SIE Unit 9

First Mate Coffee Company has reported the following financial results for the prior quarter: Earnings: $75 million Interest: $5 million Taxes: $25 million Depreciation: $2 million Amortization: $3 million What is First Mate's EBITDA? A) $75 million B) $70 million C) $35 million D) $50 million

$75 million EBITDA is an acronym referring to earnings before interest, taxes, depreciation, and amortization.

ABC and MNO both have the same market price and shares outstanding for their common stock. If ABC's price-to-earnings ratio is higher, that would indicate A) ABC sales are lower than MNO's. B) ABC's net income is less than MNO's. C) ABC's net income is higher than MNO's. D) ABC's sales are higher than MNO's.

ABC's net income is less than MNO's. If ABC's price-to-earnings ratio is higher than MNO's, then its earnings (defined as net income ÷ shares outstanding) is lower than MNO's. The information provided does not provide enough detail to know whether ABC or MNO had higher sales.

Which of the following would decrease the U.S. balance of payments deficit? A) A decrease in exports of domestic goods from the United States B) U.S. investors seeking better returns in overseas markets C) An increase in imports of foreign goods into the United States D) An increase in purchases of U.S. securities by foreign investors

An increase in purchases of U.S. securities by foreign investors Foreign investors pulling their money out of the United States or investing less in the United States will increase the U.S. deficit.

Which of the following best fits the description of a growth stock? A) Preferred shares in companies that back stated dividends with investments in pharmaceutical companies B) Common or preferred shares in companies, which experience growth in unusual, nonrecurring profitable circumstances C) Common shares in companies that pay a high dividend on rapid growth experience D) Common shares in companies that retain earnings and pays little or no dividends

Common shares in companies that retain earnings and pays little or no dividends Most every industry passes through phases; introduction, growth, maturity, and decline. An industry is in its growth phase if it is growing faster than the economy as a whole due to e.g. technological changes, new products, or changing consumer tastes. Because growth companies retain nearly all of their earnings to finance business expansion, growth stocks pay little or no dividends.

Reports of rising inventories generally occur during which period of the business cycle? A) Expansion B) Peak C) Recovery D) Contraction

Contraction Downturns in the business cycle (a contraction) tend to be characterized by rising inventories due to a lack of consumer demand. During expansion or recovery, demand is high and goods are less likely to remain in inventory.

If the U.S economy were to enter a deflationary period, which of the following would likely occur? A) Fixed-income payments become more valuable. B) Interest rates would increase. C) Gold prices would increase. D) Employment would rise.

Fixed-income payments become more valuable. Deflation is a prolonged period of falling prices. Falling prices would make fixed-income payments more valuable as bond investors could buy more goods and services with their coupon payments. Essentially, purchasing-power risk is reversed in a deflationary period. Interest rates and gold prices would likely fall during a deflationary period.

The economic indicator that reflects activity of U.S. entities without regard to where the activity takes place is A) CPI. B) GNP. C) GDP. D) FUN.

GNP. This is a description of gross national product. GDP measures activity within the U.S., regardless if it is domestic entity or not. CPI is the primary inflation measure. FUN is just a word. Do not pick something you do not recognize just because it is unfamiliar.

A surplus in the U.S. balance of payments can occur if I. interest rates in foreign countries are higher than U.S. domestic rates. II. interest rates in foreign countries are lower than U.S. domestic rates. III. U.S. consumers are purchasing (importing) foreign goods. IV. foreign consumers are purchasing (importing) U.S. goods. A) I and III B) II and III C) I and IV D) II and IV

II. interest rates in foreign countries are lower than U.S. domestic rates. IV. foreign consumers are purchasing (importing) U.S. goods. Anything that brings money into our domestic economy leads to a surplus (more money coming in than going out). When interest rates abroad are comparatively lower, money flows into the United States to earn a better rate. When foreign consumers are purchasing more U.S. domestic goods and services, money flows into the United States as well.

Which of the following is a lagging indicator? A) Decrease in industrial production B) Increase in the consumer loans to personal income ratio C) Increase in hours worked D) Raw materials orders

Increase in the consumer loans to personal income ratio Changes in the ratio of consumer installment credit to personal income is a lagging indicator. Changes in industrial production and hours worked are coincident indicators. Changes in raw materials orders is a leading indicator.

For those who follow monetary theory, which is the most complete measure of the money supply? A) M3 B) M1 C) M1 + M2 D) M2

M3 M3 is the most complete of the money supply measures because it includes all of M1 and M2 and adds large time deposits (only those over $100,000) plus repurchase agreements (repos) with a term of more than one day.

Just as markets can be influenced by many factors, so can the market price of a single company's stock. While all of the following could impact a company's stock price to some extent, which would be the least likely to have a direct and immediate impact? A) The company's earnings B) Changes in the business cycle C) Political elections D) Federal Reserve Board (FRB) policies

Political elections The price of a company's stock will be impacted directly by the company's earnings and changes in the business cycle. Less directly impactful would be FRB policies to loosen or tighten credit, and least likely to have a direct impact would be the outcome of political elections. It should be noted, however, that the outcome of political elections can influence FRB policies over time and, therefore, where the economy stands in relation to the business cycle. Still, however, elections would have less of an immediate impact.

Of the standard Federal Reserve tools, which of these is considered the most powerful and used infrequently? A) FOMC activities B) Quantitative easing C) Reserve rate D) Discount rate

Reserve rate The reserve rate (i.e., the amount member banks keep on deposit at the Federal Reserve for liquidity) has the most dramatic impact when changed. It is rarely changed.

In order to lower the rate of inflation, the Federal Reserve might take which of the following steps? A) Decrease the reserve requirement B) Increase the prime rate C) Sell federal debt D) Purchase federal debt

Sell federal debt The sale of Treasury debt by the Federal Reserve Board (FRB) decreases the liquid cash in the economy, slowing spending and decreasing demand. Purchasing debt would have the opposite effect. Decreasing the reserve requirement would also increase money supply and spur demand. The FRB does not control the prime rate.

A weak U.S. dollar leads to more A) U.S. imports and a balance of payments surplus. B) U.S. exports and a balance of payments deficit. C) U.S. imports and a balance of payments deficit. D) U.S. exports and a balance of payments surplus.

U.S. exports and a balance of payments surplus. When the dollar is weak relative to other currencies, it makes U.S. goods more affordable for foreign consumers to buy, so U.S. exports increase. As more goods flow out of the U.S., more money flows in—surplus.

All of the following would decrease the U.S. balance of payments deficit except A) an increase in exports of domestic goods from the United States. B) a decrease in dividend payments by U.S. companies to foreign investors. C) a decrease in purchases of U.S. securities by foreign investors. D) a decrease in imports of foreign goods into the United States.

a decrease in purchases of U.S. securities by foreign investors. Anything that will bring foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S., or investing less in the U.S. will increase the U.S. deficit.

In order to calculate the earnings per share you would need information from A) both the balance sheet and the income statement. B) just the balance sheet. C) the balance sheet and current market value. D) just the income statement.

both the balance sheet and the income statement. Earnings per share (EPS) is earning available to the common shareholder (from the income statement) divided by the number of outstanding shares (found in the net worth section of the balance sheet). The stock's current market value is not used in the calculation.

M1 is a measure of the value of A) cash, cash equivalents, and DDAs. B) retail CDs and money markets. C) M2 plus retail CDs and money markets. D) cash and funds held in DDAs.

cash and funds held in DDAs. M1 is the tightest of the money supply measures, including only actual cash in circulation and funds in demand deposit accounts (DDAs) (e.g., checking and savings accounts).

All the following are coincident indicators except A) changes in durable goods inventories. B) personal income. C) trade sales. D) retail employment.

changes in durable goods inventories. Changes in durable goods inventories (whether an increase or decrease) is a leading economic indicator. Trade sales, retail employment, and personal income are all coincident indicators.

All of these are leading economic indicators except A) the stock market as measured by the S&P 500. B) manufacturer's new orders. C) duration of unemployment. D) building permits.

duration of unemployment. Duration of unemployment (i.e., how long unemployed people stay unemployed) is a lagging indicator. All of the others tend to change direction before the economy changes direction.

Rising employment due to an increase in demand for goods and services would be associated with periods of A) deflation. B) stagnation. C) inflation. D) stagflation.

inflation. During inflationary periods, prices are rising due to a rising demand for goods and services. This will have the effect of creating more employment. Conversely, when the economy slows down, employment generally falls and claims for unemployment benefits will rise.

An economic indicator that tends to change direction following a change in the direction of GDP is a A) flagging indicator. B) leading indicator. C) lagging indicator. D) coincident indicator.

lagging indicator. Lagging indicators tend to change direction after a change in the overall economy. GDP is the most common indicator for economic activity. When you have studied for eight hours straight and can not keep your eyes open; that is a flagging indicator. Take a break, flagging indicator is not on the exam.

The Federal Reserve Bank is raising interest rates, this will A) make bonds trading in the open market more desirable. B) have no impact on bond prices in the open market. C) push bond prices higher in the open market. D) push bond prices lower in the open market.

push bond prices lower in the open market. This is interest-rate risk. When interest rates are rising, bond prices in the open market are pushed down. Rate movements and prices have an inverse relationship. Those already holding the bonds in their portfolios see their investments decrease in value. This also makes bonds trading in the open market less desirable because new issue bonds will be yielding the now higher rates and comparably be more desirable.

To contract or slow economic growth U.S. fiscal policy should be to A) cut taxes and increase government spending for programs and development. B) raise taxes and cut government spending for programs and development. C) cut taxes and government spending for programs and development. D) raise taxes and government spending for programs and development. Explanation

raise taxes and cut government spending for programs and development. Fiscal policies to slow economic growth or contract the economy would encompass both increases in taxes leaving consumers with less money to spend, slowing economic growth, and cutting government spending for programs and development that would otherwise have created more jobs. Fewer jobs will slow economic growth as well.

The nation has passed through very trying economic times. Many have lost jobs and are tapping into savings to maintain their lifestyles. The economy is not weakening and shows a few signs of growth, but the damage from the downturn is very visible. The nation is likely entering a period of A) trough. B) recovery. C) disaster. D) deflation.

recovery. Recovery is the best answer. A recovery occurs when the economy begins to show some signs of growth after a period of contraction. The period of the trough (bottom) along with deflation and economic disaster are hopefully behind the nation.

The economy is showing that employment is low, there is little consumer demand, and loans for expansion and retooling are way down, showing a lack of business activity. Yet prices for consumer goods are still rising. Economists would call this a period of A) stagnation. B) stagflation. C) deflation. D) inflation.

stagflation. Inflation is characterized by a rise in prices for goods and services. Stagnation is characterized by high unemployment and lack of growth and business activity. When these occur simultaneously, economists refer to these times as periods of stagflation.

Economic headlines state that the consumer prices are rising while unemployment remains high. This indicates the economy is experiencing A) inflation. B) stagflation. C) disinflation. D) stagnation. Explanation

stagflation. When prices are increasing but the economy is not growing, it is stagflation.

A company's net worth belongs to its A) bond holders. B) board of directors (BOD). C) president and CEO. D) stockholders.

stockholders. A company's net worth (assets − liabilities) belongs to the business owners (its stockholders).

The most common way of measuring purchasing power risk is A) the DND. B) the GNP. C) the CPI. D) the GDP.

the CPI. The Consumer Price Index measures the increase or decrease in consumer prices. GDP and GNP are both measures of economic activity. DND is a fictional acronym, which has nothing to do with this test. Do not pick things you do not recognize just because it is unfamiliar to you.

A barometer of short-term interest rates and one that is therefore considered the most volatile interest rate in the U.S. economy is A) the broker call loan rate. B) the federal funds rate. C) the discount rate. D) the prime rate.

the federal funds rate. The federal funds rate is the rate commercial money center banks charge each other for overnight loans of $1 million or more. A barometer of the direction of short-term interest rates, which fluctuate constantly, the federal funds rate is considered the most volatile rate in the U.S. economy.