Question 1

Which of the following best describes the principal-agent problem in corporate governance?

Accepted Answer

A problem caused by managers (agents) pursuing their own interests rather than the interests of shareholders (principals) who hired them.

Question 2

A corporation issues a bond with a face value of $$1,000, a coupon payment of 50 $$per year, and a maturity of 10 years. If the market interest rate rises above the bond’s coupon rate, what will happen to the bond’s price?

Accepted Answer

The bond’s price will fall below $1,000.

Question 3

Which of the following is an implicit cost for a business owner?

Accepted Answer

The salary the owner could have earned working elsewhere.

Question 4

Suppose a firm’s assets are valued at $$500,000 and its liabilities are 350$$,000. What is the firm’s net worth (stockholders’ equity)?

$$	ext{Net Worth} = 	ext{Assets} - 	ext{Liabilities}$$

Accepted Answer

$$150,000$$

Question 5

Which of the following is a key advantage of the corporate form of business organization?

Accepted Answer

Limited liability for owners.

Question 6

A firm’s income statement shows revenues of $$200,000, operating expenses of 120$$,000, and taxes paid of $$20,000. What is the firm’s net income?

$$	ext{Net Income} = 	ext{Revenues} - 	ext{Operating Expenses} - 	ext{Taxes Paid}$

Accepted Answer

$$60,000$$

Question 7

Which of the following best explains why stocks are generally riskier than bonds?

Accepted Answer

Stocks represent ownership and are paid after bondholders in the event of liquidation.

Question 8

If a firm pays a dividend of $$4 per share, the required rate of return is 8$$\%$$, and dividends are expected to grow at 3$$\%$$ per year, what is the price of the stock according to the constant growth dividend model?

P$$ = \frac{D}{i - g}$$

where D = 4$, i = 0.08$, g = 0.03$

Accepted Answer

$$P = \frac{4}{0.08 - 0.03} = 80$$

Question 9

Which of the following is an example of direct finance?

Accepted Answer

A firm issues bonds to investors through the stock market.

Question 10

A company is considering a project that will pay $$10,000 in $$one year and $$10,000 in $$two years. If the interest rate is $$5\%$$, what is the present value of these payments?

$$PV = \frac{10,000}{(1+0.05)^1$} + \frac{10,000}{(1+0.05)^2$}$$

Accepted Answer

$$PV = 9,523.81 + 9,070.29 = 18,594.10$$

Question 11

Which of the following is NOT a reason why a multinational corporation might open a factory in another country?

Accepted Answer

To increase the risk of exchange rate fluctuations.

Question 12

Which of the following statements about mutual funds and exchange-traded funds (ETFs) is correct?

Accepted Answer

Mutual funds are actively managed and can only be sold back to the management company.

Question 13

Why do government regulations such as the Sarbanes-Oxley Act and Dodd-Frank Act exist in the context of corporate governance?

Accepted Answer

To increase transparency and reduce the risk of financial crises.

Question 14

If a firm’s income statement shows revenue of $$500,000$$, explicit costs of $$350,000$$, and implicit costs of $$50,000$$, what is the firm’s economic profit?

$$	ext{Economic Profit} = 	ext{Revenue} - (	ext{Explicit Costs} + 	ext{Implicit Costs})$$

Accepted Answer

$$100,000$$

Question 15

Which of the following best explains why the price of a stock can be high even if the company is not currently profitable?

Accepted Answer

Stock prices reflect expectations about future profits.

Question 16

Which of the following is a disadvantage of organizing a business as a corporation?

Accepted Answer

Corporations are subject to double taxation.

Question 17

A firm’s balance sheet lists current assets of $$100,000$$, long-term assets of $$400,000$$, current liabilities of $$50,000$$, and long-term liabilities of $$200,000. $$What is the firm’s stockholders’ equity?

$$	ext{Stockholders’ Equity} = (	ext{Current Assets} + 	ext{Long-term Assets}) - (	ext{Current Liabilities} + 	ext{Long-term Liabilities})$$

Accepted Answer

$$250,000$$

Question 18

Which of the following is a primary function of financial statements for investors?

Accepted Answer

To provide unbiased information for investment decisions.

Question 19

If a firm’s board of directors wants to align the interests of managers with those of shareholders, which of the following is a common strategy?

Accepted Answer

Paying managers with stock or stock options.

Firms, the Stock Market, and Corporate Governance: Microeconomics Study Guide

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