chapter 12

Question 1

1) A top-down analysis of a firm’s prospects starts with an analysis of the ________. A) firm’s position in its industry B) U.S. economy or even the global economy C) industry D) specific firm under consideration

Answer 1

Answer: B

Question 2

3) An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either ________ on its U.S. sales. A) lose market share or reduce its profit margin B) gain market share or reduce its profit margin C) lose market share or increase its profit margin D) gain market share or increase its profit margin

Answer 2

Answer: A

Question 3

4) You estimate that the present value of a firm’s cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ________. A) a stalwart B) slow growth C) a star D) an asset play

Answer 3

Answer: D

Question 4

5) If interest rates increase, business investment expenditures are likely to ________ and consumer durable expenditures are likely to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Answer 4

Answer: D

Question 5

6) If you believe the economy is about to go into a recession, you might change your asset allocation by selling ________ and buying ________. A) growth stocks; long-term bonds B) long-term bonds; growth stocks C) defensive stocks; growth stocks D) defensive stocks; long-term bonds

Answer 5

Answer: A

Question 6

7) The yield curve spread between the 10-year T-bond yield and the federal funds rate is a ________ economic indicator. A) leading B) lagging C) coincident D) mixed

Answer 6

Answer: A

Question 7

8) The Conference Board’s Consumer Confidence Index is released ________. A) daily B) weekly C) monthly D) quarterly

Answer 7

Answer: C

Question 8

9) You can earn abnormal returns on your investments via macro forecasting ________. A) if you can forecast the economy at all B) if you can forecast the economy as well as the average forecaster C) if you can forecast the economy better than the average forecaster D) only if you can forecast the economy with perfect accuracy

Answer 8

Answer: C

Question 9

10) Which of the following industries would most analysts classify as mature? A) internet service providers B) biotechnology C) wireless communication D) auto manufacturing

Answer 9

Answer: D

Question 10

11) Which one of the following stocks represents industries with below-average sensitivity to the state of the economy? A) financials B) technology C) food and beverage D) cyclicals

Answer 10

Answer: C

Question 11

12) The most widely used monetary policy tool is ________. A) altering the discount rate B) altering reserve requirements C) open market operations D) increasing the budget deficit

Answer 11

Answer: C

Question 12

13) According to ________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work. A) Keynesian B) monetarist C) supply-side D) demand-side

Answer 12

Answer: C

Question 13

14) The market value of all final goods and services produced during a given time period is called ________. A) GDP B) industrial production C) capacity utilization D) factory orders

Answer 13

Answer: A

Question 14

15) A big increase in government spending is an example of a ________. A) positive demand shock B) positive supply shock C) negative demand shock D) negative supply shock

Answer 14

Answer: A

Question 15

16) GDP refers to ________. A) the amount of personal disposable income in the economy B) the difference between government spending and government revenues C) the total manufacturing output in the economy D) the total production of goods and services in the economy

Answer 15

Answer: D

Question 16

17) Portfolio manager Peter Lynch would classify Coca-Cola as ________. A) an asset play B) a slow grower C) a stalwart D) a turnaround

Answer 16

Answer: C

Question 17

18) Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis? A) technical analysis B) fundamental analysis C) both technical analysis and fundamental analysis D) indexing

Answer 17

Answer: B

Question 18

19) The analysis of the determinants of firm value is called ________. A) fundamental analysis B) technical analysis C) momentum analysis D) indexing

Answer 18

Answer: A

Question 19

20) Which of the following companies is the best example of a turnaround? A) Coca-Cola B) Microsoft C) ExxonMobil D) Chrysler

Answer 19

Answer: D

Question 20

21) Inflation is caused by ________. A) unions B) rapid growth of the money supply C) excess supply D) low rates of capacity utilization

Answer 20

Answer: B

Question 21

22) Everything else equal, if you expect a larger interest rate increase than other market participants, you should ________. A) buy long-term bonds B) buy short-term bonds C) buy common stocks D) buy preferred stocks

Answer 21

Answer: B

Question 22

23) To obtain an approximate estimate of the real interest rate, one must ________ the ________ the nominal risk-free rate. A) add; default premium to B) subtract; default premium from C) add; expected inflation to D) subtract; expected inflation from

Answer 22

Answer: D

Question 23

24) Which of the following would not be considered a supply shock? A) a change in the price of imported oil B) frost damage to the orange crop C) a change in the level of education of the average worker D) an increase in the level of government spending

Answer 23

Answer: D

Question 24

25) If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with ________ sensitivity to economic conditions. A) below-average B) average C) above-average D) Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

Answer 24

Answer: A

Question 25

26) Which of the following is not an example of fiscal policy? A) Social Security spending B) Medicare spending C) Fed purchases of Treasury securities D) changes in the tax rate

Answer 25

Answer: C

Question 26

27) Supply-side economics tends to focus on ________. A) government spending B) price controls C) monetary policy D) increasing productive capacity

Answer 26

Answer: D

Question 27

28) Which one of the following describes the amount by which government spending exceeds government revenues? A) balance of trade B) budget deficit C) gross domestic product D) output gap

Answer 27

Answer: B

Question 28

29) Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance? A) fiscal policy B) monetary policy C) supply-side policy D) rising minimum wages

Answer 28

Answer: A

Question 29

30) In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a ________. A) demand shock B) supply shock C) monetary shock D) refinery shock

Answer 29

Answer: B

Question 30

31) ________ in interest rates are associated with stock market declines. A) Anticipated increases B) Unanticipated increases C) Anticipated decreases D) Unanticipated decreases

Answer 30

Answer: B

Question 31

32) The average duration of unemployment is ________. A) a leading economic indicator B) a coincidental economic indicator C) a lagging economic indicator D) both a coincidental indicator and a lagging indicator

Answer 31

Answer: C

Question 32

33) The ratio of the purchasing power of two economies is termed the ________. A) balance of trade B) real exchange rate C) real interest rate D) nominal exchange rate

Answer 32

Answer: B

Question 33

34) Everything else equal, an increase in the government budget deficit would: I. Increase the government's demand for funds II. Shift the demand curve for funds to the left III. Increase the interest rate in the economy A) II only B) I and II only C) I and III only D) I, II, and III

Answer 33

Answer: C

Question 34

35) Which of the following affects a firm's sensitivity of its earnings to the business cycle? I. Financial leverage II. Operating leverage III. Type of product A) II only B) I and II only C) I and III only D) I, II, and III

Answer 34

Answer: D

Question 35

36) Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment? A) the nominal exchange rate B) the nominal interest rate C) the real exchange rate D) the real interest rate

Answer 35

Answer: D

Question 36

37) An example of a highly cyclical industry is the ________. A) automobile industry B) tobacco industry C) pharmaceutical industry D) utility industry

Answer 36

Answer: A

Question 37

38) The stock price index and contracts and orders for nondefense capital goods are ________. A) leading economic indicators B) coincidental economic indicators C) lagging economic indicators D) leading

Answer 37

Answer: A

Question 38

39) Which one of the following is not a demand shock?
A) increase in government spending
B) increases in the money supply
C) reductions in consumer spending
D) improvements in education of U.S. workers

Answer 38

Answer: D

Question 39

40) Which one of the following is not a U.S. supply shock?
A) unions force an increase in national wage rates.
B) the oil supply from the Middle East drops 30%.
C) extended droughts reduce U.S. food production 25%.
D) chinese purchases of U.S. exports increase.

Answer 39

Answer: D

Question 40

41) Pharmaceuticals, food, and other necessities would be good performers during the ________ stage of the business cycle.
A) peak
B) contraction
C) trough
D) expansion

Answer 40

Answer: B

Question 41

42) Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the ________ stage of the business cycle.
A) peak
B) contraction
C) trough
D) expansion

Answer 41

Answer: C

Question 42

43) If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because ________.
A) you have more information than others
B) you are a better analyst than others
C) you have the same information as others
D) you are an equally good analyst as others

Answer 42

Answer: B

Question 43

44) If the economy is going into a recession, a good industry to invest in would be the ________ industry.
A) automobile
B) banking
C) construction
D) medical services

Answer 43

Answer: D

Question 44

45) Members of the Board of Governors of the Federal Reserve System are appointed by ________ to serve ________ terms.
A) the Senate; 10-year
B) the House of Representatives; 8-year
C) the President; 14-year
D) the Secretary of the Treasury; 6-year

Answer 44

Answer: C

Question 45

46) A firm in the early stages of its industry life cycle will likely have ________.
A) low dividend payout rates
B) low rates of investment
C) low rates of return on investment
D) low R&D spending

Answer 45

Answer: A

Question 46

47) Which of the following describes the percentage of the total labor force that has yet to find work?
A) the capacity utilization rate
B) the participation rate
C) the unemployment rate
D) the natural rate

Answer 46

Answer: C

Question 47

48) Which of the following is the rate at which the general level of prices for goods and services is rising?
A) the exchange rate
B) the gross domestic product growth rate
C) the inflation rate
D) the real interest rate

Answer 47

Answer: C

Question 48

49) An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm's position within the industry is examined. This is called ________ analysis.
A) bottom-up
B) outside-inside
C) top-down
D) upside-down

Answer 48

Answer: C

Question 49

50) Assume that the Federal Reserve increases the money supply. This will cause:
I. Interest rates to decrease
II. Consumption and investment to decrease
III. Inflation to fall
A) I only
B) I and II only
C) II and III only
D) I, II, and III

Answer 49

Answer: A

Question 50

51) The discount rate is the ________.
A) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
B) interest rate the Fed charges commercial banks on short-term loans
C) interest rate that the U.S. Treasury pays on its bills
D) interest rate that banks charge their best corporate customers

Answer 50

Answer: B

Question 51

52) If the currency of your country is depreciating, this should ________ exports and ________ imports.
A) stimulate; stimulate
B) stimulate; discourage
C) discourage; stimulate
D) discourage; discourage

Answer 51

Answer: B

Question 52

53) If interest rates increase, business investment expenditures are likely to ________ and consumer durable expenditures are likely to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Answer 52

Answer: D

Question 53

54) Increases in the money supply will cause demand for investment and consumption goods to ________ in the short run and may cause prices to ________ in the long run.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Answer 53

Answer: A

Question 54

57) Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase:
I. Maturity
II. Relative decline
III. Consolidation
A) III, I, II
B) I, III, II
C) III, II, I
D) I, II, III

Answer 54

Answer: A

Question 55

58) An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ________.
A) sector rotation
B) contraction/expansion analysis
C) life-cycle analysis
D) business-cycle shifting

Answer 55

Answer: A

Question 56

61) The fed funds rate is the ________.
A) interest rate that banks charge their best corporate customers
B) interest rate banks charge each other for overnight loans of deposits on reserve at the Fed
C) interest rate the Fed charges commercial banks on short-term loans
D) interest rate that the U.S. Treasury pays on its bills

Answer 56

Answer: B

Question 57

63) The goal of supply-side policies is to ________.
A) increase government involvement in the economy
B) create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods
C) maximize tax revenues of the government
D) focus more on wealth redistribution policies

Answer 57

Answer: B

Question 58

64) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the ________ stage.
A) start-up
B) consolidation
C) maturity
D) relative decline

Answer 58

Answer: C

Question 59

65) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. 2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. 3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. 4. The current penetration rate in the United States is 60% of households and will be difficult to increase. 5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. 6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. 7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. 8. New manufacturers continue to enter the market. Characteristics ________ would be typical of an industry that is in the start-up stage.
A) 4 and 7
B) 1 and 4
C) 2 and 5
D) none of these options

Answer 59

Answer: D

Question 60

66) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: 1. Industry sales have grown at

Answer 60

Answer: A

Question 61

67) An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: ... Which of the characteristics would be typical of an industry that is in the maturity stage? A) 1, 2, and 3 B) 4 and 5 C) 6, 7, and 8 D) all of these options

Answer 61

B

Question 62

68) Countercyclical fiscal policy is best described by which of the following statements? ... Countercyclical fiscal policy is best described by which of the following statements? A) Government surpluses are planned during economic booms, and deficits are planned during economic recessions. B) The annual budget should always be balanced. C) Deficits should always equal surpluses. D) Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

Answer 62

A

Question 63

69) A supply-side economist would likely agree with which of the following statements? ... A supply-side economist would likely agree with which of the following statements? A) Real output and aggregate employment are primarily determined by aggregate demand. B) Real income will rise when government expenditures and tax rates increase. C) Real output and aggregate employment are primarily determined by tax rates. D) Increasing the money supply will increase real output without causing higher inflation.

Answer 63

C

Question 64

70) Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? ... Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation? A) Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. B) Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand. C) Decrease the discount rate, lowering interest rates and causing both costs and prices to fall. D) Increase taxes, reducing costs and causing prices to fall.

Answer 64

A

Question 65

71) The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? ... The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan? A) U.S. goods will increase in cost, and Japan will import more. B) U.S. goods will increase in cost, and Japan will import less. C) U.S. goods will decrease in cost, and Japan will import more. D) U.S. goods will increase in cost, and Japan will export less.

Answer 65

C

Question 66

72) Which of the following are examples of cyclical industries? ... Which of the following are examples of cyclical industries? A) Washing Machines B) Computer chip manufacturers C) Kellogg's Frosted Flakes D) Pfizer

Answer 66

A

Question 67

73) You would expect the beta of cyclical industries to be ________ and the beta of defensive industries to be ________. ... You would expect the beta of cyclical industries to be ________ and the beta of defensive industries to be ________. A) greater than 1; less than 1 B) less than 1; less than 1 C) less than 1; greater than 1 D) greater than 1; greater than 1

Answer 67

A

Question 68

74) What economic variable is most closely associated with increasing corporate profits? ... What economic variable is most closely associated with increasing corporate profits? A) exchange rates B) inflation C) gross domestic product D) budget deficits

Answer 68

C

Question 69

75) The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect? ... The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the "crowding out" effect? A) higher interest rates due to the new government borrowing B) inflation resulting from more government purchases C) a negative supply shock D) shortage of investment due to new accounts

Answer 69

A

Question 70

76) An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? ... An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy? A) an economic slowdown is likely B) employment trends will reverse and unemployment will occur C) government deficits will result from capacity utilization D) inflation may result from upward wage pressures

Answer 70

D

Question 71

77) An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ________. ... An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ________. A) asset allocation B) capacity utilization C) employment management D) strategic planning

Answer 71

B

Question 72

78) The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ________. ... The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ________. A) expanding economy B) increased inflation C) interest rate declines D) lower GDP

Answer 72

B

Question 73

79) The supply of funds in the economy is controlled primarily by ________. ... The supply of funds in the economy is controlled primarily by ________. A) the Federal Reserve System B) Congress C) money center banks D) the Treasury department

Answer 73

A

Question 74

80) The classification system used to classify firms into industries is now called the ________ code. ... The classification system used to classify firms into industries is now called the ________ code. A) SIC B) NAICS C) ISO 57 D) ISM

Answer 74

B

Question 75

81) During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? ... During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event? A) demand shock B) equilibrium event C) expanding commodity event D) supply shock

Answer 75

A

Question 76

82) Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ________. ... Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ________. A) demand shock B) equilibrium event C) expanding commodity event D) supply shock

Answer 76

D

Question 77

83) Items that are necessities and product purchases for which income is not important tend to be less cyclical in nature. Which of the following options completes the sentence correctly? A) necessities; income

Answer 77

A

Question 78

84) Cash cows are typically found in the maturity stage of the industry life cycle. In which industry stage are cash cows usually found? B) consolidation

Answer 78

C

Question 79

85) At what point in the industry life cycle are inefficiencies in competitors most likely to be removed? C) consolidation

Answer 79

B

Question 80

86) Stalwarts are typically found in the consolidation stage of the industry life cycle. In which industry stage are stalwarts usually found? C) maturity

Answer 80

B

Question 81

87) Large-growth companies generally emerge in the consolidation stage. In which industry stage do large-growth companies typically emerge? C) maturity

Answer 81

B

Question 82

88) Which of the following are barriers to entry? Options: I. Large economies of scale required to be profitable II. Established brand loyalty III. Patent protection for the firm's product IV. Rapid industry growth A) I, II, and III only

Answer 82

B

Question 83

89) Stock prices tend to rise when corporate earnings rise. What tends to happen to stock prices when corporate earnings rise? B) rise

Answer 83

A

Question 84

90) Stock prices are forward-looking measures of firm value. How are stock prices often described in relation to firm value? B) forward-looking

Answer 84

B

Question 85

91) Aerospace industry had the highest ROE in 2016 according to the text. Which industry had the highest ROE in 2016 according to the text? A) electric utilities

Answer 85

C

Question 86

92) Airlines industry had the highest stock price performance in 2017 according to the text. Which industry had the highest stock price performance in 2017 according to the text? B) electric utilities

Answer 86

D

Question 87

93) Electric utility industry is where you would expect to find the highest dividend payout yields. Which industry is typically associated with the highest dividend payout yields? C) electric utility

Answer 87

C