Deck 9: Securities Business Finance and the Economy the Tail That Wags the Dog

Question 1

A partnership requires the agreement of most or all partners to any major decision.

Answer 1

True

Question 2

Most American firms are corporations.

Answer 2

False

Question 3

Corporate profits are taxed twice.

Answer 3

True

Question 4

The special privileges and obligations of corporations are defined by law

Question 5

A corporation has legal status like an individual citizen.

Question 6

Corporations produce most of the output in the United States.

Question 7

Owners of a corporation have limited liability for the debts of the business.

Question 8

A corporation is the most preferable type of firm if the investor wants to limit liability.

Question 9

The basic disadvantage of a proprietorship is unlimited liability.

Question 10

When business is profitable, corporate managers will prefer plowback to other sources of funding.

Question 11

More than 80% of American firms are incorporated.

Question 12

The sales of the 50 largest corporations in the U.S.economy amount to nearly 37 percent of GDP.

Question 13

The sale of new stocks by a corporation is one source of investment funds.

Question 14

Unlimited liability is a distinct advantage of the proprietorship.

Question 15

Double taxation is a problem for corporations.

Question 16

A corporation is often financed through stocks and bonds.

Question 17

"Common stock" is the type sold to small investors.

Question 18

A corporation is an entity separate and distinct from its owners.

Question 19

Business firms are prohibited by law from borrowing money from banks.

Question 20

One disadvantage of corporations is the double taxation of income to the owners.

Question 21

When a firm's earnings rise, its stock prices will tend to fall.

Question 22

A portfolio of stocks, bonds, and other investments helps reduce the risk of investment.

Question 23

The price of bonds is tied to the interest rate; when one goes up, the other must fall.

Question 24

Whenever the interest rate goes up, the price of bonds will go down.

Question 25

Issuing stocks with little or nothing to back them up is described as "plowing back."

Question 26

A portfolio's performance is its yield to the holder.

Question 27

Purchasers of corporate bonds lend money to a corporation.

Question 28

Stocks are riskier for buyers because there is no commitment to pay dividends.

Question 29

A bond and stock differ in that a stock is an IOU for a fixed amount and a bond is a portion of ownership.

Question 30

Plowback refers to the profits management decides to keep and reinvest in the firm's operations.

Question 31

Corporations must always pay dividends to their shareholders.

Question 32

A person's portfolio of investments is the package of all the stocks, bonds, and other assets the person owns.

Question 33

Retained earnings may be a better source of funds than issuing stocks or bonds because management does not have to account for their effectiveness this way.

Question 34

An investor will diversify his portfolio to reduce risk.

Question 35

For a corporation, issuing bonds is riskier than issuing stock.

Question 36

Bondholders have a "prior claim" over stockholders on a company's earnings or its assets.

Question 37

If a firm goes bankrupt, the bondholders will get paid back before the stockholders get any money.

Question 38

Retained earnings are the same thing as "plowback."

Question 39

A stockholder's investment is usually riskier than a bondholder's.

Question 40

A futures contract is an agreement to buy a commodity at a specific future date, at a price set today.

Question 41

Investors must rely on stockbrokers to give detailed, day-to-day reports on stocks and bonds.

Question 42

One effect of speculators is to iron out price fluctuations because this is the way they make their profits.

Question 43

Speculators serve no useful function in a market.

Question 44

The New York Stock Exchange is the only place where a corporation can sell stocks and raise money.

Question 45

The Securities and Exchange Commission (SEC) oversees the regulation of the securities market.

Question 46

Overall, professional securities analysts have a 75% success rate in predicting winning stocks.

Question 47

Derivatives are securities that derive their values from the values of underlying investments.

Question 48

Corporations obtain funds when their previously issued stock is traded.

Question 49

Stock prices can be described as "random walks" if there is no relationship between one day's prices and the following day's prices.

Question 50

The activities of speculators often reduce the risk borne by other stock market participants.

Question 51

Takeovers and takeover attempts waste valuable capital.

Question 52

The takeover process does not use up capital; it merely redistributes it.

Question 53

A diversified portfolio only makes sense for large institutional investors, not for small investors.

Question 54

The stock market provides two functions for corporate financing: reducing investors' risk and setting the prices of stocks.

Question 55

A hostile takeover is one opposed by the firm's existing management.

Question 56

Derivatives can be used to reduce risk but they also can be a source of risk in themselves.

Question 57

A private investment firm that holds a portfolio of securities is called a mutual fund.

Question 58

The New York Stock Exchange handles only about 10 percent of all stock market transactions in the United States.

Question 59

The term "random walk" means that stock prices are fairly predictable.

Question 60

Investing in risky assets in the hope of earning profits is called speculation.

Question 61

Almost 85% of American firms have less than

A)20 employees.
B)100 employees.
C)500 employees.
D)1,000 employees.

Question 62

A corporation seeking to expand, and looking for the least risky financing option would choose:

A)stocks
B)bonds
C)retained earnings
D)a bank loan

Question 63

Why is it that only a small percentage of American firms are incorporated?

A)Corporate debt as stockholder's liability.
B)Small size of firms.
C)Unlimited liability.
D)Inability to outlast associated individuals.

Question 64

The combined incomes of Walmart, ExxonMobil and Chevron total more than the GDP of:

A)Belgium
B)Denmark
C)Ireland
D)all of these

Question 65

The sole owner of a unincorporated business unable to pay its debts:

A)may be sued by the people to whom the business owes money
B)may be forced to pay them out of his own bank account
C)may be forced to sell his personal property to pay those debts
D)all of these are correct

Question 66

A major advantage of the corporation is

A)limited taxes.
B)preferential treatment by state governments.
C)limited liability of individual owners.
D)limited numbers of owners and ease of decision making.

Question 67

What percentage of American business firms are incorporated?

A)about 20 percent
B)about 40 percent
C)about 50 percent
D)over 60 percent

Question 68

The major advantage of the corporation is

A)limited liability for owners.
B)greater profit incentive than the other forms of business organization.
C)lower taxes for owners, who are taxed only once.
D)ability of owners to have hands-on management of the firm.

Question 69

In the context of stock markets, "the tail wags the dog" means that the failure of the stock market can drag down the entire economy.

Question 70

The reason that some corporations grow so big is:

A)double taxation
B)that they are a separate entity from their owners
C)that they have limited liability
D)none of these

Question 71

A corporation's income is taxed

A)immediately after it is deposited in the bank.
B)only before it is distributed to its owners.
C)only after it is distributed to owners.
D)both before and after it is distributed to owners.

Question 72

Bonds differ from stocks in all of these ways except:

A)a purchase of corporate stock becomes a part owner of the corporation, while a bondholder does not
B)a bondholder loans money to the corporation, which has priority for repayment, while a stockholder may lose her investment
C)stockholders know with a high degree of certainty how much money they will get, while bondholders do not
D)all of these are correct

Question 73

Corporations account for a ____ proportion of U.S.firms and a ____ proportion of sales by U.S.firms.

A)small; small
B)small; large
C)large; small
D)large; large

Question 74

Double taxation of corporate earnings means

A)for individuals who get dividends on personal income, tax rates are twice as high as for wage earners.
B)stockholders pay personal income taxes and corporation taxes on profits.
C)stockholders don't get the plowback but still pay taxes on it.
D)the corporation tax raises stock prices so individuals also pay a capital gains tax in addition to a tax on dividends.

Question 75

A corporation is legally owned by its

A)chief executive officer.
B)board of directors.
C)bondholders.
D)stockholders.

Question 76

The tax treatment of corporate profit means that corporations

A)cannot profitably issue common stock.
B)choose investment opportunities more efficiently than do other types of firms.
C)limits the things in which corporations can invest.
D)can generally avoid paying federal taxes but not state taxes.

Question 77

The three noteworthy features of corporations' legal status include all of these except:

A)they are taxed
B)special limits are placed on the losses that may be incurred by those who invest incorporations
C)the corporation is a distinct entity separate from its owners
D)they may invest in the stock market and acquire financing

Question 78

When a corporation needs capital to expand, its choices are:

A)to sell stocks on a stock exchange
B)to sell bonds
C)to reinvest its own earnings
D)all of these

Question 79

For legal purposes, a corporation is treated as

A)an individual.
B)a nonprofit organization.
C)a partnership.
D)a limited partner in a partnership.

Question 80

Double taxation of corporate profits

A)imposes losses on investors' incentives in corporate stock.
B)tends to keep corporations out of low-profit activities.
C)makes the allocation of resources more efficient.
D)makes issuing new stock prohibitively expensive.