Q&A Hero

Q: How much is a bond that pays $50 in coupon payments for 3 years and $1,000 at the end of the third year worth if the interest rate is 10%? A) $876 B) $952 C) $1,045 D) $1,150

Q: Which type of business is the most difficult to set up? A) sole proprietorship B) partnership C) corporation D) There is no difference in the difficulty of establishment.

Q: On a balance sheet, short-term debts such as accounts payable are listed as A) current assets. B) current liabilities. C) stockholder's equity. D) goodwill.

Q: A sole proprietorship is A) the easiest type of business to set up. B) the most difficult type of business to set up. C) the most expensive type of business to set up. D) the least profitable type of business to set up.

Q: What must balance on a balance sheet? A) Total assets must equal total liabilities plus equity. B) Revenues must equal costs. C) Retained earnings plus dividends paid must equal earnings per share. D) All of these must balance.

Q: Unlike firms that sell stock in financial markets, which are known as ________ firms, companies which do not sell stock in financial markets are known as ________ firms. A) public; private B) open; closed C) corporate; proprietary D) stock market; bond market

Q: If a stock's dividend is expected to grow at a constant rate of 6 percent in the future and it has just paid a dividend of $3.00 per share, and you have an alternative investment of equal risk that will earn a 9 percent rate of return, what would you be willing to pay per share for this stock? A) $9 B) $20 C) $45 D) $106

Q: Organizing a successful firm in a market economy has become ________ over the last century. A) legally impossible B) politically impossible C) less difficult D) more difficult

Q: If you own a $1,000 face value bond with one year remaining to maturity and a five percent coupon rate and new bonds are paying 12 percent, what is the most you can get for your old bond? A) $1,120 B) $1,000 C) $937.50 D) impossible to determine without additional information

Q: Which of the following must a firm in a market economy do today to succeed? A) Produce the goods and services that consumers want at a lower cost than consumers themselves can produce. B) Organize the factors of production into a functioning, efficient unit. C) Have access to sufficient funds. D) Market firms today must do all of these things.

Q: What is the present value of $575 in a one year if the current rate of interest is 4 percent? A) $410.71 B) $552.88 C) $598 D) $805

Q: The present value of $300 received 5 years in the future would be calculated as which of the following when the interest rate is 5%? A) 300/(1.5)5 B) 300/(1.05)5 C) 300 1.5 5 D) 5.05/300

Q: If you want to know the present value of $10,000 received in one year, and the interest rate is 4 percent, what formula can you use? A) Present value equals $10,000 times 0.04. B) Present value equals $10,000 divided by 1.04 C) Present value equals 1.04 divided by $10,000. D) Present value equals $10,000 times 1.04.

Q: If you put $100 into a bank account that earns five percent interest per year, what is the formula you should use to determine the account's future value in one year? A) Future value equals the present value divided by the rate of interest. B) Future value equals the present value multiplied by the rate of interest. C) Future value equals the present value multiplied by one plus the rate of interest in decimals. D) All of these yield the same answer.

Q: If a dollar a year from now will likely have less purchasing power because of inflation, then a dollar today ________ a dollar a year from now. A) is more valuable than B) is less valuable than C) has the same value as D) may be more valuable or less valuable than

Q: Which of the following is operating income? A) explicit plus implicit costs B) stockholders' equity C) revenue minus operating expenses D) net profit

Q: What was the source of the problems encountered by many financial firms during the late 2000s?

Q: During 2007, many "subprime" and "Alt-A" borrowers began to default on their mortgages. Describe "subprime" and "Alt-A" borrowers.

Q: Briefly describe the Sarbanes-Oxley Act and explain why it was passed.

Q: The Sarbanes-Oxley Act of 2002 requires that each member of the board of directors personally certify the accuracy of financial reports.

Q: Purchasing a firm's stock in an IPO can be risky because financial information may not be fully disclosed.

Q: The Sarbanes-Oxley Act of 2002 requires that CEOs personally certify the accuracy of financial reports.

Q: Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000 they had converted to being publicly traded corporations. As partnerships, the principle-agent problem is ________, but as publicly traded corporations, the principal-agent problem is often ________. A) increased; more severe B) increased; less severe C) reduced; more severe D) reduced; less severe

Q: The Sarbanes-Oxley Act of 2002 was passed in response to what event? A) a series of accounting scandals B) unexpected increases in dividend payments to stockholders at various corporations C) volatility in NASDAQ indexes D) historically low bond prices

Q: When someone takes out a mortgage loan to buy a house, the mortgage lender can take possession of the house and sell it if the borrower defaults by failing to make payments on the loan because the house is being pledged as ________ for the loan. A) goodwill B) a liability C) insurance D) collateral

Q: One result of the financial meltdown of the late 2000s was that mortgage institutions ________ and ________ were brought under direct control of the government. A) Fannie Mae; Freddie Mac B) Glass Steagall; Sarbanes Oxley C) Goldman Sachs; Morgan Stanley D) Lehman Brothers; FDIC

Q: Mortgages issued to borrowers who fail to document that their incomes are high enough to afford their mortgage payments are known as ________ mortgages. A) subprime B) Alt-A C) gray market D) reciprocal

Q: David Myers, former controller for WorldCom, pleaded guilty to falsely reported costs for WorldCom that were ________ than they actually were, resulting in reported accounting profits for WorldCom that were ________ than their actual level. A) higher; higher B) lower; higher C) lower; lower D) higher; lower

Q: Two of the firms involved in the accounting scandals of the early 2000s were A) Arthur Anderson and NBC. B) Western Digital and General Motors. C) WorldCom and Enron. D) DuPont and Lehman Brothers.

Q: The financial statements of firms generally are audited by A) employees of the firm being audited. B) employees of private accounting firms. C) employees of the federal government. D) the board of directors of the corporation being audited.

Q: Firms disclose financial statements in ________ and in ________. A) periodic filings to the federal government; annual reports to shareholders B) daily filings to the federal government; daily reports to shareholders C) monthly reports to shareholders; 5-year balance statements to the board of directors D) weekly filings with the SEC; monthly reports to the Fed

Q: What is the Congressional act, enacted in 1933 and repealed in 1999, which prevented financial firms from being both commercial banks and investment banks? A) the Sarbanes-Oxley Act B) the Glass-Steagall Act C) the Taft-Hartley Act D) the Cellar-Kefauver Act

Q: Traditionally, Wall Street investment banks had been organized as partnerships, but by 2000 they had converted to being publicly traded companies. As partnerships, the principal-agent problem is ________ because there is ________ separation of ownership from control. A) reduced; much B) reduced; little C) increased; much D) increased; little

Q: Mortgages issued to borrowers whose credit histories include failures to make payments on bills are known as ________ mortgages. A) catastrophic B) variable rate C) subprime D) Alt-A

Q: When groups of mortgages are bundled together by financial institutions and sold to investors, these institutions are said to be ________ mortgage loans. A) securitizing B) underwriting C) liquidating D) harvesting

Q: In addition to requiring that CEO's personally certify the accuracy of financial statements, the Sarbanes-Oxley Act of 2002 also requires that A) CEO's conduct audits of their corporations themselves. B) firms raise funds for expansion through the sale of bonds only, not stocks. C) auditors disclose any potential conflicts of interest. D) corporations issue financial statements monthly rather than quarterly.

Q: In May 2012, Facebook stock sold for $38 per share in its initial public offering (IPO). More than a year later, in June 2013, the value of Facebook stock A) had more than doubled in price. B) had declined by nearly 40 percent from the IPO price. C) languished at the same $38 per share price. D) had increased by almost 60 percent from the IPO price.

Q: In response to accounting scandals in 2002, the federal government passed legislation requiring that corporate directors have a certain level of expertise with financial information and mandating that chief executive officers personally certify the accuracy of financial statements. What is the name of this legislation? A) the Accountant Reliability Act B) the 24th amendment to the Constitution C) the Kennedy-Lott Act D) the Sarbanes-Oxley Act

Q: In 2002, the Enron corporation was accused of falsifying information regarding liabilities on Enron's balance sheets, thereby A) increasing Enron's assets on the balance sheet. B) reducing Enron's profit on the balance sheet. C) increasing Enron's net worth on the balance sheet. D) reducing Enron's net income on the income statement.

Q: An investor is more likely to buy a firm's stock if the firm's income statement shows ________ and if its balance sheet shows ________. A) a large net worth; a large price-earnings ratio B) a large after-tax profit; a large net worth C) a large price-earnings ratio; a large dividend yield D) low opportunity costs; large liabilities

Q: Why do corporations want to keep the price of their stock high? A) A higher stock price increases the funds the firm can raise when it sells a given amount of stock. B) Corporations can pay their managers lower salaries and avoid principal-agent problems when stock prices are higher. C) Higher stock prices are correlated with lower expected profitability. D) All of the above provide incentive for corporations to keep the price of their stock high.

Q: How is economic profit found?

Q: What is a firm's balance sheet?

Q: How is accounting profit found?

Q: What is the difference between explicit and implicit costs?

Q: An increase in liabilities will reduce a firm's net worth.

Q: Economic profit is the difference between a firm's revenue and its opportunity costs.

Q: A decrease in liabilities will reduce a firm's net worth.

Q: Accounting profit is the difference between a firm's revenue and its opportunity costs.

Q: A firm's net worth is calculated as A) the difference between a firm's revenues and explicit costs. B) the difference between a firm's revenues and implicit costs. C) the difference between a firm's assets and liabilities. D) the difference between a firm's liabilities and outstanding equities.

Q: The financial statement that sums up a firm's revenues, costs, and profit over a period of time is its A) income statement. B) balance sheet. C) dividend yield statement. D) price-earnings statement.

Q: Which of the following would be considered an implicit cost of operating a business? A) advertising expenses B) wages paid to workers C) a normal rate of return for investors D) any explicit cost

Q: ________ is called an implicit cost, while ________ is called an explicit cost. A) An accounting cost; an economic cost B) A nonmonetary opportunity cost; a cost that involves spending money C) A production cost; a sales cost D) An actual cost; a hypothetical cost

Q: A firm's accounting profit is also its A) economic profit. B) income statement. C) net income. D) statement of liabilities.

Q: Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, the explicit costs of his business are $10,000, and the opportunity costs of his business are $18,000 per year. What is his economic profit? A) $14,000 B) $24,000 C) $32,000 D) $34,000

Q: Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, the explicit costs of his business are $10,000, and the opportunity costs of his business are $18,000 per year. What are the implicit costs of his business? A) $8,000 B) $18,000 C) $24,000 D) $32,000

Q: Jake sells Star Wars memorabilia on eBay. His annual revenue is $42,000 per year, and the explicit costs of his business are $10,000. What is his accounting profit? A) $10,000 B) $22,000 C) $32,000 D) $42,000

Q: Donnie's Donuts incurs $450,000 per year in explicit costs and $200,000 in implicit costs. The bakery earns $800,000 in revenues and has $2 million in net worth. Based on this information, what is the accounting profit for Donnie's Donuts? A) $150,000 B) $350,000 C) $600,000 D) $1.2 million

Q: Donnie's Donuts incurs $450,000 per year in explicit costs and $200,000 in implicit costs. The bakery earns $800,000 in revenues and has $2 million in net worth. Based on this information, what is the economic profit for Donnie's Donuts? A) $150,000 B) $350,000 C) $600,000 D) $1.2 million

Q: The minimum amount that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested, is referred to as A) the explicit costs of production. B) net worth. C) net income. D) a normal rate of return.

Q: Which of the following would explain why economic profit might be less than accounting profit? A) A firm's net income is less than its accounting profit. B) A firm has only explicit costs. C) A firm's net income is greater than its accounting profit. D) A firm has implicit costs as well as explicit costs.

Q: What is economic profit? A) gross revenue minus explicit costs B) gross revenue minus implicit costs C) gross revenue minus explicit and implicit costs D) the same as accounting profit

Q: All of the following are examples of explicit cost a firm might incur except A) the out-of-pocket expense to hire employees. B) taxes owed to the state government. C) the rental value of the warehouse space the company owns and uses for itself. D) the revenue a firm generates in using its resources.

Q: An implicit cost is A) a nonmonetary opportunity cost. B) a cost unique to sole proprietorships. C) a cost that involves spending money. D) a cost unique to corporations.

Q: Anything owed by a person or a firm is A) an asset. B) a liability. C) a bond. D) equity.

Q: The difference between a firm's assets and liabilities is its A) accounting profit. B) economic profit. C) net worth. D) implicit costs.

Q: What is shown on a firm's income statement? A) costs B) profits C) revenues D) All of these are shown on a firm's income statement.

Q: All of the following would be considered explicit costs of operating a business except A) rent paid to a landlord. B) bonuses paid to employees. C) a normal rate of return for investors. D) corporate income taxes.

Q: A nonmonetary opportunity cost is called a(n) ________, while a cost that involves spending money is called a(n) ________. A) accounting cost; explicit cost B) implicit cost; explicit cost C) accounting profit; economic profit D) normal rate of return; asset

Q: A firm's net income is also its A) economic profit. B) balance sheet. C) accounting profit. D) opportunity cost.

Q: Tanesha sells homemade candles over the Internet. Her annual revenue is $64,000 per year, the explicit costs of her business are $17,000, and the opportunity costs of her business are $22,000. What is her economic profit? A) $17,000 B) $25,000 C) $42,000 D) $47,000

Q: Tanesha sells homemade candles over the Internet. Her annual revenue is $64,000 per year, the explicit costs of her business are $17,000, and the opportunity costs of her business are $22,000. What are the implicit costs of her business? A) $17,000 B) $22,000 C) $39,000 D) $47,000

Q: Tanesha sells homemade candles over the Internet. Her annual revenue is $64,000 per year, the explicit costs of her business are $17,000, and the opportunity costs of her business are $22,000. What is her accounting profit? A) $17,000 B) $22,000 C) $47,000 D) $64,000

Q: Laura's Pizza Place incurs $800,000 per year in explicit costs and $100,000 in implicit costs. The restaurant earns $1.3 million in revenues. Based on this information, what is accounting profit for Laura's Pizza Place? A) $200,000 B) $400,000 C) $500,000 D) $900,000

Q: Laura's Pizza Place incurs $800,000 per year in explicit costs and $100,000 in implicit costs. The restaurant earns $1.3 million in revenues and has $5 million in net worth. Based on this information, what is economic profit for Laura's Pizza Place? A) $200,000 B) $400,000 C) $500,000 D) $2.8 million

Q: A normal rate of return refers to the ________ that investors must earn on the funds they invest in a firm, expressed as a percentage of the amount invested. A) minimum amount B) maximum amount C) total amount D) profit

Q: Which of the following would explain why accounting profit might be greater than economic profit? A) A firm has implicit costs as well as explicit costs. B) A firm has only explicit costs. C) A firm's net income is greater than its accounting profit. D) A firm's net income is less than its accounting profit.

Q: What is accounting profit? A) gross revenue minus explicit costs B) gross revenue minus implicit costs C) gross revenue minus explicit and implicit costs D) the same as economic profit

Q: Which of the following is an example of an implicit cost a firm might incur? A) the out-of-pocket expense to hire resources B) taxes owed to the state and Federal governments C) the rental value of the office space the company owns and uses for itself D) the revenue a firm generates in using its resources

Q: An asset is A) anything of value owned by a person or a firm. B) a payment by a corporation to its shareholders. C) a nonmonetary opportunity cost. D) anything owed by a person or a firm.