Harvey Quit His Job at State University, Where He Earned

question 20

Multiple Choice

Harvey quit his job at State University, where he earned $45,000 a year. He figures his entrepreneurial talent or forgone entrepreneurial income to be $5,000 a year. To start the business, he cashed in $100,000 in bonds that earned 10 percent interest annually to buy a software company, Extreme Gaming. In the first year, the firm sold 11,000 units of software at $75 for each unit. Of the $75 per unit, $55 goes for the costs of production, packaging, marketing, employee wages and benefits, and rent on a building. The implicit costs of Harvey's firm in the first year were

• A) $50,000.
• B) $60,000.
• C) $100,000.
• D) $150,000.

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Definitions:

Stockholders' Equity

Refers to the residual interest in the assets of a corporation after deducting its liabilities.

Common Stockholders' Equity

The portion of a company's equity that is attributable to common stock holders, calculated as the difference between total assets and total liabilities, excluding preferred shares.

Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its stock price, indicating the return on investment from dividend payments alone.

Price-Earnings Ratio

A valuation metric for a company's current share price compared to its per-share earnings, often used to assess if a stock is over or undervalued.