Question 1

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

Accepted Answer

It is a conflict that arises when shareholders and managers have different incentives, leading managers to pursue their own interests rather than those of shareholders.

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 NOT a reason why multinational corporations operate facilities in multiple countries?

Accepted Answer

To increase the risk of exchange rate fluctuations.

Question 4

Suppose a firm’s income statement shows revenue of $$500,000, operating expenses of 350$$,000, and taxes paid of $$30,000. What is the firm’s net income (accounting profit)?

$$Net\ Income = Revenue - Operating\ Expenses - Taxes$

Accepted Answer

$$Net\ Income = 500,000 - 350,000 - 30,000 = 120,000$$

Question 5

Which of the following statements about limited liability is correct?

Accepted Answer

It means that owners of a corporation cannot lose more than their investment in the firm.

Question 6

A firm is considering two projects. Project A requires an investment of $$10,000 and will return 12$$,000 in one year. Project B requires an investment of $$10,000 and will return 13$$,000 in two years. If the interest rate is 10%, which project has the higher present value?

$$PV = \frac{Future\ Value}{(1 + i)^n}$$

Accepted Answer

Project A: $$PV = \frac{12,000}{1.1} = 10,909$$; Project B: $$PV = \frac{13,000}{(1.1)^2$} = 10,744. $$Project A has the higher present value.

Question 7

Which of the following best explains why stock prices fluctuate more than bond prices?

Accepted Answer

Stock prices reflect changing expectations about future profits, which are more uncertain than the fixed payments of bonds.

Question 8

If a firm’s balance sheet shows assets of $$2,000,000 and liabilities of 1$$,200,000, what is the firm’s stockholders’ equity?

$$Stockholders'\ Equity = Assets - Liabilities$$

Accepted Answer

$$Stockholders'\ Equity = 2,000,000 - 1,200,000 = 800,000$$

Question 9

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

Accepted Answer

The salary the owner could have earned working elsewhere.

Question 10

A mutual fund differs from an exchange-traded fund (ETF) in that:

Accepted Answer

Mutual funds are actively managed and can only be sold back to the management company, while ETFs are passively managed and can be traded directly between investors.

Question 11

Which of the following is a direct method for a firm to raise funds?

Accepted Answer

Issuing stocks or bonds in financial markets.

Question 12

Suppose a stock pays a dividend of $$5 per share, the interest rate 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}$

Accepted Answer

$$P = \frac{5}{0.08 - 0.03} = 100$$

Question 13

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

Accepted Answer

Owners have limited liability, making it easier to raise funds.

Question 14

Why do governments regulate the disclosure of financial statements by corporations?

Accepted Answer

To increase investor confidence and ensure resources are allocated efficiently in the economy.

Question 15

If a firm’s assets are $$500,000 and its liabilities are 650$$,000, what is its net worth?

$$Net\ Worth = Assets - Liabilities$$

Accepted Answer

$$Net\ Worth = 500,000 - 650,000 = -150,000$$

Question 16

Which of the following best describes the purpose of the Sarbanes-Oxley Act (2002)?

Accepted Answer

To require CEOs to personally certify financial statements and disclose conflicts of interest from auditors.

Question 17

A firm’s income statement shows revenue of $$1,000,000, explicit costs of 700$$,000, and implicit costs of $$100,000. What is the firm’s economic profit?

$$Economic\ Profit = Revenue - Explicit\ Costs - Implicit\ Costs$

Accepted Answer

$$Economic\ Profit = 1,000,000 - 700,000 - 100,000 = 200,000$$

Question 18

Which of the following is a benefit of stock and bond markets for society?

Accepted Answer

They allow investors to buy and sell financial securities, increasing liquidity and enabling firms to raise funds more easily.

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

Study Guide - Practice Questions

Study Guide - Flashcards