Chapter 3 Quiz Questions

1) What is the name of the name of the rate that the Federal Reserve charges member banks for overnight loans? a. Discount rate b. Money market rate c. LIBOR d. Prime Rate

Discount Rate

1) A heavily leveraged corporation has which of the following? a. High bond ratio b. Low rate risk c. Low debt/equity ratio d. High debt/equity ratio

High debt/equity ratio i. A corp w/ more debt has a higher debt/equity ration and is more vulnerable to interest rate increases

1) Which of the following industries is most cyclical? a. Tobacco b. Natural gas c. Home appliances d. Retail

Home appliances i. Home appliances are big-ticket items, and their purchases and sales rise and fall with economic cycle.

1) Which of the following statements about the balance of payments is TRUE? a. Large trade deficits appear as an outflow of foreign capital b. Any transaction that results in money flowing into the country is a debit to its BOP account c. It is a measure of a country's total economic activity in one year d. It is the sum of all transactions between a country and the rest of the world over a specified period of time

It is the sum of all transactions between a country and the rest of the world over a specified period of time i. The U.S. balance of payments (BOP) is an accounting of the country's international transactions over a specified period of time, typically a calendar quarter or year. It represents the sum of all trans between individuals, businesses and government agencies in the U.S. and the rest of the world

1) What economic theory advocates stimulating economic growth through government intervention? a. Foreign exchange b. Keynesian theory c. Supply side d. Fiscal policy

Keynesian Theory

1) The theory that reducing taxes and limiting government involvement in business activities stimulates economic growth is called? a. Supply Side b. Cost-pull, demand-push c. Keynesianism d. Monetarism

Supply Side

1) Which of the following is considered to be a lagging indicator of economic trends? a. Personal income b. New housing permits c. Unemployment d. Consumer expectations for economic conditions

Unemployment i. Lagging indicators include average duration of unemployment, labor costs, commercial and industrial loans, and average prime rate. Housing starts (new housing permits) and consumer expectations for business and economic conditions are leading indicators. Personal income is a coincident indicator.

1) Which of the following would increase U.S. exports? a. Weakening dollar b. Balance of payment credits c. Exchange rate increases d. Strengthening dollar

Weakening dollar i. If the dollar is weak and the balance of payments is in deficit, the U.S. exports should suffer less

1) What measures a corporation's solvency? a. Profit margin b. Cash Flow c. Debt/equity ratio d. Working capital

Working Capital i. Working Capital = current assets- current liabilities. Measures a Corp's ability to meet current debt obligations

1) All of the following are true of the organizational structure of a balance sheet EXCEPT a. The net worth section or shareholders' equity section is below the liabilities section b. It is arranged from current items at the top to long-term items at the bottom c. Liquid items appear on the left and illiquid and fixed items appear on the right d. It follows an equation

quid items appear on the left and illiquid and fixed items appear on the right

1) Which of the following have currency risk? a. Government bonds b. American Depository Receipts c. Income Bonds d. Treasury Receipts

American Depository Receipts i. ADRs facilitate domestic investment in foreign securities

1) Which of the following industries is LEAST defensive? a. Utilities b. Clothing c. Automobile Repair d. Automobile Production

Automobile Production i. Auto Prod is a big-ticket consumer item, and is cyclical, not defensive. Follows the economic cycle

1) Which of the following industries is LEAST defensive? a. Automobile production b. Utilities c. Clothing d. Automobile repair

Automobile production i. Auto production is a bid-ticket consumer item (cyclical), not defensive. In other works, it follows the economic cycle.

1) Which of the following is a lagging indicator? a. Average Prime Rate b. Housing starts c. The S&P 500 d. Industrial production

Average Prime Rate i. Lagging indicators include average duration of unemployment, labor costs, commercial and industrial loans, and the avg prime rate. The rest are leading indicators.

1) All of the following are examples of defensive industries EXCEPT a. Tobacco b. Clothing c. Building materials d. Food retail

Building Materials i. Building materials are "big ticket" items related to construction and housing, which are very cyclical. Defensive industries include consumable goods, such as food, alcohol, tobacco, drugs, cosmetics, and clothing.

1) An income statement a. Shows a financial position at a specific at a specific point in time b. Lists assets and liabilities of a company c. Quantifies the value of property, plant and equipment d. Covers financial activity over a period of time

Covers financial activity over a period of time

1) Which of the following indicates the generosity of the board of directors? a. EPS b. Preferred divided ratio c. P/E ratio d. Dividend payout ratio

Dividend Payout Ratio

1) Earnings Per Share (EPS) measures? a. Earning after interest but before taxes b. Earnings available to common stockholders c. Earnings paid to stockholders d. Earnings available to stockholders

Earnings available to common stockholders i. EPS is net income available to common stock after the preferred dividend is paid

1) A normal business cycle starts with a. Decline b. Expansion c. Peak d. Recovery

Expansion

1) Which of the following is not included in the current assets section of a balance sheet? a. Goodwill b. Accounts receivable c. Inventory d. Cash

Goodwill i. Goodwill appears in the intangible assets section, below fixed assets

1) All of the following are considered lagging indicators EXCEPT a. Housing Permits b. Automobile sales c. Appliance sales d. Employment

Housing Permits i. Housing permits are a leading indicator because they are the first in a series of events. After they are issued, materials are purchased, construction begins, etc. When houses are sold, the buyers typ purch durable goods such as major appliances. The rest are legging as they measure past activity.

1) Which of the following is considered a coincident economic indicator? a. Index of industrial production b. Housing starts c. The yield curve d. Capital goods expenditures

Index of industrial production i. The rest are leading

1) Which of the following is a coincident indicator? a. Industrial Production b. Machine tool orders c. Business inventories d. Orders for durable goods

Industrial Production i. GDP (industrial production) is a coincident indicator. Inventories are a lagging indicator, while orders for durable good and machines are leading indicators

1) Open market operations of the Federal Reserve Board cause direct changes in? a. Dollar exchange rates b. M1 c. Interest Rates d. Velocity of Money

M1 i. M1 is part of the money supply that the Fed reg through buying or selling gov's & gov agencies

1) An analyst comparing the stock prices of two similar market competitors would most be interested in their a. P/E Ratio b. Working capital c. Debt ratio d. EPS

P/E Ratio i. Measures the value of a stock at current price, and is one of the most used tools when comparing similar stocks

1) What is the term for an economic downturn that lasts for 2 consecutive quarters? a. Trough b. Decline c. Recession d. Depression

Recession i. Depression is 8 consecutive quarters or 24 months of decline

1) If the Federal Reserve Board through the FOMC (Federal Open Market Committee) lowers the discount rate, which of the following will decline? a. Lending levels at banks b. Inflation c. T-Bill rate d. Prime rate

T-Bill rate i. The T-Bill and the fed funds rates will decline. The prime rate may not, and lending levels increase when rates lower.

1) Which of the following is the quick ratio? a. EPS b. EPS vs. P/E Ratio c. P/E ratio d. The acid test

The acid test i. The acid test is the same as quick ratio: current assets minus only inventory divided by current liabilities

1) Under what circumstances would the Federal Reserve sell treasury bonds in the open market? a. To tighten the money supply b. To lower interest rates c. To stimulate the economy d. To loosen the money supply

To tighten the money supply i. The sales, which are charged against the reserve balances of the banks, reduces their ability to make loans, resulting in tightening of the money supply and increase interest rate