Question 1

Which of the following best describes the main advantage of a corporation compared to a sole proprietorship or partnership?

Accepted Answer

Corporations provide limited liability to their owners, protecting personal assets.

Question 2

Sarah opened a bakery as a sole proprietor and, after selling all business assets, still owed $13,000 to creditors. What economic concept does this scenario illustrate?

Accepted Answer

Unlimited liability

Question 3

Which of the following is an example of an explicit cost for a firm?

Accepted Answer

The rent paid for office space

Question 4

A corporation’s management is not always the same as its owners. What is the term for the conflict that can arise when managers pursue their own interests rather than those of shareholders?

Accepted Answer

Principal-agent problem

Question 5

Which of the following is NOT a method by which a small business typically raises funds?

Accepted Answer

Issuing government bonds

Question 6

Suppose a firm issues a bond with a face value of $$1,000 and promises to pay 50 $$per year in interest. What is the coupon rate of the bond?

$$	ext{Coupon Rate} = \frac{	ext{Annual Coupon Payment}}{	ext{Face Value}} 	imes 100\%$$

Accepted Answer

$$5\%$$

Question 7

Which of the following best describes direct finance?

Accepted Answer

Firms borrow funds directly from lenders by selling financial securities such as stocks and bonds.

Question 8

A firm’s balance sheet shows assets of $$500,000 and liabilities of 350$$,000. What is the firm’s net worth?

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

Accepted Answer

$$150,000$$

Question 9

Tommy's Teddy Bears incurs $$300,000 per year in explicit costs and 50$$,000 in implicit costs. The shop earns $$600,000 in revenues. What is the economic profit?

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

Accepted Answer

$$250,000$$

Question 10

Which of the following is a key feature of a corporation that makes it easier to raise large amounts of funds compared to other business structures?

Accepted Answer

Limited liability for owners

Question 11

Which of the following is an example of an implicit cost?

Accepted Answer

The opportunity cost to investors of the funds invested in the firm

Question 12

Which of the following strategies can help resolve the principal-agent problem in corporations?

Accepted Answer

Tying managers’ compensation to the firm’s profits or stock price

Question 13

Which of the following statements about financial statements is correct?

Accepted Answer

The income statement shows a firm’s revenues, costs, and profit over a period of time.

Question 14

Which of the following is a reason why regulations such as the Sarbanes-Oxley Act were implemented?

Accepted Answer

To require CEOs to personally certify the accuracy of financial statements

Question 15

If a firm wants to raise funds by selling ownership shares, which financial instrument will it use?

Accepted Answer

Stock

Question 16

Which of the following best describes the difference between stocks and bonds?

Accepted Answer

Stocks represent ownership in a company, while bonds are loans to a company.

Question 17

A firm’s income statement shows revenues of $$800,000 and explicit costs of 500$$,000. If implicit costs are $$100,000, what is the accounting profit?

$$	ext{Accounting Profit} = 	ext{Total Revenue} - 	ext{Explicit Costs}$

Accepted Answer

$$300,000$$

Question 18

Which of the following is a characteristic of indirect finance?

Accepted Answer

Funds flow from savers to borrowers through financial intermediaries like banks.

Question 19

Which of the following would most likely increase the interest rate a firm must offer on its bonds?

Accepted Answer

An increase in the firm’s default risk

Question 20

Which of the following best explains why most economic activity takes place through corporations, even though most firms are sole proprietorships?

Accepted Answer

Corporations are typically larger and can raise more funds, leading to more economic activity.

Firms, the Stock Market, and Corporate Governance: Study Notes for Macroeconomics

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