A Small Business Owner Earns $50,000 in Revenue Annually

question 77

Multiple Choice

A small business owner earns $50,000 in revenue annually. The explicit annual costs equal $30,000. The owner could work for someone else and earn $25,000 annually. The owner's business profit is ________ and the economic profit is ________.

• A)$20,000, $20,000
• B)$20,000, -$5,000
• C)$25,000, -$5,000
• D)$25,000, $20,000

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Definitions:

Bankruptcy Cost

The expenses and financial losses associated with going through bankruptcy, including legal fees, lost business, and detrimental effects on creditworthiness.

Interest Tax Shield

A lowered income tax obligation stemming from approved deductions on interest expenses.

Levered Firm

A company that uses debt (loans or bonds) in addition to equity in its financing structure, often leading to higher risk and potentially higher returns.

M&M Proposition I

A theory in corporate finance suggesting that in a perfect market, the value of a firm is unaffected by how it is financed, regardless of the debt-to-equity ratio.