Q&A Hero

Q: Preferred stockholders have priority over common stockholders with respect to earnings. Dividends must be paid on preferred stock before they can be paid on common stock. In exchange for this priority to dividends, preferred stockholders give up their priority claims to common stockholders in the event of bankruptcy. a. True b. False

Q: A profit maximizing firm will hire additional workers untilA) the additional cost associated with hiring the last worker equals the average wage rate of the workers.B) the additional cost associated with hiring the last worker equals the additional revenue generated by that worker.C) the extra revenue generated by the last worker hired equals zero.D) the extra cost associated with hiring the last worker equals the price of the good produced.

Q: A proxy fight involves a battle by a shareholder or group of shareholders who seek to change the investment policy of the firm. If the proxy group is successful, current management retains control of the firm but the proxy group dictates what investments the firm makes. a. True b. False

Q: Ajax has just discovered that the marginal revenue product generated by the last worker hired was $75 while the marginal factor cost was $95. What should Ajax do?A) Leave the level of production unchanged. B) Increase the amount produced.C) Reduce the amount produced.D) Collect more information before making a decision.

Q: From a social welfare perspective, common stock is a desirable form of financing in part because it involves no fixed charge payments. Its inclusion in a firm's capital structure makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings than if only debt were available. a. True b. False

Q: Which of the following is NOT a government response to asymmetric information?A) Liability laws B) Social regulationC) Manufacturerʹs warranties D) Government licensing

Q: "Treasury zeros" are Treasury bonds that have been split or "stripped" into a zero coupon discount Treasury certificate and a series of interest payments (the coupon payments). These bonds are safer than corporate zeros and thus, are very popular with institutional investors such as pension fund managers. a. True b. False

Q: A cartel is likely to last longer if A) more new firms enter the market. B) the profits of participating members are relatively stable. C) market prices vary more over time. D) there are more firms in the industry.

Q: One of the disadvantages to a firm in issuing zero coupon bonds is that the tax shield associated with the bonds' appreciation cannot be claimed until the bond matures. a. True b. False

Q: An example of direct marketing isA) the use of coupons in newspapers.B) allowing the use of the product for 7 days before the consumer is billed for the product.C) charging customers who pay with cash a different price than those using credit cards. D) the use of personalized advertising by using mailing lists.

Q: A zero coupon bond's value increases over time at a compounded (or exponential) rate, not at a constant (or linear) rate. The corporate issuer reports the annual increase as interest expense, and the owner of the bond reports the increase as interest income and pays taxes on it each year. a. True b. False

Q: Which of the following is NOT a characteristic of monopolistic competition? A) A large number of sellers in a highly competitive market B) Differentiated products C) The existence of advertising D) Marginal cost pricing in the long run

Q: Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture. a. True b. False

Q: PriceQuantity$191118121713161415151416Given the data in the above table, what is the marginal revenue when the 12th unit is sold?A) $7.00 B) $5.00 C) $3.00 D) $1.00

Q: A putable bond can be redeemed at par value at the holder's option. Usually, the put option can be exercised only if the issuer takes some specific action, such as significantly increasing debt. a. True b. False

Q: A firm is currently producing at the rate of output at which total revenues just cover its total variable costs. If demand falls, the firm shouldA) lower both price and its rate of output. B) shut down.C) increase its rate of output to make up for the lower price.D) not change its rate of output because it is still covering its variable costs.

Q: Income bonds pay interest only when the amount of the interest is actually earned by the company. Thus, these securities cannot bankrupt a company and this makes them safer than regular bonds. a. True b. False

Q: The demand curve for the product of a perfectly competitive firmʹs demand curve indicates that if the firmA) lowers its price, it can sell more.B) accepts the market -set price, the number of units the firm can sell is limited. C) raises its price, sales will fall to zero.D) changes its price, the quantity demanded will change in the opposite direction.

Q: An indexed bond has its value tied to an inflation index. As inflation increases the value of the bond increases and the issuer is responsible for the accumulated value which may become much greater than the original face value. a. True b. False

Q: QTFCTVCTC0$90$ 0$ 901902511529032122390421324906415459095185Refer to the above table. When output rises from 3 units to 4 units, marginal costs areA) $16. B) $10. C) $22. D) $31.

Q: The part of corporate profits that is paid to the shareholders of a corporation isA) retained earnings. B) shareholders.C) dividends. D) business revenue.

Q: Although common stock represents a riskier investment to an individual than do bonds, in the sense of exposing the firm to the risk of bankruptcy, bonds represent a riskier method of financing to a corporation than does common stock. a. True b. False

Q: The implicit cost incurred by a firm to use its resources to produce its output is the firmʹsA) total cost. B) explicit cost.C) opportunity cost. D) accounting cost.

Q: The interest rate paid on Eurodollar deposits depends on the particular bank's lending rate and on rates of return available on U.S. money market instruments. a. True b. False

Q: The inverse relationship between quantity demanded and price of a good or service can be explained, in part, byA) a shift in the demand curve.B) diminishing marginal utility only.C) diminishing marginal utility and the rule of equal marginal utilities per dollar. D) the real income effect.

Q: The Eurodollar market is essentially a long-term market; most loans and deposits have maturities of longer than one year. a. True b. False

Q: A Eurodollar is a U.S. dollar deposited in a bank outside the United States. a. True b. False

Q: The total utility of consuming 6 units of a good is 255. The marginal utility of the 6th unit is 45 and the marginal utility of the 5th unit is 60. The total utility of consuming 5 units of the good isA) 300. B) 150. C) 210. D) 195.

Q: LIBOR is an acronym for London Interbank Offer Rate, which is an average of interest rates offered by London banks to U.S. corporations. a. True b. False

Q: Which of the following is a determinant of the price elasticity of demand for a product?I. The existence of substitute goodsII. The percentage of a consumerʹs total budget devoted to purchases of that commodityA) I only B) II only C) Both I and II D) Neither I nor II

Q: Firms generally do not call their convertibles unless their conversion value is greater than their call price. a. True b. False

Q: A difficulty with using a uniform per-unit tax to address a negative externality is thatA) the tax will reduce output.B) the tax will increase price.C) the social cost of pollution might vary across geographic regions.D) the social cost of pollution should not be assessed on the consumers, but should be assessed on the firms.

Q: Convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder. a. True b. False

Q: The egalitarian principle refers to:A) ʺTo each according to her need.ʺ B) ʺTo each exactly the same.ʺC) ʺTo each according to her productivity.ʺ D) ʺTo each according to his ability.ʺ

Q: A convertible debenture cannot be worth more than its conversion value or less than its bond value. a. True b. False

Q: ʺUnions in the United States have helped raise the incomes of union workers as compared to nonunion workers.ʺ Do you agree or disagree? Why?

Q: The owner of a convertible bond owns, in effect, both a bond and a call option. a. True b. False

Q: When a firm is hiring an input such that the marginal revenue product of the input is equal to the marginal factor cost of the input, the firmA) should be expanding output. B) is hiring too little of the input. C) is maximizing economic profit. D) is producing too much output.

Q: The striking price is different from the exercise price and deals with convertibles rather than with warrants. a. True b. False

Q: Ajax has just discovered that the marginal revenue product generated by the last worker hired was $125 while the marginal factor cost was $85. What should Ajax do?A) Leave the level of production unchanged. B) Increase the amount produced.C) Reduce the amount produced.D) Collect more information before making a decision.

Q: The exercise price is the price that must be paid for a share of common stock when it is bought by exercising a warrant. a. True b. False

Q: A possible market solution that a reputable firm can engage in when faced with the lemons problem isA) to offer a warranty. B) to engage in externalities. C) to create asymmetric information. D) to use average cost pricing.

Q: An option is a contract which gives its holder the right to buy (sell) an asset at a predetermined price within a specified period of time. a. True b. False

Q: Cartel agreements are more likely to break down whenA) there are few variations in market demand. B) new firms enter the market.C) participating firms earn huge profits. D) none of the above

Q: The "preferred" feature of preferred stock means that it normally will generate a higher total return for the stockholder than common stock. a. True b. False

Q: Advertising that is intended to alter a consumerʹs tastes and preferences and induce the customer to purchase a particular product isA) persuasive advertising. B) educational advertising.C) informational advertising.D) effective advertising.

Q: A publicly owned corporation is simply a company whose shares are held by the investing public, which may include other corporations and institutions. a. True b. False

Q: All of the following are characteristics of monopolistic competition EXCEPTA) a few firms dominate the industry. B) product differentiation.C) many firms in the industry. D) advertising.

Q: When a corporation's shares are owned by a few individuals who are associated with the firm's management, we say that the firm is "closely held." a. True b. False

Q: PriceQuantity$191118121713161415151416Given the data in the above table, what is the marginal revenue when the 15th unit is sold?A) $7.00 B) $5.00 C) $3.00 D) $1.00

Q: ʺAn industryʹs short-run supply curve is constructed by adding horizontally all the average variable cost curves of firms in that industry.ʺ Do you agree or disagree? Why?

Q: Companies can have different types of preferred stock, such as Class A or Class B, with each type having different rights and privileges, but by law there can be only one class of common stock. a. True b. False

Q: If a firm's stockholders are given the preemptive right, this means that a group of stockholders can call for a meeting to replace the management. Without the preemptive right, dissident stockholders would have to seek to oust management through a proxy fight. a. True b. False

Q: In the model of perfect competition, the market demand curve is found byA) a marketing analysis.B) taking the demand curve of a ʺrepresentative consumerʺ and expanding it by the number of consumers of the good.C) horizontally summing the demand curves of individual consumers. D) horizontally summing the supply curves of individual firms.

Q: QTFCTVCTC0$90$ 0$ 901902511529032122390421324906415459095185Refer to the above table. When output rises from 2 units to 3 units, marginal costs areA) $7. B) $10. C) $22. D) $41.

Q: Founders' shares is a type of classified stock where the shares are owned by the firm's founders and they retain the sole voting rights to those shares but have restricted dividends for a specified time period. a. True b. False

Q: Classified stock is one can be used to meet special needs of a firm, such as when owners of a start-up firm need capital but don't want to relinquish control of the firm. a. True b. False

Q: A shareholder in a corporationA) may not sell his or her share of ownership in the business without the business dissolving. B) can earn interest, but not dividends, from the profits of the business.C) is a part owner of the business.D) is personally liable for the debts of the corporation.

Q: A proxy is a document giving one party the authority to act for another party, typically the power to vote shares of common stock. A proxy can be an important tool relating to control of the firm. a. True b. False

Q: Implicit costs are measured byA) the value of the next-best alternative uses of inputs. B) actual expenses paid by a firm.C) total revenues minus total costs.D) the lowest value of all alternative uses of inputs.

Q: The additional paid-in capital account represents the difference between a stock's par value and the funds actually received from the sale of new common stock. a. True b. False

Q: According to the substitution effect, if the price of a product goes downA) the consumer will buy more of the good at the lower price than at a higher price, creating a downward sloping demand curve.B) the consumer will buy more of the good at a lower price than at a higher price, creating a horizontal demand curve.C) the consumer will not change the level of purchases of the good when the price changes, making the demand curve a vertical line.D) the real income of the consumer will increase, causing the consumer to want to buy more of the good, creating a downward sloping demand curve.

Q: Par value is not necessarily the actual price at which common stock is issued by the firm, but it does constitute the maximum legal liability per share in the event of bankruptcy. a. True b. False

Q: Quantity of Movies Watched per WeekMichelleʹs Total Utility per WeekRobertʹs Total Utility per Week00011001002195190327027043403405390400642035074353908445420945044010440450Refer to the above table. In examining the utility schedules for Michelle and Robert, we can conclude thatA) they like movies the same.B) they like the third movie the same.C) Michelle likes movies more than Robert does.D) they both received the same satisfaction from watching the fourth movie.

Q: In the event of bankruptcy, debtholders have a prior or first claim to a firm's income and assets over the claims of both common and preferred stockholders. However, in bankruptcy all debtholders are treated equally as a single class of claimants. a. True b. False

Q: Which of the following is a determinant of the price elasticity of demand for an item? A) The availability of a close substitute for the item B) The percentage of a consumers budget allocated to expenditures on the item C) The amount of time available to adjust to a change in the price of the item D) All of the above are correct

Q: There is an inverse relationship between bond ratings and the required return on a bond. The required return is lowest for AAA rated bonds, and required returns increase as the ratings get lower (worse). a. True b. False

Q: There are two coal-burning electrical utilities-one in tiny, rural Wanunu, Montana, and another in metropolitan Detroit, Michigan-and each produces the same amount of pollution per unit of output. If a permit tax is going to be used to force these firms to internalize pollution costs, the tax levied should beA) the same in each city. B) higher in Wanunu than in Detroit. C) higher in Detroit than in Wanunu. D) less than zero in each city.

Q: Because junk bonds are such high-risk instruments, the returns on such bonds aren't very high and the existence of this market detracts from social welfare. a. True b. False

Q: The productivity standard says A) that everyone should have exactly the same income. B) that the age-earnings cycle should determine income. C) that people should be compensated on the basis of what they produce. D) that people should be compensated on the basis of their need.

Q: A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a merger, or to provide financing to a company of questionable financial strength. a. True b. False

Q: Discuss the benefits of unions.

Q: Several types of futures contracts are available to hedge against price changes in such items as gold, agricultural products, and so forth. a. True b. False

Q: If the marginal revenue product of an input exceeds the marginal factor cost of the input, the firmA) should hire less of the input. B) is maximizing profit.C) is not on its marginal cost curve. D) should increase its use of the input.

Q: Issuing zero coupon bonds might appeal to a company that is considering investing in a long-term project that will not generate positive cash flows for several years. a. True b. False

Q: A profit-maximizing firm will hire additional units of labor untilA) the additional cost of hiring the last worker equals the additional revenue generated by that worker.B) the additional cost of hiring the last worker equals the marginal factor cost of the worker.C) the extra revenue from hiring the last worker equals the marginal physical product of labor.D) the extra cost from hiring the last worker equals the cost of the product.

Q: Many bond indentures allow the company to acquire bonds for a sinking fund either by purchasing bonds in the market or by a lottery administered by the trustee for the purchase of a percentage of the issue through a call at face value. a. True b. False

Q: The problem of asymmetric information that brings about a general decline in product quality in an industry isA) a market failure. B) the result of government regulation. C) creative response. D) the lemons problem.

Q: A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates. a. True b. False

Q: One of the fundamental problems a cartel faces isA) to determine how much each producer will decrease its output. B) to determine how much each producer will increase its output. C) to determine how much each producer will lower it price.D) to determine how much each producer will lower its profit.