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Microeconomics – Testbank 1, (Hubbard/O’Brien)
Chapter 7: Firms, the Stock Market, and Corporate Governance
Choose the one alternative that best completes the statement or answers the question.
1) If a corporation retains all its profits and distributes none of the profit to owners, owners benefit through:
A) changing the management.
B) changing the board of directors.
C) converting shares of stock into bonds to be able to earn coupon payments.
D) the firm retaining earnings that are expected to create future profits causing the market price of the
firm's stock to increase.
Page Ref: 205
2) A primary difference between a sole proprietorship and a partnership is:
A) sole proprietorships have unlimited liability while partnerships have limited liability.
sole proprietorships have more layers
of management than partnerships.
C) partnerships have more owners than do sole proprietorships.
D) partnerships can issue stocks and bonds while sole proprietorships cannot.
Page Ref: 201
3) Among the differences between a share of stock and a bond is:
A) differences of opinion about a stock's future may vary considerably but there is less difference about a
B) the future growth of a stock is more uncertain than the payments of a bond.
C) a stock can possibly pay dividends forever, but bonds have a fixed number of payments.
D) all of the above.
Page Ref: 205
4) How are corporate profits taxed?
A) Corporate profits are not taxed at all.
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) Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level.
Page Ref: 201
5) If the coupon rate on a newly issued bond is higher than the interest rate on similar bonds, then:
A) the market price of the bond will be higher than the face value.
B) the market price of the bond will be lower than the face value.
C) the market price of the bond will be equal to the face value.
D) the face value of the bond will fall.
Page Ref: 208
6) A stock's earnings per share equal to:
A) the last dividend payment made.
B) total dividend payments plus retained earnings divided by outstanding stock shares.
C) the price of stock divided by its dividend.
D) the amount by which the stock's market price has increased in the last year.
Page Ref: 207
7) The type of businesses that earn the largest percentage of aggregate profits in the United States are:
A) sole proprietorships.
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