UNIT 14 Checkpoint

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What is the balance sheet equation?

. Assets = liabilities + shareholders equity Total assets equal total liabilities plus total shareholders' equity

The board of ABC has voted to pay a $.32 dividend to holders of its common stock. These dividends will be paid from A. new stock issues B. operating income C. debt service D. retained earnings

. D. Cash dividends are typically paid from retained earnings.

To reflect a more accurate picture of economic results, gross domestic product is adjusted for

. inflation By adjusting GDP for inflation, one can measure economic activity with less distortion. A constant dollar adjustment is made to remove the effects of inflation.

When a member bank of the Federal Reserve System borrows from the Federal Reserve, it would pay

. the discount rate The discount rate is set by the FRB to designate the rate at which member banks can borrow from the Fed.

In the technical analysis of the value of securities, which of the following items is NOT important? A. amount of company's past earnings B. resistance and support levels C. breadth of market volume D. prevailing mkt trend in response to shifts in supply and demand

. A. The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.

A fundamental analyst is concerned with all of the following EXCEPT A. trading volumes B. capitalization C. inflation rates D. historical earnings trends

. A. A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and balance sheet ratios. A technical analyst is concerned with trading volumes or market trends and prices.

Which of the following industries is most likely to be considered cyclical? A. utilities B. durable goods C. pharmaceutical D. food

. B. The production of durable goods depends on whether the economy is in an expansion or a contraction phase. Pharmaceuticals, utilities, and food are always necessary.

Which of the following is a leading economic indicator? A. GDP B. Industrial production C. S&P 500 D. Duration of unemployment claims

. C Broad stock market indices are generally leading indicators. GDP and industrial production are coincident indicators, and the duration of unemployment claims is a lagging indicator.

A new corporation with no existing products or services has a patent pending with the U.S. government. Which of the following describes this type of company? A. Asset allocation B. Value C. Special situation D. Growth

. C. A company with a patent pending is known as a special situation..

Which of the following is most likely to be regarded as a defensive stock? A. aerospace stock B. stock with strong cash position and little debt C. food company stock D. stock with high PE ratio

. C. A defensive stock maintains future earnings that are likely to withstand an economic downturn. Typical examples are stocks of those firms that supply basic consumer necessities such as foodstuffs. A stock selling at an extremely high PE ratio is indicative of a speculative company or one that can decline in value rapidly.

Investments that move in the opposite direction of the economic cycles are known to be counter cyclical. Historically investments that fit into this category are A. consumer goods manufacturing stocks B. utility stocks C. precious metals such as gold D. pharmaceutical stocks

. C. Historically precious metals, like gold, are counter cyclical and move opposite of the economic cycles. Utility and pharmaceutical companies are defensive or noncyclical and their movement is not tied to the economic cycles while manufactures of consumer goods move with the economic cycles.

The Federal Reserve System is responsible for all of the following EXCEPT A. acting as agent for U.S. Treasury B. conducting monetary policy C. setting prime rate D. acting as coordinator of the money supply

. C. The prime rate is set by large commercial banks in competition with one another.

To stimulate a sluggish economy using fiscal policy measures, policymakers would A. increase in income taxes B. increase the money supply C. reduce income taxes D. reduce the money supply

. C. Reducing income taxes is a fiscal policy tool intended to increase overall demand for goods and services. Adjusting the money supply is a monetary policy tool.

Which of the following indicators reflects the current level of business activity? A. building permits B. expenditures on plant and capital equipment C. level of inventories D. personal incomes

. D. Personal income levels reflect the current state of the economy. Building permits and expenditures on plant and capital equipment indicate future economic activity and are considered leading indicators. Inventory levels are considered a lagging indicator.

If the FRB decides to tighten the money supply, which of the following would the Fed be most likely to do? A. raise prime rate B. lower taxes C. lower discount rate D. raise the discount rate

. D. Raising the discount rate discourages borrowers and shrinks the money supply. The FRB has no authority over tax levels. The prime rate and broker call loan rate are determined by banks, not the FRB.

Which economic theory states that a reduced tax rate will result in a healthy economy that will in turn generate more taxes? A. Monetarist Economic B. Demand Side Economic C. Keynesian Side Economic D. Supply Side Economic

. D. The Supply Side Economic Theory (Reaganomics) is that reduced tax rates will result in a healthier economy, which will generate more taxes to compensate for the reduced rates.

Which of the following is a NOT a leading economic indicator? A)Money supply B)New housing permits C)Orders for durable goods D)Duration of unemployment

. D. The average amount of time it takes for an unemployed person to find a new job is a lagging indicator, not a leading one. Employment is usually one of the last things to pick up as the economy enters a period of expansion. Layoffs are one of the last resorts for companies when the economy turns down.

Which of the following would NOT be considered a defensive security? A. food chain stock B. tobacco stock C. utility company stock D. steel company stock

. D. Steel is cyclical and is not considered defensive; defensive stocks are generally less affected by the business cycle.

During the past 2 quarters, the GDP declined by 3%, unemployment rose by .7%, and the Consumer Price Index fell off by 1.3%; this economic condition is called A. inflation B. stagflation C. depression D. recession

. D. Two consecutive quarters of economic decline is termed a recession

Which of the following would you most likely consider characteristics of a growth stock?

. High PE and low dividend yield. Growth stocks generally have high PE ratios and low (or no) dividends. Value stocks normally have low PE ratios with higher dividend payouts.

In an efficient market, which of the following statements are TRUE? I.Spreads narrow II.Spreads widen III.Trading volume decreases IV.Trading volume increases

. I and IV The efficient market hypothesis (EMH) suggests that, at any given time, prices fully reflect all available information on a particular stock and/or market. Thus, no investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. As a result, spreads will narrow, and volume will increase

In what order do the following economic phases typically occur? I.Recovery II.Trough III.Decline IV.Prosperity

. I, IV, III, II Economists consider expansion (recovery) the beginning of the business cycle, followed by the peak (prosperity), contraction (decline), and trough.

Which of the following would be considered in the fundamental analysis of a security? I.Support and resistance levels II.Trading volumes III.Liquidity ratios IV.Historical earnings trends

. III and IV Fundamental analysts are concerned with information relating to the economy, industries, and individual companies. A company's liquidity ratios and past earning trends fall within these areas of concern. Concerns about the stock price and volume of trading would be of primary interest to a technical analyst.

The theory that the small investor is usually wrong is called

. The Odd-Lot Theory is based on the belief that the smaller investor (who normally buys in odd lots) is usually wrong. If odd-lot purchase volume increases, it indicates a market decline is near. If odd-lot sale volume increases, it indicates that market prices will appreciate.

How often is the Consumer Price Index (CPI) is released

. The U.S. Bureau of Labor Statistics releases the CPI monthly.


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