Series 7 Chapter 14: Economics & Analysis

Which of the following industries is most likely to be considered cyclical? A) Food. B) Durable goods. C) Utilities. D) Pharmaceutical.

Your answer, Food., was incorrect. The correct answer was: Durable goods. 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.

Each of the following would add to the balance of trade deficit EXCEPT: A) Foreign spending in the U.S. B) U.S. spending abroad. C) U.S. investing abroad. D) Imports of foreign goods into the U.S.

Your answer, Foreign spending in the U.S., was correct!. Any spending overseas by U.S. investors or consumers adds to the trade deficit. For instance, the trade deficit increases when imports of foreign goods exceed exports of U.S. goods. Foreign spending in the U.S.would decrease the balance of trade deficit.

A corporation has a net income of $5.2 million after taxes. If 4 million shares of common stock are outstanding, the earnings per share is: A) $1.78. B) $0.80. C) $1.30. D) $5.20.

Your answer, $5.20., was incorrect. The correct answer was: $1.30. Earnings per share equals net income (less preferred dividends) divided by the number of common shares outstanding. In this case, $5.2 million divided by 4 million equals an EPS of $1.30.

A recession is defined as a drop in GDP for: A) 6 consecutive quarters. B) 4 consecutive quarters. C) 3 consecutive quarters. D) 2 consecutive quarters.

Your answer, 2 consecutive quarters., was correct!. A recession is a drop in GDP for 2 consecutive quarters.

ABC Investors Group is looking to do a leveraged buyout of the XYZ Corporation. Which of the following would be the most likely source of capital to fund this takeover? A) XYZ's liquid assets. B) XYZ's creditors. C) ABC's liquid assets. D) A long-term bank loan.

Your answer, ABC's liquid assets., was incorrect. The correct answer was: A long-term bank loan. The word "leverage" generally implies the use of borrowed money. The acquiring company will either issue a bond or borrow from a bank and use that money to fund the acquisition. In most cases, the assets of the target company are used as collateral for the loan.

Which of the following economists supports demand-side economics? A) Milton Friedman. B) John Maynard Keynes. C) Arthur Laffer. D) Adam Smith.

Your answer, Adam Smith., was incorrect. The correct answer was: John Maynard Keynes. John Maynard Keynes was the first demand-side economist. He believed that by increasing the income available for spending and saving, a government could increase demand and improve the country's economic well-being. Higher taxes and higher government spending are key tenets of this theory.

Which of the following is the CORRECT order of the stages in a business cycle? A) Expansion, peak, contraction, trough. B) Contraction, trough, peak, expansion. C) Trough, contraction, expansion, peak. D) Peak, expansion, contraction, trough.

Your answer, Contraction, trough, peak, expansion., was incorrect. The correct answer was: Expansion, peak, contraction, trough. The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point as long as the stages are shown in the right order.

Industrial production is what kind of economic indicator? A) Leading. B) Coterminous. C) Coincident. D) Lagging.

Your answer, Coterminous., was incorrect. The correct answer was: Coincident. Industrial production is a coincident economic indicator.

An analyst interested in measuring the breadth of market movement as an indicator of future market direction would monitor the: A) betas of the S&P 500 stocks. B) advance/decline line. C) DJIA. D) Value Line Index.

Your answer, DJIA., was incorrect. The correct answer was: advance/decline line. The advance/decline line, which measures the number of stocks that have advanced versus the number of stocks that have declined, is an indicator of the breadth of the market's advance or decline.

Which of the following is a lagging indicator? A) Durable goods orders. B) Housing starts. C) Corporate profits. D) The GNP.

Your answer, Durable goods orders., was incorrect. The correct answer was: Corporate profits. Corporate profits are a lagging indicator, as the economic direction has been established before it is reflected in corporate profits.

Which of the following tools is most often used by the Federal Reserve Board to control the money supply? A) Altering the reserve requirements. B) Lowering the discount rate. C) Engaging in open market operations. D) Changing margin requirements.

Your answer, Engaging in open market operations., was correct!. The Federal Reserve Board has 3 tools to influence the money supply: the discount rate, the reserve requirement, and open market operations. The purchase and sale of government securities by the Federal Open Market Committee (FOMC) is the most frequently used tool of the Fed.

Which organization or governmental unit sets fiscal policy? A) Secretary of the Treasury. B) Federal Open Market Committee (FOMC). C) Congress and the President. D) Federal Reserve Board (FRB).

Your answer, Federal Reserve Board (FRB)., was incorrect. The correct answer was: Congress and the President. Congress and the President set fiscal policy, while the FRB sets monetary policy.

Which of the following may be affected when a company declares a cash dividend? Shareholders' equity. Total assets. Total liabilities. Current assets. A) III and IV. B) II and IV. C) I and III. D) I and II.

Your answer, I and III., was correct!. When a company declares a cash dividend, it will reduce retained earnings (part of shareholders' equity) and increase current liabilities (dividends payable), which will increase total liabilities. Assets are not affected until the cash is paid out several weeks later.

Market interest rates have risen steadily over the past several months. The market price of which 2 of the following shares would probably reflect the biggest impact of this change? Growth stock. Money market mutual fund. Preferred stock. Public utility stock. A) I and II. B) I and IV. C) II and III. D) III and IV.

Your answer, II and III., was incorrect. The correct answer was: III and IV. Stocks that are interest rate sensitive will reflect the impact of a change to market interest rates more than others. Preferred stock with its fixed dividend and utility stocks with their high degree of debt leverage are considered interest rate sensitive. The yield of the money market fund will change, but the price is fixed at $1 per share.

If the Federal Reserve Board (FRB) decides that the rate of inflation is too high, which is it most likely to do? Tighten the money supply. Loosen the money supply. Lower the discount rate. Raise the discount rate. A) II and III. B) I and IV. C) II and IV. D) I and III.

Your answer, II and IV., was incorrect. The correct answer was: I and IV. If the FRB decides to attempt to curb inflation, it can raise the discount rate which in turn tightens the money supply.

Which of the following are methods used to manage the economy? Modern portfolio theory. Monetary policy. Fiscal policy. Efficient market theory. A) II and III. B) I and III. C) I and IV. D) III and IV.

Your answer, III and IV., was incorrect. The correct answer was: II and III. Fiscal and monetary policies are two methods used to manage the nation's economic activity.

Which of the following investment strategies makes sense for an investor who believes in the efficient market hypothesis (EMH)? A) Investing in actively managed mutual funds. B) Investing in a market index fund. C) Hedging through the purchase of derivative investments. D) Market timing.

Your answer, Investing in a market index fund., was correct!. A market index fund is a favorite strategy of those who believe in the efficient market hypothesis, which holds that all relevant information has already been taken into account by the market, and it is pointless to try to outperform the broader market indexes.

Active government manipulation of the economy through tax and budget policies is referred to as: A) supply side. B) Keynesian. C) monetarist. D) soft landing.

Your answer, Keynesian., was correct!. Keynesian economics is the body of economic thought that believes that active government intervention in the marketplace is the only method of insuring economic growth and stability, and that the government should manipulate the economy through adjusting levels of government expenditure and taxation. A monetarist economist is one that believes that the manipulation of the money supply is the most important tool with regard to affecting the economy. These are the two major types of fiscal policy that basically advocate affecting the economy through manipulation of taxation and the spending policies of the federal government.

Which of the following analyze corporate financial statements and trends in sales and income? A) Fundamentalists. B) Market timers. C) Technicians. D) Chartists.

Your answer, Technicians., was incorrect. The correct answer was: Fundamentalists. Fundamental analysts obtain information from corporate financial statements as well as other relevant sources. Technical analysts review market charts while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements.

One company is guaranteeing the debt service of another company (guaranteed bond). In which of the following scenarios is this most likely to occur? A) Never, because SEC rules prohibit "guaranteed" bonds B) When a company guarantees the debt of one of its own existing creditors C) When 2 competitors have merged D) In a spin-off where one company, the parent company, has divested itself of some equity and some debt to form a separate company

Your answer, When a company guarantees the debt of one of its own existing creditors, was incorrect. The correct answer was: In a spin-off where one company, the parent company, has divested itself of some equity and some debt to form a separate company Of the scenarios listed, in a spin-off, where one company, a parent company, divests itself of some of its equity and debt to form a new separate company, it is likely that the parent company would guarantee the debt of the new company.

Each of the following would cause a decrease in the balance of trade deficit EXCEPT: A) an increase in exports of U.S. products. B) an increase in imports of foreign products. C) an increase in dividends paid on foreign stocks to U.S. investors. D) an increase in dividends paid on U.S. stocks held by foreign investors.

Your answer, an increase in exports of U.S. products., was incorrect. The correct answer was: an increase in imports of foreign products. The trade deficit occurs when imports exceed exports (as they have for years). We want to know which one of these would not be helpful to our balance of trade-that is, which one would cause the negative balance to increase. If you read it correctly, an increase in foreign imports is obviously correct since it is bad for our trade balance and would cause an increase in the deficit instead of a decrease.

One of your customers notices that the short interest on the NYSE is high. When she asks you for an interpretation, you should tell her that this signals a: A) period of volatility in the market. B) period of stability in the market. C) bullish market. D) bearish market.

Your answer, bullish market., was correct!. Even though short interest represents the number of shares sold short, many investors consider it a bullish indicator when this number is high. Each share that has been sold short must be replaced (covered) at some point. To replace the stock shorted, an investor must go into the market to buy that stock. When all of those short sellers have to buy back stock they shorted, it puts upward pressure on the prices of those stocks.

A report by the federal government stating the Consumer Price Index (CPI) has increased by .3% indicates: A) consumers purchased .3% more goods that month. B) consumers purchased .3% more higher-priced products than lower-priced products. C) the economy experienced deflation. D) the cost of goods purchased by consumers increased, on average, .3% for the month.

Your answer, consumers purchased .3% more goods that month., was incorrect. The correct answer was: the cost of goods purchased by consumers increased, on average, .3% for the month. The Consumer Price Index (CPI) is a statistic used by the federal government to measure month-to-month changes in prices to the end-consumer. It includes prices on items such as food, oil, and clothing. The CPI is usually used to indicate the general inflation rate of the economy.

All of the following are liquidity measures EXCEPT: A) current assets divided by current liabilities. B) annual dividends per share divided by EPS. C) cash equivalents and receivables divided by current liabilities. D) current assets minus inventory divided by current liabilities.

Your answer, current assets divided by current liabilities., was incorrect. The correct answer was: annual dividends per share divided by EPS. Liquidity is the ability to convert an asset into cash. All of the options listed are used to measure the liquidity of a company except for the dividend payout ratio which would tell you nothing about liquidity.

A fundamental analyst would be interested in all of the following EXCEPT: A) innovations within the automotive industry. B) daily trading volumes on the NYSE. C) corporate annual reports. D) statistics of the U.S. Department of Commerce on disposable income.

Your answer, daily trading volumes on the NYSE., was correct!. Trading volume interests the technical analyst, who looks at fluctuations in the market, not at fundamental economic values.

When comparing the change in the GNP from one year to another, each year's GNP should be converted into: A) constant dollars. B) international dollars. C) dollars in terms of gold bullion. D) dollars valued by the exchange ratios with foreign currencies.

Your answer, dollars in terms of gold bullion., was incorrect. The correct answer was: constant dollars. The GNP measures growth in the economy. To retain an accurate comparison of one year to the next, it must be measured with constant dollars (inflation-adjusted dollars).

Net worth is equal to: A) liabilities minus income. B) income minus liabilities. C) liabilities minus assets. D) assets minus liabilities.

Your answer, income minus liabilities., was incorrect. The correct answer was: assets minus liabilities. The balance sheet offers a "snap shot" view of a firm's resources and obligations based on the firm's most recent reporting date. The basic balance sheet equation is: assets − liabilities = net worth.

If a corporation has a dividend payout ratio of 70%, the undistributed earnings will: A) increase retained earnings. B) increase earnings per share. C) increase capital surplus. D) decrease book value.

Your answer, increase retained earnings., was correct!. Retained earnings represent income that has not been paid out to shareholders.

The Federal Open Market Committee's (FOMC) open market operations affect all of the following EXCEPT: A) the amount of money in circulation. B) interest rates. C) bank excess reserves. D) the national debt.

Your answer, interest rates., was incorrect. The correct answer was: the national debt. When the Fed buys and sells securities on the open market, it attempts to expand or contract the amount of money in circulation. When the Fed buys, bank excess reserves go up; when the Fed sells, bank excess reserves go down. This, in turn, affects the money supply, credit, and interest rates. The national debt is affected only when the government issues and redeems treasury securities, not when it trades them in the market.

If one of your clients has recently bought several defensive stocks, she is probably anticipating: A) a depression. B) a recession. C) mild economic growth. D) strong economic growth.

Your answer, mild economic growth., was incorrect. The correct answer was: a recession. Defensive stocks such as food company stocks do reasonably well in poor economic climates. If the client were anticipating a depression, the client would probably get out of equities and into high-quality short-term debt securities.

Your customer wants to know what portion of earnings one of the companies held in her portfolio has available to pay interest expense on bonds the company currently has outstanding. You would be able to find this information A) on the firm's income statement indicated as earnings before interest and taxes (EBIT) B) on a firm's income statement by subtracting preferred dividends from EBIT C) by contacting the Internal Revenue Service (IRS) D) on the firm's most recent balance sheet

Your answer, on the firm's income statement indicated as earnings before interest and taxes (EBIT), was correct!. Earnings before interest and taxes (EBIT) is the amount of money a company has retained before paying taxes and interest on outstanding debt issues. This can be found by looking at the income statement for the company.

A highly leveraged company has the smallest percentage of its total capitalization in: A) long-term debt. B) preferred stock. C) common stock. D) short-term debt.

Your answer, preferred stock., was incorrect. The correct answer was: common stock. Common stock, which represents ownership, would account for the smallest amount of capitalization of a highly leveraged company. Highly leveraged companies have the largest amount of their capitalization in debt instruments. Preferred stock, although an equity, is more like a debt instrument because of the stated dividend rate.

A technical analyst is concerned with all of the following trends EXCEPT: A) support levels. B) reversals. C) changes in the DJIA. D) PE ratios.

Your answer, reversals., was incorrect. The correct answer was: PE ratios. Technical analysts are more interested in forecasting market trends and securities prices than in studying individual corporations. Therefore, they are concerned with market prices, trading volumes, changes in the Dow Jones Industrial Average, reversals, support and resistance levels, advance/decline lines, short interest, and many other factors that might help them time buying and selling decisions. Fundamental analysts, on the other hand, concentrate on a stock's intrinsic quality and are concerned with PE ratios and earnings per share.

The economic philosophy that believes in controlling the money supply to stimulate economic growth is often referred to as: A) the Supply Side Economic Theory. B) the Fiscal Economic Theory. C) the Monetarist Economic Theory. D) the Demand Side Economic Theory.

Your answer, the Fiscal Economic Theory., was incorrect. The correct answer was: the Monetarist Economic Theory. Controlling the money supply implies a hands-on theory that is referred to as the Monetarist Theory.

If DMF Corporation issues $10 million par value of convertible debentures, all of the following balance sheet items will be affected immediately EXCEPT: A) the liabilities. B) the assets. C) the working capital. D) the net worth.

Your answer, the assets., was incorrect. The correct answer was: the net worth. Net worth (equity in the company) remains unchanged. Assets and liabilities both increase, as does the working capital.