Questions
Question 1
A shareholder in a corporation
a. 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.
Question 2
Suppose that you borrow $10,000 for one year, and at the end of the year, you must repay $11,450. The interest rate is
a. 11.4 percent. b. 14.5 percent. c. 18 percent. d. 12.7 percent.
Question 3
The owners of preferred stock
a. receive preferential treatment in the payment of dividends. b. have the same voting rights as owners of common stock. c. are the original owners of the corporation. d. have the same rights as bondholders.
Question 4
The main advantage of a corporate form of organization is that
a. shareholders have limited liability. b. shareholders have unlimited liability. c. shareholders are not subject to double taxation. d. all corporate profits must be distributed as dividends.
Question 5
Which of the following is the most common form of business organization in the United States?
a. Proprietorship b. Partnership c. Corporation d. S-corporation
Question 6
Suppose that you open your own business and earn an accounting profit of $30,000 per year. When you started your business, you left a job that paid you a $25,000 salary annually. Also, suppose that you invested $70,000 of your own money to start up your business. If the normal rate of return on capital is 12 percent, your economic profit is
a. $66,400. b. -$3,400. c. $6,600. d. -$8,400.
Question 7
The random walk theory says that
a. stock prices follow a trend for varying periods of time. b. successive stock prices increase more than they decrease. c. successive stock prices are dependent on the weighted average of the previous week's prices. d. successive stock prices are independent of each other.
Question 8
Accounting profits are total revenues minus
a. all relevant opportunity costs. b. explicit and implicit costs. c. explicit costs and all other relevant opportunity costs. d. explicit costs.
Question 9
The PE ratio for a stock is
a. the predicted earnings per share of the stock divided by its current yield. b. the current yield of the stock. c. the price of the stock divided by its earnings per share. d. the predicted volatility of the stock.
Question 10
The most common type of firm in the United States is the
a. proprietorship. b. partnership. c. corporation. d. limited partnership.
Question 11
Economic profits equal
a. 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 owner's labor opportunity costs.
Question 12
A difference between a share of stock in a corporation and a corporate bond is that
a. the share of stock is a legal claim while the bond is not. b. the bond owner has voting rights within the corporation whereas the stockholder does not. c. the bond owner is entitled to receive a fixed annual coupon payment plus a lump-sum payment at the bond's maturity date, whereas the stockholder is entitled to a share of future profits. d. stocks are issued in return for funds that are lent to the corporation.
Question 13
A pure economic rent is
a. a payment to a resource owner over and above what is necessary to keep the resource in its current use. b. a payment to a resource owner just sufficient to keep its supply constant. c. the inverse of economic profit. d. the competitive rental rate on capital.
Question 14
Economic rent is any payment
a. received by the owner of a resource in perfectly elastic supply. b. received by the owner of a resource with a supply curve that is not horizontal. c. in excess of the resource's opportunity cost. d. below that of a normal profit or return.
Question 15
Implicit costs are measured by
a. the value of alternative uses of the resources used in production. b. actual expenses paid by the firm. c. total revenues minus total costs. d. comparing the compensation packages of the CEOs in the industry.
Question 16
Economic profit can be calculated as
a. total revenue - explicit costs. b. total revenue - implicit costs. c. total revenue - explicit costs - implicit costs. d. total revenue - fixed costs.
Question 17
Accounting costs represent
a. explicit costs paid by the firm. b. opportunity costs. c. both sunk and future costs. d. long run costs only.
Question 18
The part of corporate profits that is paid to the shareholders of a corporation is
a. retained earnings. b. shareholders. c. dividends. d. business revenue.
Question 19
The real rate of interest is
a. the nominal interest rate minus the rate of inflation. b. the interest rate actually paid explicitly by the borrower. c. the interest rate received by the lender minus the handling charges of the loan. d. the average rate of interest over the last 20 years.
Question 20
In a partnership, legal responsibility for all debts is
a. shared by the partners. b. passed to the shareholders. c. paid by the principle owner. d. handled by the bondholders.
Question 21
Another term to describe the normal rate of return on capital is the
a. fixed cost of capital. b. depreciation cost of capital. c. opportunity cost of capital. d. monopoly rent.
Question 22
Bond coupon payments represent
a. dividends paid to owners. b. interest on the amount borrowed. c. capital gains for tax purposes. d. payments to preferred shareholders.
Question 23
The yield percentage of a stock is calculated as
a. the corporation's net worth divided by the number of shareholders. b. the book value of the stock divided by the number of shareholders. c. the stock dividend divided by the price of the stock. d. the expected appreciation of the stock.
Question 24
The nominal rate of interest is
a. the same as the price level. b. the real rate of interest minus the previous year's change in the price level. c. the interest rate actually paid by the borrower. d. lower than the real rate in a period of inflation.
Question 25
In an inflationary atmosphere, lenders will
a. desire a lower nominal interest rate to increase the real rate. b. desire a higher nominal interest rate to protect against the inflation. c. tend to see the real rate of interest increase, particularly if the inflation is unforeseen. d. have the real rate of interest guaranteed by the Federal Reserve Board.