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Q:
Jane Doe, who has substantial personal wealth and income, is considering the possibility of opening a new business in the chemical waste management field. She will be the sole owner. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane expects to realize substantial cash flows from dividends the firm will eventually pay out. Which of the legal forms of business organization would probably best suit her needs?
a. Proprietorship, because of ease of entry.
b. Regular corporation, because of the limited liability.
c. Partnership, if she needs additional capital.
d. S corporation, to enjoy tax advantages and gain limited liability.
e. In this situation, the various forms of organization seem equally desirable.
Q:
The reason that diamonds cost more than water isA) the marginal utility of each diamond a consumer purchases is quite high due to the small amount of diamonds that most consumers purchase.B) most consumers consume little water.C) diamonds are more beautiful than water.D) water is a necessity.
Q:
Which of the following statements is correct?
a. The proper goal of the financial manager should be to maximize the firm's expected cash flow, because this will add the most wealth to each of the individual shareholders (owners) of the firm.
b. One way to state the decision framework most useful for carrying out the firm's objective is as follows: "The financial manager should seek that combination of assets, liabilities, and capital which will generate the largest expected projected after-tax income over the relevant time horizon."
c. The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, which means it depends upon the firm's assets, but EPS does not depend on the manner in which those assets are financed.
d. Because large, publicly-owned firms are controlled by their management teams, and typically, ownership is widely dispersed, managers have great freedom in managing the firm. Managers may operate in the stockholders' best interest, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply aren't any effective controls over managerial decisions in such situations.
e. Agency problems exist between stockholders and managers, and between stockholders and creditors.
Q:
When marginal utility is positive, total utility isA) increasing. B) zero.C) at its minimum. D) decreasing.
Q:
Which of the following statements is correct?
a. The optimal dividend policy is the one that satisfies the shareholders because they supply the firm's capital.
b. The use of debt financing has no effect on earnings per share (EPS) or stock price.
c. The riskiness of projected EPS depends upon how the firm is financed.
d. Stock price is dependent on the projected EPS and the use of debt but not on the timing of the earnings stream.
e. Dividend policy is one aspect of the firm's financial policy that is determined directly by the shareholders.
Q:
Which of the following is NOT a determinant of the price elasticity of demand?
A) Existence of substitutes
B) Expenditures on the good as a share of a consumerʹs budget
C) The amount of time allowed for adjustment to changes in the price of the commodity
D) The price level in a country
Q:
Which of the following statements is correct?
a. A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do.
b. An advantage of the corporate form for many businesses is the fact that the corporate tax rate always exceeds the personal tax rate, which is the rate at which proprietorships and partnerships are taxed.
c. There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce more goods and services than do other forms of business.
d. Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large businesses choose to incorporate.
e. Because lawyers have the incorporation process so automated (e.g., word processors for drawing up the necessary papers), it is less expensive to form a corporation than to form a proprietorship or partnership.
Q:
Which of the following might be a way that an automobile driverʹs pollution costs could be internalized?A) The driver could purchase abatement equipment for her car. B) The state could eliminate the gas tax.C) The state could pay a gas subsidy for everyone who drives.D) The state could allow her to drive in the HOV lane.
Q:
Which of the following statements is correct?
a. Other things held constant, it generally is safer to invest money in a proprietorship than in a partnership or a corporation.
b. According to the text, law firms and accounting firms must be organized as proprietorships or partnerships; these businesses do not have the option of incorporating.
c. If you are planning to start a business, which you will run as the sole employee, and if you expect the business to earn $1,000,000 per year before taxes, you can minimize federal income taxes by setting up the business as a corporation.
d. According to the text, "agency problems" tend to increase as the percentage of a corporation's stock owned by its managers increases.
e. Maximizing the income statement item "net income" is not the best goal for a corporation whose managers are interested in maximizing the economic welfare of the firm's stockholders.
Q:
Which of the following is NOT correct regarding the theories of income distribution?
A) Dealing with how income ought to be distributed is a normative issue.
B) The productivity standard for the distribution of income is stated ʺto each according to what they produce.ʺ
C) The egalitarian principle of income distribution is ʺto each exactly the same.ʺ
D) Dealing with how income should be distributed is a positive economic issue.
Q:
Which of the following statements is correct?
a. In a partnership, liability for other partners' misdeeds includes but is limited to the amount a particular partner has invested in the business.
b. Partnerships must be formed according to specific rules which include the filing of a formal written agreement with state authorities where the partnership does business.
c. A fast growth company would be more likely to set up a partnership for its business organization than would a slow-growth company.
d. Partnerships have difficulties attracting capital in part because of the other disadvantages of the partnership form of business, including impermanence of the organization.
e. A major disadvantage of a partnership as a form of business organization is the high cost and practical difficulties of its formation.
Q:
Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00According to the above table, if the marginal revenue product is $24, how many workers will the profit maximizing monopsonist hire?A) 4 B) 5 C) 6D) 7
Q:
Which of the following statements is correct?
a. A hostile takeover is a primary method of transferring ownership interest in a corporation.
b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation.
c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.
d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.
e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way.
Q:
A firm that maximizes profits alsoA) is inefficient.B) cuts corners in production processes so that its products are made too cheaply.C) uses the least-cost combination of resources. D) pays input prices lower than other firms do.
Q:
Which of the following statements is correct?
a. The corporate bylaws are the set of rules drawn up by the state to enable managers to run the firm in accordance with state laws.
b. Procedures for electing corporate directors are contained in bylaws while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.
c. Procedures which govern changes in the bylaws of the corporation are contained in the corporate charter.
d. Although most companies design a charter, only the bylaws are legally required to be filed with the secretary of state in order for a corporation to be in official existence.
Q:
The demand for labor isA) derived from the demand for the final product of the firm.B) derived from the satisfaction that hiring labor provides the owner of the firm.C) derived from the satisfaction workers get for being employed.D) derived from a utility-maximizing process similar to that used to derive the demand curve for all workers in a given industry.
Q:
Which of the following statements is correct?
a. The ability of firms to engage in socially beneficial projects that involve voluntary costs is constrained by competition and the need of firms to attract capital at low cost.
b. The actions that maximize a firm's stock price are inconsistent with maximizing social welfare.
c. The concepts of social responsibility and ethical responsibility on the part of corporations are completely different and neither is relevant in maximizing stock price.
d. In a competitive market, if a group of firms do not spend resources making social welfare improvements, but another group does, in general, this will not affect the second group's ability to attract capital.
e. If government did not mandate socially responsible corporate actions, such as those relating to product safety and fair hiring practices, most firms in competitive markets would still pursue such policies voluntarily.
Q:
The benefits of social regulation are
A) easy to measure by the marginal value method.
B) often difficult to measure.
C) obvious to almost everyone, but the costs are usually hidden.
D) greater than the costs of social regulation in every example in the country today.
Q:
Which of the following actions is consistent with social responsibility but is necessarily inconsistent with stockholder wealth maximization?
a. Investing in a smokestack "scrubber" to reduce the firm's air pollution as mandated by law.
b. Voluntarily installing expensive machinery to treat effluent discharge which currently is being dumped into a river where it is ruining the drinking water of the community where the plant is located.
c. Investing in a smokestack filter to reduce sulphur-dioxide emissions in order to reduce the current tax being levied on the firm by the state for its pollution.
d. Making a large corporate donation to the local community in order to fund a recreation complex that will be used by the community and the firm's employees.
e. Each of the above actions is consistent with social responsibility and none is necessarily inconsistent with stockholder wealth maximization.
Q:
An association of producers such as OPEC that agrees to set common pricing or output goals is referred to as aA) cartel. B) conglomerate. C) monopoly. D) partnership.
Q:
Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity?
a. Attracting and sustaining new customers.
b. Hiring and keeping skilled employees.
c. Keeping up with competition.
d. Dealing with firms who use "questionable" ethics.
e. None of the above.
Q:
The production of information products is characterized byA) relatively low fixed cost. B) relatively low marginal cost.C) diseconomies of operation. D) an upward sloping marginal cost curve.
Q:
Which of the following statements is correct?
a. Given the multi-owner nature of most large corporations, agency costs associated with perquisite consumption are not really a problem.
b. Managers may operate in the stockholders' best interests, but they may also operate in their own personal best interests. As long as managers stay within the law, there simply are not any effective controls that stockholders can implement to control managerial decision making.
c. Shareholder agency costs include the opportunity costs associated with constraining managerial freedom but do not include managerial salaries.
d. An agency relationship exists when one or more persons hire another person to perform some service but withhold decision-making authority from that person.
e. All of the above statements are false.
Q:
In which industry structure is advertising and sales promotion likely to be most important?
A) Perfect competition
B) Monopoly
C) Monopolistic competition
D) All of the above are equally reliant on effective advertising and promotion
Q:
Multinational managerial finance requires that
a. The effects of changing currency values be included in financial analyses.
b. Legal and economic differences be considered in financial decisions.
c. Political risk be excluded from multinational corporate financial analyses.
d. All of the above.
e. Only a and b above.
Q:
The demand curve facing a monopolist will be more elasticA) the greater is the number of substitute products.B) as the consumersʹ need for the good increases. C) the greater is the amount of fixed costs to cover.D) as the number of consumers increases.
Q:
Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.
Q:
If an industry has constant marginal and average costs, any shift in demand will eventually
A) result in a higher equilibrium price.
B) be met by a smaller change in quantity supplied.
C) be met by an equal change in quantity supplied, and equilibrium price will not change.
D) make economic profits zero in the short run.
Q:
A loss incurred by a corporation
a. Must be carried forward unless the company has had 2 loss years in a row.
b. Can be carried back 2 years, then carried forward up to 20 years following the loss.
c. Can be carried back 5 years and forward 3 years.
d. Cannot be used to reduce taxes in other years except with special permission from the IRS.
e. Can be carried back 3 years or forward 15 years, whichever is more advantageous to the firm.
Q:
If a firm in a perfectly competitive market raises its price,A) it will sell more products. B) it will sell fewer products. C) its sales will remain unchanged. D) it will sell nothing.
Q:
Which of the following statements is correct?
a. For the most part, our federal tax rates are progressive, because higher incomes are taxed at higher average rates.
b. Bonds issued by a municipality such as the city of Miami would carry a lower interest rate than bonds with the same risk and maturity issued by a private corporation such as Florida Power & Light.
c. Our federal tax laws tend to encourage corporations to finance with debt rather than with equity securities.
d. Our federal tax laws encourage the managers of corporations with surplus cash to invest it in stocks rather than in bonds. However, other factors may offset tax considerations.
e. All of the above statements are true.
Q:
The total cost of the firmA) includes explicit costs but excludes implicit costs.B) includes implicit costs but excludes explicit costs. C) includes implicit and explicit costs.D) includes implicit and explicit costs but excludes a normal rate of return on investment.
Q:
Current tax laws have which of the following effects?
a. Favor dividends because there are no capital gains taxes on dividends.
b. Do not favor capital gains because the tax must be paid as the value of the stock increases, whether or not the stock is sold.
c. Favor capital gains because the tax does not have to be paid until the stock is sold.
d. Do not favor dividends or capital gains for most people because different people are in different tax brackets.
e. Favor dividends since dividends are tax-deductible for the paying corporation whereas retained earnings, which produce capital gains, are not tax-deductible.
Q:
Bond coupon payments representA) dividends paid to owners. B) interest on the amount borrowed.C) capital gains for tax purposes. D) payments to preferred shareholders.
Q:
Which of the following statements is correct?
a. The major disadvantage of organizing as a corporation is that it does not provide its owners with limited liability.
b. Bond covenants, or restrictions on debt, are an important device to reduce agency conflicts between stockholders and bondholders.
c. The threat of a hostile takeover serves to reduce agency conflicts between stockholders and bondholders.
d. Compensation packages are designed, in part, to reduce agency conflicts between shareholders and managers.
e. Both answers b and d are correct.
Q:
If, as an entrepreneur, I am earning accounting profits of $50,000 per year and the opportunity cost of my time is $60,000,A) I am earning economic profits of $10,000. B) I am earning economic profits of $50,000. C) I should close my business.D) I am in a long-run equilibrium position.
Q:
Which of the following statements is correct?
a. A good goal for a corporate manager is maximization of expected EPS.
b. Most business in the U.S. is conducted by corporations; corporations' popularity results primarily from their favorable tax treatment.
c. A good example of an agency relationship is the one between stockholders and managers.
d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not.
e. Firms in highly competitive industries find it easier to exercise "social responsibility" than do firms in oligopolistic industries.
Q:
The diamond-water paradox was solved by knowing thatA) the total utility of water is greater than the total utility of diamonds.B) the marginal utility of water is greater than the marginal utility of diamonds.C) the price of water and diamonds is determined by total utility received, not marginal utility.D) the price of water and diamonds is determined by marginal utility, not total utility.
Q:
Taking poison pills and offering greenmail are
a. Ways stockholders protect themselves and their interest from management's conflicting interests.
b. Tactics used by creditors to make their position more favorable when resolving agency problems between stockholders and creditors.
c. Two actions managers might take to ward off hostile takeovers.
d. Both commonly practiced methods used by firms' managers to increase stockholders' wealth.
Q:
When marginal utility is negative, total utility isA) increasing at a decreasing rate. B) zero.C) at its maximum. D) decreasing.
Q:
Which of the following mechanisms is not used by shareholders to get managers to act in shareholders' best interests?
a. Threat of firing.
b. Managerial compensation.
c. Performance shares.
d. Threat of takeover.
e. Answers b and c above.
Q:
The government raises gasoline taxes as part of the price of gasoline and receives more tax revenues. However, after five years, the government discovers that revenues from the gasoline tax have declined. This situation would be most likely to occur ifA) the long-run elasticity of supply was much greater than the long -run elasticity of demand. B) the demand for gasoline was inelastic in the short run, but elastic in the long run.C) the long-run elasticity of demand was greater than the long -run elasticity of supply. D) the demand for gasoline was perfectly inelastic in both the short run and the long run.
Q:
A uniform tax according to the physical quantities of pollution may not be the appropriate way to correct for an externality because
A) it places a unfair burden on small producers.
B) a uniform tax can only account for social costs and not external costs.
C) a firm will reduce production.
D) it may not adequately account for economic damages.
Q:
Which of the following does not need to be considered when assessing the impact of financial decisions?
a. Projected earnings.
b. Financial market conditions.
c. Timing of the earnings flow.
d. Riskiness of the firm.
e. All of the above must be considered.
Q:
The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Minimize the debt used by a firm.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.
Q:
The idea that the Lorenz curve should be along the 45 degree line is consistent withA) the productivity standard. B) the egalitarian principle.C) the conservative principle. D) none of the above.
Q:
Which of the following is not one of the things that causes a corporation to have a significant advantage over a partnership or a proprietorship?
a. Limited liability.
b. Ease of transfer of ownership interest.
c. Unlimited life.
d. Elimination of double taxation.
e. Ability to retain earnings and thus convert income from personal income to capital gains.
Q:
Quantity of Labor SuppliedRequired Wage Rate1$6.0029.00312.00415.00518.00621.00724.00827.00930.001033.00According to the above table, if the marginal revenue product is $48, how many workers will the profit maximizing monopsonist hire?A) 5 B) 6 C) 7 D) 8
Q:
Long-term bonds are more vulnerable to reinvestment rate risk than short-term bonds.
a. True
b. False
Q:
If a firm wants to maximize profits it shouldA) hire lots of capital and very little labor since labor needs to be trained.B) hire unskilled labor rather than skilled labor since unskilled labor is cheaper. C) equate the marginal physical product for each input to the price of the input. D) equate the marginal revenue product for each input to the price of the input.
Q:
All else equal, the maturity risk premium tends to decline when interest rate volatility increases.
a. True
b. False
Q:
When the demand curve for an input is a derived demand this means thatA) the demand curve is derived from the demand for the final product being produced.B) the demand curve depends upon the MFC.C) the law of diminishing marginal product does not hold.D) the demand curve slopes upward.
Q:
Firms with the least profitable opportunities are willing and able to pay the most for capital.
a. True
b. False
Q:
According to the text, critics point out that the costs incurred by firms due to regulationsA) increase production costs.B) lower production costs to the shutdown point.C) reduce taxes too far. D) none of the above.
Q:
The return realized by investors comes only from the change in value of an asset over time
a. True
b. False
Q:
An association of producers in an industry that agree to set common prices and output quotas to prevent competition isA) an oligopolist. B) a monopolistic competitor. C) a constrained monopoly. D) a cartel.
Q:
Expectations of high inflation lead to low interest rates and vice versa.
a. True
b. False
Q:
In the long run, the price of information products in monopolistically competitive markets will be equal toA) AVC. B) MC. C) AFC. D) ATC.
Q:
Inflationary pressures are usually strongest during business booms.
a. True
b. False
Q:
The main objective of advertising for a monopolistically competitive firm isA) to differentiate the product and boost demand. B) to reduce cost.C) to earn long run profits. D) none of the above.
Q:
A downward sloping yield curve is considered normal.
a. True
b. False
Q:
What is the main difference between the demand curves for the perfect competitor and the monopolist?
Q:
When the federal government runs a deficit the interest rates generally increases due to increased demand for funds.
a. True
b. False
Q:
In the long run when a perfectly competitive firm experiences negative economic profits,A) firms exit the industry, the market supply curve shifts rightward, and the market price falls.B) firms enter the industry, the market supply curve shifts rightward, and the market price falls.C) firms exit the industry, the market supply curve shifts leftward, and the market price rises.D) firms enter the industry, the market supply curve shifts rightward, and the market price rises.
Q:
If the Fed increases the money supply interest rates will generally increase.
a. True
b. False
Q:
The demand curve for the product of a perfectly competitive firm isA) downward sloping. B) upward sloping.C) perfectly inelastic. D) perfectly elastic.
Q:
The difference between the nominal risk-free rate and the real risk-free rate is that the real risk-free includes inflation and the nominal risk-free rate does not include inflation.
a. True
b. False
Q:
Fixed costs include all butA) a normal rate of return on investment. B) temporary labor.C) property tax on the existing buildings.D) machines that have been producing output.
Q:
The liquidity premium reflects the fact that some investments are more easily converted into cash on a short notice at fair market value than other securities.
a. True
b. False
Q:
An investor who owns preferred stock hasA) regular voting rights.B) preferential treatment in the payment of dividends. C) the same rights as a bond holder.D) unlimited liability for the debts of the firm.
Q:
Investors with a high time preference for current consumption would be willing to pay a higher price for the same investment than investors with a low time preference for current consumption.
a. True
b. False
Q:
Often single-owner proprietorships seem more profitable than they really are. The reason for this is thatA) they receive special tax benefits compared to corporations. B) they use different accounting procedures.C) they often fail to consider the opportunity cost of the labor provided by the owner. D) they are not allowed to deduct depreciation expense.
Q:
The price of a bond bought at a discount cannot go down in the financial markets.
a. True
b. False
Q:
Why are diamonds more expensive than water?A) because the last glass of water has higher marginal utility than the last diamond B) because the last diamond has higher marginal utility than the last glass of water C) because you get more total utility from diamondsD) because water is a necessity
Q:
The dollar return earned on a debt investment is comprised of the interest payments received and the change in value of the debt instrument in the financial markets.
a. True
b. False
Q:
As more of a product is consumed, total utility increases up to a point at whichA) marginal utility increases at an increasing rate.B) marginal utility increases at a constant rate. C) marginal utility decreases.D) marginal utility will initially decrease, then increase.
Q:
Suppose financial institutions, such as savings and loans, were required by law to make long-term, fixed interest rate mortgages, but, at the same time, were largely restricted, in terms of their capital sources, to deposits that could be withdrawn on demand. Under these conditions, these financial institutions should prefer a "normal" yield curve to an inverted curve.
a. True
b. False
Q:
The longer any price change persists, theA) more difficult it is to alter quantity demanded.B) greater is the price elasticity of demand. C) lower is the price elasticity of demand.D) more likely price will return to its original level.
Q:
The existence of an upward sloping yield curve proves that the liquidity preference theory is correct, because an upward sloping curve necessarily implies that firms must offer a maturity risk premium in order to induce investors to lend for longer periods.
a. True
b. False
Q:
To efficiently improve environmental quality, it is usuallyA) better to focus on the hardest areas to clean up first since these usually are the biggest problems.B) more appropriate to concentrate on the physical quantities of pollution rather than on economic costs.C) best to set up stringent emission standards that must be followed by everyone.D) better to focus on economic damages rather than physical quantities of pollution.