Ch 8 Quiz
If the interest rate is 10 percent, what is the present value of a bond that matures in two years, pays $85 one year from now, and pays $1,085 two years from now? The present value of the bond is $__
$973.96
Suppose you have inherited $100,000 from your aunt. However, you will not receive this until your aunt's estate is settled, which will take one year. If the interest rate is 2 percent, then what is the present value of your inheritance? The present value (PV) of your inheritance to be received in one year is $ ____
$98039.22 The present value (PV) of your inheritance to be received in one year is 100,000/(1+.02) = 98039.22
Suppose Madison has used $37,500 of her money to start a window-washing company. Assume that her money otherwise could have been invested elsewhere and earned as much as a 12 percent annual rate of return. The window-washing company's revenue as well as its various costs of production is depicted in its income statement below: 1. What is the accounting profit of Madison's window-washing company? $____ 2. What is Madison's economic profit? $____
1. $110,70 [15,000-3,500-180-250] 2. $6,570 [37,500 x 0.12]= 4,500 110,70-4,500= $6570
Suppose Ford Motor Company issues bonds with a face value of $500 and an annual coupon payment of $15. What is the interest rate Ford is paying on the borrowed funds? The interest rate is ____ percent.
3% [coupon payment/ face value] = 15/500 = .03 = 3%
Suppose Ford Motor Company issues bonds with a face value of $10,000 and an annual coupon payment of $600. What is the interest rate Ford is paying on the borrowed funds? The interest rate is _____ percent
6% 600/10,000 = .06
All of the following statements are true, except A. economic profits are less than accounting profits. B. a firm earns an economic profit when its revenues are greater than all of its implicit and explicit costs. C. a firm maximizes profit when total cost equals total revenue. D. a firm earns an accounting profit when its revenues are greater than its taxes and operating expenses.
C. a firm maximizes profit when total cost equals total revenue. (Economic profit = Revenue−Explicit costs−Implicit costs.Accounting profit = Revenue−Operating expenses−Taxes.Economic profit deducts implicit costs whereas accounting profit doesn't. Thus, economic costs are higher than accounting costs and economic profit is lower than accounting profit.)
Tronc is a publishing firm that owns several newspapers, including the Los Angeles Times and the Chicago Tribune. In early 2017, one of Tronc's largest investors sent the corporation a letter stating that he was "troubled by the company's corporate governance, or lack thereof." In particular, he was unhappy with a limit of 25 percent on how many of the corporation's shares he could own and with an attempt to remove him from the board of directors. 1. What is corporate governance? In whose interest should corporations be governed?
Corporate governance is the way in which a firm is structured to represent shareholder interests.
2. Is limiting the percentage of a firm's stock that one person can hold an example of good corporate governance or bad corporate governance? Briefly explain. A. Good, since this person would have an incentive to encourage managers to pursue profit-maximizing profits that benefit all shareholders. B. Bad, if this person encourages managers to pursue policies that are riskier than other shareholders believe is prudent. C. Bad, if it reduces the role of board members to more of an advisory role who serve at the pleasure of this one individual. D. All of the above are correct.
D. All of the above are correct.
Absent government regulations to guard against fraud, why might top managers deceive investors about the true financial condition of their firms? Top managers might want to deceive investors about the true financial condition of their firms _____ A. to inflate profits to keep the firm's stock price high. B. to hide liabilities that should be listed on balance sheets to increase the funds the firm can generate when it sells stock. C. to reduce the cost of expensive external audits. D. Both a and b. E. All of the above.
D. Both a and b.
Which of the following is true of the management structure of corporations in the United States? A. Members of the board of directors who are outside directors do not have a direct management role in the firm. B. Large corporations are legally owned by shareholders who do usually not directly manage the firm. C. Large corporations are legally owned by a board of directors that directly manages the firm. D. The chief executive officer runs the day-to-day operations of the corporation but does not sit on the board of directors. E. Both a and b.
E. Both a and b.
In 2002, the federal government passed the Sarbanes-Oxley Act A. requiring that analysts disclose whether conflicts of interest exist limiting independent financial evaluations. B. creating the Public Company Accounting Oversight Board to oversee the auditing of financial reports. C. requiring that corporate directors have a certain level of expertise with financial information. D. promoting management accountability by specifying the responsibilities of corporate officers. E. all of the above.
E. all of the above.
Owners of small businesses typically obtain funds for expansion
With retained earnings, by taking onpartners, or by borrowing funds from relatives or a bank.
The key difference between a balance sheet and an income statement is
an income statement shows the activities of a firm over a period of time, while a balance sheet shows a firm's position at a particular moment in time.
Economic profit is equal to a firm's revenues minus its costs, ___________. Accounting profit is __________ economic profit.
both explicit and Implicit, accounting profit Is larger than b/c it is only [revenue- explicit]
A firm's
explicit cost is its monetary cost whereas its implicit cost is its nonmonetary opportunity cost.
Limited liability becomes more important for firms trying to raise funds from a large number of investors, rather than from a small number of investors, because
investors that make a small investment in a firm may be unwilling to risk all their personal assets if the firm fails.
The left side of the balance sheet shows ________, while the right side shows _______.
left side = assets, right side = liabilities and stockholders' equity.
A large corporation suffers from the principal-agent problem when its:
management does not own a large share of firm stock and pursues its own interests rather than those of shareholders.
Suppose that shortly after graduating from college you decide to start your own business. Assuming you are starting a small business and realize that you need someone with particular expertise or business skills, which category of firm are you most likely to start?
partnership
Limited liability means that
shareholders in a corporation cannot lose more than their investment in the firm.
Of the three types of firms in the United States, the
sole proprietorship has the disadvantage of limited ability to raise funds.
In 2010, Congress attempted to overhaul regulation of the U.S. financial system with the passage of
the Dodd-Frank Act.
The government grants limited liability to the owners of corporations
to limit shareholder risk and thus encourage investment in corporations.
In the United States, ________ account for the majority of revenue earned and ________ account for the majority of business organizations.
corporations; sole proprietorships
