividend growth rate is 3 percent, and the interest rate is 1 percent.
B) The dividend is $7 per share, the dividend growth rate is 1 percent, and the interest rate is 4 percent.
C) The stock price is $700, the dividend growth rate is 3 percent, and the interest rate is 4 percent.
D) The dividend is $7 per share, the dividend growth rate is 4 percent, and the interest rate is 3 percent.
Answer: C
*: Recurring
decisions.
18) What is the present value of $777 in one year if the current rate of interest is 7 percent?
A) $831.39
B) $726.17
C) $457.06
D) $111.00
Answer: B
*: Recurring
decisions.
19) If you own a $1,000 face value bond with one year remaining to maturity and a 3 percent coupon
rate and new bonds are paying 9 percent, what is the most you can get for your old bond?
A) $917.43
B) $944.95
C) $970.87
D) $1,000
Answer: B
*: Recurring
decisions.
65
20) If a stock's dividend is expected to grow at a constant rate of 6 percent in the future and it has just
paid a dividend of $2.50 a share, and you have an alternative investment of equal risk that will earn a 8
percent rate of return, what would you be willing to pay per share for this stock?
A) $2.86
B) $33.13
C) $132.50
D) $200.00
Answer: C
Topic: Stocks
*: Recurring
21) If a company pays a dividend of $2 to be received one year from now, dividends are expected to
grow at a rate of 3 percent per year for the indefinite future, and the interest rate is 4 percent, the price
of the company's stock should be ________ per share.
A) $3.40
B) $28.57
C) $200.00
D) $340.00
Answer: C
*: Recurring
decisions.
22) How much is a bond that pays $40 in coupon payments for 2 years and $1,000 at the end of the
fourth year worth if the interest rate is 4%?
A) $844.56
B) $924.56
C) $1,000
D) $1,123.2
Answer: C
*: Recurring
decisions.
23) Yolanda received a $100 savings bond for her birthday. The bond pays $100 at maturity, which is in
five years. If the interest rate is 3%, the bond has a present value of $86.26.
Answer: TRUE
*: Recurring
66
24) On a balance sheet, stockholders' equity is listed as an asset.
Answer: FALSE
*: Recurring
25) Georgia's great uncle gave her a $5,000 savings bond as a wedding gift. The bond pays $5,000 at
maturity, which is in 10 years. If the interest rate is 4%, the bond has a present value of $ 3,377.82.
Answer: TRUE
*: Recurring
decisions.
26) The difference between a firm's revenue and its operating expenses is the firm's operating income.
Answer: TRUE
*: Recurring
27) Why is money you receive at some future date worth less to you than money you receive today?
Answer: Money received at some future date is worth less than money received today because if you
have the money today, you can use it today to buy goods and services and receive enjoyment from
them. In addition, prices are likely to rise, so money received later won't buy as much. Finally, there is
some risk that you will not receive the money in the future.
*: Recurring
decisions.
67
28) Suppose you hit a progressive jackpot on a 25-cent Fortunemaker slot machine in a casino in Las
Vegas and are given the choice of the following prizes:
Prize 1: $200,000 to be received right away, with four additional payments of $200,000 to be received
each year for the next four years.
Prize 2: $750,000 to be received right away.
If the interest rate is 3 percent, what is the present value of each prize?
Answer: Prize 1: Present value = $200,000 + [$200,000 / (1 + 0.03)] + [$200,000 / (1 + 0.03) 2] + [200,000 /
(1 + 0.03)3] + [$200,000 / (1 + 0.03)4 = $943,419.68
Prize 2: Present value = $750,000

Special Feature: Solved Problem: How to Receive Your Contest Winnings
68

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Macroeconomics 6th Edition Hubbard

6.1 Types of Firms

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

3) Public companies ________ and private companies ________.

9) How do a partnership and a corporation differ?

14) ________ of people work at firms that have 50 or more employees.

15) In a typical year, new small firms create ________ jobs.

17) A partnership is limited to how many owners?

18) A corporation is limited to how many owners?

19) What does unlimited liability mean?

31) The limited ability to raise funds is a disadvantage for

33) The possible double taxation of income is a disadvantage for

34) Limited personal liability is an advantage for

38) Which of the following statements is true?

41) The decline in starting new businesses

42) The decline in starting new businesses

55) What is an outside director?

60) Who selects the board of directors of a corporation?

64) The shareholders of a corporation

65) ________ are the owners of a corporation.

74) An asset is anything of value owned by a person or firm.

77) Corporations are legally owned by their board of directors.

85) Explain the difference between a sole proprietorship and a partnership.

1) It is the role of ________ to transfer funds from savers to borrowers.

3) If a firm raises funds by recruiting additional owners to invest in the firm,

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

7) A bond is a financial security that represents a promise to repay

8) Bonds ________ and stocks ________.

10) Dividends are

14) The interest rate on a bond is calculated as

35) Which of the following statements is true?

36) All of the following are characteristics of a bond except

53) Stock prices start to rise

57) The interest payment on a bond is called a face value payment.

59) Stocks represent partial ownership of a firm.

60) Dividends are the interest rates paid on stocks.

65) How is the interest rate on a bond calculated?

72) Why is a bond considered to be a loan but a share of stock is not?

2) A cost that involves spending money is

3) Anything of value owned by a person or a firm is

5) Gross revenue minus explicit costs equals

6) If a firm has implicit costs as well as explicit costs,

7) If a firm fails to provide investors with at least a normal rate of return,

13) Which of the following is true?

17) Assets minus liabilities equals

21) Gross revenue minus explicit and implicit costs is equal to

22) If a firm has implicit costs as well as explicit costs,

28) A firm's accounting profit is measured as

31) An income statement shows a firm's revenue, costs, and profit

33) Explicit costs are nonmonetary costs.

35) A firm's net income is also its accounting profit.

36) Opportunity costs are implicit costs.

38) What is an income statement?

6.4 Corporate Governance Policy and the Financial Crisis of 2007-2009

1) Information in a firm's financial statements

3) In 2002, WorldCom was accused of falsifying information regarding liabilities on WorldCom's

5) The Sarbanes-Oxley Act of 2002

6) When mortgage loans are securitized, they are

7) Subprime mortgages are

3) Public companies and private companies .

8) Bonds and stocks .