Microeconomics 1B: Chapter 8 - Firms, the Stock Market, and Corporate Governance

*see chapter 8 lecture page in notebook for chart*

*see chapter 8 lecture page in notebook for chart*

Corporate governance involves the way in which -a corporation is structured. -a corporation is subject to government regulations. -the government nationalizes corporations. -the government licenses corporations.

-a corporation is structured.

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

-operates and controls a corporation in its day-to-day activities.

Which is the least common type of business? -corporation -impossible to determine without further information -sole proprietorship -partnership

-partnership

By tying the salaries of top corporate managers to the price of the corporation's stock, corporations hope to avoid -paying high salaries to their managers. -conflict between the CFO and the CEO. -corporate governance. -the principal-agent problem.

-the principal-agent problem.

bonds

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

Which of the following would explain why accounting profit might be greater than economic profit? A firm's net income is greater than its accounting profit. A firm has implicit costs as well as explicit costs. A firm's net income is less than its accounting profit. A firm has only explicit costs.

A firm has implicit costs as well as explicit costs.

indirect finance

A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).

Which of the following is an advantage of starting a new business as a proprietorship? -Business profits are not taxed at all. -A proprietorship can easily attain additional funding. -The owner has limited personal liability. -A proprietorship has few government rules and regulations to comply with.

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

How can a proprietorship or partnership raise funds for expansion? -take on a partner or more partners -borrow from someone or an institution willing to lend the funds -reinvest profit back into the business -Any of these would generate funds for expansion.

Any of these would generate funds for expansion.

What takes place in the indirect finance market? -Deposits of savers are accepted and loans made to borrowers. -Government purchases of buildings and equipment are sold to the highest bidder. -Part ownership of corporations is sold in the form of stocks. -Corporate and government bonds are sold to savers.

Deposits of savers are accepted and loans made to borrowers.

In many corporations, there is "separation of ownership from control." What does this mean? -Top corporate managers only make decisions that have been approved unanimously by shareholders. -The shareholders control the corporation, although the board of directors owns the corporation. -The board of directors controls corporate operations, although the managers of the corporation own the corporation. -The managers of the corporation run the corporation, although the shareholders own the corporation.

The managers of the corporation run the corporation, although the shareholders own the corporation.

An explicit cost is

a cost that involves spending money.

economic profit

a firm's revenues minus all of its implicit and explicit costs

direct finance

a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange. a borrower sells financial securities (bonds, stocks etc.) to the lender

An implicit cost is

a nonmonetary opportunity cost.

principle-agent problem

a problem caused by an agent pursuing his own interests rather than the interests of the principal who hired them (agent = management)

coupon payment

an interest payment on a bond

If a corporation goes bankrupt, which of the following has first claim on the firm's assets? -the state where chartered -stockholders -employees -bondholders

bondholders

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

corporations

Assume you set up a sole proprietorship and your lawyer tells you that as the owner, you could stand to lose your personal wealth if the business goes bankrupt. This means a sole proprietorship -faces unlimited liability. -faces limited liability. -is not a good type of business to set up. -has little chance of succeeding.

faces unlimited liability

If Southwest Airlines borrows $20 million from a bank to finance the renovation of their corporate offices, this is an example of -indirect finance. -a bond market transaction. -a stock market transaction. -direct finance.

indirect finance

Included on the board of directors of Microsoft are Dina Dublon, former chief financial officer of JP Morgan Chase , the president of Harvey Mudd college Maria M. Klawe, and the vice chairman of Bank of America Charles H. Noski. These three board members do not have a direct management role with Microsoft and are therefore referred to as -competitive directors. -inside directors. -honorary directors. -outside directors.

outside directors.

interest rate

the cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

A corporation is the type of business that has ________ government rules and regulations affecting it. -the fewest -the most -only federal no-

the most

When an investor buys a corporate bond -the investor becomes part owner of the corporation. -the face value of the bond is always equal to what the investor paid for the bond. -the principal of the bond is a loan to the corporation. -the interest made on the bond represents the bondholder's limited liability in the company.

the principal of the bond is a loan to the corporation.

Which of the following is an example of an implicit cost a firm might incur? -the out-of-pocket expense to hire resources -the revenue a firm generates in using its resources -taxes owed to the state and Federal governments -the rental value of the office space the company owns and uses for itself

the rental value of the office space the company owns and uses for itself

If a corporation earns a profit, how do owners of the firm share in the profit? -by raising the interest rate on bonds -through dividend payments on shares of that firm's stock -by selling any bonds or stocks owned and realizing a capital gain -through coupon payments on that firm's bonds

through dividend payments on shares of that firm's stock