Series 7 Unit 14

Q: Statistics from which of the following industries are considered a leading indicator of economic growth? A) New housing. B) Natural gas. C) Automotive. D) High technology

A) New housing. leading indicator predicts economic trends. Such indicators include steel shipments, stock market indices, manufacturing orders, and housing starts.

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

B) Coincident.

Q: 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. Spreads narrow. IV. Trading volume increases. 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.

Q: Stock of which of the following companies trades on equity? A) Public utility. B) Drug manufacturer. C) Car manufacturer. D) Steel manufacturer.

A) Public utility. Trading on equity relates to a highly leveraged company. Utility companies are normally highly leveraged.

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

B) reduce income taxes. 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.

Q: In analyzing the ability of a company to meet its debt obligations but not wanting to chance that certain accounting decisions or practices will cloud the picture, one measure that you might look at is the firm's A) cash flow found on a cash flow statement B) earnings before interest, taxes, depreciation, and amortization (EBITDA), calculated from the firm's income statement C) price-to-earnings (P/E) ratio D) net worth found on the firm's balance sheet

B) earnings before interest, taxes, depreciation, and amortization (EBITDA), calculated from the firm's income statement Earnings before interest, taxes, depreciation, and amortization (EBITDA), calculated from the firm's income statement, is a metric that measures the ability of a company to repay debt obligations (interest and principal), eliminating accounting decisions and techniques that might not allow for the best assessment.

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

C) Foreign spending in the U.S. 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.

Q: Which of the following would you most likely consider characteristics of a growth stock? A) Low PE and low dividend yield. B) High PE and high dividend yield. C) High PE and low dividend yield. D) Low PE and high dividend yield.

C) 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.

Q: An analyst comparing revenues with expenses is most likely analyzing: A) capitalization. B) liquidity. C) cash flow. D) working capital.

C) cash flow. The analyst is most likely measuring the income statement for cash flow (money coming in against money going out). Working capital analysis would involve examining the balance sheet's current assets and current liability entries, not the income statement. Capitalization analysis involves examination of long-term debt and stock issues. Liquidity analysis involves examining current assets and liabilities from the balance sheet.

Q: The issuance of a debenture by a company would have an immediate effect on which of the following balance sheet items? I. The total assets. II. The total liabilities. III. The working capital. IV. The shareholders' equity.

I. The total assets. II. The total liabilities. III. The working capital. The cash received from the sale of the bonds is a current asset of the company and as such would increase assets and working capital on the balance sheet. The debentures are debts of the company and would increase the liabilities of the company. Shareholders' equity is only affected by gains, losses, new invested capital, and cash distributions (dividends) to shareholders.

Q: Which of the following balance sheet entries may be affected when a company pays a cash dividend? I.Shareholders' equity. II.Total assets. III.Total liabilities. IV.Working capital.

II.Total assets. III.Total liabilities. When a company pays a cash dividend, the dividends payable (a current liability) and the cash account (current assets) are reduced by the same amount. Because liabilities and assets are each reduced by the same amount, working capital is not affected. Shareholders' equity, or net worth, is also not affected when the dividend is paid.