Unit 15 Quiz Deck Flashcards
All the following are cyclical industries except
A) precious metals.
B) home appliances.
C) heavy equipment.
D) automobiles.
A) precious metals.
Cyclical industries are those that grow during expansions and shrink during declines. Automobiles, home appliances, and heavy equipment are all cyclical industries. Precious metals are the exact opposite—they grow during declines and contract during expansions in the business cycle, and are termed countercyclical.
Those industries that are least affected by normal business cycles are
A) growth industries.
B) cyclical industries.
C) special situation.
D) defensive industries.
D) defensive industries.
Defensive industries are least affected by normal business cycles. Companies in defensive industries produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco or supply essential services such as those supplied by utility companies. Public consumption of such goods remains fairly steady throughout the business cycle.
A company’s net worth belongs to its
A) bond holders.
B) stockholders.
C) board of directors (BOD).
D) president and CEO.
B) stockholders.
A company’s net worth (assets − liabilities) belongs to the business owners (its stockholders).
Reports of rising inventories generally occur during which period of the business cycle?
A) Expansion
B) Contraction
C) Recovery
D) Peak
B) 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.
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 sales are higher than MNO’s.
C) ABC’s net income is less than MNO’s.
D) ABC’s net income is higher than MNO’s.
C) 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.
A company very concerned about liquidity would want
A) low price-to-earnings ratio.
B) low current ratio.
C) high current ratio.
D) high price-to-earnings ratio
C) high current ratio.
The current ratio is a measure of liquidity. The higher the ratio, the more liquid the company. This has no bearing on whether high or low price-to-earnings ratios are desirable.
ABC Corporation’s earnings remained steady while its shares outstanding increased by 5%. How does this impact ABC’s earnings per share (EPS)?
A) EPS has increased
B) EPS has stayed the same
C) EPS has decreased
D) Not enough information to answer the question
C) EPS has decreased
EPS is calculated by dividing the company’s earnings by the number of outstanding shares. If earnings remain the same while the number of shares increase, then the result (EPS) must decrease.
Which of the following is considered to be the order of the stages in a business cycle?
A) Contraction, trough, peak, expansion
B) Trough, contraction, expansion, peak
C) Peak, expansion, contraction, trough
D) Expansion, peak, contraction, trough
D) 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.
What is the formula for calculating working capital?
A) Current assets – current liabilities
B) Current assets ÷ current liabilities
C) Assets + liabilities
D) Assets – liabilities
A) Current assets – current liabilities
Working capital = current assets – current liabilities.
All of the following would be considered current assets except
A) marketable securities.
B) a warehouse.
C) cash.
D) inventory.
B) a warehouse.
Current assets are those that are either cash or expected to generate cash within the next year. Warehouses are fixed assets used for many years
The business cycle is generally viewed as having how many stages?
A) Two
B) Six
C) Three
D) Four
D) Four
Economists recognize four stages in the business cycle: peak (prosperity), contraction (decline), trough, and expansion (recovery). Because it is a cycle, there is no set starting point or end to the business cycle, but the four stages always occur in the same order.
ABC Corporation raised capital through an offering of equity securities. Which component of the balance sheet has changed as a result?
A) Current assets
B) Current liabilities
C) Long-term liabilities
D) Fixed assets
A) Current assets
When equity securities are issued, cash (a current asset) and net worth increases. Fixed assets and liabilities remain unchanged as a result of the offering.
Which of the following is used to calculate a company’s net worth?
A) Assets − liabilities
B) Liabilities ‒ assets
C) Assets + liabilities
D) Debt − equity
A) Assets − liabilities
Net worth is calculated by taking the business’s assets less its liabilities (creditors’ claims).
A toy company is experiencing sudden strong demand for a game. Purchasing this company’s stock may prove profitable in the short run. This company’s stock might best be termed as
A) a special situation.
B) a cyclical.
C) a short sale.
D) a growth.
A) a special situation.
Special situations arise when a company shows unusual profit potential resulting from nonrecurring circumstances. These situations might include new management, the discovery of a valuable natural resource on corporate property, patents pending, or the introduction of a new product.
When the economy shows high unemployment and is failing to expand as measured by a lack of consumer demand and business activity, but prices for goods and services are still rising, this could be described as what?
A) Inflation
B) Stagflation
C) Deflation
D) Stagnation
B) Stagflation
Stagflation is the term used to describe the unusual combination of inflation (a rise in prices) and high unemployment (stagnation). This generally occurs when the economy is not growing and there is a lack of consumer demand and business activity, yet prices for goods continue to rise.
