Micro Chapter 8
Although only _____ percent of all firms are corporations, corporations account for _____ of revenue and profits earned by all firms
20; the majority
Which of the following statements is correct?
Accounting profit is larger than economic profit.
Economic profit is equal to a firm's revenues minus its costs,______. Accounting profit is _______ economic profit
Both explicit and implicit; larger than
Which of the following statements is true about firms in the United States?
In the United States, corporations account for the majority of profits earned by all firms
What does the term "insiders" refer to in the realm of corporate management?
Insiders are members of top management who also serve on a firm's board of directors
Which of the following is one of the advantages of a sole proprietorship as a business organization?
Profits are taxed only once
The landmark legislation that helps guard against inflated profits and hidden liabilities on balance sheets to protect against financial scandals is the
Sarbanes-Oxley act of 2002
Your friend asks you to join him in the new smartphone app business he is setting up as a partnership. If you invest $10,000 in the business, what is the limit to your liability?
There is no limit to your liability.
One of the causes of the 2007-2009 financial crisis was a dramatic decrease in the value of mortgagebacked securities when housing prices began to fall. What does it mean to securitize a mortgage?
To securitize a mortgage is to bundle mortgages together and sell them to investors.
Accounting profit is equal to which of the following?
Total revenue - explicit costs; Economic profit + implicit costs
Which of the following types of firms have limited liability?
a corporation
Which set of incentives does the top management of a corporation have?
an incentive to attract investors and to keep the firm's stock price high
In the United States, the Securities and Exchange Commission requires publicly owned firms to report their performance in financial statements using standard methods. What are these methods called?
generally accepted accounting principles
The owners of corporations have
limited liability
What are markets called in which an issuer sells new claims to buyers?
primary markets
Which type of firms accounts for the majority of business organizations in the United States in 2012?
sole proprietorships
In 2010, Congress attempted to overhaul regulation of the U.S. financial system with the passage of
the Dodd-Frank Act.
Which of the following is the most important of the over-the-counter markets?
the NASDAQ
Your friend asks you to join him in the new smartphone app business he is setting up as a corporation. If you invest $10,000 in the business, what is the limit to your liability?
$10,000
If Facebook sells a bond with a face value of $10,000 and agrees to pay $300 of interest per year to bond purchasers, what is the interest rate paid on the bond?
3%
What is corporate governance?
Corporate governance is the way in which corporations are structured and the impact a corporation's structure has on the firm's behavior.
In the United States, how are corporate profits taxed?
Corporate profits are taxed both at the corporate level and at the time when investors of the corporations receive a share of the profits.
A sole proprietorship is
a firm owned by a single individual and not organized as a corporation
What is the name given to the interest payments on a bond?
coupon payments
Which of the following refers to a flow of funds from savers to firms through financial markets?
direct finance
In which of the following industries do investors require a higher rate of return?
in more risky industries
A flow of funds from savers to borrowers through financial intermediaries such as banks is ____ finance, while a flow of funds from savers to firms through financial markets, such as the New York Stock Exchange is ____ finance
indirect; direct
Changes in the value of a firm;s stocks and bonds offer important information for a firm's managers. If the price is increasing investors are___ and are providing information that indicates the firm;s managers might want to _____ the business.
more optimistic, expand
An income statement starts with the firm's revenue and subtracts its operating expenses and taxes paid. What is the remainder called?
net income
Subtracting the value of a firm's liabilities from the value of its assets leaves its
net worth
What do you obtain by subtracting the value of a firm's liabilities from the value of its assets?
net worth
An increase in a firm's stock price most likely reflects which of the following?
optimism about the firm's profit prospects
Which of the following sums up a firm's revenues, costs, and profit over a period of time?
the income statement
If Facebook sells a bond with a face value of $5,000 and an interest rate of 1 percent, what is the coupon payment on the bond?
$50
An income statement shows a firm's
Cost, profits, revenues
A(n) _____ is a financial security that represents partial ownership of a firm, while a _____ is a financial security that represents a promise to repay a fixed amount of funds.
Stock, bond
When Mark Zuckerberg, the owner and founder of Facebook, opened up ownership of his company to the public, the initial public offering of stock in Facebook would take place in what type of market?
a primary market
If investors become more optimistic about a firm's profit prospects, and the firm's managers want to expand the firm's operations as a result, what will happen to the price of the company's stock?
It will rise.
When a corporation fails, which of the following is true?
The owners can never lose more than the amount they have invested in the firm.
Which of the following is true about liability for a corporation?
The owners of a corporation have limited liability
What term do economists use to refer to the conflict between the interests of shareholders and the interests of top management?
a principal-agent problem
Investors resell existing stocks to each other in what type of market?
a secondary market
What is a balance sheet?
a summary of a firm's financial position on a particular day
How can a firm obtain funds for an expansion of its operation?
a. by reinvesting profits b. by recruiting additional owners to invest in the firm c. by borrowing funds from relatives, friends, or a bank
The landmark Sarbanes-Oxley Act of 2002 mandated that
a. chief executive officers personally certify the accuracy of financial statements. b. financial analysts and auditors shall disclose whether any conflicts of interest might exist that could limit their independence in evaluating a firm's financial condition. c. managers shall be held accountable and face stiff penalties (including long jail sentences) for not meeting their responsibilities.
Which of the following is considered an explicit cost?
a. the cost of labor b. the cost of materials c. the cost of electricity
To answer the three basic questions: what to produce, how to produce it, and what price to charge, what does a firm's management need to know?
a. the firm's revenues and costs b. the value of the property and other assets the firm owns c. the firm's debts, or other liabilities, that it owes to another person or business
The principal-agent problem occurs when
an agent pursues his own interests rather than the interests of the principal who hired him
In which of the following cases is there a legal distinction between the personal assets of the owners of the firm and the assets of the firm?
corporations
Which type of firms account for the majority of revenue earned in the United States in 2012?
corporations
Which of the following is true? Top managers who are determined to cheat and hide the true financial condition of their firms can
deceive investors and sometimes also deceive outside auditors
What are the payments by a corporation to its shareholders?
dividends
What term do economists use to refer to the minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested?
the normal rate of return
