Econ 501

501 sample test 1

True/False

Indicate whether the statement is true or false.

____1.One danger of starting a proprietorship is that you may be exposed to personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.

____2.In order to maximize its shareholders' value, a firm's management must attempt to maximize the expected EPS.

____3.If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.

____4.The NYSE is defined as a "spot" market purely and simply because it has a physical location. The Nasdaq, on the other hand, is not a spot market because it has no one central location.

____5.Primary markets are large and important, while secondary markets are smaller and less important.

____6.The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

____7.Typically, the statement of stockholders' equity starts with retained earnings at the beginning of the year, adds net income, subtracts dividends paid, and ends up with retained earnings at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and the series of annual retained earnings will result in a substantial amount of retained earnings as shown on the balance sheet.

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____8.Which of the following statements is CORRECT?

a. | One advantage of forming a corporation is that equity investors are usually exposed to less liability than they would be in a...