Macroeconomics 2nd Edition Hubbard Test Bank 1

Macroeconomics 2nd Edition
Hubbard Test Bank

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2nd-edition-hubbard-brien-rafferty-0132992795-9780132992794/
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macroeconomics-2nd-edition-hubbard-brien-rafferty-0132992795-
9780132992794/
Chapter 5 Firms, the Stock Market, and Corporate

Governance
5.1 Types of Firms
1.
223
Chapter 5: Firms, the Stock Market, and Corporate Governance
A business owned by a single individual and not organized as a corporation is called a

A)
224
sole proprietorship.
B)
225
consortium.
C)
226
limited firm.
D)
227
partnership.
Answer:
228
A
Diff: 1
229
Type: MC
230
Page Ref: 210/138

Topic:
231
Types of Firms
Skill:
232
Definition
Objective:
233
LO1: Categorize the major types of firms in the U.S.

AACSB Coding:
234
Reflective Thinking
Special Feature:
235
None
2.
236
A firm owned jointly by two or more persons is called a

A)
237
dual proprietorship.
B)
238
binary enterprise.
C)
239
partnership.
D)
240
proprietorship .
Answer:
241
C
Diff: 1
242
Type: MC
243
Page Ref: 210/138

Topic:
244
Types of Firms
Skill:
245
Definition
Objective:
246

AACSB Coding:
247
Reflective Thinking
Special Feature:
248
None
3.
249
A created as a distinct legal entity that provides its owners limited liability is called a
business
A)
250
conglomerate.
B)
251
proprietorship .
C)
252
corporation.
D)
253
merger.
Answer:
254
C
Diff: 1
255
Type: MC
256
Page Ref: 210/138

Topic:
257
Types of Firms
Skill:
258
Definition
Objective:
259

AACSB Coding:
260
Reflective Thinking
Special Feature:
261
None
4.
262
Which type of firm structure is most common in the United States?

A)
223
limited partnership
B)
224
corporation
C)
225
partnership
D)
226
sole proprietorship
Answer:
227
D
Diff: 1
228
Type: MC
229
Page Ref: 210/138

Topic:
230
Types of Firms
Skill:
231
Factual
Objective:
232

AACSB Coding:
233
Reflective Thinking
Special Feature:
234
None
5.
235
What does it mean to say that an owner has "unlimited liability" for business debts?
A)
236
It means the borrow an unlimited amount of money in credit markets at very low interest
owner can rates.
B)
237
It means the owner will always honor all her debts in the event of a bankruptcy.
C)
238
It means seek payments for outstanding debts through business assets and the owner's
creditors can personal assets.
D)
239
It means no recourse to collect payments from the owner in the event of bankruptcy.
creditors have
Answer:
240
C
Diff: 1
241
Type: MC
242
Page Ref: 210/138

Topic:
243
Types of Firms
Skill:
244
Definition
Objective:
245

AACSB Coding:
246
Reflective Thinking
Special Feature:
247
None
6.
248
What does the term "limited liability" mean?

A)
249
It is a legal provision that entitles management to a limited portion of the firm's profits.
B)
250
It is a code of business practices that limits the harm a firm can do to the environment.
conduct about
C)
251
It is a legal provision that limits the borrowing activities of a firm.

D)
252
It is the legal shields a firm's owners from losing more than they have invested in the firm.
provision that
Answer:
253
D
Diff: 1
254
Type: MC
255
Page Ref: 210/138

Topic:
256
Types of Firms
Skill:
257
Definition
Objective:
258

AACSB Coding:
259
Reflective Thinking
Special Feature:
260
None
7.
261
Which of the following types of firms have unlimited liabilities?

A)
262
a sole proprietorship
B)
263
a partnership
C)
264
a corporation
D)
265
A and B only
Answer:
266
D
Diff: 1
267
Type: MC
268
Page Ref: 210/138

Topic:
269
Types of Firms
Skill:
270
Definition
Objective:
271

AACSB Coding:
272
Reflective Thinking
Special Feature:
273
None
8.
274
Which of the following types of firms are likely to be organized as partnerships?

A)
275
supermarkets
B)
276
commercial banks
C)
277
public accounting firms

D)
278
department stores
Answer:
279
C
Diff: 1
280
Type: MC
281
Page Ref: 210/138

Topic:
282
Types of Firms
Skill:
283
Conceptual
Objective:
284

AACSB Coding:
285
Reflective Thinking
Special Feature:
286
None
9.
287
In which following types of firms is there a legal distinction between the owners' personal
of the assets and the assets of the firm?
A)
288
partnership
B)
289
sole proprietorship
C)
290
limited partnership
D)
291
corporation
Answer:
292
D
Diff: 1
293
Type: MC
294
Page Ref: 210/138

Topic:
295
Types of Firms
Skill:
296
Factual
Objective:
297

AACSB Coding:
298
Reflective Thinking
Special Feature:
299
None
10.
300
Which of following is considered an advantage for choosing a partnership structure rather

the than a corporate structure for a firm?
A)
301
unlimited liability
B)
302
ability to issue stock to the public

C)
303
greater ability to raise funds

D)
304
increased control for firm owners

Answer:
305
D
Diff: 1
306
Type: MC
307
Page Ref: 210-1/138-9

Topic:
308
Types of Firms
Skill:
309
Definition
Objective:
310

AACSB Coding:
311
Reflective Thinking
Special Feature:
312
None
11.
313
Which of the following is an advantage of organizing a business as a corporation?

A)
314
possible double taxation of income

B)
315
inexpensive to organize
C)
316
greater ability to raise funds

D)
317
no layers of management
Answer:
318
C
Diff: 1
319
Type: MC
320
Page Ref: 210-1/138-9

Topic:
321
Types of Firms
Skill:
322
Factual
Objective:
323

AACSB Coding:
324
Reflective Thinking
Special Feature:
325
None
12.
326
One tage of a corporation is that its profits may be subject to "double taxation". What
disadvan does this mean?
A)
327
Corporate profits are taxed twice: once at the federal level and again at the state level.
B)
328
Corporate taxed twice a year -- once in the first quarter and once in the third quarter.
profits are
C)
329
Corporate profits are taxed at twice the rate of non-corporate profits.

D)
330
Corporate taxed twice: at the corporate level and again at the personal level as dividends.
profits are
Answer:
331
D
Diff: 1
332
Type: MC
333
Page Ref: 211/139

Topic:
334
Types of Firms
Skill:
335
Definition
Objective:
336

AACSB Coding:
337
Reflective Thinking
Special Feature:
338
None
13.
339
Which of following statements about the underwriters or "Names" of Lloyds of London are
the correct?
A)
340
They were not a corporation, but were protected from losses by limited liability.
B)
341
They were not protected by limited liability and lost millions in the late 1980s.
C)
342
They were not limited liability, but their numbers have grown substantially since the late
protected by 1980s.
D)
343
They formed a corporation and therefore were protected by limited liability.

Answer:
344
B
Diff: 1
345
Type: MC
346
Page Ref: 211/139

Topic:
347
Limited Liability
Skill:
348
Factual
Objective:
349

AACSB Coding:
350
Reflective Thinking
Special Feature:
351
Making the Connection: Lloyd's of London Learns about Unlimited Liability the Hard Way
What's in a "Name"?
14.
352
In the States, more than 80 percent of sales revenue and about 70 percent of profits are
United generated by
A)
353
corporations.
B)
354
government- owned businesses.

C)
355
sole proprietors.
D)
356
partnerships.
Answer:
357
A
Diff: 1
358
Type: MC
359
Page Ref: 212/140

Topic:
360
Types of Firms
Skill:
361
Factual
Objective:
362

AACSB Coding:
363
Reflective Thinking
Special Feature:
364
None
15.
365
If you owner of a sole proprietorship, you face a risk of losing your home or other assets
are the you personally own if the company went bankrupt.
Answer:
366
367
True
368
False
Diff: 2
369
Type: TF
370
Page Ref: 210/138

Topic:
371
Limited Liability
Skill:
372
Conceptual
Objective:
373

AACSB Coding:
374
Reflective Thinking
Special Feature:
375
None
16.
376
Sole proprietorships are harder to organize and run as compared to corporations.

Answer:
377
True
378
379
False
Diff: 1
380
Type: TF
381
Page Ref: 210/138

Topic:
382
Types of Firms
Skill:
383
Factual
Objective:
384

AACSB Coding:
385
Reflective Thinking
Special Feature:
386
None
17.
387
A that is owned by a single individual who is fully liable for the debts of her firm is
business referred to as a proprietorship or a sole proprietorship.
Answer:
388
389
True
390
False
Diff: 1
391
Type: TF
392
Page Ref: 210/138

Topic:
393
Types of Firms
Skill:
394
Definition
Objective:
395

AACSB Coding:
396
Reflective Thinking
Special Feature:
397
None
18.
398
A legal business that provides its owners with limited liability is known as a corporation.
form of
Answer:
399
400
True
401
False
Diff: 1
402
Type: TF
403
Page Ref: 211/139

Topic:
404
Types of Firms
Skill:
405
Definition
Objective:
406

AACSB Coding:
407
Reflective Thinking
Special Feature:
408
None
19.
409
What are advantages of a sole proprietorship? Why would one choose a corporate form of
the ownership rather than a sole proprietorship?
Answer:
410
The advantages of Second, there are no layers of management so the firm is easier to run and
a sole operate as compared to the other forms of firm organization.
proprietorship are One would choose a corporate form of ownership rather than a sole
that the owner has proprietorship to take advantage of limited liability. The owners of a
complete control corporation can never lose more than the amount they have invested in the
of the firm. corporation.
Diff: 1
411
Type: SA
412
Page Ref: 211/139

Topic:
413
Types of Firms
Skill:
414
Conceptual
Objective:
415

AACSB Coding:
416
Reflective Thinking
Special Feature:
417
None
5.2 The Structure of Corporations and the Principle-Agent Problem
1.
418
The way corporations are structured and the impact of a corporation's structure on the firm's
in which behavior is called
A)
419
corporate governance.
B)
420
corporate covenants.
C)
421
corporate laws.
D)
422
corporate ordinance.
Answer:
423
A
Diff: 1
424
Type: MC
425
Page Ref: 212/140

Topic:
426
Types of Firms
Skill:
427
Definition
Objective:
428

AACSB Coding:
429
Reflective Thinking
Special Feature:
430
None
2.
431
A shareholder is
A)
432
someone who has loaned money to the corporation.

B)
433
someone who has management responsibilities in a corporation.

C)
434
an owner of the corporation.

D)
435
all of the above

Answer:
436
C
Diff: 1
437
Type: MC
438
Page Ref: 213/141

Topic:
439
Types of Firms
Skill:
440
Factual
Objective:
441
LO2: Describe the typical management structure of corporations; principle agent problem
AACSB Coding:
442
Reflective Thinking
Special Feature:
443
None
3.
444
Members board of directors who do not have a direct management role in the firm are called
of the
A)
445
partial directors.
B)
446
adjunct directors.
C)
447
outside directors.
D)
448
executive directors.
Answer:
449
C
Diff: 1
450
Type: MC
451
Page Ref: 213/141

Topic:
452
Structure of Corporation
Skill:
453
Definition
Objective:
454
AACSB Coding:
455
Reflective Thinking
Special Feature:
456
None
4.
457
Members of management serving on the board of directors are referred to as

A)
458
the bureaucrats.
B)
459
the inner circle.

C)
460
inside directors.
D)
461
outside directors.
Answer:
462
C
Diff: 1
463
Type: MC
464
Page Ref: 213/141

Topic:
465
Skill:
466
Definition
Objective:
467
AACSB Coding:
468
Reflective Thinking
Special Feature:
469
None
5.
470
The possibility of a conflict of interest between shareholders and management is called

A)
471
the corporate governance problem.

B)
472
the principal- agent problem.

C)
473
the bureaucracy problem.

D)
474
the employer- employee problem.

Answer:
475
B
Diff: 1
476
Type: MC
477
Page Ref: 213/141

Topic:
478
Principal-Agent Problem
Skill:
479
Definition
Objective:
480
AACSB Coding:
481
Reflective Thinking
Special Feature:
482
None
6.
483
In many corporations, the chief executive officer accepts compensation to oversee the day-to-
large day operations of the company. In this capacity, the chief executive officer is
A)
484
a principal of the shareholders who are the ultimate owners of the corporation.
representative
B)
485
a principal of the corporation, serving the board of directors, who own the firm.
C)
486
an agent of the shareholders who are the ultimate owners or principals of the corporation.
D)
487
an agent of the banks who issues bonds with principle.

Answer:
488
C
Diff: 2
489
Type: MC
490
Page Ref: 213/141

Topic:
491
Skill:
492
Conceptual
Objective:
493
AACSB Coding:
494
Reflective Thinking
Special Feature:
495
None
7.
496
Giles is purchasing Ted's desktop publishing company, the Peach Pit Press. Being relatively
intereste inexperienced in the business field, Giles hires Diana to negotiate on his behalf.
d in Identify the parties to this transaction.
A)
497
Giles is the principal and Diana is the agent.

B)
498
Giles is the principal and Ted is the agent.

C)
499
Diana is the principal and Ted is the agent.

D)
500
Ted is the principal and Diana is the agent.

Answer:
501
A
Diff: 2
502
Type: MC
503
Page Ref: 213/141

Topic:
504
Skill:
505
Conceptual
Objective:
506
AACSB Coding:
507
Reflective Thinking
Special Feature:
508
None
8.
509
Which of following could provide an incentive to managers to work in the best interests of
the shareholders?
A)
510
tying managers' salaries to profits of the corporation

B)
511
offering managers perquisites such as first class travel

C)
512
allowing managers to sit on the board of directors

D)
513
threatening managers with dismissal

Answer:
514
A
Diff: 2
515
Type: MC
516
Page Ref: 213/141

Topic:
517
Skill:
518
Conceptual
Objective:
519
AACSB Coding:
520
Reflective Thinking
Special Feature:
521
None
9.
522
In many large corporations, day-to-day operations are controlled by

A)
523
shareholders rather than top management.

B)
524
venture capitalists rather than top management.

C)
525
top management rather than shareholders

D)
526
shareholders rather than by bond holders.

Answer:
527
C
Diff: 1
528
Type: MC
529
Page Ref: 213/141

Topic:
530
Skill:
531
Factual
Objective:
532
AACSB Coding:
533
Reflective Thinking
Special Feature:
534
None
10.
535
Your professor has to go to a conference and asks her graduate assistant to teach the
economi course while she is at the conference. Which of the following describes a potential
cs principle-agent problem related to this situation?
A)
536
You skip class knowing that the graduate assistant will be boring.
B)
537
The economics professor decides to stay at the conference an extra week.

C)
538
Your friend skips class knowing that the graduate assistant will be boring.
D)
539
The graduate assistant cancels class because he is lazy and wants to sleep in.
Answer:
540
D
Diff: 2
541
Type: MC
542
Page Ref: 213-4/141-2

Topic:
543
Skill:
544
Analytical
Objective:
545
AACSB Coding:
546
Analytic Skills
Special Feature:
547
Solved Problem: Does the Apply to the Relationship between Managers and Workers?
11.
548
How can owner of a pizza parlor reduce the principle-agent problem caused by pizza delivery
the workers pursuing their own interests?
A)
549
The owner should threaten to fire the workers.

B)
550
The owner should allow the workers to organize and join a union.
C)
551
The owner should pay workers based on how many pizzas per hour they deliver.
D)
552
The owner should promote the workers to assistant manager.

Answer:
553
C
Diff: 2
554
Type: MC
555
Page Ref: 213-4/141-2

Topic:
556
Skill:
557
Conceptual
Objective:
558
AACSB Coding:
559
Reflective Thinking
Special Feature:
560
12.
561
Members of management serving on the board of directors are referred to as outside directors.
Answer:
562
True
563
564
False
Diff: 1
565
Type: TF
566
Page Ref: 213/141

Topic:
567
Skill:
568
Definition
Objective:
569
AACSB Coding:
570
Reflective Thinking
Special Feature:
571
None
13.
572
Inside directors act as checks on the decisions of top management.

Answer:
573
True
574
575
False
Diff: 1
576
Type: TF
577
Page Ref: 213/141

Topic:
578
Skill:
579
Conceptual
Objective:
580
AACSB Coding:
581
Reflective Thinking
Special Feature:
582
None
14.
583
What is principle-agent problem? How did corporations reduce the impact of this problem
the during the 1990s?
Answer:
584
The principal- manage a firm act in ways that may not be consistent with the profit
agent problem is maximization objective of owners. To reduce the impact of this problem in
the incentive the 1990s, many boards of directors tied the salaries of top managers to the
problem that arises profits of the firm or to the price of the firm's stock. The hope was that top
when top-level managers would then have an incentive to make the firm as profitable as
executives hired to possible.
Diff: 1
585
Type: SA
586
Page Ref: 213/141

Topic:
587
Skill:
588
Definition
Objective:
589
AACSB Coding:
590
Reflective Thinking
Special Feature:
591
None
15.
592
Tony business. Tony keeps the books and orders supplies and Lara manages the day-to-
and Lara day operations of the business. They hire Patrick to help take care of the store’s
own a warehouse in the back of the store. Who are the principles and who are the agents
dog in this scenario? How can the principle-agent problem be reduced in this case?
washing
Answer:
593
In this scenario, principles. Patrick is hired help so he is the agent and his objectives may not
both Tony and be consistent with the profit maximization objectives of the owners of the
Lara are owners of firm. Tony and Lara could pay Patrick according to how much inventory he
the business so unpacks or boxes he moves, thereby giving him an incentive to work harder.
they are the
Diff: 2
594
Type: SA
595
Page Ref: 213-4/141-2

Topic:
596
Skill:
597
Conceptual
Objective:
598
AACSB Coding:
599
Reflective Thinking
Special Feature:
600
5.3 How Firms Raise Funds
1.
601
Google's sale of stock to the public in 2004

A)
602
went unnoticed in the press.

B)
603
did not significantly enrich its owners and founders.

C)
604
forced Google to seek other sources of funds for growth.

D)
605
increased the amount of funds available for Google's growth.

Answer:
606
D
Diff: 1
607
Type: MC
608
Page Ref: 208/136

Topic:
609
How Firms Raise Funds

Skill:
610
Factual
Objective:
611
LO3: Explain how firms obtain the funds they need to operate and expand
AACSB Coding:
612
Reflective Thinking
Special Feature:
613
Chapter Opener: Google: From Dorm Room to Wall Street
2.
614
What is not a way by which a firm can finance its investment projects?
A)
615
putting retained earnings back into the business

B)
616
taking one or more partners who would invest in the firm

C)
617
lowering the interest rate

D)
618
borrowing from a financial intermediary

Answer:
619
C
Diff: 2
620
Type: MC
621
Page Ref: 214/142

Topic:
622

Skill:
623
Factual
Objective:
624
AACSB Coding:
625
Reflective Thinking
Special Feature:
626
None
3.
627
Profits not paid out to shareholders of a corporation are called

A)
628
principle.
B)
629
coupon payments.
C)
630
retained earnings
D)
631
dividends.
Answer:
632
C
Diff: 1
633
Type: MC
634
Page Ref: 214/142

Topic:
635

Skill:
636
Definition
Objective:
637
AACSB Coding:
638
Reflective Thinking
Special Feature:
639
None
4.
640
Financial intermediaries are

A)
641
financial institutions through which savers can provide funds directly to borrowers.
B)
642
financial institutions through which savers can indirectly provide funds to borrowers.
C)
643
financial institutions through which borrowers can provide funds directly to savers.
D)
644
financial institutions that provide accounting advice to firms.

Answer:
645
B
Diff: 1
646
Type: MC
647
Page Ref: 215/143

Topic:
648

Skill:
649
Definition
Objective:
650
AACSB Coding:
651
Reflective Thinking
Special Feature:
652
None
5.
653
If you buy a bond issued by a corporation such as Amgen, you have purchased a
A)
654
financial security and become a creditor of Amgen.

B)
655
financial security and become part owner of Amgen.

C)
656
financial security and become a debtor to Amgen.

D)
657
debt instrument and become part owner of Amgen.

Answer:
658
A
Diff: 2
659
Type: MC
660
Page Ref: 215/143

Topic:
661

Skill:
662
Factual
Objective:
663
AACSB Coding:
664
Reflective Thinking
Special Feature:
665
None
6.
666
Financial markets are

A)
667
also called commercial banks.

B)
668
financial institutions through which savers can indirectly provide funds to borrowers.
C)
669
financial institutions through which savers can provide funds directly to borrowers.
D)
670
financial institutions through which borrowers can indirectly provide funds to savers.
Answer:
671
C
Diff: 1
672
Type: MC
673
Page Ref: 215/143

Topic:
674

Skill:
675
Factual
Objective:
676
AACSB Coding:
677
Reflective Thinking
Special Feature:
678
None
7.
679
Which of the following is not an action a corporation can take to finance its growth?
A)
680
issuing new shares of stocks.

B)
681
buying municipal bonds

C)
682
issuing bonds
D)
683
using the corporation's retained earnings

Answer:
684
B
Diff: 1
685
Type: MC
686
Page Ref: 215/143

Topic:
687

Skill:
688
Factual
Objective:
689
AACSB Coding:
690
Reflective Thinking
Special Feature:
691
None
8.
692
The two main types of financial securities are

A)
693
stocks and bonds.

B)
694
financial markets and financial intermediaries.

C)
695
assets and liabilities.

D)
696
savings and loans.

Answer:
697
A
Diff: 1
698
Type: MC
699
Page Ref: 215/143

Topic:
700

Skill:
701
Factual
Objective:
702
AACSB Coding:
703
Reflective Thinking
Special Feature:
704
None
9.
705
If Google fund by issuing bonds this is called _____ finance. If Google raises funds by
raises borrowing from Bank of America, this is called _______ finance.
A)
706
direct; direct
B)
707
indirect; direct
C)
708
direct; indirect
D)
709
indirect; indirect
Answer:
710
C
Diff: 1
711
Type: MC
712
Page Ref: 215/143

Topic:
713

Skill:
714
Definition
Objective:
715
AACSB Coding:
716
Reflective Thinking
Special Feature:
717
None
10.
718
Which of the following is an example of indirect financing?

A)
719
Google sells a bond in the financial market

B)
720
Google sells a financial security in the financial market

C)
721
Google borrows money from Credit Suisse, an investment bank

D)
722
Google issues new stock for sale in the financial market

Answer:
723
C
Diff: 2
724
Type: MC
725
Page Ref: 215/143

Topic:
726

Skill:
727
Analytical
Objective:
728
AACSB Coding:
729
Analytic Skills
Special Feature:
730
None
11.
731
A t that states the terms under which funds have passed from lender to borrower is
documen called a
A)
732
financial security.
B)
733
property rights transfer.

C)
734
financial liability.
D)
735
financial asset.
Answer:
736
A
Diff: 1
737
Type: MC
738
Page Ref: 215/143

Topic:
739

Skill:
740
Definition
Objective:
741
AACSB Coding:
742
Reflective Thinking
Special Feature:
743
None
12.
744
An issuer of bonds is
A)
745
making a long term loan to the buyer.

B)
746
a borrower of funds.
C)
747
a lender of funds.
D)
748
buying part ownership of a firm.

Answer:
749
B
Diff: 2
750
Type: MC
751
Page Ref: 215/143

Topic:
752

Skill:
753
Conceptual
Objective:
754
AACSB Coding:
755
Reflective Thinking
Special Feature:
756
None
13.
757
A on may choose to distribute some of its profits to its shareholders. This share of the
corporati profits that is distributed is called
A)
758
dividends.
B)
759
rate of return.
C)
760
coupon payments.
D)
761
interest on capital.
Answer:
762
A
Diff: 1
763
Type: MC
764
Page Ref: 215/143

Topic:
765

Skill:
766
Definition
Objective:
767
AACSB Coding:
768
Reflective Thinking
Special Feature:
769
None
14.
770
People who buy stock in Merck & Company become

A)
771
debt holders the benefits of holding the company's debts depend on its future profits.
of Merck, so
B)
772
debt holders the benefits of holding the company's debts are independent of its future
of Merck and profits.
C)
773
part owners of benefits of holding the company's stock are independent of its future profits.
Merck and the
D)
774
part owners of benefits of holding the company's stock depend on its future profits.
Merck, so the
Answer:
775
D
Diff: 2
776
Type: MC
777
Page Ref: 215/143

Topic:
778
Stocks
Skill:
779
Factual
Objective:
780
AACSB Coding:
781
Reflective Thinking
Special Feature:
782
None
15.
783
Which of the following markets is considered a dealer market?

A)
784
the primary stock market

B)
785
the over-the- counter market

C)
786
the American Stock Exchange

D)
787
the New York Stock Exchange

Answer:
788
B
Diff: 1
789
Type: MC
790
Page Ref: 216/144

Topic:
791

Skill:
792
Factual
Objective:
793
AACSB Coding:
794
Reflective Thinking
Special Feature:
795
None
16.
796
The in which newly issued claims are sold to initial buyers by the issuer of those claims
market is called
A)
797
a primary market.
B)
798
an equity market.
C)
799
a secondary market.
D)
800
an over-the- counter market.

Answer:
801
A
Diff: 1
802
Type: MC
803
Page Ref: 216/144

Topic:
804

Skill:
805
Factual
Objective:
806
AACSB Coding:
807
Reflective Thinking
Special Feature:
808
Don't let This Happen to YOU!: When Google Shares Change Hands, Google Doesn't Get the Money
17.
809
The most important over-the-counter securities market is

A)
810
the New York Stock Exchange (NYSE).

B)
811
the Standard & Poor's 500 (S&P 500).

C)
812
the Bond market.

D)
813
the National Association of Securities Dealers' Automated Quotation System (NASDAQ).

Answer:
814
D
Diff: 1
815
Type: MC
816
Page Ref: 216/144

Topic:
817

Skill:
818
Factual
Objective:
819
AACSB Coding:
820
Reflective Thinking
Special Feature:
821
None
18.
822
The term for the broad category of markets in which previously issued securities are
general traded is
A)
823
tertiary markets.
B)
824
primary markets.
C)
825
secondary markets.
D)
826
commodity markets.
Answer:
827
C
Diff: 1
828
Type: MC
829
Page Ref: 216/144

Topic:
830

Skill:
831
Definition
Objective:
832
AACSB Coding:
833
Reflective Thinking
Special Feature:
834
19.
835
The price of a bond traded in secondary markets is influenced by

A)
836
the coupon the bond relative to the coupons payments on newly issued bonds.
payments on
B)
837
the risk that the bond issuer might default on payment of interest and/or principal.
C)
838
the time to maturity.

D)
839
all of the above

Answer:
840
D
Diff: 2
841
Type: MC
842
Page Ref: 216/144

Topic:
843
Bonds
Skill:
844
Conceptual
Objective:
845
AACSB Coding:
846
Reflective Thinking
Special Feature:
847
None
20.
848
All else equal, when people become more optimistic about Genentech's future profitability,
A)
849
the supply of Genentech's stock rises as more investors express interest in the firm.
B)
850
the demand for Genentech's stock rises and thus its stock price also rises.
C)
851
the demand for Genentech's stock falls as investors hold on to the firm's stock.
D)
852
the supply of Genentech's stock falls as the firm buys back stock.
Answer:
853
B
Diff: 2
854
Type: MC
855
Page Ref: 216/144

Topic:
856
Stocks
Skill:
857
Conceptual
Objective:
858
AACSB Coding:
859
Reflective Thinking
Special Feature:
860
None
21.
861
When Google's stock price rises,

A)
862
this signal may encourage Google's managers to issue stock in the primary market.
B)
863
Google influx of funds from investors trading its stock in the secondary market.
receives an
C)
864
those that hold Google stock stand to lose by selling in the secondary market.
D)
865
Google suffers an outflow of funds from investors trading its stock in the secondary market.
Answer:
866
A
Diff: 2
867
Type: MC
868
Page Ref: 216-7/144-5

Topic:
869

Skill:
870
Analytical
Objective:
871
AACSB Coding:
872
Reflective Thinking
Special Feature:
873
22.
874
When a corporation issues stocks, it is

A)
875
announcing its intention to break up the company.

B)
876
increasing the value of its debt because stocks are liabilities to the firm.
C)
877
increasing the value of the company.

D)
878
increasing its financial capital by bringing additional owners into the firm.
Answer:
879
D
Diff: 2
880
Type: MC
881
Page Ref: 216-7/144-5

Topic:
882

Skill:
883
Conceptual
Objective:
884
AACSB Coding:
885
Reflective Thinking
Special Feature:
886
None
23.
887
Suppose the price of a firm's bonds rise. This implies that

A)
888
the coupon bond has fallen so the bond holder will be receiving smaller payments each
rate of the year.
B)
889
the principle of the bond has fallen.

C)
890
the cost of new external funds to finance the firm's investment expenditures has risen.
D)
891
the cost of new external funds to finance the firm's investment expenditures has fallen.
Answer:
892
D
Diff: 3
893
Type: MC
894
Page Ref: 216-7/144-5

Topic:
895
Bonds
Skill:
896
Conceptual
Objective:
897
AACSB Coding:
898
Reflective Thinking
Special Feature:
899
None
24.
900
Which of the following would not be listed on the face of a bond?

A)
901
the principal amount of the bond

B)
902
the name of the issuer

C)
903
the market price of the bond

D)
904
the coupon rate of bond

Answer:
905
C
Diff: 1
906
Type: MC
907
Page Ref: 216-7/144-5

Topic:
908
Bonds
Skill:
909
Factual
Objective:
910
AACSB Coding:
911
Reflective Thinking
Special Feature:
912
None
25.
913
If Kellogg's Foods goes into bankruptcy, the stockholders

A)
914
as creditors of the firm are paid before bondholders get paid anything at all.
B)
915
as creditors of the firm are paid after bondholders get paid.

C)
916
as part owners of the firm are paid after the bondholders get paid.
D)
917
as part owners of the firm are paid before bondholders get paid anything at all.
Answer:
918
C
Diff: 1
919
Type: MC
920
Page Ref: 217/145

Topic:
921

Skill:
922
Factual
Objective:
923
AACSB Coding:
924
Reflective Thinking
Special Feature:
925
None
26.
926
What does the term "coupon rate" on a bond mean?

A)
927
The coupon rate is the interest rate that a bondholder receives.

B)
928
The coupon rate is the amount that a bondholder receives when the bond matures.
C)
929
The coupon rate is the discount rate that a buyer of a bond is entitled to.
D)
930
The coupon rate is the share of profits that a bondholder is entitled to.
Answer:
931
A
Diff: 1
932
Type: MC
933
Page Ref: 217/145

Topic:
934

Skill:
935
Definition
Objective:
936
AACSB Coding:
937
Reflective Thinking
Special Feature:
938
None
27.
939
Suppose purchase a $1,000 bond issued by the General Electric Corporation. What is another
you word for the $1,000 that you will receive when the bond matures?
A)
940
rate of return
B)
941
face value
C)
942
dividend
D)
943
coupon
Answer:
944
B
Diff: 1
945
Type: MC
946
Page Ref: 217/145

Topic:
947
Bonds
Skill:
948
Definition
Objective:
949
AACSB Coding:
950
Reflective Thinking
Special Feature:
951
None
28.
952
Suppose annual coupon payment on a $1,000 bond is $70. What is the coupon rate on the
the bond?
A)
953
$70
B)
954
7%
C)
955
70 %
D)
956
cannot be determined without information on the interest rate

Answer:
957
B
Diff: 1
958
Type: MC
959
Page Ref: 217/145

Topic:
960

Skill:
961
Analytical
Objective:
962
AACSB Coding:
963
Analytic Skills
Special Feature:
964
None
29.
965
The coupon rate on a bond is calculated as

A)
966
interest payment ÷ price of the bond.

B)
967
face value of the bond ÷ price of the bond.

C)
968
face value of the bond ÷ interest payment.

D)
969
interest payment ÷ face value of the bond.

Answer:
970
D
Diff: 1
971
Type: MC
972
Page Ref: 217/145

Topic:
973

Skill:
974
Definition
Objective:
975
AACSB Coding:
976
Reflective Thinking
Special Feature:
977
None
30.
978
The price-earnings ratio is calculated by dividing:

A)
979
the current price of a firm's stock by earnings per share.

B)
980
the current price of a firm's stock by dividends per share.

C)
981
the current price of a firm's stock by the market interest rate.

D)
982
the current price of a firm's stock by asset value per share

Answer:
983
A
Diff: 1
984
Type: MC
985
Page Ref: 217-8/145-6

Topic:
986
Stocks
Skill:
987
Definition
Objective:
988
AACSB Coding:
989
Reflective Thinking
Special Feature:
990
Making the Connection: Following Abercrombie & Fitch's Stock Price in the Financial Pages
31.
991
Suppose Exxon's price-earnings ratio is 19 on a given day. What does this mean?
A)
992
Buyers can expect to receive a 19 percent return on their investment in Exxon.

B)
993
Exxon's stock price has risen 19-fold in the past year.

C)
994
On that particular day, buyers must pay $19 for the right to buy $1 of Exxon's profits.
D)
995
For every dollar invested in Exxon, you get $19 return on that given day.
Answer:
996
C
Diff: 2
997
Type: MC
998
Page Ref: 217-8/145-6

Topic:
999
Stocks
Skill:
1000
Conceptual
Objective:
1001
AACSB Coding:
1002
Reflective Thinking
Special Feature:
1003
None
32.
1004
Suppose r day, the average price-earnings (P-E) ratio for all firms listed in the New York
on a Stock Exchange is 27 but Applied Magnetics, a technology firm, traded at a P-E ratio
particula of 48. What does this suggest about investors? opinion of Applied Magnetics?
A)
1005
Applied Magnetics has promising growth potential.

B)
1006
Applied Magnetics is ready to distribute dividends.

C)
1007
Applied Magnetic's stocks are over-rated.

D)
1008
Applied Magnetic's future growth prospects are bleak.

Answer:
1009
A
Diff: 2
1010
Type: MC
1011
Page Ref: 217-8/145-6

Topic:
1012
Stocks
Skill:
1013
Conceptual
Objective:
1014
AACSB Coding:
1015
Reflective Thinking
Special Feature:
1016
None
33.
1017
If the Street Journal reported that GE's stock 52 Week High equaled its 52 Week Low, and
Wall Microsoft's stock 52 Week High was $50 higher than its 52 Week Low, we would say
A)
1018
Microsoft's stock exhibits no stock price volatility.

B)
1019
No can be made about the relative stock price volatility of GE's stock compared to
conclusions Microsoft's stock.
C)
1020
Microsoft's stock price is more volatile than GE's stock price.

D)
1021
GE's stock price is more volatile than Microsoft's stock price.

Answer:
1022
C
Diff: 2
1023
Type: MC
1024
Page Ref: 217-8/145-6

Topic:
1025
Calculating Stock Price

Skill:
1026
Analytical
Objective:
1027
AACSB Coding:
1028
Analytic Skills
Special Feature:
1029
34.
1030
A dividend yield is calculated by

A)
1031
dividing the dividend by the retained earnings per share.

B)
1032
dividing the dividend by the price of the stock.

C)
1033
dividing the stock price by the dividend paid.

D)
1034
dividing the current dividend by the current year's profits.

Answer:
1035
B
Diff: 1
1036
Type: MC
1037
Page Ref: 218/146

Topic:
1038
Stocks
Skill:
1039
Definition
Objective:
1040
AACSB Coding:
1041
Reflective Thinking
Special Feature:
1042
35.
1043
A security that represents a promise to repay a fixed amount of funds at some future
financial date is called a bond.
Answer:
1044
1045
True
1046
False
Diff: 1
1047
Type: TF
1048
Page Ref: 215/143

Topic:
1049

Skill:
1050
Definition
Objective:
1051
AACSB Coding:
1052
Reflective Thinking
Special Feature:
1053
None
36.
1054
Profits paid out to stockholders are called dividends.

Answer:
1055
1056
True
1057
False
Diff: 1
1058
Type: TF
1059
Page Ref: 215/143

Topic:
1060
Stocks
Skill:
1061
Definition
Objective:
1062
AACSB Coding:
1063
Reflective Thinking
Special Feature:
1064
None
37.
1065
A financial security that represents part ownership to a firm is called a bond.

Answer:
1066
True
1067
1068
False
Diff: 1
1069
Type: TF
1070
Page Ref: 215/143

Topic:
1071

Skill:
1072
Definition
Objective:
1073
AACSB Coding:
1074
Reflective Thinking
Special Feature:
1075
None
38.
1076
You are microbrewery, Lucky Labrador. You need to replace your brew kettles, fermenting
the sole tanks, and storage kettles. Currently your profits are extremely low. Given this
proprieto scenario, what options do you have to obtain funding for your production
r of a equipment? How would your options change if your business was a large
small corporation and not a small proprietorship?
Answer:
1077
A firm can fund from a bank, or raising money by issuing stocks or bonds. Since the business
large capital is small, access to bond and equity markets is limited. Also since profits are
expenditures three low, retained earning would be low and not a viable source of funds. So the
ways: from best option for funding is to borrow the money from a bank.
retained earnings, If the business was a large corporation, then the firm could raise the
borrowing money money in the financial market by selling stocks or bonds.
Diff: 2
1078
Type: SA
1079
Page Ref: 214-8/142-6

Topic:
1080

Skill:
1081
Conceptual
Objective:
1082
AACSB Coding:
1083
Reflective Thinking
Special Feature:
1084
None
39.
1085
Suppose from Microsoft, with a $10,000 face value, and the coupon rate is 7%. Carefully
Ted buys explain what Ted will receive financially each year if he keeps the bond for the next
a 30-year 30 years. Be sure to explain how you came up with the amounts. If interest rates of
corporat similar investments in the economy increase to 10%, what would happen to the price
e bond of Ted's bond if he tries to sell it in the secondary market?
Answer:
1086
Since the coupon by multiplying the coupon rate times the face value: .07 x $10,000 = $700. At
rate is 7%, Ted will the end of 30 years, Microsoft will pay Ted the face value amount $10,000.
receive a coupon The price of Ted's bond would have to fall if interest rates rise in the
payment of $700 economy. Ted's bond pays a fixed coupon payment of $700 per year. If the
per year each year price of the bond remains at $10,000, the rate of return (700/10000 = 7%) is
for the next 30 below the going interest rate of 10%. The price of the bond will fall until the
years. This rate of return (700/price of the bond) rises to 10%.
amount is found
Diff: 2
1087
Type: SA
1088
Page Ref: 214-8/142-6

Topic:
1089

Skill:
1090
Analytical
Objective:
1091
AACSB Coding:
1092
Analytic Skills
Special Feature:
1093
None
5.4 Using Financial Statements to Evaluate a Corporation
1.
1094
The s and Exchange Commission requires firms that sell securities in financial markets to
Securitie submit financial statements. These statements
A)
1095
completely eliminate the information costs associated with buying stock.

B)
1096
do not eliminate information costs as some firms are too young and don't have much
completely information to evaluate.
C)
1097
do not eliminate information costs as managers may present financial information in a

completely positive light so that investors overvalue the company.
D)
1098
b and c
Answer:
1099
D
Diff: 1
1100
Type: MC
1101
Page Ref: 219/147

Topic:
1102
Financial Statements
Skill:
1103
Factual
Objective:
1104
LO4: Understand the information provided in corporations' financial statements

AACSB Coding:
1105
Reflective Thinking
Special Feature:
1106
None
2.
1107
A "soft is a phrase that describes an economy's transition from a boom to recession such that
landing"
A)
1108
growth will gradually decline.

B)
1109
a depression will result.

C)
1110
growth will rapidly decline and lead to a financial crisis.

D)
1111
growth will rapidly decline and lead to inflation.

Answer:
1112
A
Diff: 1
1113
Type: MC
1114
Page Ref: 219/147

Topic:
1115
Skill:
1116
Definition
Objective:
1117

AACSB Coding:
1118
Reflective Thinking
Special Feature:
1119
Making the Connection: A Bull in China's Financial Shop
3.
1120
Which of following is a reason why economists are worried the Chinese economic expansion
the may be coming to an end?
A)
1121
The Chinese government does not interfere in providing direction for the expansion.
B)
1122
Chinese banks have a high level of nonperforming loans.

C)
1123
China's current financial system is a model of accounting transparency.

D)
1124
The Chinese savings rate is triple the rate in other counties.

Answer:
1125
B
Diff: 2
1126
Type: MC
1127
Page Ref: 219-20/147-8

Topic:
1128
Skill:
1129
Conceptual
Objective:
1130

AACSB Coding:
1131
Reflective Thinking
Special Feature:
1132
Making the Connection: A Bull in China's Financial Shop
4.
1133
Anythin g owed by a person or firm is called

A)
1134
net worth.
B)
1135
a liability.
C)
1136
an asset.
D)
1137
an economic profit.
Answer:
1138
B
Diff: 1
1139
Type: MC
1140
Page Ref: 220/148

Topic:
1141
Skill:
1142
Definition
Objective:
1143

AACSB Coding:
1144
Reflective Thinking
Special Feature:
1145
None
5.
1146
The Brewery is a boutique beer brewer. It borrowed $70,000 from Wells Fargo Bank to
Steelhea get started. One of the items it purchased with this loan was fermentation vat. The
d loan is considered a(n) __________ on Steelhead Brewery's balance sheet.
A)
1147
owner's equity
B)
1148
liability
C)
1149
economic profit
D)
1150
asset
Answer:
1151
B
Diff: 2
1152
Type: MC
1153
Page Ref: 220/148

Topic:
1154
Skill:
1155
Analytical
Objective:
1156

AACSB Coding:
1157
Reflective Thinking
Special Feature:
1158
None
6.
1159
A statement that sums up a firm's revenues, costs, and profit on a particular day,
financial usually the end of a quarter or year is called a(n)
A)
1160
cash flow statement.

B)
1161
balance sheet.
C)
1162
income statement.
D)
1163
spreadsheet.
Answer:
1164
C
Diff: 1
1165
Type: MC
1166
Page Ref: 220/148

Topic:
1167
Skill:
1168
Definition
Objective:
1169

AACSB Coding:
1170
Reflective Thinking
Special Feature:
1171
None
7.
1172
Suppose research paper comparing the labor costs of certain retail firms. The financial
you have statement you would request from the firm to obtain this information is called a(n)
to write a
A)
1173
price-earnings statement.
B)
1174
income statement.
C)
1175

D)
1176
balance sheet.
Answer:
1177
B
Diff: 2
1178
Type: MC
1179
Page Ref: 220/148

Topic:
1180
Skill:
1181
Conceptual
Objective:
1182

AACSB Coding:
1183
Reflective Thinking
Special Feature:
1184
None
8.
1185
Carmen bakery. To do so, she would have to quit her current job at the Pattiserrie which
is pays $30,000 a year and take over a store front that she owns and currently rents to
consideri her cousin for $12,000 a year. She estimates that her annual expenses at the bakery
ng would be $25,000 for food items, $20,000 for hired help and $3,000 for utilities. What
opening is the minimum amount of revenue that Carmen must earn per year in order for it to
her own be worth her while to open her own bakery?
A)
1186
$90,000
B)
1187
$48,000
C)
1188
$60,000
D)
1189
$72,000
Answer:
1190
A
Diff: 2
1191
Type: MC
1192
Page Ref: 220/148

Topic:
1193
Income Statement
Skill:
1194
Analytical
Objective:
1195

AACSB Coding:
1196
Analytic Skills
Special Feature:
1197
None
9.
1198
Carmen her own bakery. To do so, she would have to quit her current job at the Pattiserrie
is which pays $30,000 a year and take over a store front that she owns and currently
consideri rents to her cousin for $12,000 a year. She estimates that her annual expenses at the
ng bakery would be $25,000 for food items, $20,000 for hired help and $3,000 for
opening utilities. What are her implicit costs and what do they amount to?
A)
1199
her foregone salary of $30,000

B)
1200
he amount would have to give up, both monetary and non-monetary amounting to
that she $90,000
C)
1201
her monetary expenses of$48,000

D)
1202
her foregone salary and the rent she must forego for a total of $42,000
Answer:
1203
D
Diff: 2
1204
Type: MC
1205
Page Ref: 220-1/148-9

Topic:
1206
Implicit Costs
Skill:
1207
Analytical
Objective:
1208

AACSB Coding:
1209
Reflective Thinking
Special Feature:
1210
None
10.
1211
Which of be categorized as explicit costs?

the a. wages of workers
followin b. raw material costs
g would c. forgone investment opportunities
A)
1212
a and c only
B)
1213
a and b only
C)
1214
a, b, and c
D)
1215
c only
Answer:
1216
B
Diff: 1
1217
Type: MC
1218
Page Ref: 220-1/148-9

Topic:
1219
Income Statement
Skill:
1220
Conceptual
Objective:
1221

AACSB Coding:
1222
Reflective Thinking
Special Feature:
1223
None
11.
1224
Anythin g of value that a firm owns is called

A)
1225
net worth.
B)
1226
an asset.
C)
1227
a liability.
D)
1228
an explicit cost.
Answer:
1229
B
Diff: 1
1230
Type: MC
1231
Page Ref: 221/149

Topic:
1232
Skill:
1233
Definition
Objective:
1234

AACSB Coding:
1235
Reflective Thinking
Special Feature:
1236
None
12.
1237
The difference between assets and liabilities on a firm's balance sheet is the firm's
A)
1238
net worth.
B)
1239
an economic profit.
C)
1240
explicit cost.
D)
1241
accounting profit.
Answer:
1242
A
Diff: 1
1243
Type: MC
1244
Page Ref: 221/149

Topic:
1245
Skill:
1246
Definition
Objective:
1247

AACSB Coding:
1248
Reflective Thinking
Special Feature:
1249
None
13.
1250
The bakes and sells artisan bread. It borrowed $50,000 from Washington Mutual Bank to
Hideawa get started. One of the items it purchased with this loan was an oven. The bakery's
y Bakery oven is a(n) __________ on Hideaway Bakery's balance sheet.
A)
1251
asset
B)
1252
owner's equity
C)
1253
economic profit
D)
1254
liability
Answer:
1255
A
Diff: 2
1256
Type: MC
1257
Page Ref: 221/149

Topic:
1258
Skill:
1259
Analytical
Objective:
1260

AACSB Coding:
1261
Reflective Thinking
Special Feature:
1262
None
14.
1263
A statement that sums up a firm's financial position on a particular day, usually the
financial end of a quarter or year is called a(n)
A)
1264
spreadsheet.
B)
1265

C)
1266
income statement.
D)
1267
balance sheet.
Answer:
1268
D
Diff: 1
1269
Type: MC
1270
Page Ref: 221/149

Topic:
1271
Skill:
1272
Definition
Objective:
1273

AACSB Coding:
1274
Reflective Thinking
Special Feature:
1275
None
15.
1276
Total minus the explicit costs of producing goods and services is called an economic
revenue profit.
Answer:
1277
True
1278
1279
False
Diff: 1
1280
Type: TF
1281
Page Ref: 220/148

Topic:
1282
Income Statement
Skill:
1283
Definition
Objective:
1284

AACSB Coding:
1285
Reflective Thinking
Special Feature:
1286
None
16.
1287
Costs include the value of owner supplied resources and may not be included in the
that accounting statement of a firm are called implicit costs.
Answer:
1288
1289
True
1290
False
Diff: 1
1291
Type: TF
1292
Page Ref: 220/148

Topic:
1293
Income Statement
Skill:
1294
Definition
Objective:
1295

AACSB Coding:
1296
Reflective Thinking
Special Feature:
1297
None
17.
1298
A firm's minus all its costs of production, both implicit and explicit are called economic
revenues profit.
Answer:
1299
1300
True
1301
False
Diff: 1
1302
Type: TF
1303
Page Ref: 220/148

Topic:
1304
Income Statement
Skill:
1305
Definition
Objective:
1306

AACSB Coding:
1307
Reflective Thinking
Special Feature:
1308
None
18.
1309
The valued alternative that must be forgone to engage in an activity is called opportunity
highest cost.
Answer:
1310
1311
True
1312
False
Diff: 1
1313
Type: TF
1314
Page Ref: 220/148

Topic:
1315
Income Statement
Skill:
1316
Definition
Objective:
1317

AACSB Coding:
1318
Reflective Thinking
Special Feature:
1319
None
19.
1320
Accordin ts, the minimum amount that investors must earn on the funds they invest in a firm,
g to expressed as a percentage of the amount invested is called a normal rate of return.
economis
Answer:
1321
1322
True
1323
False
Diff: 1
1324
Type: TF
1325
Page Ref: 220-1/148-9

Topic:
1326
Skill:
1327
Definition
Objective:
1328

AACSB Coding:
1329
Reflective Thinking
Special Feature:
1330
None
20.
1331
Loretta a drive-through coffee shop called the Supreme Bean. She owns the coffee kiosk
quits her which she used to rent to her cousin for $5,000/year. She gives up her salary of
job as a $40,000/year. Her direct expenses are $20,000/year for food and coffee supplies,
bus $30,000/year for hired help, and $7,000/year for utilities. Over the course of a year
driver to Loretta earns $100,000 in revenue. How much is Loretta's accounting profit for the
take over year? Is she earning an economic profit? Explain.
Answer:
1332
Accounting profit cost =

is found by
subtracting the $20,000 + $30,000 + $7,000 = $57,000
explicit costs from
revenue. Accounting profit = $100,000 - $57,000 = $43,000.
Loretta's explicit Economic profit is found by subtracting both explicit and implicit costs from
costs = food and revenue. Loretta's implicit costs are her opportunity cost of lost salary
supply cost + hired ($40,000) and lost rent ($5,000) for a total of $45,000. So her economic profit =
help cost + utility
$100,000 - $57,000 - $45,000 = -$2,000.
Diff: 3
1333
Type: SA
1334
Page Ref: 220-1/148-9

Topic:
1335
Implicit Costs
Skill:
1336
Analytical
Objective:
1337

AACSB Coding:
1338
Analytic Skills
Special Feature:
1339
None
5.5 Corporate Governance Policy
1.
1340
Which of following events would have raised the price of Google stock if it had occurred prior
the to Google's initial public offering of the stock in 2004?
A)
1341
Google's Board of Directors becomes dominated by top management.

B)
1342
Google reports profits 30% higher than financial analysts' predictions.

C)
1343
Yahoo launches a search engine that works as well as Google's.

D)
1344
Corporate taxes and dividend taxes are both increased by 10%.

Answer:
1345
B
Diff: 2
1346
Type: MC
1347
Page Ref: 208/136

Topic:
1348
Stocks
Skill:
1349
Analytical
Objective:
1350
LO5: Understand the role of government in corporate governance

AACSB Coding:
1351
Analytic Skills
Special Feature:
1352
Chapter Opener: Google: From Dorm Room to Wall Street
2.
1353
The Sarbanes-Oxley Act of 2002 was passed

A)
1354
to prevent corporate top management from holding company stock.

B)
1355
in response to involving the misreporting of corporate financial information in the late 1990s.
scandals
C)
1356
in response to the rash of insider trading scandals that occurred in the late 1990s.
D)
1357
to decrease the level of government interference in financial markets.

Answer:
1358
B
Diff: 1
1359
Type: MC
1360
Page Ref: 222/150

Topic:
1361
Sarbanes-Oxley
Skill:
1362
Factual
Objective:
1363

AACSB Coding:
1364
Reflective Thinking, Ethical Reasoning

Special Feature:
1365
None
3.
1366
Which of following is true of the incentives created by linking top manager compensation to
the the corporation's stock price?
A)
1367
They create incentives for managers to maximize profit.

B)
1368
They create incentives for top managers to spend lavishly on office furniture.
C)
1369
They create incentives for mangers that conflict with those of shareholders.
D)
1370
They create incentives for top managers to increase costs.

Answer:
1371
A
Diff: 2
1372
Type: MC
1373
Page Ref: 222/150

Topic:
1374
Skill:
1375
Conceptual
Objective:
1376

AACSB Coding:
1377

Special Feature:
1378
None
4.
1379
The Enron and WorldCom scandals of the 1990s occurred because

A)
1380
top managers' compensation was not tied to the stock price.

B)
1381
top managers deceived outside auditors about the true financial condition of their firms.
C)
1382
top managers' was based 100% on salary and this reduced the principle agent problem.
compensation
D)
1383
the federal government did not regulate how financial statements are prepared.
Answer:
1384
B
Diff: 1
1385
Type: MC
1386
Page Ref: 222/150

Topic:
1387
Business Scandals
Skill:
1388
Factual
Objective:
1389

AACSB Coding:
1390

Special Feature:
1391
None
5.
1392
Which of the following is not a characteristic of the Sarbanes-Oxley Act of 2002?

A)
1393
It requires auditors disclose any conflicts of interest

B)
1394
It mandates that CEOs personally certify the accuracy of financial statements.

C)
1395
It requires corporate directors have a certain level of expertise with financial information.
D)
1396
It neglects to impose penalties to enforce violations of the act.

Answer:
1397
D
Diff: 2
1398
Type: MC
1399
Page Ref: 222-3/150-1

Topic:
1400
Sarbanes-Oxley
Skill:
1401
Factual
Objective:
1402

AACSB Coding:
1403
Reflective Thinking
Special Feature:
1404
None
6.
1405
The Company Accounting Oversight Board created by the Sarbanes-Oxley Act of 2002
Public
A)
1406
decreased governmental regulation of corporate financial reporting.

B)
1407
oversees the auditing of public companies' financial reports.

C)
1408
ensures that CEOs do not own too much company stock.

D)
1409
vastly lowered the costs to firms of issuing stocks and bonds.

Answer:
1410
B
Diff: 1
1411
Type: MC
1412
Page Ref: 223/151

Topic:
1413
Sarbanes-Oxley
Skill:
1414
Factual
Objective:
1415

AACSB Coding:
1416
Reflective Thinking
Special Feature:
1417
None
7.
1418
Some ts argue that the costs of the Sarbanes-Oxley Act of 2002 exceed the benefits because
economis
A)
1419
the number of on the NYSE has risen relative to the number of new listings on foreign stock
new listings exchanges.
B)
1420
the rules for section 404 of the act are more costly to firms than what was anticipated.
implementing
C)
1421
the number of on the London Stock Exchange have fallen relative to listing on the NASDAQ.
new listings
D)
1422
a greater number of corporate boards of directors own stock.

Answer:
1423
B
Diff: 2
1424
Type: MC
1425
Page Ref: 223/151

Topic:
1426
Sarbanes-Oxley
Skill:
1427
Conceptual
Objective:
1428

AACSB Coding:
1429
Reflective Thinking
Special Feature:
1430
None
8.
1431
The on's board of directors monitors and controls top managers of the corporation well
corporati when
A)
1432
the board is dominated by insiders.

B)
1433
the board is dominated by independent outsiders.

C)
1434
there is a supermajority (67% or more) of insiders on the board.

D)
1435
the board is dominated by outsiders who are not necessarily independent.

Answer:
1436
B
Diff: 1
1437
Type: MC
1438
Page Ref: 223-4/151-2

Topic:
1439
Corporate Governance
Skill:
1440
Factual
Objective:
1441

AACSB Coding:
1442
Reflective Thinking
Special Feature:
1443
Solved Problem: What Makes a Good Board of Directors?
9.
1444
Which of following would increase the chances that the board of directors will act in the best
the interests of top management?
A)
1445
having the directors own stock

B)
1446
having the compensation committee composed of outsiders

C)
1447
having an auditing committee composed of insiders

D)
1448
having the majority of the board consist of independent outsiders

Answer:
1449
C
Diff: 1
1450
Type: MC
1451
Page Ref: 223-4/151-2

Topic:
1452
Skill:
1453
Conceptual
Objective:
1454

AACSB Coding:
1455
Reflective Thinking
Special Feature:
1456
10.
1457
Western Corporate governance structure was viewed favorably by Standard and Poor's
Digital's Equity Research Service because
A)
1458
the auditing committee is comprised solely of independent insiders.

B)
1459
the compensation committee is comprised solely of independent insiders.

C)
1460
the board is controlled by a supermajority of independent outsiders.

D)
1461
none of the board of directors own stock.

Answer:
1462
C
Diff: 1
1463
Type: MC
1464
Page Ref: 223-4/151-2

Topic:
1465
Skill:
1466
Factual
Objective:
1467

AACSB Coding:
1468
Reflective Thinking
Special Feature:
1469
11.
1470
Which of following would make you more likely to purchase stock when weighing the stock's
the reward verses its risk?
A)
1471
The board of directors is not required to buy stock and is paid 100% in salary.
B)
1472
The auditing committee is comprised solely of insiders.

C)
1473
The CEO's pay is not tied to the stock price.

D)
1474
The firm is well known and is closely scrutinized by Wall Street analysts.
Answer:
1475
D
Diff: 3
1476
Type: MC
1477
Page Ref: 209/137

Topic:
1478
Skill:
1479
Analytical
Objective:
1480

AACSB Coding:
1481
Analytic Skills
Special Feature:
1482
Economics in YOUR Life!: Is It Risky to Own Stock?
12.
1483
Which of following facts about the board of directors would make you less likely to by Apple
the computer stock when weighing the stock's risk versus its reward?
A)
1484
The CEO of warehouse, a company which accounted for 2.9% of Apple's net sales sits on
Micro the compensation committee.
B)
1485
The board of directors is comprised of a supermajority of independent outsiders.

C)
1486
The auditing made up of persons who have no close relationship and therefore are
committee is independent to Apple Computer.
D)
1487
Founder Steve Jobs, who sits on the board of directors, owns a significant amount of stock.
Answer:
1488
A
Diff: 3
1489
Type: MC
1490
Page Ref: 209/137

Topic:
1491
Skill:
1492
Analytical
Objective:
1493

AACSB Coding:
1494
Analytic Skills
Special Feature:
1495
Economics in YOUR Life!: Is It Risky to Own Stock?
13.
1496
Which of the following statements about executive Compensation at Google is true?

A)
1497
The Google CEO and founders draw large salaries from Google.
B)
1498
The package for the Google CEO and founders consists solely of million dollar
compensation bonuses.
C)
1499
Most of the package for the Google CEO and founders comes from the sale of stock.
compensation
D)
1500
The salary Google CEO and founders is 600 times the salary paid to the average Google
paid to the worker.
Answer:
1501
C
Diff: 2
1502
Type: MC
1503
Page Ref: 226/154

Topic:
1504
Skill:
1505
Factual
Objective:
1506

AACSB Coding:
1507
Reflective Thinking
Special Feature:
1508
An Inside Look: Executive Compensation at Google
14.
1509
Which of the following statements about executive Compensation at Google is true?

A)
1510
Most of the package for the Google CEO and founders makes them more likely to reward
compensation themselves with lavish perks at the company's expense.
B)
1511
The package for the Google CEO and founders is a cause and not a solution for the
compensation principle agent problem.
C)
1512
The package for the Google CEO and founders makes them less inclined to pursue
compensation the interests of stockholders.
D)
1513
The package for the Google CEO and founders reduces the principle agent
compensation problem.
Answer:
1514
D
Diff: 3
1515
Type: MC
1516
Page Ref: 226/154

Topic:
1517
Skill:
1518
Analytical
Objective:
1519

AACSB Coding:
1520

Special Feature:
1521
An Inside Look: Executive Compensation at Google
15.
1522
Purchasi stock of well known firms that are closely scrutinized by Wall Street analysts
ng the reduces the risk associated with the principle agent problem.
Answer:
1523
1524
True
1525
False
Diff: 2
1526
Type: TF
1527
Page Ref: 222/150

Topic:
1528
Skill:
1529
Conceptual
Objective:
1530

AACSB Coding:
1531
Reflective Thinking
Special Feature:
1532
None
16.
1533
The -Oxley Act of 2002 lowered costs to firms of issuing stocks and bonds in the United
Sarbanes States.
Answer:
1534
True
1535
1536
False
Diff: 2
1537
Type: TF
1538
Page Ref: 223/151

Topic:
1539
Sarbanes-Oxley
Skill:
1540
Conceptual
Objective:
1541

AACSB Coding:
1542
Reflective Thinking
Special Feature:
1543
None
17.
1544
Explain tying a CEO's compensation to a stock price reduces the principle-agent problem?
how
Answer:
1545
If a CEO’s pay is the CEO will earn more in compensation. As a result, the CEO has a strong
tied to the stock incentive to make decisions to make the firm profitable. The more profitable
price, then as the the firm, the more attractive its stock is to investors and the higher the stock
stock price rises, price. In this way, the CEO acts in the best interest of the owners of the firm.
Diff: 1
1546
Type: SA
1547
Page Ref: 222/150

Topic:
1548
Skill:
1549
Conceptual
Objective:
1550

AACSB Coding:
1551
Reflective Thinking
Special Feature:
1552
None
18.
1553
government passed what is considered the single most important piece of legislation
In 2002,
affecting corporate governance, financial disclosure and the practice of public
the
accounting since the U.S. securities laws of the early 1930s. What is this piece of
federal
legislation called? List three of its major provisions.
Answer:
1554
The legislation is requires that CEOs personally certify the accuracy of financial statements.
the Sarbanes-Oxley 2. It requires that financial analysts and auditors disclose whether
Act. Three of the any conflicts of interest might exist that would limit their
following four independence in evaluating a firm's financial condition.
provisions should 3. It creates the Public Company Accounting Oversight board to
be specified in the oversee the auditing of public companies' financial reports.
answer: 4. It imposes stiff penalties including long jail sentences for managers
1. It who do not meet their responsibilities.
Diff: 1
1555
Type: SA
1556
Page Ref: 222-3/150-1

Topic:
1557
Business Scandals
Skill:
1558
Factual
Objective:
1559

AACSB Coding:
1560
Reflective Thinking
Special Feature:
1561
None
5.6 Appendix: Tools to Analyze Firms’ Financial Information
1.
1562
Which of following accurately depicts the relationship between the present value of funds and
the the future value to be received in one year? Let i= the interest rate.
A)
1563
Present Value = Future Value ÷ (1 + i)

B)
1564
Present Value = Future Value x (1 + i)

C)
1565
Future Value = (1 + Present Value) ÷ (1 + i)

D)
1566
Future Value = Present Value ÷ (1 + i)

Answer:
1567
A
Diff: 1
1568
Type: MC
1569
Page Ref: 234/162

Topic:
1570
Analyzing Financial Information

Skill:
1571
Definition
Objective:
1572
Appendix: Understand value and the information contained on a firm's income statement and balance sheet
the concept of present
AACSB Coding:
1573
Reflective Thinking
Special Feature:
1574
None
2.
1575
Your buy a brand new car in 4 years. How much would you have to invest today at 8%
goal is to compounded annually to have $25,000 in 4 years time?
A)
1576
$19,147.25
B)
1577
$18,267.26
C)
1578
$18,375.75
D)
1579
$21,370.10
Answer:
1580
C
Diff: 2
1581
Type: MC
1582
Page Ref: 234/162

Topic:
1583

Skill:
1584
Analytical
Objective:
1585
AACSB Coding:
1586
Reflective Thinking
Special Feature:
1587
None
3.
1588
Gertie lend Sebilla $1,000 today, which will be repaid at the end of two years at an interest
has rate of 10 percent compounded annually. What is the amount that Gertie will receive
agreed to at the end of two years?
A)
1589
$1,100
B)
1590
$1,200
C)
1591
$2,000
D)
1592
$1,210
Answer:
1593
D
Diff: 1
1594
Type: MC
1595
Page Ref: 234/162

Topic:
1596

Skill:
1597
Analytical
Objective:
1598
AACSB Coding:
1599
Reflective Thinking
Special Feature:
1600
None
4.
1601
Lucy bother, JJ, "You give me $X today and in two years time I will repay you $3,500,
Bossier which is a really good deal because I am offering you an interest rate of 8 percent,
tells her far better than anything you'll get in the market today." What is the value of X?
A)
1602
approximately $3,000
B)
1603
C)
1604
D)
1605
Answer:
1606
A
Diff: 1
1607
Type: MC
1608
Page Ref: 234/162

Topic:
1609

Skill:
1610
Analytical
Objective:
1611
AACSB Coding:
1612
Analytic Skills
Special Feature:
1613
None
5.
1614
What is future value of $25,000 received today if it is invested at 3 percent compounded

the annually for three years?
A)
1615
$27,318.18
B)
1616
$25,750
C)
1617
$22,878.54
D)
1618
$32,500
Answer:
1619
A
Diff: 2
1620
Type: MC
1621
Page Ref: 234/162

Topic:
1622

Skill:
1623
Analytical
Objective:
1624
AACSB Coding:
1625
Reflective Thinking
Special Feature:
1626
None
6.
1627
What stock that is expected to pay a $1.50 dividend in one year if the expected dividend
would growth rate is 3 percent and you have the option of investing in an alternative
you pay investment of the same risk class that will earn an interest rate of 10 percent?
for a
A)
1628
$50
B)
1629
$21.43
C)
1630
$15
D)
1631
$11.54
Answer:
1632
B
Diff: 3
1633
Type: MC
1634
Page Ref: 236-7/164-5

Topic:
1635

Skill:
1636
Analytical
Objective:
1637
AACSB Coding:
1638
Reflective Thinking
Special Feature:
1639
None
7.
1640
The price that investors are willing to pay for a financial asset
A)
1641
should be present value of the payments to be received from owning that asset.
equal to the
B)
1642
must equal its face value.

C)
1643
must be the present value of the payments to be received from owning that asset,
greater than otherwise the investor will not make a profit.
D)
1644
A and B
Answer:
1645
A
Diff: 2
1646
Type: MC
1647
Page Ref: 236-7/164-5

Topic:
1648

Skill:
1649
Analytical
Objective:
1650
AACSB Coding:
1651
Reflective Thinking
Special Feature:
1652
None
8.
1653
You are Jacoberg Corporation's stock. Your research reveals that currently, Jacoberg's
consideri earnings per share are estimated at $2. Suppose Jacoberg pays out that $2 in
ng dividends and that the $2 is expected to grow at a moderate rate of 5 percent per
buying year. The market interest rate, however, is 8 percent. Based on this information, how
the much should you pay for one share of Jacoberg's stock?
A)
1654
$25
B)
1655
$66.67
C)
1656
$40
D)
1657
You should stocks of a firm that is expected to grow at a rate below the market interest rate.
not buy the
Answer:
1658
B
Diff: 2
1659
Type: MC
1660
Page Ref: 236-7/164-5

Topic:
1661

Skill:
1662
Analytical
Objective:
1663
AACSB Coding:
1664
Reflective Thinking
Special Feature:
1665
None
9.
1666
Which of explains why it is more difficult to estimate stock prices than bond prices?
the a. Stock valuation is sensitive to estimates of the dividend growth rate.
followin b. Stocks have a firm maturity date.
g c. Information about a firm's future profitability is not known with certainty.
A)
1667
b and c only
B)
1668
a, b, and c
C)
1669
a and c only
D)
1670
a and b only
Answer:
1671
C
Diff: 3
1672
Type: MC
1673
Page Ref: 236/164

Topic:
1674

Skill:
1675
Analytical
Objective:
1676
AACSB Coding:
1677
Reflective Thinking
Special Feature:
1678
None
10.
1679
In 2000 y issued 10-year bonds with a face value of $1,000 and a coupon payment of $60. It is
the now 2008 and the bonds will mature in two years. You are now considering buying
Siemens one of the bonds. You require a return of 10 percent to invest your funds. What is
Compan the maximum price you will pay for this bond?
A)
1680
$939.23
B)
1681
$1,039.11
C)
1682
$1,098.52
D)
1683
$980.29
Answer:
1684
C
Diff: 2
1685
Type: MC
1686
Page Ref: 236-7/164-5

Topic:
1687
Calculating Bond Prices

Skill:
1688
Analytical
Objective:
1689
AACSB Coding:
1690
Reflective Thinking
Special Feature:
1691
None
11.
1692
Which of following statements is true about interest rates in the economy and bond prices in
the general?
A)
1693
Bond prices fall when interest rates in the economy rise.

B)
1694
Bond prices rise when interest rates in the economy rise.

C)
1695
Bond prices influenced by interest rates in the economy; they are only influenced by their
are not coupon rates
D)
1696
A or B could occur.
Answer:
1697
A
Diff: 2
1698
Type: MC
1699
Page Ref: 236-7/164-5

Topic:
1700
Calculating Bond Prices

Skill:
1701
Analytical
Objective:
1702
AACSB Coding:
1703
Reflective Thinking
Special Feature:
1704
None
12.
1705
Suppose the payment as either:

you win Choice A: $130,000 right away
the or
lottery Choice B: 5 payments of $30,000 each. The first of the 5 payments is to be received
and you right away and the four additional payments are to be received each year for the
are given next four years. Explain which prize you would choose and the basis for your
the decision. Assume the interest rate is 10%.
choice to
receive Bonus: How would a decrease in the interest rate affect your decision?
Answer:
1706
Unless one needed

cash immediately,
$30,000 + + + + =
the present value
$30,000 + 27,272.73 + $24,793.39 + $22,539.44 + $20,490.40 =
of both choices
$125,095.96
should be
calculated, and the
Since choice A is received immediately, its present value is $130,000. Clearly
choice with the
choice A has the highest present value, so it should be chosen.
highest present
If the interest rate decreased, this would raise the present value of
value should be
choice B. The interest rate is in the denominator of each term above; a
chosen.
decrease in the interest rate lowers the denominator, and rises each term in
the sum. Conceivably, the interest rate could fall to a low enough rate so that
The present value
choice B would have a higher present value than choice A.
of choice B is:
Diff: 3
1707
Type: SA
1708
Page Ref: 235-6/163-4

Topic:
1709

Skill:
1710
Analytical
Objective:
1711
AACSB Coding:
1712
Analytic Skills
Special Feature:
1713
Solv
ed
Probl
em:
How
to
Recei
ve
Your
Cont
est
Win
ning
s
1714

Macroeconomics 2nd Edition Hubbard Test Bank 1

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Macroeconomics 2nd Edition Hubbard Test Bank 1

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Macroeconomics 2nd Edition

Hubbard Test Bank

Test Bank: https://testbankpack.com/p/test-bank-for-macroeconomics-

Solution Manual: https://testbankpack.com/p/solution-manual-for-

Chapter 5 Firms, the Stock Market, and Corporate

5.1 Types of Firms

A business owned by a single individual and not organized as a corporation is called a

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

A firm owned jointly by two or more persons is called a

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Which type of firm structure is most common in the United States?

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

What does the term "limited liability" mean?

It is a legal provision that limits the borrowing activities of a firm.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Which of the following types of firms have unlimited liabilities?

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Which of the following types of firms are likely to be organized as partnerships?

public accounting firms

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Which of following is considered an advantage for choosing a partnership structure rather

ability to issue stock to the public

greater ability to raise funds

increased control for firm owners

Page Ref: 210-1/138-9

LO1: Categorize the major types of firms in the U.S.

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

possible double taxation of income

greater ability to raise funds

Page Ref: 210-1/138-9

LO1: Categorize the major types of firms in the U.S.

Corporate profits are taxed at twice the rate of non-corporate profits.

Page Ref: 211/139

LO1: Categorize the major types of firms in the U.S.

They formed a corporation and therefore were protected by limited liability.

Page Ref: 211/139

LO1: Categorize the major types of firms in the U.S.

government- owned businesses.

Page Ref: 212/140

LO1: Categorize the major types of firms in the U.S.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Sole proprietorships are harder to organize and run as compared to corporations.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Page Ref: 210/138

LO1: Categorize the major types of firms in the U.S.

Page Ref: 211/139

LO1: Categorize the major types of firms in the U.S.

Page Ref: 211/139

LO1: Categorize the major types of firms in the U.S.

5.2 The Structure of Corporations and the Principle-Agent Problem