Chapter 10 Business Econ
During which decade did the largest mergers in history occur? (a) 1930s (b) 1950s (c) 1990s (d) 1920s
C
How much interest is charged annually if you borrow $850 at an 8 percent interest rate? (a) $8.50 (b) $16.25 (c) $68 (d) $85
C
Suppose a company that cuts trees to provide firms with timber merges with a construction company. What type of merger has occurred? (a) conglomerate merger (b) horizontal merger (c) vertical merger (d) input merger
C
What caused the First Merger Wave to end? (a) hostile takeovers (b) conglomerate mergers (c) antitrust laws (d) the stock market crash
C
What is the market value of a firm on a given day if there are 600,000 shares outstanding at a price of $4 per share? (a) $150,000 (b) $200,000 (c) $2,400,000 (d) $10,000,000
C
Which of the following is a payment shareholders of a company receive? (a) retained earnings (b) bonds (c) dividends (d) securities
C
Why did many of the conglomerate mergers of the Third Merger Wave fail? (a) results of the stock market crash and the Great Depression (b) hostile takeovers were out of control (c) firms tried to produce all types of products well instead of focusing on a few (d) too much competition in the market
C
Why would a saver use a bank to lend money out instead of making loans directly to borrowers? (a) Savers are unable to find borrowers without banks. (b) Savers need credit, which can only be gained through a bank. (c) Banks reduce the transaction costs of lending money to borrowers. (d) Savers can collect a loan from borrowers more easily than a bank can.
C
You can buy a new style of jeans the day they are put on store shelves. Or, you can wait a few weeks for the pants to go on sale or wait a few months for them to show up at the outlet stores. Which option would cost you the most money? (a) buying the jeans after they've gone on sale (b) buying the jeans at the outlet store (c) buying the jeans the day stores put them on display (d) It cannot be determined from the information given.
C
The demand curve for loans reflects a negative relationship between the interest rate and the quantity of loans demanded
True
The greater a corporation's profit, other things constant, the higher the value of the corporation's shares.
True
The interest earned on loans to state and local governments is not subject to federal income taxes.
True
The lower the interest rate, the greater the quantity of loans demanded
True
The more valuable the collateral backing up a loan, the lower the interest rate charged on that loan.
True
Those who demand and supply loans determine the market rate of interest.
True
You can think of interest as the reward for not consuming in the present
True
Name a business that may need to access a line of credit for use during off seasons.
gift-basket companies, Christmas tree producers, and ski resorts.
Profitable firms grow faster because they can more easily obtain loans.
True
The Third Merger Wave occurred between 1948 and 1969.
True
Summarize the types of mergers for each of the four merger waves. (a) 1887-1904 (b) 1916-1929 (c) 1948-1969 (d) 1982-present
(a) Horizontal mergers were common as firms got big quickly. (U.S. Steel formed in 1901 as a result of dozens of steel producers merging) (b) Vertical mergers of firms at different stages of the production process occurred. (Copper refiner with a copper fabricator) (c) Conglomerate mergers of large firms stretched management expertise and benefits of specialization. (d) Many hostile takeovers of record value. Horizontal and vertical mergers occurred. Mergers were often financed with corporate stock.
Of the following cities, where would an American multinational corporation most likely be based? (a) Los Angeles (b) Taiwan (c) Sydney (d) Barcelona
A
Which of the following is essential to production? (a) savings (b) borrowers (c) investors (d) loans
A
Which of these terms is defined as the ability to borrow now based on the promise of repayment in the future? (a) credit (b) prime rate (c) bond (d) line of credit
A
Why do profitable firms grow faster? (a) They can more easily obtain loans. (b) More profits can be given to shareholders. (c) Owners tend to invest less of their own money into the firm. (d) They don't need to issue new shares of stock.
A
Why does the demand curve for loans slope downward? (a) because firms borrow more when the interest rate declines (b) because firms borrow less when the interest rate declines (c) because there is a positive relationship between interest rate and the quantity of loans demanded (d) because firms must borrow at any rate to purchase capital goods
A
Why might a business negotiate a line of credit with a bank? (a) so the business can borrow money when and as it is needed (b) so the business can open a savings account (c) so the business can obtain a mortgage on its property (d) so the business would not have to pay taxes on the loan
A
Why is a bank more able to withstand a default on a loan rather than an individual lender?
A bank would have many loans and would be able to sustain a default because it is a larger financial institution and has diversified its assets.
If a corporation issues a bond, what is it promising to do? (a) pay back the holder a monthly fixed sum until the loan is completely paid off (b) pay back the holder a fixed sum of money on the maturity date plus annual interest (c) pay back the holder within a one-year period (d) pay back the holder at a given maturity date without paying interest
B
Suppose that four different firms take out four different loans as follows: firm A, $1,000; firm B, $25,000; firm C, $8,020; firm D, $20,600. Which firm's loan will have the lowest administration cost per dollar borrowed? (a) firm A (b) firm B (c) firm C (d) firm D
B
The interest rate for borrowing money from a bank increases. What effect would this have on the demand for loans curve? (a) rightward shift of the curve (b) movement along the curve (c) leftward shift of the curve (d) no shift would occur
B
What was the most prevalent type of merger during the Second Merge Wave? (a) horizontal mergers (b) vertical mergers (c) conglomerate mergers (d) hostile mergers
B
Which of the following contributed to the First Merger Wave (1887-1904)? (a) hostile takeovers (b) technological breakthroughs (c) an increase in the cost of transportation (d) the Great Depression
B
Which of these results from investment? (a) labor (b) capital goods (c) interest rates (d) banks
B
Which situation illustrates that an equilibrium interest rate has been achieved? (a) The quantity of loans demanded is greater than the quantity of loans supplied. (b) The quantity of loans demanded is equal to the quantity of loans supplied. (c) The quantity of loans demanded is less than the quantity of loans supplied. (d) The quantity of loans could never change from the equilibrium point.
B
Who is a financial intermediary? (a) saver (b) bank (c) borrower (d) the IRS
B
In what way do banks reduce the transaction costs between savers and borrowers?
Banks are better able to determine creditworthy borrowers than an individual could. It is better to let the bank serve as the lender.
Most of the world's largest multinational corporations are located in (a) Mexico City (b) the Netherlands (c) Europe (d) the United States
D
What is not an advantage to buying a franchise? (a) the risk of failure is lower than if one opened a brand new business (b) people with limited experience can run a business (c) people gain valuable marketing and production experience (d) the owner can always borrow money at prime rate from banks
D
Which of the following is an example of securities? (a) retained earnings (b) dividends (c) collateral (d) stocks
D
Which of the following is true of the supply curve for loans? (a) It shows that the more people save, the fewer loans supplied. (b) The curve slopes downward. (c) The curve shifts rightward as the interest rate decreases. (d) It shows a positive relationship between interest rate and the quantity of loans supplied.
D
Which of these would a corporation not do to acquire financial capital? (a) use retained earnings (b) borrow from banks (c) issue stock (d) give a dividend to stockholders
D
Who does not determine the market rate of interest? (a) those who demand loans (b) those who save money (c) those who supply loans (d) those not in the market for a loan
D
Who is not a key player in the market for loans? (a) savers (b) borrowers (c) suppliers of loans (d) politicians
D
All borrowers are guaranteed the prime rate.
False
As a general trend, people value future consumption over present consumption.
False
As the duration of a loan increases, the interest rate charged decreases.
False
Bonds have outperformed stocks in every decade.
False
During the 1980s, many mergers were hostile, meaning they violated antitrust laws.
False
Financial markets allocate funds readily to corporations experiencing financial difficulty.
False
Firms are the only demanders of loans
False
Franchises slow down the rate at which a business grows.
False
In general, people value future consumption over present consumption
False
Interest rates are identical across all industries, e.g., car loans, home mortgages, personal loans.
False
Owners of securities are never allowed to resell them.
False
The Fourth Merger Wave came to an end due to hostile takeovers.
False
The higher the interest rate, the greater the quantity of loans demanded.
False
The lower the interest rate, the less money someone will borrow
False
The quantity of loans supplied is inversely related to the interest rate
False
The secondary market for securities decreases the liquidity of securities.
False
The supply curve for loans shifts rightward as the interest rate decreases.
False
When people save more and businesses borrow less, interest rates will increase.
False
With a conglomerate merger, one firm combines with another from which it buys inputs or to which it sells output.
False
How might expectations of future interest rates changes affect people's choices to save now?
If they expect interest rates to fall, they may choose not to save now. If they expect interest rates to climb, they may increase savings now.
What are some benefits to firms that operate as multinational corporations?
Increased opportunities for sales through brand awareness, supply products and create jobs worldwide, spread the latest technology and the best production techniques around the world.
How is the equilibrium, or market interest rate, determined?
It is determined by the intersection of the demand and supply curves for loans.
How might impatience affect a consumers buying habits?
It may be a reason for valuing present consumption more than future consumption
Why do home purchases increase when mortgage rates decline?
People are more willing and able to buy homes at lower mortgage prices.
How do high share values benefit a corporation?
The higher the share value, the more money the firm can raise issuing new shares of stock.
Interest rates differ across industries.
True
Mergers are the quickest way for a company to grow.
True
Opening a franchise can increase the rate at which a firm can grow.
True
Present consumption usually cost more than future consumption
True
Describe how a borrower might secure the lowest possible interest rate considering risk, duration of the loan, costs and tax treatment.
They could use a home as collateral, borrow for the shortest period of time possible, borrow the largest amount needed at one time, and consider any taxation differences.
A merger between a clothing producer and a media company is an example of a conglomerate merger.
True
Advanced industrial economics invest more than economies
True
An increase in capital makes workers more productive
True
An initial public offering allows the public to buy stock in a company.
True
Banks are an example of a financial intermediary.
True
Burger King is an example of a franchise.
True
Firms grew quickly in the last half of the nineteenth century because the geographical size of markets increased.
True
Why are some of the pro and con arguments of multinational influences in poorer countries?
Wages lower than U.S. level wages are paid to foreign workers; however, these wages often are higher than those paid by local firms. Some contend that multinationals have too much influence on local culture and politics.
What are some of the benefits of operating a franchise business?
brand name, marketing experience, business practices, reduced risk of failure
What are some typical items that households borrow to pay for?
homes, cars, and tuition