Unit 3 - Economic Factors and Business Information Flashcards Preview

Series 65 > Unit 3 - Economic Factors and Business Information > Flashcards

Flashcards in Unit 3 - Economic Factors and Business Information Deck (19):

Leading Indicators

plant and equipment orders,
money supply,
stock prices,
consumer expectations,
average work week for production workers and average weekly claims for unemployment insurance.


Coincident Indicators

non-farm employment,
industrial production,
manufacturing and trade sales,
and personal income minus transfer payments such as Social Security,
disability benefits and unemployment compensation


Lagging Indicator

unemployment rate,
business spending,
labor costs,
bank loans outstanding and bank interest rates.


If a corporation issues mortgage bonds, all of the following would be affected EXCEPT:
A) shareholder's equity.
B) total assets.
C) total liabilities.
D) working capital.

When issued, the corporation receives the net proceeds in cash, increasing current assets (and thus total assets). Simultaneously, the corporation's long-term liabilities increase reflecting the debt (and thus total liabilities). Working capital increases because of the increase in current assets. Shareholder's equity, or net worth, is only affected by the sale of new equity securities or by any profit or loss generated by the corporation.


Accrued Wages

Under the accrual basis of accounting, unpaid wages that have been earned by employees should be entered as 1) Wages Expense and 2) Wages Payable or Accrued Wages Payable. Wages Expense is an income statement account. Wages Payable is a current liability account that is reported on the balance sheet.


Dividend Payout Ratio

dividends paid per share divided by earnings per share or dividends / net income


Cash Flow

net income plus depreciation expense for that year.


Company's net worth

Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.



suggest lower levels of taxation and more government spending


Classical Economist (Supply-Side Economics)

lower taxes and less government regulation benefits consumers through a greater supply of goods and services at lower cost


Tools of the Federal Reserve:
- Changes in reserve requirements
- Changes in the discount rate
- Open market operations

Reserve Requirements: by raising the amount of funds commercial banks must leave on deposit with the FED

Discount Rate: Rate the FED charges member banks when lending them money

Open Market Operations: Buys and sells US Treasury securities in the open market under direction of the FOMC


Business Troughs

- a change from negative to positive GDP growth rate
- a high unemployment rate, increasing use of overtime and temp workers
- spending on consumer durable goods and housing
- a moderate or decreasing inflation rate


Real Rate of Interest

nominal rate of interest minus the expected rate of inflation


Prime Rate

the most preferential interest rate on corporate loans at large US money centers


Retained Earnings

Profits not paid out in dividends yet - when cash dividend is declared, Retained earnings are lowered and current liabilities are increased


Working Capital

current assets - current liabilities


Book Value

tangible assets - liabilities - par value of preferred / shares of common stock outstanding



(total portfolio return - risk free rate) - (portfolio beta x (market return - risk free rate))


If a company successfully gets its 7% debenture holders to exchange their 7% debentures for 7% preferred stock, what is the effect on EPS?
A) Increase.
B) Not enough information.
C) No effect.
D) Decrease.

D) Decrease

The 7% payment is moved from a pre-tax deduction to an after-tax payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.