Question 1

Which of the following best explains why corporations, despite being fewer in number than sole proprietorships, account for the majority of revenue and profit in the U.S. economy?

Accepted Answer

Corporations benefit from limited liability, which allows them to raise large amounts of capital and operate on a larger scale.

Question 2

A firm’s balance sheet follows the equation $$	ext{Assets} = 	ext{Liabilities} + 	ext{Stockholders' Equity}. If a $$firm has assets worth $$\500$$,000$$ and liabilities of $$\$$350,000$$, what is its stockholders’ equity?

Accepted Answer

$$\150$$,000$

Question 3

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 4

Suppose a firm’s revenue is $$\200$$,000$$, explicit costs are $$\$$120,000$$, and the owner’s opportunity cost of time is $$\50$$,000$. What is the firm’s economic profit?

Accepted Answer

$$\30$$,000$

Question 5

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

Accepted Answer

Managers may pursue their own interests rather than those of shareholders.

Question 6

A bond with a face value of $$\1$$,000$$ pays a coupon of $$\$$50$$ per year for 5 years. If the market interest rate is 5%, what is the present value of the bond’s payments (ignoring principal repayment for simplicity)? Use the formula $$PV = \sum_{t=1}^{n} \frac{C}{(1+i)^t}$$ where $$C is $$the coupon, $$i is $$the interest rate, and $$n is $$the number of years.

Accepted Answer

$$PV = \216.47$

Question 7

Which of the following is a key advantage of limited liability for corporate shareholders?

Accepted Answer

Shareholders cannot lose more than their investment in the firm.

Question 8

If a firm’s income statement shows revenue of $$\500$$,000$$ and operating expenses of $$\$$400,000$$, what is the operating income before taxes?

Accepted Answer

$$\100$$,000$

Question 9

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

Accepted Answer

Issuing government bonds

Question 10

A stock pays a constant dividend of $$\2$ per year. If the required rate of return is 8%, what is the price of the stock according to the present value of a perpetuity formula P$$ = \frac{D}{i}$?

Accepted Answer

$$\25$

Question 11

Which of the following best explains why mutual funds and exchange-traded funds (ETFs) are popular among small investors?

Accepted Answer

They allow investors to diversify their investments without needing large amounts of money.

Question 12

During the Covid-19 pandemic, there was a sharp increase in new business formation. Which of the following is a plausible explanation for this trend?

Accepted Answer

Workers whose jobs changed or disappeared started new businesses.

Question 13

Which of the following statements about stock and bond markets is correct?

Accepted Answer

The existence of resale markets allows investors to buy and sell securities, increasing liquidity.

Question 14

If a firm’s net income is $$\20$$,000$$, its explicit costs are $$\$$80,000$$, and its total revenue is $$\100$$,000$, what is the firm’s accounting profit?

Accepted Answer

$$\20$$,000$

Question 15

Which of the following government regulations was enacted to increase confidence in the financial system by requiring CEOs to certify financial statements?

Accepted Answer

The Sarbanes-Oxley Act

Question 16

A firm is considering a project that will pay $$\10$$,000$$ in one year and $$\$$10,000 in $$two years. If the interest rate is 10%, what is the present value of these payments? Use $$PV = \frac{10,000}{(1+0.10)^1$} + \frac{10,000}{(1+0.10)^2$}.$$

Accepted Answer

$$PV = \17$$,355$

Question 17

Which of the following is a reason why multinational corporations operate facilities in multiple countries?

Accepted Answer

All of the above.

Question 18

Which of the following best describes the separation of ownership from control in a corporation?

Accepted Answer

Top management controls daily operations, while shareholders own the firm.

Question 19

If a firm’s assets are $$\1$$,000,000$$ and its liabilities are $$\$$750,000$$, what is its net worth (stockholders’ equity)?

Accepted Answer

$$\250$$,000$

Question 20

Which of the following is a key difference between accounting profit and economic profit?

Accepted Answer

Economic profit includes both explicit and implicit costs, while accounting profit includes only explicit costs.

Chapter 8 Study Guide

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