Q&A Hero

Q: Most firms today use executive stock options, as opposed to other incentive methods, to induce management to act in the best interests of stockholders. a. True b. False

Q: ʺDemand curves slope down, so the demand curve faced by a perfectly competitive firm must also be downward sloping.ʺ Do you agree or disagree? Why?

Q: The riskiness inherent in a firm's earnings per share (EPS) depends on both the types of projects the firm takes on and the manner in which the projects are financed. a. True b. False

Q: Average variable cost equalsA) TC/Q. B) TVC/Q.C) TFC/Q. D) change in total cost/change in output.

Q: If management is maximizing the firm's net income, this is necessarily identical to maximizing earnings per share and stock price. a. True b. False

Q: Which legal claim comes with voting rights?A) Common stock B) Preferred stock C) Bond D) Reinvestment

Q: By maximizing the earnings of the firm we will ensure that the price per share of common stock is maximized, hence shareholders' wealth also will be maximized. a. True b. False

Q: If the explicit costs to a firm to produce a unit of output are $6 and the firm sells 200,000 units of output for $9 per unit, the accounting profit received by the producer isA) $1.2 million. B) $850,000. C) $1.8 million. D) $600,000.

Q: A financial decision which results in an increase in net income is necessarily consistent with the firm's objective of maximizing its stock price. a. True b. False

Q: Which of the following statements is FALSE, with respect to what economist Adam Smith called the diamond-water paradox?A) The total utility of water greatly exceeds the total utility derived from diamonds.B) Total utility does not determine what people are willing to pay for a unit of a particular commodity; marginal utility does.C) The demand for water is much smaller than the demand for diamonds.D) There are relatively few diamonds, so the marginal utility of the last diamond consumed is relatively high.

Q: One way to state the decision framework most useful for carrying out the firm's objective is that the financial managers should seek that combination of assets, liabilities, and capital which will generate the largest expected projected income over the relevant time horizon. a. True b. False

Q: The marginal utility derived from viewing the next movie DVD is theA) average utility per minute of viewing.B) additional utility from viewing the DVD. C) average utility per hour of viewing.D) additional utility from viewing the first minute of the DVD.

Q: If a firm has a single owner, we can say that the proper goal of a financial manager would be to maximize the firm's earnings per share. a. True b. False

Q: When very few substitutes for a good exist, demand will beA) elastic. B) unit-elastic.C) inelastic. D) perfectly elastic.

Q: The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm. a. True b. False

Q: Output/HourPrivate MCMarginal BenefitExternal Marginal Costs1$10$200.20210.4018.500.40310.90170.70411.5016.501.20512.2014.001.80613.0013.002.80714.4012.004.00Use the above table. If the level of production was determined by the market, it would beA) 4. B) 5. C) 6. D) 7.

Q: The major advantage of a regular partnership or a corporation as a form of business is the fact that both offer their owners limited liability, whereas proprietorships do not. a. True b. False

Q: A personʹs productive contribution in a capitalist society is measured by determining theA) market value of the individualʹs output.B) comparable output of other workers in similar jobs. C) total number of goods produced by the individual. D) index of occupational values.

Q: Four of the disadvantages of a partnership are (1) unlimited liability, (2) limited life of the organization, (3) difficulty of transferring ownership, and (4) difficulty in attracting large amounts of capital. a. True b. False

Q: Exploitation due to a single buyer in the input market is known asA) monopoly exploitation. B) monopsonistic exploitation. C) Marxian exploitation. D) the result of closed shops.

Q: No firm can take cost-increasing, socially responsible actions in a competitive marketplace and expect to continue to compete, even if those cost-increasing actions yield significant benefits to the firm. a. True b. False

Q: The cost-minimizing rule is that a firm should utilize inputs such that the marginal physical product of an input divided by the price of the input is the same for all inputs. This is also the profit-maximizing rule becauseA) we obtain the profit-maximizing rule by multiplying each ratio by the marginal revenue produced.B) we obtain the profit-maximizing rule by multiplying each ratio by the product price, which is the same for each input.C) the profit-maximizing rule is just the inverse of the cost-minimizing rule. D) they are exactly the same.

Q: The text makes the point that due to competitive pressures and the continuing need of firms to attract capital, most socially beneficial but cost increasing actions will have to be made mandatory by government. a. True b. False

Q: Which of the following will not cause the marginal revenue product of labor curve for a firm to shift?A) An increase in the productivity of workers. B) An increase in demand for the product.C) A decrease in the price of the product.D) An increase in the wage rate.

Q: A hostile takeover involves an attempt by one group of stockholders to solicit votes from other stockholders in order to put a new management team into place and is usually motivated by low stock price. a. True b. False

Q: Which of the following is an example of an agency concerned with social regulation?A) Federal Communications Commission B) Securities and Exchange CommissionC) Consumer Product Safety Commission D) Federal Energy Regulatory Commission

Q: The key value of limited liability is that it lowers the firm's risk thereby enhancing its value. a. True b. False

Q: Why do firms form a cartel? How do cartels achieve their goals?

Q: Two key limitations of the proprietorship form of business involve potential difficulty in raising needed capital and the presence of unlimited personal liability for business debts. a. True b. False

Q: Which of the following conditions best explain the short -run economies of operation associated with production of an information product?A) AVC slopes downward, and AFC is constant, so that ATC slopes downward. B) AVC is constant, and AFC slopes downward, so that ATC slopes downward. C) AFC is constant, and MC slopes downward, so that AVC slopes downward. D) MC is constant, and MC slopes upward, so that AVC slopes upward.

Q: Deciding upon the form of organization for a business is an important financial decision with potentially significant consequences for the future wealth of the owners. a. True b. False

Q: A market situation in which a large number of firms produce similar but not identical products isA) a monopoly. B) an oligopoly.C) monopolistic competition. D) perfect competition.

Q: Profit maximization does not always lead to wealth maximization because a. it does not consider the riskiness of the cash flows. b. it does not consider the timing of the cash flows. c. it does not consider the size of the cash flows. d. two of the above are correct. e. all of the above are correct

Q: The profit-maximizing monopolist will never operate in a price range over whichA) the demand curve slopes downward. B) demand is inelastic.C) P > MR. D) P > MC.

Q: Managers of a firm can increase the value of a firm by a. increasing the size of the cash inflows. b. reducing the riskiness of the cash flows. c. speeding up the timing of the cash flows. d. all of the above will increase the value of the firm.

Q: In a perfectly competitive market, if P > ATC in the short run, there is apt to be A) entry of new firms into the market. B) an accounting loss for existing firms. C) an inward shift in the industry supply curve. D) an upward pressure on price.

Q: Most executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior does all of the following except a. avoids fines and legal expenses. b. reduces corporate taxes c. attracts business from customers who appreciate and support ethical policies. d. attracts and keeps employees of the highest caliber.

Q: The perfectly competitive firmʹs demand curve hasA) a negative slope. B) a positive slope. C) an undefined slope. D) a slope of 0.

Q: All of the following are advantages of a corporation except a. unlimited life b. limited liability c. easy transfer of ownership d. All of the above are advantages

Q: Average total cost equalsA) TC/Q. B) TVC/Q.C) TFC/Q. D) change in total cost/change in output.

Q: Which of the following is not an advantage of a proprietorship? a. Inexpensive to form b. Not regulated heavily c. Unlimited liability d. Taxed like an individual

Q: A legal claim to a part of a corporationʹs future profits is calledA) a bond. B) a share of stock.C) a dividend. D) a financial debt.

Q: Which of the following are important in determining the value of the firm? a. Expected future cash flows. b. Timing of future cash flows. c. Riskiness of future cash flows. d. All of the above.

Q: Economic profits equalA) accounting profits.B) accounting profits less economic rents.C) total revenue less the opportunity costs of all factors of production. D) accounting profits plus the ownerʹs labor opportunity costs.

Q: Managers can increase the value of a firm by making decisions that a. increase the future cash flows of the firm. b. increase the amount of time required to generate future cash flows. c. increase the riskiness of future cash flows. d. decrease the liquidity of the firm's securities.

Q: Refer to the above figure. All of the following are true concerning the diamond -water paradox EXCEPTA) the demand for water exceeds the demand for diamonds.B) the price of diamonds exceeds the price of water.C) since the price of diamonds is high, demand is great.D) marginal utility of diamond consumption is relatively high.

Q: ____ decisions are decisions as to how much of current earnings to pay out as dividends rather than to retain for reinvestment in the firm. a. Capital structure b. Capital budgeting c. Dividend policy d. Investment

Q: When marginal utility is zero, total utility isA) increasing. B) at its maximum.C) at its minimum. D) decreasing.

Q: ____ decisions are decisions as to what types of assets should be purchased to help generate cash flows. a. Capital structure b. Capital budgeting c. Dividend policy d. Repurchase

Q: When many substitutes exist for a good, demand will beA) elastic. B) unit-elastic.C) inelastic. D) perfectly unit-elastic.

Q: ____ decisions are decisions about how much and what types of debt and equity should be used to finance the firm. a. Capital structure b. Capital budgeting c. Dividend policy d. Risk tolerance

Q: When an external cost exists that is NOT taken into account in the production of a product,A) the level of output is too low, and the supply curve should shift to the right to account for the externality.B) the level of output is optimal, and there should be no change in the supply curve.C) the price of the product is too high, and production should be expanded to lower the price. D) the level of output is too high, and the supply curve should shift to the left to account for the externality.

Q: The corporate charter of a firm includes all of the following information except a. the initial price of the stock to be issued. b. the types of activities it will pursue. c. the name of the proposed corporation. d. the amount of capital stock. e. the number of directors.

Q: ʺTo each according to what he or she producesʺ describes the theory of income determination.A) productivity B) egalitarian C) equity D) needs

Q: Which of the following is not a disadvantage of forming a business as a partnership? a. Unlimited liability for the owners. b. Limited life of the organization. c. Difficulty of transferring ownership. d. Difficulty in raising capital. e. Business is taxed like an individual.

Q: Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00From the information in the above table, calculate the marginal factor cost of the third worker.A) $24.00 B) $36.00 C) $18.00 D) $12.00

Q: Which of the following is not a limitation of the proprietorship form of business? a. Unlimited personal liability b. Difficulty raising capital c. Double taxation d. Difficulty in transferring ownership e. Limited life

Q: If a firm wants to maximize profits it shouldA) hire each factor of production up to the point at which the marginal physical product per last dollar spent is equalized.B) hire each factor of production up to the point at which the marginal revenue product per last dollar spent is equalized.C) hire each factor of production up to the point at which the marginal factor cost per last dollar spent is equalized.D) hire the same number of units of all inputs.

Q: In 2014, Craig and Kathy Koehler owned a small business which was held as a proprietorship in Kathy's name. They were thinking of incorporating if that would lower their total tax liability. The Koehlers expected the company to earn $100,000 before taxes next year. They planned to take out salaries of $45,000, and to reinvest the rest in the business. Their personal deductions total $8,150 and they will file a joint return for their personal income. (1) What is their expected total tax liability as a proprietorship? (2) As a corporation? (3) Based on current taxes, should they incorporate? a. $23,304.50; $14,675.00; Yes b. $14,675.00; $13,427.50; Yes c. $23,304.50; $13,427.50; Yes d. $15,212.50; $23,450.00; No e. $20,778.00; $23,450.00; No

Q: The demand curve for labor will shift wheneverA) the wage rate changes. B) the marginal factor cost changes. C) demand for the final product changes. D) the supply of labor changes.

Q: Your corporation has the following cash flows: Operating income $250,000 Interest received 10,000 Interest paid 45,000 Dividends received 20,000 Dividends paid 50,000 If 70 percent of dividends received are excludable, and if the applicable tax table is as follows, Taxable Income Rate $0 −$50,000 15% 50,000 − 75,000 25 75,000 −100,000 34 100,000 −335,000 39 over $335,000 34 What is the corporation's tax liability? a. $57,530 b. $65,350 c. $69,440 d. $88,350 e. $100,280

Q: Regulation focused on the impact of production on the environment and society, the working conditions under which production occurs, or the physical attributes of goods, is known asA) cost-of-service regulation. B) rate-of-return regulation. C) social regulation. D) monopoly regulation.

Q: A 9 percent coupon bond issued by the State of Pennsylvania sells for $1,000 and thus provides a 9 percent yield to maturity. What yield on a Synthetic Chemical Company bond would cause the two bonds to provide the same after-tax rate of return to an investor in the 28 percent tax bracket? a. 12.50% b. 17.50% c. 7.00% d. 14.00% e. 9.00%

Q: What is a cartel? Can cartels generate long -term profits without the existence of barriers to entry?

Q: Solarcell Corporation has $20,000 which it plans to invest in marketable securities. It is choosing between AT&T bonds which yield 11%, State of Florida municipal bonds which yield 8%, and AT&T preferred stock with a dividend yield of 9%. Solarcell's corporate tax rate is 40%, and 70% of the preferred stock dividends it receives are tax exempt. Assuming that the investments are equally risky and that Solarcell chooses strictly on the basis of after-tax returns, which security should be selected? Answer by giving the after-tax rate of return on the highest yielding security. a. 8.46% b. 8.00% c. 7.92% d. 9.00% e. 9.16%

Q: The ATC curve for a firm that produces an information productA) slopes downward, because AVC is constant, AFC slopes downward, and ATC = AVC + AFC.B) slopes upward, because AFC is constant, AVC slopes upward, and ATC = AFC + AVC.C) is U-shaped, because AVC is U -shaped, AFC slopes downward, and ATC = AVC + AFC.D) slopes downward, because MC slopes downward, AVC is constant, and ATC = AVC + MC.

Q: Your corporation has the following cash flows: Operating income $250,000 Interest received 10,000 Interest paid 45,000 Dividends received 20,000 Dividends paid 50,000 If the applicable income tax rate is 40 percent, and if 70 percent of dividends received are exempt from taxes, what is the corporation's tax liability? a. $74,000 b. $88,400 c. $91,600 d. $100,000 e. $106,500

Q: A market situation in which a large number of firms produce similar but not identical products isA) a collusive market structure. B) competitive monopoly.C) a homogeneous market. D) monopolistic competition.

Q: A corporation with a marginal tax rate of 34 percent would receive what after-tax dividend yield on a 12 percent coupon rate preferred stock bought at par, assuming a 70 percent dividend exclusion? a. 11.03% b. 10.78% c. 6.48% d. 7.31% e. 5.52%

Q: The price elasticity of demand for a good produced by a monopolistA) equals zero as long as the good has no close substitutes.B) is always inelastic since the demand curve slopes down.C) does not equal zero because there will always be some substitutes, however imperfect they may be.D) does not equal zero because every good has at least one good substitute for it.

Q: As a corporate investor paying a marginal tax rate of 34 percent, if 70 percent of dividends are excludable, what would be your after-tax dividend yield on preferred stock with a 16 percent before-tax dividend yield? a. 6.36% b. 7.36% c. 12.19% d. 13.01% e. 14.37%

Q: In a perfectly competitive market, positive economic profits act to A) attract new entrants into the industry. B) drive potential competitors away from the industry. C) prevent reinvestment on the part of firms within the industry. D) signal resource owners elsewhere not to invest their capital in this industry.

Q: Weston Corporation has some money to invest, and its treasurer is choosing between General Motors bonds and State of Illinois bonds. Both have the same maturity, and they are equally risky and liquid. If the Illinois bonds, which are tax-exempt, yield 6 percent, and Weston's marginal income tax rate is 40 percent, what yield on GM bonds would make Weston's treasurer indifferent between the two? a. 6.0% b. 7.5% c. 10.0% d. 12.5% e. 15.0%

Q: A perfectly competitive firm faces a horizontal demand curve because it isA) a price taker. B) a price maker.C) a large firm in a small industry. D) one of few firms in the market.

Q: Carter Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Carter's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Carter's treasurer indifferent between the two? a. 2.40% b. 3.60% c. 4.50% d. 5.25% e. 6.00%

Q: Average variable costs equalA) total variable costs divided by marginal costs.B) total variable costs divided by output.C) the change in marginal costs from producing another unit of output.D) output divided by the change in total costs.

Q: Which of the following statements is correct? a. Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations. b. Most businesses (by number and total dollar sales) are organized as proprietorships or partnerships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, primarily because corporations have important tax advantages over proprietorships and partnerships. c. For a large company (taxable income over $1 million), the tax situation would, generally, favor organization as a partnership or proprietorship, or possibly as an S corporation, rather than as a regular corporation. However, legal considerations related to ownership transfers and liability offset the tax situation, with the result that most business (measured by dollar sales) is conducted by corporations. d. In the typical situation, a taxpayer's average tax rate is below his or her marginal rate. However, there is an income range within which the average rate exceeds the marginal rate. e. Statements c and d are both correct.

Q: Which of the following modern methods of financing a corporation was not available to corporations four hundred years ago?A) Selling stock. B) Selling bonds. C) Reinvestment.D) All of these methods were used then as well as now.

Q: Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the same funds in the preferred stock of FPL, which should provide Allen with a before-tax return of 9%, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested? a. All in the plant project. b. All in FPL preferred stock. c. 60% in the project; 40% in FPL. d. 60% in FPL; 40% in the project. e. 50% in each.

Q: If, as an entrepreneur, I am earning accounting profits of $60,000 per year and the opportunity cost of my time is $50,000,A) I am earning economic profits of $10,000. B) I am earning economic profits of $60,000. C) I am earning economic losses of $10,000. D) I should close my business.