Deck 8: Firms, the Stock Market, and Corporate Governance

Question 1

Assume that you set up a sole proprietorship and your lawyer tells you that as the owner, you could stand to lose your personal wealth if the business goes bankrupt. This means that a sole proprietorship

A) faces limited liability.
B) faces unlimited liability.
C) has little chance of succeeding.
D) is not a good type of business to set up.

Answer 1

B

Question 2

How does the owner of a sole proprietorship relate to the business?

A) The owner and the business are separate legal entities.
B) The owner and the business are not separate legal entities.
C) The assets of the owner are considered separate from the assets of the business.
D) None of these describe the legal relationship of the owner to the business.

Answer 2

B

Question 3

What does limited liability mean?

A) The owners of the business are personally responsible for paying expenses incurred by the business.
B) Only employees can have a claim on the assets of the business.
C) The personal assets of the owners cannot be used to pay the firm's debts if the business is bankrupt.
D) Anybody with a liability against a firm can claim only what their liability refers to.

Answer 3

C

Question 4

In a typical year, ________ of new jobs are created by small firms.

A) less than 5 percent
B) 10 percent
C) more than 40 percent
D) about 75 percent

Question 5

How do a sole proprietorship and a corporation differ?

A) Proprietorships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while proprietorships cannot.
C) Corporations face more taxes than do proprietorships.
D) All of these are differences between the two types of businesses.

Question 6

A corporation is the type of business that has ________ government rules and regulations affecting it.

A) no
B) the fewest
C) the most
D) only federal

Question 7

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

Question 8

Who controls a sole proprietorship?

A) stockholders
B) bondholders
C) the owner
D) all of these

Question 9

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.

Question 10

Over ninety-five percent of all new businesses that open each year in the United States employ ________ workers.

A) only one or two
B) fewer than 20
C) 50 or more
D) over 100

Question 11

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.

Question 12

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

Question 13

Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a sole proprietorship. What is one disadvantage to Jeremy of setting up his business as a sole proprietorship?

A) As a sole proprietor, Jeremy would be taxed twice.
B) As a sole proprietor, Jeremy would not have control of the business.
C) As a sole proprietor, Jeremy would face unlimited liability.
D) As a sole proprietor, Jeremy would be subject to significant rules and regulations.

Question 14

As a form of business, a partnership

A) has limited liability.
B) has only one owner.
C) cannot issue stock.
D) has the most government rules and regulations affecting it.

Question 15

The owners of a ________ have a separate legal distinction from the business.

A) corporation
B) partnership
C) sole proprietorship
D) All of the above are correct.

Question 16

A corporation is owned by its

A) board of directors.
B) stockholders.
C) employees.
D) CEO.

Question 17

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.

Question 18

Which type of business has the least government rules and regulations affecting it?

A) sole proprietorship
B) partnership
C) corporation
D) They all have the same set of rules and regulations affecting them.

Question 19

Which of the following is an advantage of starting a new business as a sole proprietorship?

A) The owner has limited personal liability.
B) A sole proprietorship has few government rules and regulations to comply with.
C) Business profits are not taxed.
D) A sole proprietorship can easily attain additional funding.

Question 20

Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a sole proprietorship. What is one advantage to Jeremy of setting up his business as a sole proprietorship?

A) As a sole proprietor, Jeremy would face limited liability.
B) As a sole proprietor, Jeremy would have the ability to share risk with shareholders.
C) As a sole proprietor, Jeremy would have both ownership and control over the business.
D) All of the above would be advantages of setting up his business as a sole proprietorship.

Question 21

Assume you set up a sole proprietorship and your lawyer tells you that as the owner you will face unlimited liability. What does that mean?

A) You are liable for organizing the business.
B) You could stand to lose your personal wealth if the business goes bankrupt.
C) There is no legal responsibility of the business in case a customer sues, as the business is legally untouchable.
D) None of these explain what unlimited liability means.

Question 22

Of the different types of businesses, a corporation has the ________ government rules and the ________ government regulations affecting it.

A) least; least
B) least; most
C) most; least
D) most; most

Question 23

Sole proprietorships are ________ type of business.

A) the most profitable
B) the least common
C) the most common
D) the least risky

Question 24

Which of the following statements is false?

A) Corporations can issue stocks and bonds, while proprietorships cannot.
B) Corporations have one owner, while proprietorships have many owners.
C) Corporations face more taxes than do proprietorships.
D) Proprietorships have unlimited liability while corporations have limited liability.

Question 25

How has organizing a typical firm in a market economy changed over the last century?

A) It has become easier as more and more firms discover how to do it.
B) As government intervention has decreased, firms now have more freedom.
C) There has been no change one way or the other over the last century.
D) It has become more difficult to efficiently organize production.

Question 26

Who controls a partnership?

A) the owners
B) stockholders
C) bondholders
D) employees

Question 27

Which of the following is not an advantage of starting a new business as a corporation?

A) separation of ownership and business liability
B) enhanced ability to raise funds
C) ability to share risks
D) possibility of double taxation

Question 28

What is the primary difference between a sole proprietorship and a partnership?

A) Proprietorships have unlimited liability while partnerships have limited liability.
B) Partnerships can issue stocks and bonds while proprietorships cannot.
C) Partnerships have more owners than do proprietorships.
D) There is no real difference between the two types of firms.

Question 29

Which is the least common type of business?

A) corporation
B) partnership
C) sole proprietorship
D) impossible to determine without further information

Question 30

A firm in a market economy must do all of the following to succeed except

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) be organized as a corporation.

Question 31

Which type of businesses earns the majority of profits in the United States?

A) corporations
B) partnerships
C) sole proprietorships
D) none of these

Question 32

How do a partnership and a corporation differ?

A) Partnerships have unlimited liability while corporations have limited liability.
B) Corporations can issue stocks and bonds, while partnerships cannot.
C) Corporations face more taxes than do partnerships.
D) All of these are differences between the two types of businesses.

Question 33

Stockholders are the owners of which type of business?

A) sole proprietorships
B) partnerships
C) corporations
D) all of the above

Question 34

Which type of business has the most government rules and regulations affecting it?

A) sole proprietorship
B) partnership
C) corporation
D) They all have the same set of rules and regulations affecting them.

Question 35

What type of business is the easiest to set up?

A) sole proprietorship
B) partnership
C) corporation
D) There is no difference in the ease of establishment.

Question 36

Before its IPO, Facebook was an example of a private firm. As a private firm, Facebook was

A) not subject to government regulations and taxation.
B) run by stockholders and a board of directors.
C) run by its founder, Mark Zuckerberg.
D) not legally allowed to raise funds through venture capital firms.

Question 37

A corporation is

A) the easiest type of business to set up.
B) the least expensive type of business to set up.
C) the most difficult type of business to set up.
D) the least profitable type of business to set up.

Question 38

How are corporate profits taxed in the United States?

A) Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level.
B) Earnings are taxed first as personal income then as corporate profits at the Federal level.
C) Earnings are taxed first as corporate profits then as personal income after dividends are paid.
D) Corporate profits are not taxed at all.

Question 39

As a business type, corporations ________ in the United States.

A) earn the majority of revenues
B) are the most common
C) are the least common
D) are subject to the fewest taxes

Question 40

Anything of value owned by a person or a firm is

A) an asset.
B) a liability.
C) wealth.
D) owner's yield.

Question 41

Who controls a sole proprietorship?

A) the owner
B) the stockholders
C) the bondholders
D) the employees

Question 42

In a typical year, ________ new firms open in the United States.

A) more than 400,000
B) more than 1 million
C) less than 200,000
D) approximately 125,000

Question 43

As a business type, corporations ________ in the United States.

A) earn the majority of profits
B) are the most common
C) are the least common
D) are subject to the least amount of taxes

Question 44

What is an inside director?

A) a movie director who also appears in the movie
B) a member of a corporate board of directors that is also a manager of the business
C) the CEO that is selected by the corporation's board of directors
D) a board of director chair who has been in the job for at least three years

Question 45

Who operates and controls a corporation in its day-to-day activities?

A) the board of directors
B) stockholders
C) employees
D) management

Question 46

How does the owner of a corporation relate to the business?

A) The owners of the business have a separate legal distinction from the business.
B) The owners of the business have no separate legal distinction from the business.
C) The personal assets are part of the corporation's assets.
D) None of these describe the legal relationship of corporate owners to the business.

Question 47

Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He asks his friend, Carmen, if she'd like to join him in setting up a partnership to start the business. What is one disadvantage in joining the partnership that Carmen should consider?

A) Carmen should realize that profits in the partnership will be reduced by dividend payments to shareholders.
B) Carmen should realize that, as an owner of the business, she will be personally responsible for the debts of the business.
C) Carmen should realize that the profits of the business will also be taxed as dividend income, so she faces the potential for double taxation of that business income.
D) Carmen should realize that the Jeremy will have complete control over the business because it was his idea.

Question 48

Jeremy is thinking of starting up a small business selling NASCAR memorabilia. He is considering setting up his business as a corporation. What is one advantage to Jeremy of setting up his business as a corporation?

A) By setting up the business as a corporation, Jeremy would not face double taxation.
B) By setting up the business as a corporation, Jeremy would have the ability to share risk with shareholders.
C) By setting up the business as a corporation, Jeremy would have both ownership and control over the business.
D) All of the above would be advantages of setting up his business as a corporation.

Question 49

A corporation's board of directors

A) hire the managers of the corporation.
B) control the day-to-day activities of the corporation.
C) are personally liable for the debts of the corporation.
D) are the sole owners of the corporation.

Question 50

Which type of businesses earns the majority of revenues in the United States?

A) corporations
B) partnerships
C) sole proprietorships
D) none of these

Question 51

In the United States, corporate profits are taxed

A) only at the corporate level.
B) only when investors receive dividends.
C) at both the corporate level and when investors receive dividends.
D) neither at the corporate level nor when investors receive dividends.

Question 52

A partnership is ________ type of business.

A) the most common
B) the least common
C) the least risky
D) the most profitable

Question 53

Which of the following is not an advantage of starting a new business as a proprietorship?

A) The owner has complete control over the business.
B) A proprietorship has few government rules and regulations to comply with.
C) Business profits are only taxed once, not twice.
D) A proprietorship can easily attain additional funding.

Question 54

Which of the following is an advantage of starting a new business as a corporation?

A) double taxation
B) ease in setting up
C) low expenses of legally organizing
D) greater ability to raise funds

Question 55

If the personal assets of the owners cannot be claimed if the business is bankrupt, the owners are said to have

A) unlimited liability.
B) a proprietorship type of business.
C) limited liability.
D) a partnership type of business.

Question 56

Corporate governance involves the way in which

A) the government nationalizes corporations.
B) the government licenses corporations.
C) a corporation is subject to government regulations.
D) a corporation is structured.

Question 57

In the late 1970s, ________ of all firms were less than a year old. In recent years, ________ were.

A) almost half; less than one-quarter
B) less than 5 percent; more than 40 percent
C) about 16 percent; only about 8 percent
D) about 40 percent; about 20 percent

Question 58

How do the owners of a partnership relate to the business?

A) The owners and the business are not separate legal entities.
B) The owners and the business are separate legal entities.
C) The assets of the owners are considered separate from the asset of the business.
D) None of these describe the legal relationship of the owners to the business.

Question 59

Stockholders

A) select the board of directors of a corporation.
B) select the employees of a corporation.
C) select the managers of a corporation.
D) all of the above.

Question 60

What is the most common type of business?

A) corporation
B) partnership
C) sole proprietorship
D) They are equally represented because of federal laws.

Question 61

In a given year, ________ of smartphone or tablet owners will pay for any apps.

A) less than 15 percent
B) only about one-third
C) about 75 percent
D) almost 90 percent

Question 62

According to the textbook, which of the following must a firm in a market economy do today to succeed?

A) produce new or better goods or services
B) efficiently organize production
C) produce existing goods and services at a lower cost
D) Market firms today must do all of these things.

Question 63

Included on the board of directors of Microsoft are John W. Stanton, the chairman of Trilogy Equity Partners, the executive president and chief financial officer of Gap, Inc. Teri L. List-Stoll, and the former vice chairman of Bank of America Charles H. Noski. These three board members do not have a direct management role with Microsoft and are therefore referred to as

A) inside directors.
B) outside directors.
C) competitive directors.
D) honorary directors.

Question 64

Stockholders

A) are liable for the debts of a corporation.
B) are the owners of a corporation.
C) control a corporation's day-to-day activities.
D) hire the managers of a corporation.

Question 65

Some corporate governance experts believe that serving on a company's board of directors for an extended length of time diminishes that member's independence from the company's CEO. If this is true, it would tend to

A) reduce the principal-agent problem.
B) increase the principal-agent problem.
C) be in the best interest of shareholders.
D) have no impact on the company's performance, since the CEO is only one member of top management.

Question 66

By tying the salaries of top corporate managers to the price of the corporation's stock, corporations hope to avoid

A) corporate governance.
B) conflict between the CFO and the CEO.
C) the principal-agent problem.
D) paying high salaries to their managers.

Question 67

A member of a corporate board of directors who is also a manager of the business is known as

A) a shareholder.
B) an inside director.
C) a partner.
D) a corporate governor.

Question 68

The typical firm in many industries has become ________ over the past 100 years, and efficiently organizing production has become ________.

A) larger; more difficult
B) smaller; more difficult
C) larger; easier
D) smaller; easier

Question 69

Who hires the managers of a corporation?

A) the board of directors
B) stockholders
C) managers
D) employees

Question 70

The way in which a corporation is structured and the impact a corporation's structure has on the firm's behavior is referred to as

A) corporate taxation.
B) structure composition theory.
C) structural behavior.
D) corporate governance.

Question 71

Which of the following is a solution to the principal-agent problem?

A) threaten to liquidate the firm
B) link top manager salaries to the profits of the firm or the price of the firm's stock
C) have the CEO be a rotating position
D) forbid managers from owning any company stock

Question 72

The person hired by a corporation's board of directors to run the day-to-day operations of the corporation is known as the

A) chairman of the board.
B) chief executive officer.
C) owner-manager.
D) corporate governor.

Question 73

Economists refer to the conflict between the interests of shareholders and the interests of top management as

A) a stock-equity problem.
B) a liability problem.
C) a principal-agent problem.
D) a financial intermediary problem.

Question 74

What do economists call the situation where a hired manager does not have the same interests as the owners of the business?

A) conquest and control
B) a financial problem
C) a principal-agent problem
D) a financial intermediary problem

Question 75

Satya Nadella is the Chief Executive Officer of Microsoft as well as a member of Microsoft's board of directors. Nadella is therefore classified as an

A) inside director.
B) outside director.
C) independent director.
D) unbiased director.

Question 76

In many corporations, there is "separation of ownership from control." What does this mean?

A) The shareholders control the corporation, although the board of directors owns the corporation.
B) The managers of the corporation run the corporation, although the shareholders own the corporation.
C) The board of directors controls corporate operations, although the managers of the corporation own the corporation.
D) Top corporate managers only make decisions that have been approved unanimously by shareholders.

Question 77

A corporation's management

A) owns the corporation.
B) hires the board of directors.
C) is liable for the corporation's debts.
D) operates and controls a corporation in its day-to-day activities.

Question 78

Public companies ________ and private companies ________.

A) sell stock in financial markets; also sell stock in financial markets
B) sell stock in financial markets; do not sell stock in financial markets
C) do not sell stock in financial markets; also do not sell stock in financial markets
D) do not sell stock in financial markets; sell stock in financial markets

Question 79

Damian wants to start a business where he is the only owner and the company does not issue stock. The type of business Damian wants to start is a

A) sole proprietorship.
B) partnership.
C) corporation.
D) Any of the above could be correct.

Question 80

Who selects the board of directors of a corporation?

A) the state where the corporation is chartered
B) employees
C) stockholders
D) managers