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FIN 320 Week 11 Final Exam – Strayer

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Chapters 9, 10, 12 Through 15 And 17 Through 22

Student: ___________________________________________________________________________

Testing many different trading rules until you find one that would have worked in the past is called _______.

data mining

perceived patterning

pattern searching

behavioral analysis

Models of financial markets that emphasize psychological factors affecting investor behavior are called _______.

data mining

fundamental analysis

charting

behavioral finance

The trin statistic is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

The put/call ratio is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Relative strength is ______ indicator.

a fundamental

an economic

a technical

an international

Short interest is a ______ indicator.

sentiment

flow of funds

market structure

fundamental

Moving averages are ______ indicators.

sentiment

flow of funds

trend

fundamental

Market breadth is a ______ indicator.

sentiment

flow of funds

technical

fundamental

The cumulative tally of the number of advancing stocks minus declining stocks is called the ______________.

market breadth

market volume

trin ratio

relative strength ratio

10.

A high amount of short interest is typically considered as a __________ signal, and contrarians may consider it as a _________ signal.

bearish; bullish

bullish; bearish

bearish; false

bullish; false

11.

Technical analysis focuses on _____________________.

finding opportunities for risk-free investing

finding repeating trends and patterns in prices

changing prospects for earnings growth of particular firms or industries

forecasting technical regulatory changes

12.

Behavioralists point out that even if market prices are ____________, there may be _______________.

distorted; limited arbitrage opportunities

distorted; fundamental efficiency

allocationally efficient; limitless arbitrage opportunities

distorted; allocational efficiency

13.

According to market technicians, it is time to sell stock in a head-and-shoulders formation when ___________.

the price index pierces the left shoulder

the price index pierces the right shoulder

the price index pierces the head

none of these options takes place

14.

When a stock price breaks through the moving average from below, this is considered to be ______.

the starting point for a new moving average

a bearish signal

a bullish signal

none of these options

15.

When the stock price falls below a moving average, a possible conclusion is that _____.

market momentum has become positive

market momentum has become negative

there is no regular pattern for this stock's market momentum

professional analysts' opinions are invalid until the stock price rises again

16.

Following a period of falling prices, the moving average will _____.

be below the current price

be above the current price

be equal to the current price

become more volatile than it had been before prices fell

17.

A moving average of stock prices _________________.

always lies above the most recent price

always lies below the most recent price

is less volatile than the actual prices

is more volatile than the actual prices

18.

When the housing bubble burst in 2007, it set off the worst financial crisis _____.

in 25 years.

in 40 years.

in 50 years.

in 75 years.

19.

A support level is ___________________.

a level beyond which the market is unlikely to rise

a level below which the market is unlikely to fall

an equilibrium price level justified by characteristics such as earnings and cash flows

the peak of a market wave or cycle

20.

According to Kondratieff, the macro economy moves in a series of waves that recur at intervals of approximately _________________.

18 months

4 years

8 years

50 years

21.

According to Elliot's wave theory, stock market behavior can be explained as _________________.

a series of medium-term wave cycles with no short-term trend

a series of long-term wave cycles with no short-term trend

a series of superimposed long-term and short-term wave cycles

sine and cosine functions

22.

Conventional finance theory assumes investors are _______, and behavioral finance assumes investors are _______.

rational; irrational

irrational; rational

greedy; philanthropic

philanthropic; greedy

23.

The only way for behavioral patterns to persist in prices is if ______________.

markets are not weak-form efficient

there are limits to arbitrage activity

there are no significant trading costs

market psychology is inconsistent over time

24.

In the context of a point and figure chart, a horizontal band of Xs and Os is a _____________.

buy signal

sell signal

congestion area

trend reversal

25.

Even though indexing is growing in popularity, only about _____ of equity in the mutual fund industry is held in indexed funds. This may be a sign that investors and managers __________.

5%; are excessively conservative

15%; overestimate their ability

20%; suffer from framing biases

25%; engage in mental accounting

26.

If investors are too slow to update their beliefs about a stock's future performance when new evidence arises, they are exhibiting _______.

representativeness bias

framing error

conservatism

memory bias

27.

If investors overweight recent performance in forecasting the future, they are exhibiting _______.

representativeness bias

framing error

memory bias

overconfidence

28.

Trading activity and average returns in brokerage accounts tend to be _________.

uncorrelated

negatively correlated

positively correlated

positively correlated for women and negatively correlated for men

29.

Your two best friends each tell you about a person they know who successfully started a small business. That's it, you decide; if they can do it, so can you. This is an example of _____________.

mental accounting

framing bias

conservatism

representativeness bias

30.

Which of the following is not a sentiment indicator?

Confidence index

Short interest

Odd-lot trading

Put/call ratio

31.

Which of the following is considered a sentiment indicator?

A 200-day moving average

Short interest

Credit balances in brokerage accounts

Relative strength

32.

An investor holds a very conservative portfolio invested for retirement, but she takes some extra cash she earned from her year-end bonus and buys gold futures. She appears to be engaging in ___________.

overconfidence

representativeness

forecast errors

mental accounting

33.

Which of the following analysts focus more on past price movements of a firm's stock than on the underlying determinants of its future profitability?

Credit analysts

Fundamental analysts

Systems analysts

Technical analysts

34.

A trin ratio of greater than 1 is considered a __________.

bearish signal

bullish signal

bearish signal by some technical analysts and a bullish signal by other technical analysts

trend reversal signal

35.

Contrarian investors consider a high put/call ratio a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

36.

The ratio of the average yield on 10 top-rated corporate bonds to the average yield on 10 intermediate-grade bonds is called the __________.

bond price index

confidence index

relative strength index

trin ratio

37.

An investor needs cash to pay some hospital bills. He is willing to use his dividend income to pay the bills, but he will not sell any stock to do so. He is engaging in ___________.

overconfidence

representativeness

forecast errors

mental accounting

38.

Bill and Shelly are friends. Bill invests in a portfolio of hot stocks that almost all his friends are invested in. Shelly invests in a portfolio that is totally different from the portfolios of all her friends. Both Bill's and Shelly's stocks fall 15%. According to regret theory, _________________________________________.

Bill will have more regret over the loss than Shelly

Shelly will have more regret over the loss than Bill

Bill and Shelly will have equal regret over their losses

Bill's and Shelly's risk aversion will increase in the future

39.

The most common measure of __________ is the spread between the number of stocks that advance in price and the number of stocks that decline in price.

market breadth

market volume

odd-lot trading

short interest

40.

Jill is offered a choice between receiving $50 with certainty or possibly receiving the proceeds from a gamble. In the gamble a fair coin is tossed, and if it comes up heads, Jill will receive $100; if the coin comes up tails, she will receive nothing. Jill chooses the $50 instead of the gamble. Jill's behavior indicates __________________.

regret avoidance

overconfidence

that she has a diminishing marginal utility of wealth

prospect theory loss aversion

41.

When the market breaks through the moving average line from below, a technical analyst would probably suggest that it is a good time to ___________.

buy the stock

hold the stock

sell the stock

short the stock

42.

If you believed in the reversal effect, you should __________.

buy bonds this period if you held stocks last period

buy stocks this period that performed poorly last period

buy stocks this period that performed well last period

do nothing if you held the stock last period

43.

According to technical analysts, a shift in market fundamentals will __________.

be reflected in stock prices immediately

lead to a gradual price change that can be recognized as a trend

lead to high volatility in stock market prices

leave prices unchanged

44.

According to market technicians, a trin statistic of less than 1 is considered a __________.

bearish signal

bullish signal

volume decline

signal reversal

45.

It is difficult to test the Kondratieff wave theory because _________.

it applies to only Russian stocks

its main proponent found contrary research results

only two independent data points are generated each century

the stock market is too volatile to generate smooth waves

46.

A _________ is a value above which it is difficult for the market to rise.

book value

resistance level

support level

confidence level

47.

_____________ is a tool that can help identify the direction of a stock's price.

Prospect theory

Framing

A moving average

Conservatism

48.

If the utility you derive from your next dollar of wealth increases by less than a loss of a dollar reduces it, you are exhibiting __________.

loss aversion

regret avoidance

mental accounting

framing bias

49.

In technical analysis, __________ is a value below which the market is relatively unlikely to fall.

book value

resistance level

support level

the Dow line

50.

A possible limit on arbitrage activity that may allow behavioral biases to persist is _______.

technical trends in prices

momentum effects

fundamental risk

trend reversals

51.

If you are not a contrarian, you consider a high put/call ratio to be a __________.

bearish signal

bullish signal

trend confirmation signal

signal to enter the options market

52.

On day 1, the stock price of Ford was $12 and the automotive stock index was 127. On day 2, the stock price of Ford was $15 and the automotive stock index was 139. Consider the ratio of Ford to the automotive stock index at day 1 and day 2. Ford is __________ the automotive industry, and technical analysts who follow relative strength would advise __________ the stock.

outperforming; buying

outperforming; selling

underperforming; buying

underperforming; selling

53.

At the end of July, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 7.65% and 8.42%, respectively. At the end of August, the average yields on 10 top-rated corporate bonds and 10 intermediate-grade bonds were 6% and 6.71%, respectively. The confidence index _________ during August, and bond technical analysts are likely to be ________.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

54.

On a particular day, there were 890 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The common measure of market breadth is __________.

-10,449,000

-167

167

10,449,000

55.

On a particular day, there were 920 stocks that advanced on the NYSE and 723 that declined. The volume in advancing issues was 80,846,000, and the volume in declining issues was 70,397,000. The trin ratio is __________, and technical analysts are likely to be __________.

.90; bullish

.90; bearish

1.11; bullish

1.11; bearish

56.

An accumulation of cash by mutual funds may be viewed by technical traders as a __________ indicator.

bullish

neutral

bearish

trend reversal

57.

A point and figure chart: I. Gives a sell signal when the stock price penetrates previous lows II. Tracks significant upward or downward movements III. Has no time dimension IV. Indicates congestion areas

I and II only

II and III only

I, III, and IV only

I, II, III, and IV

58.

When technical analysts say a stock has good "relative strength," they mean that in the recent past __________.

it has performed well compared to its closest competitors

it has exceeded its own historical high

trading volume in the stock has exceeded the normal trading volume

it has outperformed the market index

59.

Technical traders view mutual fund investors as _________ market timers.

excellent

frequent

neutral

poor

60.

An important assumption underlying the use of technical analysis techniques is that ___________________.

security prices adjust rapidly to new information

security prices adjust gradually to new information

security dealers will provide enough liquidity to keep price changes relatively small

all investors have immediate and costless access to information

61.

If the put/call ratio increases, market contrarians may interpret this as what kind of signal?

Buy signal

Sell signal

Hold signal

This is not interpreted as a signal

62.

The tendency of investors to hold on to losing investments is called the ________.

overweighting effect

head-in-the-sand effect

disposition effect

prospector effect

63.

Which one of the following best describes fundamental risk?

A stock is overpriced, but your fund does not allow you to engage in short sales.

Your models indicate a stock is mispriced, but you are not sure if this is a real profit opportunity or a model input error.

You buy a stock that you believe is underpriced, and the underpricing persists for a long time, hurting your short-term results.

A stock is trading in two different markets at two different prices.

64.

The trin on day 2 is ___.

.72

1.04

.92

.55

65.

The confidence index on day 1 is _____.

.82

.89

.92

1.09

66.

The breadth on day 3 is _______.

-70

170

67.

The cumulative breadth for the first 2 days is ___.

-240

-50

110

250

68.

Cumulative breadth for the 4 days is ___, which is ___.

-140; bullish

-140; bearish

-300; bullish

-300; bearish

69.

From day 1 to day 4, the trin has ___ and is ___.

increased; bullish

increased; bearish

decreased; bullish

decreased; bearish

70.

From day 1 to day 4, the confidence index has _____. This is _____.

increased; bullish

decreased; bullish

increased; bearish

decreased; bearish

71.

Problems with behavioral finance include: I. The behavioralists tell us nothing about how to exploit any irrationality. II. The implications of behavioral patterns are inconsistent from case to case, sometimes suggesting overreaction, sometimes underreaction. III. As with technical trading rules, behavioralists can always find some pattern in past data that supports a behavioralist trait.

I only

II only

I and III only

I, II, and III

72.

A major problem with technical trading strategies is that ________.

it is very difficult to identify a true trend before the fact

it is very difficult to identify the correct trend after the fact

it is so easy to identify trends that all investors quickly do so

Kondratieff showed that you can't identify trends without 48 to 60 years of data

73.

The Elliott wave theory gives a buy signal when you can identify a primary bull trend by identifying _________.

when the long-term direction of the market is positive

when the long-term direction of the market is negative

when the long-term direction of the market is stable

good stocks without regard to the long-term direction of the market

74.

In 1997 CSX successfully purchased a significant share of Conrail. Immediately after the first offer was announced and the acquisition eventually consummated, the price of CSX fell below preacquisition levels and took many years to recover. This may be an example of ________________.

loss aversion

mental accounting

overreaction

managerial overconfidence

75.

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________.

loss aversion

mental accounting

overreaction

winner's curse

76.

Identify the resistance-level stock price.

$40

$42

$44

$46

77.

Identify the support level stock price.

$40

$42

$44

$46

78.

Investors gravitate toward the latest hot stock even though it has never paid a dividend. Even though net income is projected to fall over the current and next several years, the price of the stock continues to rise. What behavioral concept may explain this price pattern?

Overconfidence

Loss aversion

Mental accounting

Calendar bias

79.

During a period when prices have been rising, the _________ will be _______ the current price.

relative strength index; declining with

relative strength index; declining faster than

moving average; above

moving average; below

80.

An investor purchases shares of an index fund. The investor could take on the same level of risk by taking out a loan and purchasing a higher-risk specialty fund. The Sharpe ratio on this complete portfolio is higher than her existing investment. What behavioral concept prevents the investor from taking out the loan and investing in the index fund?

Framing bias

Excessive volatility

Loss aversion

Mental accounting

81.

The price of a stock fluctuates between $43 and $60. If the time frame referenced encompasses the primary trend, the $43 price may be considered the ___________.

intermediate trend level

minor trend level

resistance level

support level

82.

The moving average generates buy signal(s) _____.

on days 3, 11, and 15

on days 2 and 16

on days 5, 9, and 13

on no days

83.

The moving average generates sell signals _____.

on days 3, 11, and 15

on days 7, 15, and 18

on days 5, 9, and 13

on day 16

84.

The price of a stock fluctuates over a period of 10 days. The movement of the stock price below the 10-day minimum price of $25 triggers a rash of selling. The $25 price might now be considered the _______________.

congestion area

penetration point

resistance level

support level

85.

Trend analysts who follow bonds are most likely to monitor the ____________.

confidence index

odd-lot trading

short interest

trin statistic

86.

You find that the confidence index is down, the market breadth is up, and the trin ratio is down. In total, how many bullish signs do you have?

87.

You find that the trin ratio is up, the market breadth is down, and the market has closed below its 50-day moving average. In total, how many bearish signs do you have?

Student: ___________________________________________________________________________

The invoice price of a bond is the ______.

stated or flat price in a quote sheet plus accrued interest

stated or flat price in a quote sheet minus accrued interest

bid price

average of the bid and ask price

Sinking funds are commonly viewed as protecting the _______ of the bond.

issuer

underwriter

holder

dealer

A collateral trust bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A mortgage bond is _______.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

A debenture is _________.

secured by other securities held by the firm

secured by equipment owned by the firm

secured by property owned by the firm

unsecured

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital gain; capital loss

capital gain; capital gain

capital loss; capital gain

capital loss; capital loss

Floating-rate bonds have a __________ that is adjusted with current market interest rates.

maturity date

coupon payment date

coupon rate

dividend yield

Inflation-indexed Treasury securities are commonly called ____.

PIKs

CARs

TIPS

STRIPS

In regard to bonds, convexity relates to the _______.

shape of the bond price curve with respect to interest rates

shape of the yield curve with respect to maturity

slope of the yield curve with respect to liquidity premiums

size of the bid-ask spread

10.

A Japanese firm issued and sold a pound-denominated bond in the United Kingdom. A U.S. firm issued bonds denominated in dollars but sold the bonds in Japan. Which one of the following statements is correct?

Both bonds are examples of Eurobonds.

The Japanese bond is a Eurobond, and the U.S. bond is termed a foreign bond.

The U.S. bond is a Eurobond, and the Japanese bond is termed a foreign bond.

Neither bond is a Eurobond.

11.

The primary difference between Treasury notes and bonds is ________.

maturity at issue

default risk

coupon rate

tax status

12.

TIPS offer investors inflation protection by ______________ by the inflation rate each year.

increasing only the coupon rate

increasing only the par value

increasing both the par value and the coupon payment

increasing the promised yield to maturity

13.

You would typically find all but which one of the following in a bond contract?

A dividend restriction clause

A sinking fund clause

A requirement to subordinate any new debt issued

A price-earnings ratio

14.

To earn a high rating from the bond rating agencies, a company would want to have: I. A low times-interest-earned ratio II. A low debt-to-equity ratio III. A high quick ratio

I only

II and III only

I and III only

I, II, and III

15.

According to the liquidity preference theory of the term structure of interest rates, an increase in the yield on long-term corporate bonds versus short-term bonds could be due to _______.

declining liquidity premiums

an expectation of an upcoming recession

a decline in future inflation expectations

an increase in expected interest rate volatility

16.

__________ are examples of synthetically created zero-coupon bonds.

COLTS

OPOSSMS

STRIPS

ARMs

17.

A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date.

callable

coupon

puttable

Treasury

18.

TIPS are an example of _______________.

Eurobonds

convertible bonds

indexed bonds

catastrophe bonds

19.

Bonds issued in the currency of the issuer's country but sold in other national markets are called _____________.

Eurobonds

Yankee bonds

Samurai bonds

foreign bonds

20.

You buy a TIPS at issue at par for $1,000. The bond has a 3% coupon. Inflation turns out to be 2%, 3%, and 4% over the next 3 years. The total annual coupon income you will receive in year 3 is _________.

$30

$33

$32.78

$30.90

21.

The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are _________.

high grade

intermediate grade

investment grade

junk bonds

22.

Bonds rated _____ or better by Standard & Poor's are considered investment grade.

BBB

CCC

23.

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on short-term bonds than on long-term bonds

a higher yield on long-term bonds than on short-term bonds

the same yield on both short-term bonds and long-term bonds

none of these options (The liquidity preference theory cannot be used to make any of the other statements.)

24.

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, _________.

both bonds will increase in value but bond A will increase more than bond B

both bonds will increase in value but bond B will increase more than bond A

both bonds will decrease in value but bond A will decrease more than bond B

both bonds will decrease in value but bond B will decrease more than bond A

25.

You hold a subordinated debenture in a firm. In the event of bankruptcy you will be paid off before which one of the following?

Mortgage bonds

Senior debentures

Preferred stock

Equipment obligation bonds

26.

Bonds with coupon rates that fall when the general level of interest rates rise are called _____________.

asset-backed bonds

convertible bonds

inverse floaters

index bonds

27.

_______ bonds represent a novel way of obtaining insurance from capital markets against specified disasters.

Asset-backed bonds

TIPS

Catastrophe

Pay-in-kind

28.

The issuer of ________ bond may choose to pay interest either in cash or in additional bonds.

an asset-backed

a TIPS

a catastrophe

a pay-in-kind

29.

Everything else equal, the __________ the maturity of a bond and the __________ the coupon, the greater the sensitivity of the bond's price to interest rate changes.

longer; higher

longer; lower

shorter; higher

shorter; lower

30.

Which one of the following statements is correct?

Invoice price = Flat price - Accrued interest

Invoice price = Flat price + Accrued interest

Flat price = Invoice price + Accrued interest

Invoice price = Settlement price - Accrued interest

31.

A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date.

callable

coupon

puttable

Treasury

32.

Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years?

Callable feature

Convertible feature

Subordination clause

Sinking fund

33.

Serial bonds are associated with _________.

staggered maturity dates

collateral

coupon payment dates

conversion features

34.

In an era of particularly low interest rates, which of the following bonds is most likely to be called?

Zero-coupon bonds

Coupon bonds selling at a discount

Coupon bonds selling at a premium

Floating-rate bonds

35.

Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future.

increase

decrease

not change

change in an unpredictable manner

36.

A convertible bond has a par value of $1,000, but its current market price is $975. The current price of the issuing company's stock is $26, and the conversion ratio is 34 shares. The bond's market conversion value is _________.

$1,000

$884

$933

$980

37.

A convertible bond has a par value of $1,000, but its current market price is $950. The current price of the issuing company's stock is $19, and the conversion ratio is 40 shares. The bond's conversion premium is _________.

$50

$190

$200

$240

38.

A coupon bond that pays interest of 4% annually has a par value of $1,000, matures in 5 years, and is selling today at $785. The actual yield to maturity on this bond is _________.

7.2%

8.8%

9.1%

9.6%

39.

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at an $84.52 discount from par value. The yield to maturity on this bond is _________.

7.23%

8.12%

9.45%

40.

A coupon bond that pays interest of $60 annually has a par value of $1,000, matures in 5 years, and is selling today at a $75.25 discount from par value. The current yield on this bond is _________.

6.49%

6.73%

41.

A callable bond pays annual interest of $60, has a par value of $1,000, matures in 20 years but is callable in 10 years at a price of $1,100, and has a value today of $1055.84. The yield to call on this bond is _________.

6.58%

7.2%

42.

A coupon bond that pays interest semiannually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%. If the coupon rate is 7%, the intrinsic value of the bond today will be __________.

$1,000

$1,062.81

$1,081.82

$1,100.03

43.

A coupon bond that pays interest annually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 12%. If the coupon rate is 9%, the intrinsic value of the bond today will be _________.

$856.04

$891.86

$926.47

$1,000

44.

A coupon bond that pays semiannual interest is reported in the Wall Street Journal as having an ask price of 117% of its $1,000 par value. If the last interest payment was made 2 months ago and the coupon rate is 6%, the invoice price of the bond will be _________.

$1,140

$1,170

$1,180

$1,200

45.

A Treasury bond due in 1 year has a yield of 6.3%, while a Treasury bond due in 5 years has a yield of 8.8%. A bond due in 5 years issued by High Country Marketing Corp. has a yield of 9.6%, while a bond due in 1 year issued by High Country Marketing Corp. has a yield of 6.8%. The default risk premiums on the 1-year and 5-year bonds issued by High Country Marketing Corp. are, respectively, __________ and _________.

.4%; .3%

.4%; .5%

.5%; .5%

.5%; .8%

46.

A zero-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today.

$458.11

$641.11

$789.11

$1,100.11

47.

Yields on municipal bonds are typically ___________ yields on corporate bonds of similar risk and time to maturity.

lower than

slightly higher than

identical to

twice as high as

48.

You purchased a 5-year annual-interest coupon bond 1 year ago. Its coupon interest rate was 6%, and its par value was $1,000. At the time you purchased the bond, the yield to maturity was 4%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 3%, your annual total rate of return on holding the bond for that year would have been approximately _________.

5.5%

7.6%

8.9%

49.

Analysis of bond returns over a multiyear horizon based on forecasts of the bond's yield to maturity and reinvestment rate of coupons is called ______.

multiyear analysis

horizon analysis

maturity analysis

reinvestment analysis

50.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 1-year interest rate 1 year from now should be about _________.

7.5 %

9.02%

10.08%

51.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) One year from now bond C should sell for ________ (to the nearest dollar).

$857

$842

$835

$821

52.

$1,000 par value zero-coupon bonds (ignore liquidity premiums) The expected 2-year interest rate 3 years from now should be _________.

9.55%

11.74%

14.89%

13.73%

53.

The __________ of a bond is computed as the ratio of the annual coupon payment to the market price.

nominal yield

current yield

yield to maturity

yield to call

54.

A bond has a par value of $1,000, a time to maturity of 10 years, and a coupon rate of 8% with interest paid annually. If the current market price is $750, what is the capital gain yield of this bond over the next year?

.72%

1.85%

2.58%

3.42%

55.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 2 years from now should be _________.

10%

56.

Which of the following bonds would most likely sell at the lowest yield?

A callable debenture

A puttable mortgage bond

A callable mortgage bond

A puttable debenture

57.

A 1% decline in yield will have the least effect on the price of a bond with a _________.

10-year maturity, selling at 80

10-year maturity, selling at 100

20-year maturity, selling at 80

20-year maturity, selling at 100

58.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 3 years from now should be _________.

10%

59.

Consider the following $1,000 par value zero-coupon bonds: The expected 1-year interest rate 4 years from now should be _________.

16%

18%

20%

22%

60.

You can be sure that a bond will sell at a premium to par when _________.

its coupon rate is greater than its yield to maturity

its coupon rate is less than its yield to maturity

its coupon rate is equal to its yield to maturity

its coupon rate is less than its conversion value

61.

A corporate bond has a 10-year maturity and pays interest semiannually. The quoted coupon rate is 6%, and the bond is priced at par. The bond is callable in 3 years at 110% of par. What is the bond's yield to call?

6.72%

9.17%

4.49%

8.98%

62.

Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be _________.

higher

lower

the same

indeterminate

63.

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

expected increases in inflation over time

expected decreases in inflation over time

the presence of a liquidity premium

that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market

64.

The yield to maturity on a bond is: I. Above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium II. The discount rate that will set the present value of the payments equal to the bond price III. Equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity

I only

II only

I and II only

I, II, and III

65.

Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in _________.

marketability

risk

taxation

call protection

66.

Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________.

$97.22

$104.49

$364.08

$732.14

67.

A discount bond that pays interest semiannually will: I. Have a lower price than an equivalent annual payment bond II. Have a higher EAR than an equivalent annual payment bond III. Sell for less than its conversion value

I and II only

I and III only

II and III only

I, II, and III

68.

A 6% coupon U.S. Treasury note pays interest on May 31 and November 30 and is traded for settlement on August 10. The accrued interest on the $100,000 face amount of this note is _________.

$581.97

$1,163.93

$2,327.87

$3,000

69.

The yield to maturity of a 10-year zero-coupon bond with a par value of $1,000 and a market price of $625 is _____.

4.8%

6.1%

7.7%

10.4%

70.

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the nominal rate of return on the TIPS bond in the first year?

5.15%

8.15%

71.

Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments. What is the real rate of return on the TIPS bond in the first year?

8.15%

7.15%

72.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

The price of the Wildwood bond would decline by more than the price of the Asbury bond.

The price of the Wildwood bond would decline by less than the price of the Asbury bond.

The price of the Wildwood bond would increase by more than the price of the Asbury bond.

The price of the Wildwood bond would increase by less than the price of the Asbury bond.

73.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If interest rates are expected to rise, then Joe Hill should ____.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

74.

On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds. If the volatility of interest rates is expected to increase, then Joe Hill should __.

prefer the Wildwood bond to the Asbury bond

prefer the Asbury bond to the Wildwood bond

be indifferent between the Wildwood bond and the Asbury bond

The answer cannot be determined from the information given.

75.

One-, two-, and three-year maturity, default-free, zero-coupon bonds have yields to maturity of 7%, 8%, and 9%, respectively. What is the implied 1-year forward rate 1 year from today?

2.07%

8.03%

9.01%

11.12%

76.

If the quote for a Treasury bond is listed in the newspaper as 98:09 bid, 98:13 ask, the actual price at which you can purchase this bond given a $10,000 par value is _____________.

$9,828.12

$9,809.38

$9,840.62

$9,813.42

77.

If the price of a $10,000 par Treasury bond is $10,237.50, the quote would be listed in the newspaper as ________.

102:10

102:11

102:12

102:13

78.

A bond pays a semiannual coupon, and the last coupon was paid 61 days ago. If the annual coupon payment is $75, what is the accrued interest? (Assume 182 days in the 6-month period.)

$13.21

$12.57

$15.44

$16.32

79.

A bond has a flat price of $985, and it pays an annual coupon. The last coupon payment was made 90 days ago. What is the invoice price if the annual coupon is $69?

$999.55

$1,002.01

$1,007.45

$1,012.13

80.

If the quote for a Treasury bond is listed in the newspaper as 99:08 bid, 99:11 ask, the actual price at which you can sell this bond given a $10,000 par value is _____________.

$9,828.12

$9,925

$9,934.37

$9,955.43

81.

A bond has a 5% coupon rate. The coupon is paid semiannually, and the last coupon was paid 35 days ago. If the bond has a par value of $1,000, what is the accrued interest?

$4.81

$14.24

$25

$50

82.

The price on a Treasury bond is 104:21, with a yield to maturity of 3.45%. The price on a comparable maturity corporate bond is 103:11, with a yield to maturity of 4.59%. What is the approximate percentage value of the credit risk of the corporate bond?

1.14%

3.45%

4.59%

8.04%

83.

You buy a bond with a $1,000 par value today for a price of $875. The bond has 6 years to maturity and makes annual coupon payments of $75 per year. You hold the bond to maturity, but you do not reinvest any of your coupons. What was your effective EAR over the holding period?

10.4%

9.57%

7.45%

8.78%

84.

You buy an 8-year $1,000 par value bond today that has a 6% yield and a 6% annual payment coupon. In 1 year promised yields have risen to 7%. Your 1-year holding-period return was ___.

.61%

-5.39%

1.28%

-3.25%

85.

You buy a 10-year $1,000 par value zero-coupon bond priced to yield 6%. You do not sell the bond. If you are in a 28% tax bracket, you will owe taxes on this investment after the first year equal to _______.

$4.27

$9.38

$33.51

86.

You buy a 10-year $1,000 par value 4% annual-payment coupon bond priced to yield 6%. You do not sell the bond at year-end. If you are in a 15% tax bracket, at year-end you will owe taxes on this investment equal to _______.

$9.10

$4.25

$7.68

$5.20

87.

An investor pays $989.40 for a bond. The bond has an annual coupon rate of 4.8%. What is the current yield on this bond?

4.8%

4.85%

9.6%

9.7%

88.

If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?

4.3%

4.5%

5.2%

5.5%

89.

The price of a bond (with par value of $1,000) at the beginning of a period is $980 and at the end of the period is $975. What is the holding-period return if the annual coupon rate is 4.5%?

4.08%

4.5%

5.1%

5.6%

90.

A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

Increased

Decreased

Stayed the same

The answer cannot be determined from the information given.

91.

The ___________ is the document that defines the contract between the bond issuer and the bondholder.

indenture

covenant agreement

trustee agreement

collateral statement

Student: ___________________________________________________________________________

A top-down analysis of a firm's prospects starts with an analysis of the ____.

firm's position in its industry

U.S. economy or even the global economy

industry

specific firm under consideration

In 1980 the dollar-yen exchange rate was about $.0045. In 2012 the yen-dollar exchange rate was about 80 yen per dollar. A Japanese producer would have had to increase the dollar price of a good sold in the United States by approximately _____ to maintain the same yen price in 2012.

178%

79.5%

265.4%

36%

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.

lose market share or reduce its profit margin

gain market share or reduce its profit margin

lose market share or increase its profit margin

gain market share or increase its profit margin

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 stalwart

slow growth

a star

an asset play

Between 1999 and 2010, the purchasing power of the U.S. dollar increased relative to the purchasing power of _______.

the United Kingdom

the Euro

Switzerland

Canada

If you believe the economy is about to go into a recession, you might change your asset allocation by selling _______ and buying ______.

growth stocks; long-term bonds

long-term bonds; growth stocks

defensive stocks; growth stocks

defensive stocks; long-term bonds

The yield curve spread between the 10-year T-bond yield and the federal funds rate is a _______ economic indicator.

leading

lagging

coincident

mixed

The Conference Board's Consumer Confidence Index is released ______.

daily

weekly

monthly

quarterly

You can earn abnormal returns on your investments via macro forecasting ______.

if you can forecast the economy at all

if you can forecast the economy as well as the average forecaster

if you can forecast the economy better than the average forecaster

only if you can forecast the economy with perfect accuracy

10.

Which of the following industries would most analysts classify as mature?

Internet service providers

Biotechnology

Wireless communication

Auto manufacturing

11.

Which one of the following stocks represents industries with below-average sensitivity to the state of the economy?

Financials

Technology

Food and beverage

Cyclicals

12.

The most widely used monetary policy tool is _________.

altering the discount rate

altering reserve requirements

open market operations

increasing the budget deficit

13.

Which one of the following is the ratio of actual output from factories to potential output from factories?

Capacity utilizationrate

Participation rate

Durable goods orders rate

Industrial production rate

14.

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.

Keynesian

monetarist

supply-side

demand-side

15.

The market value of all goods and services produced during a given time period is called ______.

GDP

industrial production

capacity utilization

factory orders

16.

A big increase in government spending is an example of a _________.

positive demand shock

positive supply shock

negative demand shock

negative supply shock

17.

GDP refers to _________.

the amount of personal disposable income in the economy

the difference between government spending and government revenues

the total manufacturing output in the economy

the total production of goods and services in the economy

18.

Portfolio manager Peter Lynch would classify Coca-Cola as _________.

an asset play

a slow grower

a stalwart

a turnaround

19.

Attempting to forecast future earnings and dividends is consistent with which of the following approaches to securities analysis?

Technical analysis

Fundamental analysis

Both technical analysis and fundamental analysis

Indexing

20.

The analysis of the determinants of firm value is called _____________.

fundamental analysis

technical analysis

momentum analysis

indexing

21.

Which of the following companies is the best example of a turnaround?

Coca-Cola

Microsoft

ExxonMobil

Kmart

22.

Inflation is caused by ________________.

unions

rapid growth of the money supply

excess supply

low rates of capacity utilization

23.

Everything else equal, if you expect a larger interest rate increase than other market participants, you should _________.

buy long-term bonds

buy short-term bonds

buy common stocks

buy preferred stocks

24.

To obtain an approximate estimate of the real interest rate, one must _________ the __________ the nominal risk-free rate.

add; default premium to

subtract; default premium from

add; expected inflation to

subtract; expected inflation from

25.

Which of the following would not be considered a supply shock?

A change in the price of imported oil

Frost damage to the orange crop

A change in the level of education of the average worker

An increase in the level of government spending

26.

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.

below-average

average

above-average

Since growth is expected to be slow, sensitivity to economic conditions is not an issue.

27.

Which of the following is not an example of fiscal policy?

Social Security spending

Medicare spending

Fed purchases of Treasury securities

Changes in the tax rate

28.

Supply-side economics tends to focus on _______________.

government spending

price controls

monetary policy

increasing productive capacity

29.

Which one of the following describes the amount by which government spending exceeds government revenues?

Balance of trade

Budget deficit

Gross domestic product

Output gap

30.

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?

Fiscal policy

Monetary policy

Supply-side policy

Rising minimum wages

31.

In macroeconomic terms, an increase in the price of imported oil or a decrease in the availability of oil is an example of a _________.

demand shock

supply shock

monetary shock

refinery shock

32.

______________ in interest rates are associated with stock market declines.

Anticipated increases

Unanticipated increases

Anticipated decreases

Unanticipated decreases

33.

The average duration of unemployment is _________.

a leading economic indicator

a coincidental economic indicator

a lagging economic indicator

both a coincidental indicator and a lagging indicator

34.

The ratio of the purchasing power of two economies is termed the _______.

balance of trade

real exchange rate

real interest rate

nominal exchange rate

35.

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

II only

I and II only

I and III only

I, II, and III

36.

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

II only

I and II only

I and III only

I, II, and III

37.

Which of the following describes the rate at which your ability to purchase grows while you hold an interest-earning investment?

The nominal exchange rate

The nominal interest rate

The real exchange rate

The real interest rate

38.

An example of a highly cyclical industry is the _________.

automobile industry

tobacco industry

pharmaceutical industry

utility industry

39.

The stock price index and contracts and orders for nondefense capital goods are _________.

leading economic indicators

coincidental economic indicators

lagging economic indicators

leading and coincidental indicators, respectively

40.

Which one of the following is not a demand shock?

Increase in government spending

Increases in the money supply

Reductions in consumer spending

Improvements in education of U.S. workers

41.

Which one of the following is not a U.S. supply shock?

Unions force an increase in national wage rates.

The oil supply from the Middle East drops 30%.

Extended droughts reduce U.S. food production 25%.

Chinese purchases of U.S. exports increase.

42.

Pharmaceuticals, food, and other necessities would be good performers during the ____ stage of the business cycle.

peak

contraction

trough

expansion

43.

Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the _____ stage of the business cycle.

peak

contraction

trough

expansion

44.

If you are going to earn abnormal returns based on your macroeconomic analysis, it will most likely have to be because __________.

you have more information than others

you are a better analyst than others

you have the same information as others

you are an equally good analyst as others

45.

If the economy is going into a recession, a good industry to invest in would be the __________ industry.

automobile

banking

construction

medical services

46.

Members of the Board of Governors of the Federal Reserve System are appointed by ____________ to serve _____________ terms.

the Senate; 10-year

the House of Representatives; 8-year

the President; 14-year

the Secretary of the Treasury; 6-year

47.

A firm in the early stages of its industry life cycle will likely have _________.

low dividend payout rates

low rates of investment

low rates of return on investment

low R&D spending

48.

Which of the following describes the percentage of the total labor force that has yet to find work?

The capacity utilization rate

The participation rate

The unemployment rate

The natural rate

49.

Which of the following is the rate at which the general level of prices for goods and services is rising?

The exchange rate

The gross domestic product growth rate

The inflation rate

The real interest rate

50.

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.

bottom-up

outside-inside

top-down

upside-down

51.

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

I only

I and II only

II and III only

I, II, and III

52.

The discount rate is the ________.

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

interest rate that banks charge their best corporate customers

53.

If the currency of your country is depreciating, this should __________ exports and __________ imports.

stimulate; stimulate

stimulate; discourage

discourage; stimulate

discourage; discourage

54.

If interest rates increase, business investment expenditures are likely to __________ and consumer durable expenditures are likely to _________.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

55.

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.

increase; increase

increase; decrease

decrease; increase

decrease; decrease

56.

The nominal interest rate is 6%. The inflation rate is 3%. The exact real interest rate must be _________.

2.91%

3.85%

1.45%

2.12%

57.

The nominal interest rate is 10%. The real interest rate is 4%. The inflation rate must be _________.

-6%

5.77%

14.4%

58.

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

III, I, II

I, III, II

III, II, I

I, II, III

59.

An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed ______________.

sector rotation

contraction/expansion analysis

life-cycle analysis

business-cycle shifting

60.

Firm A produces gadgets. The price of gadgets is $2 each. Firm A has total fixed costs of $1,000,000 and variable costs of $1 per gadget. The corporate tax rate is 40%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy enters a recession, the after-tax profit of firm A will be _________.

$90,000

$180,000

$270,000

61.

Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 30%. If the economy is strong, the firm will sell 2,000,000 gadgets. If the economy enters a recession, the firm will sell only half as many gadgets. If the economy is strong, the after-tax profit of firm B will be _________.

$90,000

$210,000

$300,000

$630,000

62.

The fed funds rate is the __________.

interest rate that banks charge their best corporate customers

interest rate banks charge each other for overnight loans of deposits on reserve at the Fed

interest rate the Fed charges commercial banks on short-term loans

interest rate that the U.S. Treasury pays on its bills

63.

Firm B produce gadgets. The price of gadgets is $2 each. Firm B has total fixed costs of $300,000 and variable costs of $1.40 per gadget. The corporate tax rate is 40%. What is the breakeven number of gadgets B must sell to make a zero after-tax profit?

300,000

400,000

500,000

600,000

64.

The goal of supply-side policies is to _______.

increase government involvement in the economy

create an environment where workers and owners of capital have the maximum incentive and ability to produce and develop goods

maximize tax revenues of the government

focus more on wealth redistribution policies

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 4 and 5 would indicate that the industry is in the _________ stage.

start-up

consolidation

maturity

relative decline

66.

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.

4 and 7

1 and 4

2 and 5

none of these options

67.

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 consolidation stage.

6 and 7

1 and 4

5 and 6

2 and 8

68.

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. Which of the characteristics would be typical of an industry that is in the maturity stage?

1, 2, and 3

4 and 5

6, 7, and 8

all of these options

69.

Countercyclical fiscal policy is best described by which of the following statements?

Government surpluses are planned during economic booms, and deficits are planned during economic recessions.

The annual budget should always be balanced.

Deficits should always equal surpluses.

Government deficits are planned during economic booms, and surpluses are planned during economic recessions.

70.

A supply-side economist would likely agree with which of the following statements?

Real output and aggregate employment are primarily determined by aggregate demand.

Real income will rise when government expenditures and tax rates increase.

Real output and aggregate employment are primarily determined by tax rates.

Increasing the money supply will increase real output without causing higher inflation.

71.

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?

Sell government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Buy government bonds, reducing money supply, increasing interest rates, and slowing aggregate demand.

Decrease the discount rate, lowering interest rates and causing both costs and prices to fall.

Increase taxes, reducing costs and causing prices to fall.

72.

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?

U.S. goods will increase in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will import less.

U.S. goods will decrease in cost, and Japan will import more.

U.S. goods will increase in cost, and Japan will export less.

73.

Which of the following are examples of cyclical industries? I. Maytag II. Computer chip manufacturers III. Kellogg's Frosted Flakes IV. Pfizer

I and II only

I, II, and III only

II, III, and IV only

I, II, III, and IV

74.

You would expect the beta of cyclical industries to be ______ and the beta of defensive industries to be ______.

greater than 1; less than 1

less than 1; less than 1

less than 1; greater than 1

greater than 1; greater than 1

75.

What economic variable is most closely associated with increasing corporate profits?

Exchange rates

Inflation

Gross domestic product

Budget deficits

76.

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?

Higher interest rates due to the new government borrowing

Inflation resulting from more government purchases

A negative supply shock

Shortage of investment due to new accounts

77.

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 economic slowdown is likely

Employment trends will reverse and unemployment will occur

Government deficits will result from capacity utilization

Inflation may result from upward wage pressures

78.

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 ____________.

asset allocation

capacity utilization

employment management

strategic planning

79.

The expansion of the money supply at a rate that exceeds the increase in goods and services will likely result in ___________.

expanding economy

increased inflation

interest rate declines

lower GDP

80.

The supply of funds in the economy is controlled primarily by ____________.

the Federal Reserve System

Congress

money center banks

the Treasury department

81.

The classification system used to classify firms into industries is now called the _____ code.

SIC

NAICS

ISO 57

ISM

82.

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?

Demand shock

Equilibrium event

Expanding commodity event

Supply shock

83.

Whenever OPEC attempts to influence the price of oil by significantly altering production, economists refer to this type of event as a ______________.

demand shock

equilibrium event

expanding commodity event

supply shock

84.

Items that are ____________ and product purchases for which ________ is not important tend to be less cyclical in nature.

necessities; income

luxuries; leverage

discretionary goods; time of purchase

produced with high fixed costs; entertainment

85.

Cash cows are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

86.

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

Start-up stage

Consolidation stage

Maturity stage

Relative decline stage

87.

Stalwarts are typically found in the _________ stage of the industry life cycle.

start-up

consolidation

maturity

relative decline

88.

Large-growth companies generally emerge in the __________ stage.

start-up

consolidation

maturity

relative decline

89.

Which of the following are barriers to entry? 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

I and II only

I, II, and III only

II, III, and IV only

III and IV only

Student: ___________________________________________________________________________

The accounting measure of a firm's equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

book value

market value

liquidation value

Tobin's q

The price-to-sales ratio is probably most useful for firms in which phase of the industry life cycle?

Start-up phase

Consolidation

Maturity

Relative decline

If a firm increases its plowback ratio, this will probably result in _______ P/E ratio.

a higher

a lower

an unchanged

The answer cannot be determined from the information given.

The value of Internet companies is based primarily on _____.

current profits

Tobin's q

growth opportunities

replacement cost

New-economy companies generally have higher _______ than old-economy companies.

book value per share

P/E multiples

profits

asset values

P/E ratios tend to be _______ when inflation is ______.

higher; higher

lower; lower

higher; lower

They are unrelated.

Which one of the following statements about market and book value is correct?

All firms sell at a market-to-book ratio above 1.

All firms sell at a market-to-book ratio greater than or equal to 1.

All firms sell at a market-to-book ratio below 1.

Most firms have a market-to-book ratio above 1, but not all.

Earnings yields tend to _______ when Treasury yields fall.

fall

rise

remain unchanged

fluctuate wildly

Which one of the following is a common term for the market consensus value of the required return on a stock?

Dividend payout ratio

Intrinsic value

Market capitalization rate

Plowback ratio

10.

Which one of the following is equal to the ratio of common shareholders' equity to common shares outstanding?

Book value per share

Liquidation value per share

Market value per share

Tobin's q

11.

A firm has current assets that could be sold for their book value of $10 million. The book value of its fixed assets is $60 million, but they could be sold for $95 million today. The firm has total debt at a book value of $40 million, but interest rate changes have increased the value of the debt to a current market value of $50 million. This firm's market-to-book ratio is ________.

1.83

1.5

1.35

1.46

12.

If a stock is correctly priced, then you know that ____________.

the dividend payout ratio is optimal

the stock's required return is equal to the growth rate in earnings and dividends

the sum of the stock's expected capital gain and dividend yield is equal to the stock's required rate of return

the present value of growth opportunities is equal to the value of assets in place

13.

A stock has an intrinsic value of $15 and an actual stock price of $13.50. You know that this stock ________.

has a Tobin's q value < 1

will generate a positive alpha

has an expected return less than its required return

has a beta > 1

14.

Bill, Jim, and Shelly are all interested in buying the same stock that pays dividends. Bill plans on holding the stock for 1 year. Jim plans on holding the stock for 3 years. Shelly plans on holding the stock until she retires in 10 years. Which one of the following statements is correct?

Bill will be willing to pay the most for the stock because he will get his money back in 1 year when he sells.

Jim should be willing to pay three times as much for the stock as Bill will pay because his expected holding period is three times as long as Bill's.

Shelly should be willing to pay the most for the stock because she will hold it the longest and hence will get the most dividends.

All three should be willing to pay the same amount for the stock regardless of their holding period.

15.

A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct? I. All else equal, the firm's growth rate will accelerate after the payout change. II. All else equal, the firm's stock price will go up after the payout change. III. All else equal, the firm's P/E ratio will increase after the payout change.

I only

I and II only

II and III only

I, II, and III

16.

A firm cuts its dividend payout ratio. As a result, you know that the firm's _______.

return on assets will increase

earnings retention ratio will increase

earnings growth rate will fall

stock price will fall

17.

__________ is the amount of money per common share that could be realized by breaking up the firm, selling its assets, repaying its debt, and distributing the remainder to shareholders.

Book value per share

Liquidation value per share

Market value per share

Tobin's q

18.

An underpriced stock provides an expected return that is ____________ the required return based on the capital asset pricing model (CAPM).

less than

equal to

greater than

greater than or equal to

19.

Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ______.

100%

between 0% and 50%

between 50% and 100%

20.

The constant-growth dividend discount model (DDM) can be used only when the ___________.

growth rate is less than or equal to the required return

growth rate is greater than or equal to the required return

growth rate is less than the required return

growth rate is greater than the required return

21.

Suppose that in 2012 the expected dividends of the stocks in a broad market index equaled $240 million when the discount rate was 8% and the expected growth rate of the dividends equaled 6%. Using the constant-growth formula for valuation, if interest rates increase to 9%, the value of the market will change by _____.

-10%

-20%

-25%

-33%

22.

You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

23.

Each of two stocks, A and B, is expected to pay a dividend of $7 in the upcoming year. The expected growth rate of dividends is 6% for both stocks. You require a return of 10% on stock A and a return of 12% on stock B. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

24.

You want to earn a return of 11% on each of two stocks, A and B. Stock A is expected to pay a dividend of $3 in the upcoming year, while stock B is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends for both stocks is 4%. Using the constant-growth DDM, the intrinsic value of stock A _________.

will be higher than the intrinsic value of stock B

will be the same as the intrinsic value of stock B

will be less than the intrinsic value of stock B

The answer cannot be determined from the information given.

25.

You are considering acquiring a common share of Sahali Shopping Center Corporation that you would like to hold for 1 year. You expect to receive both $1.25 in dividends and $35 from the sale of the share at the end of the year. The maximum price you would pay for a share today is __________ if you wanted to earn a 12% return.

$31.25

$32.37

$38.47

$41.32

26.

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 50%, its P/E ratio will be _________.

8.33

12.5

19.23

24.15

27.

The market capitalization rate on the stock of Aberdeen Wholesale Company is 10%. Its expected ROE is 12%, and its expected EPS is $5. If the firm's plowback ratio is 60%, its P/E ratio will be _________.

7.14

14.29

16.67

22.22

28.

Weyerhaeuser Incorporated has a balance sheet that lists $70 million in assets, $45 million in liabilities, and $25 million in common shareholders' equity. It has 1 million common shares outstanding. The replacement cost of its assets is $85 million. Its share price in the market is $49. Its book value per share is _________.

$16.67

$25

$37.50

$40.83

29.

Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?

.5%

1.5%

30.

Gagliardi Way Corporation has an expected ROE of 15%. If it pays out 30% of its earnings as dividends, its dividend growth rate will be _____.

4.5%

10.5%

15%

30%

31.

A preferred share of Coquihalla Corporation will pay a dividend of $8 in the upcoming year and every year thereafter; that is, dividends are not expected to grow. You require a return of 7% on this stock. Using the constant-growth DDM to calculate the intrinsic value, a preferred share of Coquihalla Corporation is worth _________.

$13.50

$45.50

$91

$114.29

32.

Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earnings in the form of dividends.

15%

17.5%

45%

33.

A firm is planning on paying its first dividend of $2 three years from today. After that, dividends are expected to grow at 6% per year indefinitely. The stock's required return is 14%. What is the intrinsic value of a share today?

$25

$16.87

$19.24

$20.99

34.

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be _________.

$1.12

$1.44

$2.40

$5.60

35.

Rose Hill Trading Company is expected to have EPS in the upcoming year of $6. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its intrinsic value should be _________.

$20.93

$69.77

$128.57

$150

36.

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

12%

14%

18%

37.

Grott and Perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 20%, and its earnings retention ratio is 70%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

$20

$70

$90

$115

38.

Ace Ventura, Inc., has expected earnings of $5 per share for next year. The firm's ROE is 15%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 10%, what is the present value of its growth opportunities?

$25

$50

$75

$100

39.

Annie's Donut Shops, Inc., has expected earnings of $3 per share for next year. The firm's ROE is 18%, and its earnings retention ratio is 60%. If the firm's market capitalization rate is 12%, what is the value of the firm excluding any growth opportunities?

$25

$50

$83.33

$208

40.

Flanders, Inc., has expected earnings of $4 per share for next year. The firm's ROE is 8%, and its earnings retention ratio is 40%. If the firm's market capitalization rate is 15%, what is the present value of its growth opportunities?

-$6.33

$20.34

$26.67

41.

Firm A is high-risk, and Firm B is low-risk. Everything else equal, which firm would you expect to have a higher P/E ratio?

Firm A

Firm B

Both would have the same P/E if they were in the same industry.

There is not necessarily any linkage between risk and P/E ratios.

42.

Firms with higher expected growth rates tend to have P/E ratios that are ___________ the P/E ratios of firms with lower expected growth rates.

higher than

equal to

lower than

There is not necessarily any linkage between risk and P/E ratios.

43.

Value stocks are more likely to have a PEG ratio _____.

less than 1

equal to 1

greater than 1

less than zero

44.

Generally speaking, as a firm progresses through the industry life cycle, you would expect the PVGO to ________ as a percentage of share price.

increase

decrease

stay the same

No typical pattern can be expected.

45.

Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant-growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant-growth DDM and the CAPM, the beta of the stock is _________.

1.4

46.

Westsyde Tool Company is expected to pay a dividend of $1.50 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using the CAPM, an appropriate required return on Westsyde Tool Company's stock is _________.

10.8%

15.6%

16.8%

47.

Westsyde Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Company's stock is 1.2. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company stock today is _________.

$24.29

$27.39

$31.13

$34.52

48.

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the CAPM, the return you should require on the stock is _________.

7.25%

10.25%

14.75%

21%

49.

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

17.65

37.50

50.

Generally speaking, the higher a firm's ROA, the _________ the dividend payout ratio and the _________ the firm's growth rate of earnings.

higher; lower

higher; higher

lower; lower

lower; higher

51.

Interior Airline is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. Using the constant-growth DDM, the intrinsic value of the stock is _________.

$10

$22.73

$27.78

$41.67

52.

Caribou Gold Mining Corporation is expected to pay a dividend of $4 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the CAPM, the return you should require on the stock is _________.

53.

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

$50

$100

$150

$200

54.

Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%. Using the multistage DDM, the stock should be worth __________ today.

$63.80

$65.13

$67.95

$85.60

55.

Ace Frisbee Corporation produces a good that is very mature in the firm's product life cycles. Ace Frisbee Corporation is expected to pay a dividend in year 1 of $3, a dividend in year 2 of $2, and a dividend in year 3 of $1. After year 3, dividends are expected to decline at the rate of 2% per year. An appropriate required return for the stock is 8%. Using the multistage DDM, the stock should be worth __________ today.

$13.07

$13.58

$18.25

$18.78

56.

A firm's earnings per share increased from $10 to $12, its dividends increased from $4 to $4.40, and its share price increased from $80 to $100. Given this information, it follows that _________.

the stock experienced a drop in its P/E ratio

the company had a decrease in its dividend payout ratio

both earnings and share price increased by 20%

the required rate of return increased

57.

Assuming all other factors remain unchanged, __________ would increase a firm's price-earnings ratio.

an increase in the dividend payout ratio

a reduction in investor risk aversion

an expected increase in the level of inflation

an increase in the yield on Treasury bills

58.

A company with an expected earnings growth rate which is greater than that of the typical company in the same industry most likely has _________________.

a dividend yield which is greater than that of the typical company

a dividend yield which is less than that of the typical company

less risk than the typical company

less sensitivity to market trends than the typical company

59.

Everything else equal, which variable is negatively related to the intrinsic value of a company?

60.

Sanders, Inc., paid a $4 dividend per share last year and is expected to continue to pay out 60% of its earnings as dividends for the foreseeable future. If the firm is expected to generate a 13% return on equity in the future, and if you require a 15% return on the stock, the value of the stock is _________.

$26.67

$35.19

$42.94

$59.89

61.

A firm has PVGO of 0 and a market capitalization rate of 12%. What is the firm's P/E ratio?

8.33

10.25

18.55

62.

A firm has an earnings retention ratio of 40%. The stock has a market capitalization rate of 15% and an ROE of 18%. What is the stock's P/E ratio?

12.82

7.69

8.33

9.46

63.

A common stock pays an annual dividend per share of $1.80. The risk-free rate is 5%, and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $1.80 per share, what is the value of the stock?

$17.78

$20

$40

None of these options

64.

Transportation stocks currently provide an expected rate of return of 15%. TTT, a large transportation company, will pay a year-end dividend of $3 per share. If the stock is selling at $60 per share, what must be the market's expectation of the constant-growth rate of TTT dividends?

10%

20%

None of these options

65.

A stock is priced at $45 per share. The stock has earnings per share of $3 and a market capitalization rate of 14%. What is the stock's PVGO?

$23.57

$15

$19.78

$21.34

66.

A firm increases its dividend plowback ratio. All else equal, you know that _____________.

earnings growth will increase and the stock's P/E will increase

earnings growth will decrease and the stock's P/E will increase

earnings growth will increase and the stock's P/E will decrease

earnings growth will increase and the stock's P/E may or may not increase

67.

A firm has a stock price of $54.75 per share. The firm's earnings are $75 million, and the firm has 20 million shares outstanding. The firm has an ROE of 15% and a plowback of 65%. What is the firm's PEG ratio?

1.5

1.25

1.1

68.

ART has come out with a new and improved product. As a result, the firm projects an ROE of 25%, and it will maintain a plowback ratio of .20. Its earnings this year will be $3 per share. Investors expect a 12% rate of return on the stock. At what price would you expect ART to sell?

$25

$34.29

$42.86

$45.67

69.

8.33

11.43

14.29

15.25

70.

$8.57

$9.29

$14.29

$16.29

71.

$53.96

$44.95

$41.68

$39.76

72.

The EBIT of a firm is $300, the tax rate is 35%, the depreciation is $20, capital expenditures are $60, and the increase in net working capital is $30. What is the free cash flow to the firm?

$85

$125

$185

$305

73.

A firm reports EBIT of $100 million. The income statement shows depreciation of $20 million. If the tax rate is 35% and total capital expenditures and increases in working capital total $10 million, what is the free cash flow to the firm?

$57

$65

$75

$95

74.

The free cash flow to the firm is $300 million in perpetuity, the cost of equity equals 14%, and the WACC is 10%. If the market value of the debt is $1 billion, what is the value of the equity using the free cash flow valuation approach?

$1 billion

$2 billion

$3 billion

$4 billion

75.

If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9.5%?

$679.81 million

$715.54 million

$769.23 million

$803.03 million

76.

The free cash flow to the firm is reported as $405 million. The interest expense to the firm is $76 million. If the tax rate is 35% and the net debt of the firm increased by $50 million, what is the free cash flow to the equity holders of the firm?

$405.6 million

$454.2 million

$505.8 million

$553.5 million

77.

The free cash flow to the firm is reported as $275 million. The interest expense to the firm is $60 million. If the tax rate is 35% and the net debt of the firm increased by $33 million, what is the free cash flow to the equity holders of the firm?

$269 million

$296 million

$305 million

$327 million

78.

The free cash flow to the firm is reported as $205 million. The interest expense to the firm is $22 million. If the tax rate is 35% and the net debt of the firm increased by $25 million, what is the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?

$2,168 billion

$2,445 billion

$2,565 billion

$2,998 billion

79.

The free cash flow to the firm is reported as $198 million. The interest expense to the firm is $15 million. If the tax rate is 35% and the net debt of the firm increased by $20 million, what is the approximate market value of the firm if the FCFE grows at 3% and the cost of equity is 14%?

$1,950 billion

$2,497 billion

$2,585 billion

$3,098 billion

80.

Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that: I. Stock A will give us a higher return than Stock B. II. An investment in stock A is probably riskier than an investment in stock B. III. Stock A has higher forecast earnings growth than stock B.

I only

I and II only

II and III only

I, II, and III

81.

A firm is expected to produce earnings next year of $3 per share. It plans to reinvest 25% of its earnings at 20%. If the cost of equity is 11%, what should be the value of the stock?

$27.27

$37.50

$66.67

$70

82.

Next year's earnings are estimated to be $5. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities?

$9.09

$10.10

$11.11

$12.21

83.

Next year's earnings are estimated to be $6. The company plans to reinvest 33% of its earnings at 12%. If the cost of equity is 8%, what is the present value of growth opportunities?

$24.50

$44.44

$75

84.

When Google's share price reached $475 per share, Google had a P/E ratio of about 68 and an estimated market capitalization rate of 11.5%. Google pays no dividends. Approximately what percentage of Google's stock price was represented by PVGO?

92%

87%

77%

64%

85.

A firm has a stock price of $55 per share and a P/E ratio of 75. If you buy the stock at this P/E and earnings fail to grow at all, how long should you expect it to take to just recover the cost of your investment?

27 years

37 years

55 years

75 years

86.

In what industry are investors likely to use the dividend discount model and arrive at a price close to the observed market price?

Import/export trade

Software

Telecommunications

Utility

87.

Estimates of a stock's intrinsic value calculated with the free cash flow methodology depend most critically on _______.

the terminal value used

whether one uses FCFF or FCFE

the time period used to estimate the cash flows

whether the firm is currently paying dividends

88.

The greatest value to an analyst from calculating a stock's intrinsic value is _______.

how easy it is to come up with accurate model inputs

the precision of the value estimate

how the process forces analysts to understand the critical variables that have the greatest impact on value

how all the different models typically yield identical value results

89.

Which of the following valuation measures is often used to compare firms that have no earnings?

Price-to-book ratio

P/E ratio

Price-to-cash-flow ratio

Price-to-sales ratio

Student: ___________________________________________________________________________

Which of the following assets is most liquid?

Cash equivalents

Receivables

Inventories

Plant and equipment

Cost of goods sold refers to ___________.

direct costs attributable to producing the product sold by the firm

salaries, advertising, and selling expenses

payments to the firm's creditors

payments to federal and local governments

Many observers believe that firms "manage" their income statements to _______.

minimize taxes over time

maximize expenditures

smooth their earnings over time

generate level sales

Depreciation expense is in what broad category of expenditures?

Operating expenses

General and administrative expenses

Debt interest expense

Tax expenditures

Firm A acquires firm B when firm B has a book value of assets of $155 million and a book value of liabilities of $35 million. Firm A actually pays $175 million for firm B. This purchase would result in goodwill for firm A equal to _____.

$175 million

$155 million

$120 million

$55 million

One of the biggest impediments to a global capital market has been _________.

volatile exchange rates

the lack of common accounting standards

lower disclosure standards in the United States than abroad

the lack of transparent reporting standards across the EU

Benjamin Graham thought that the benefits from detailed analysis of a firm's financial statements had _________ over his long professional life.

increased greatly

increased slightly

remained constant

decreased

If the interest rate on debt is higher than the ROA, then a firm's ROE will _________.

decrease

increase

not change

change but in an indeterminable manner

Which of the following is not one of the three key financial statements available to investors in publicly traded firms?

Income statement

Balance sheet

Statement of operating earnings

Statement of cash flows

10.

In 2006 Hewlett-Packard repurchased shares of common stock worth $5,241 million and made dividend payments of $894 million. Other financing activities raised $196 million, and Hewlett-Packard's total cash flow from financing was -$6,077 million. How much did the long-term debt accounts of Hewlett-Packard change?

Increased $138 million

Decreased $138 million

Increased $836 million

Decreased $836 million

11.

What must cash flow from financing have been in 2008 for Interceptors, Inc.?

$28

$30

$33

12.

Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct? I. This firm appears to be a good investment because of its steady growth in cash. II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows. III. Financing activities have been increasingly important for this firm's operations, at least in the short run.

I only

II and III only

II only

I and II only

13.

Common-size balance sheets are prepared by dividing all quantities by ____________.

total assets

total liabilities

shareholders' equity

fixed assets

14.

Operating ROA is calculated as __________, while ROE is calculated as _________.

EBIT/Total assets; Net profit/Total assets

Net profit/Total assets; EBIT/Total assets

EBIT/Total assets; Net profit/Equity

Net profit/EBIT; Sales/Total assets

15.

A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm's: I. Beta II. Earnings variability over the business cycle III. ROE IV. Stock price

I and II only

III and IV only

I, III, and IV only

I, II, and III only

16.

The highest possible value for the interest-burden ratio is ______, and this occurs when the firm _________.

0; uses as much debt as possible

1; uses debt to the point where ROA = interest cost of debt

1; uses no interest-bearing debt

-1; pays down its existing debts

17.

Which one of the following ratios is used to calculate the times-interest-earned ratio?

Net profit/Interest expense

Pretax profit/EBIT

EBIT/Sales

EBIT/Interest expense

18.

The process of decomposing ROE into a series of component ratios is called ______________.

DuPont analysis

technical analysis

comparative analysis

liquidity analysis

19.

Which of the following is not a ratio used in the DuPont analysis?

Interest burden

Profit margin

Asset turnover

Earnings yield ratio

20.

By 2008, over 100 countries had adopted financial reporting standards that are in conformance with ________.

GAAP

IFRS

FASB

GASB

21.

Operating ROA can be found as the product of ______.

Return on sales × ATO

Tax burden × Interest burden

Interest burden × Leverage ratio

ROE × Dividend payout ratio

22.

A firm has an ROE of 20% and a market-to-book ratio of 2.38. Its P/E ratio is _________.

8.4

11.9

17.62

47.6

23.

If a firm has a positive tax rate and a positive operating ROA, and the interest rate on debt is the same as the operating ROA, then operating ROA will be _________.

greater than zero, but it is impossible to determine how operating ROA will compare to ROE

equal to ROE

greater than ROE

less than ROE

24.

You find that a firm that uses debt has a compound leverage factor less than 1. This tells you that ________.

the firm's use of financial leverage is positively contributing to ROE

the firm's use of financial leverage is negatively contributing to ROE

the firm's use of operating leverage is positively contributing to ROE

the firm's use of operating leverage is negatively contributing to ROE

25.

A firm has a P/E ratio of 24 and an ROE of 12%. Its market-to-book-value ratio is _________.

2.88

1.75

.69

26.

A firm has an ROA of 8% and a debt/equity ratio of .5; its ROE is _________.

12%

27.

A firm has a tax burden of .7, a leverage ratio of 1.3, an interest burden of .8, and a return-on-sales ratio of 10%. The firm generates $2.28 in sales per dollar of assets. What is the firm's ROE?

12.4%

14.5%

16.6%

17.8%

28.

Economic value added (EVA) is:

the difference between the return on assets and the opportunity cost of capital times the capital base

ROA × ROE

a measure of the firm's abnormal return

largest for high-growth firms

29.

Which of the following statements is true concerning economic value added?

A growing number of firms tie managers' compensation to EVA.

A profitable firm will always have a positive EVA.

EVA recognizes that the cost of capital is not a real cost.

If a firm has positive present value of growth opportunities, it will have positive EVA.

30.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's current ratio for 2012 indicates that Flathead's liquidity has ________ since 2011.

risen

fallen

stayed the same

The answer cannot be determined from the information given.

31.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

11.6

10.2

9.5

7.7

32.

2.13

2.44

2.56

2.89

33.

$810,000

$775,000

$755,000

$735,000

34.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

Flathead's receivables are outstanding about 9 fewer days than the industry average.

Flathead's receivables are outstanding about 15 fewer days than the industry average.

Flathead's receivables are outstanding about 12 more days than the industry average.

Flathead's receivables are outstanding about 6 more days than the industry average.

35.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

3.56

3.26

3.14

3.02

36.

$.075

$.086

$.092

$.099

37.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

6.5%

26.5%

33.4%

38%

38.

3.39

3.6

13.33

10.67

39.

The financial statements of Flathead Lake Manufacturing Company are shown below: Note: The common shares are trading in the stock market for $15 per share Refer to the financial statements of Flathead Lake Manufacturing Company. The firm's compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.5

2.5

40.

1.3

1.5

1.69

2.83

41.

1.3

1.5

1.69

2.83

42.

1.3

1.5

1.69

2.83

43.

2.8

11.11

44.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's fixed-asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

2.8

11.11

45.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

1.3

1.5

1.69

2.83

46.

.0409

.0429

.0475

.0753

47.

The financial statements of Burnaby Mountain Trading Company are shown below. Note: The common shares are trading in the stock market for $27 each. Refer to the financial statements of Burnaby Mountain Trading Company. The firm's return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

.0409

.0429

.0462

.0923

48.

2.8

3.6

11.11

49.

.1708

.1529

.1462

.1636

50.

A firm has a net profit/pretax profit ratio of .6, a leverage ratio of 1.5, a pretax profit/EBIT of .7, an asset turnover ratio of 4, a current ratio of 2, and a return-on-sales ratio of 6%. Its ROE is _________.

7.56%

15.12%

20.16%

30.24%

51.

A firm has an ROA of 19%, a debt/equity ratio of 1.8, and a tax rate of 30%, and the interest rate on its debt is 7%. Its ROE is _________.

15.12%

28.42%

37.24%

40.6%

52.

The level of real income of a firm can be distorted by the reporting of depreciation and interest expense. During periods of low inflation, the level of reported depreciation tends to __________ income, and the level of interest expense reported tends to __________ income.

understate; overstate

understate; understate

overstate; understate

overstate; overstate

53.

If a firm's ratio of stockholders' equity/total assets is lower than the industry average and its ratio of long-term debt/stockholders' equity is also lower than the industry average, this would suggest that the firm _________.

has more current liabilities than the industry average

has more leased assets than the industry average

will be less profitable than the industry average

has more current assets than the industry average

54.

A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has: I. Lower ATO than the industry average II. Lower ROA than the industry average III. Lower ROE than the industry average

I only

I and II only

II and III only

I, II, and III

55.

A high price-to-book ratio may indicate which one of the following?

The firm expanded its plant and equipment in the past few years.

The firm is doing a poorer job controlling its inventory expense than other related firms.

Investors may believe that this firm has opportunities for earning a rate of return in excess of the market capitalization rate.

All of these options.

56.

A firm has an ROE equal to the industry average, but its price-to-book ratio is below the industry average. You know that the firm's _________.

earnings yield is above the industry average

P/E ratio is above the industry average

dividend payout ratio is too high

interest burden must be below the industry average

57.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by operating activities of Haven Hardware?

-$30,000

$220,000

$320,000

$780,000

58.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in investing activities of Haven Hardware?

-$12,000

-$62,000

$12,000

$164,000

59.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net cash provided by or used in financing activities of Haven Hardware?

-$10,000

-$120,000

$10,000

$120,000

60.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the net increase or decrease in cash for Haven Hardware for 2012?

-$94,000

-$88,000

$88,000

$188,000

61.

Use the following cash flow data of Haven Hardware for the year ended December 31, 2012. What is the cash at the end of 2012 for Haven Hardware?

$6,000

$94,000

$736,000

$188,000

62.

All of the following ratios are related to efficiency except _______.

total asset turnover

fixed-asset turnover

average collection period

cash ratio

63.

Which of the following would result in a cash inflow under the heading "Cash flow from investing" in the statement of cash flows?

Purchase of capital equipment

Payments to suppliers for inventory

Collections on receivables

Sale of production machinery

64.

When assessing the sustainability of a firm's cash flows, analysts will prefer to see cash growth generated from which of the following sources?

Cash flow from investment activities

Cash flow from operating activities

Cash flow from financing

Cash flow from extraordinary events

65.

The ABS company has a capital base of $100 million, an opportunity cost of capital (k) of 15%, a return on assets (ROA) of 9%, and a return on equity (ROE) of 18%. What is the economic value added (EVA) for ABS?

$8 million

-$6 million

$3 million

-$4 million

66.

Another term for EVA is ______.

net income

operating income

residual income

market-based income

67.

Which of the following transactions will result in a decrease in cash flow from operations?

Increase in accounts receivable

Decrease in inventories

Decrease in taxes payable

Decrease in bonds outstanding

68.

Which of the following transactions will result in a decrease in cash flow from investments?

Acquisition of another business

Capital gain from sale of a subsidiary

Decrease in net investments

Sale of equipment

69.

Which of the following will result in an increase in cash to the firm?

Dividends paid

A delay in collecting on accounts receivable

Net new investments

An increase in accounts payable

70.

The table below shows some data for Key Biscuit Company: What must have caused the firm's ROE to drop?

The firm began using more debt as a percentage of financing.

The firm began using less debt as a percentage of financing.

The compound leverage ratio was less than 1.

The operating ROA was declining.

71.

A firm purchases goods on credit worth $150. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $300 to pay for the purchase. What is the change in net cash provided by operations?

$50 increase

$100 increase

$150 increase

$250 increase

72.

A firm purchases goods on credit worth $100. The same firm pays off $80 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $200 to pay for the purchase. What is the change in net cash provided by financing?

$20 increase

$80 increase

$100 increase

$200 increase

73.

A firm purchases goods on credit worth $90. The same firm pays off $100 in old credit purchases. An investment is made via the purchase of a new facility, and equity is issued in the amount of $180 to pay for the purchase. What is the change in net cash provided by investments?

$10 decrease

$90 decrease

$180 decrease

$190 decrease

74.

The net income of the company is $120. Accounts payable increase by $20, depreciation is $15, and equipment is purchased for $40. If the firm issued $110 in new bonds, what is the total change in cash for the firm for all activities?

Increase of $225

Increase of $130

Decrease of $195

Decrease of $110

75.

The term quality of earnings refers to ________.

how well reported earnings conform to GAAP

the realism and sustainability of reported earnings

whether actual earnings matched expected earnings

how well reported earnings fit a trend line of earnings growth

76.

The practice of "selling" large quantities of goods to customers in order to get quarterly sales up while allowing these customers to return the goods next quarter is termed _____________.

channel stuffing

clogging the network

spamming the johns

artificial sales

77.

What ratio will definitely increase when a firm increases its annual sales with no corresponding increase in assets?

Asset turnover

Current ratio

Liquidity ratio

Quick ratio

78.

A firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .25, and its asset turnover is 1.1. What is the firm's compound leverage factor?

.243

.267

.826

.972

79.

The tax burden of the firm is .4, the interest burden is .65, the return on sales is .05, the asset turnover is .90, and the leverage ratio is 1.35. What is the ROE of the firm?

1.58%

5.68%

12.2%

13.33%

80.

The tax burden of the firm is .5, the interest burden is .55, the profit margin is .25, the asset turnover is 1.5, and the leverage ratio is 1.65. What is the ROE of the firm?

1.88%

6.68%

12.15%

17.02%

81.

The major difference between IFRS and GAAP is that U.S. standards are ___________ and IFRS standards are _________.

strictly enforced; weakly enforced

rules-based; principles-based

evolutionary; devolutionary

based on government standards; based on corporate practice

82.

The quick ratio is a measure of a firm's __________.

asset turnover

market valuation

liquidity

interest burden

83.

The firm's leverage ratio is 1.2, interest-burden ratio is .81, and profit margin is .24, and its asset turnover is 1.25. What is the firm's ROA?

.25

.335

.372

84.

A firm has a compound leverage factor greater than 1; this indicates that ______.

the firm has no interest payments

the firm uses less debt as a percentage of financing

the firm's interest payments are equal to the firm's pretax profits

the firm's debt has a positive contribution to the firm's ROA

Student: ___________________________________________________________________________

You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$300 profit

$300 loss

You purchase one IBM July 125 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$200 profit

$200 loss

$500 profit

$500 loss

You purchase one IBM July 120 put contract for a premium of $3. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

$300 profit

$300 loss

$500 loss

$200 profit

You write one IBM July 120 call contract for a premium of $4. You hold the option until the expiration date, when IBM stock sells for $121 per share. You will realize a ______ on the investment.

$300 profit

$200 loss

$600 loss

$200 profit

______ option can only be exercised on the expiration date.

A Mexican

An Asian

An American

A European

All else the same, an American style option will be ______ valuable than a ______ style option.

more; European-

less; European-

more; Canadian-

less; Canadian-

At contract maturity the value of a call option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

At contract maturity the value of a put option is ___________, where X equals the option's strike price and ST is the stock price at contract expiration.

Max (0, ST - X)

Min (0, ST - X)

Max (0, X - ST)

Min (0, X - ST)

An American put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

10.

An Asian call option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

11.

An Asian put option gives its holder the right to ____________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at a price determined by the average stock price during some specified portion of the option's life

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at a price determined by the average stock price during some specified portion of the option's life

12.

A time spread may be executed by _____.

selling an option with one exercise price and buying a similar one with a different exercise price

buying two options that have the same expiration dates but different strike prices

selling two options that have the same expiration dates but different strike prices

selling an option with one expiration date and buying a similar option with a different expiration date

13.

Which of the following statements about convertible bonds are true? I. The conversion price does not change over time. II. The associated stocks may not pay dividends as long as the bonds are outstanding. III. Most convertibles are also callable at the discretion of the firm. IV. They may be thought of as straight bonds plus a call option.

I and III only

I and IV only

I, II, and IV only

III and IV only

14.

A quanto provides its holder with the right to ______________.

participate in the payoffs from a portfolio of gambling casino stocks

exchange a fixed amount of a foreign currency for dollars at a specified exchange rate

participate in the investment performance of a foreign security

exchange the payoff from a foreign investment for dollars at a fixed exchange rate

15.

You purchase a call option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and C0 is the original purchase price of the option.

Max (-C0, ST - X - C0)

Min (-C0, ST - X - C0)

Max (C0, ST - X + C0)

Max (0, ST - X - C0)

16.

Strips and straps are variations of __________.

straddles

collars

money spreads

time spreads

17.

You write a put option on a stock. The profit at contract maturity of the option position is ___________, where X equals the option's strike price, ST is the stock price at contract expiration, and P0 is the original premium of the put option.

Max (P0, X - ST - P0)

Min (-P0, X - ST - P0)

Min (P0, ST - X + P0)

Max (0, ST - X - P0)

18.

Longer-term American-style options with maturities of up to 3 years are called __________.

warrants

LEAPS

GICs

CATs

19.

The initial maturities of most exchange-traded options are generally __________.

less than 1 year

less than 2 years

between 1 and 2 years

between 1 and 3 years

20.

A futures call option provides its holder with the right to ___________.

purchase a particular stock at some time in the future at a specified price

purchase a futures contract for the delivery of options on a particular stock

purchase a futures contract at a specified price for a specified period of time

deliver a futures contract and receive a specified price at a specific date in the future

21.

Exchange-traded stock options expire on the _______________ of the expiration month.

second Monday

third Wednesday

second Thursday

third Friday

22.

The writer of a put option _______________.

agrees to sell shares at a set price if the option holder desires

agrees to buy shares at a set price if the option holder desires

has the right to buy shares at a set price

has the right to sell shares at a set price

23.

Advantages of exchange-traded options over OTC options include all but which one of the following?

Ease and low cost of trading

Anonymity of participants

Contracts that are tailored to meet the needs of market participants

No concerns about counterparty credit risk

24.

Each listed stock option contract gives the holder the right to buy or sell __________ shares of stock.

100

1,000

25.

Exercise prices for listed stock options usually occur in increments of ____ and bracket the current stock price.

$20

$25

26.

You buy a call option and a put option on General Electric. Both the call option and the put option have the same exercise price and expiration date. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

27.

In 1973, trading of standardized options on a national exchange started on the _________.

AMEX

CBOE

NYSE

CFTC

28.

An American call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

29.

A put option on Dr. Pepper Snapple Group, Inc., has an exercise price of $45. The current stock price is $41. The put option is _________.

at the money

in the money

out of the money

knocked out

30.

You buy a call option on Merritt Corp. with an exercise price of $50 and an expiration date in July, and you write a call option on Merritt Corp. with an exercise price of $55 and an expiration date in July. This is called a ________.

time spread

long straddle

short straddle

money spread

31.

A call option on Brocklehurst Corp. has an exercise price of $30. The current stock price of Brocklehurst Corp. is $32. The call option is _________.

at the money

in the money

out of the money

knocked in

32.

You invest in the stock of Rayleigh Corp. and write a call option on Rayleigh Corp. This strategy is called a _________.

covered call

long straddle

naked call

money spread

33.

You buy a call option on Summit Corp. with an exercise price of $40 and an expiration date in September, and you write a call option on Summit Corp. with an exercise price of $40 and an expiration date in October. This strategy is called a _________.

time spread

long straddle

short straddle

money spread

34.

A European call option gives the buyer the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

35.

You invest in the stock of Valleyview Corp. and purchase a put option on Valleyview Corp. This strategy is called a _________.

long straddle

naked put

protective put

short stroll

36.

The value of a listed call option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II, III, and IV only

I, III, and IV only

I, II, and III only

I, II, III, and IV

37.

The Option Clearing Corporation is owned by _________.

the exchanges on which stock options are traded

the Federal Deposit Insurance Corporation

the Federal Reserve System

major U.S. banks

38.

The value of a listed put option on a stock is lower when: I. The exercise price is higher. II. The contract approaches maturity. III. The stock decreases in value. IV. A stock split occurs.

II only

II and IV only

I, II, and III only

I, II, III, and IV

39.

The maximum loss a buyer of a stock call option can suffer is the _________.

call premium

stock price

stock price minus the value of the call

strike price minus the stock price

40.

Which one of the statements about margin requirements on option positions is not correct?

The margin required will be higher if the option is in the money.

If the required margin exceeds the posted margin, the option writer will receive a margin call.

A buyer of a put or call option does not have to post margin.

Even if the writer of a call option owns the stock, the writer will have to meet the margin requirement in cash.

41.

A European put option gives its holder the right to _________.

buy the underlying asset at the exercise price on or before the expiration date

buy the underlying asset at the exercise price only at the expiration date

sell the underlying asset at the exercise price on or before the expiration date

sell the underlying asset at the exercise price only at the expiration date

42.

The potential loss for a writer of a naked call option on a stock is _________.

equal to the call premium

larger the lower the stock price

limited

unlimited

43.

A writer of a call option will want the value of the underlying asset to __________, and a buyer of a put option will want the value of the underlying asset to _________.

decrease; decrease

decrease; increase

increase; decrease

increase; increase

44.

Buyers of listed options __________ required to post margins, and writers of naked listed options __________ required to post margins.

are; are not

are; are

are not; are

are not; are not

45.

An option with a payoff that depends on the average price of the underlying asset during at least some portion of the life of the option is called ______ option.

an American

a European

an Asian

an Australian

46.

Which of the following expressions represents the value of a call option to its holder on the expiration date?

ST - X if ST>X, 0 if ST ≤ X

- (ST - X) if ST> X, 0 if ST ≤ X

0 if ST ≥ X,X - ST if ST<X

0 if ST ≥ X, - (X - ST) if ST<X

47.

A "bet" option is also called a ____ option.

barrier

lookback

digital

foreign exchange

48.

Which one of the following is the ticker symbol for the CBOE option contract on the S&P 100 Index?

SPX

DJX

CME

OEX

49.

The May 17, 2012, price quotation for a Boeing call option with a strike price of $50 due to expire in November is $20.80, while the stock price of Boeing is $69.80. The premium on one Boeing November 50 call contract is _________.

$1,980

$4,900

$5,000

$2,080

50.

You purchase one IBM March 120 put contract for a put premium of $10. The maximum profit that you could gain from this strategy is _________.

$120

$1,000

$11,000

$12,000

51.

You buy one Hewlett Packard August 50 call contract and one Hewlett Packard August 50 put contract. The call premium is $1.25, and the put premium is $4.50. Your highest potential loss from this position is _________.

$125

$450

$575

unlimited

52.

You sell one Hewlett Packard August 50 call contract and sell one Hewlett Packard August 50 put contract. The call premium is $1.25 and the put premium is $4.50. Your strategy will pay off only if the stock price is __________ in August.

either lower than $44.25 or higher than $55.75

between $44.25 and $55.75

higher than $55.75

lower than $44.25

53.

Suppose you purchase one Texas Instruments August 75 call contract quoted at $8.50 and write one Texas Instruments August 80 call contract quoted at $6. If, at expiration, the price of a share of Texas Instruments stock is $79, your profit would be _________.

$150

$400

$600

$1,850

54.

__________ is the most risky transaction to undertake in the stock-index option markets if the stock market is expected to fall substantially after the transaction is completed.

Writing an uncovered call option

Writing an uncovered put option

Buying a call option

Buying a put option

55.

Which one of the following is a correct statement?

Exercise of warrants results in more outstanding shares of stock, while exercise of listed call options does not.

A convertible bond consists of a straight bond plus a specified number of detachable warrants.

Call options always have an initial maturity greater than 1 year, while warrants have an initial maturity less than 1 year.

Call options may be convertible into the stock, while warrants are not convertible into the stock.

56.

A put on Sanders stock with a strike price of $35 is priced at $2 per share, while a call with a strike price of $35 is priced at $3.50. The maximum per-share loss to the writer of an uncovered put is __________, and the maximum per-share gain to the writer of an uncovered call is _________.

$33; $3.50

$33; $31.50

$35; $3.50

$35; $35

57.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: To establish a bull money spread with calls, you would _______________.

buy the 55 call and sell the 45 call

buy the 45 call and buy the 55 call

buy the 45 call and sell the 55 call

sell the 45 call and sell the 55 call

58.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

$1,050

$650

$400

$400 income rather than cost

59.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

$300

-$400

$150

$50

60.

sell the 55 put and buy the 45 put

buy the 45 put and buy the 55 put

buy the 55 put and sell the 45 put

sell the 45 put and sell the 55 put

61.

You are cautiously bullish on the common stock of the Wildwood Corporation over the next several months. The current price of the stock is $50 per share. You want to establish a bullish money spread to help limit the cost of your option position. You find the following option quotes: Suppose you establish a bullish money spread with the puts. In June the stock's price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

$500

$700

$200

$250

62.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. What would be a simple options strategy using a put and a call to exploit your conviction about the stock price's future movement?

Sell a call.

Purchase a put.

Sell a straddle.

Buy a straddle.

63.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Selling a straddle would generate total premium income of _____.

$300

$400

$500

$700

64.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

$200

$300

$700

$400

65.

The common stock of the Avalon Corporation has been trading in a narrow range around $40 per share for months, and you believe it is going to stay in that range for the next 3 months. The price of a 3-month put option with an exercise price of $40 is $3, and a call with the same expiration date and exercise price sells for $4. How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

Buy the call, sell the put; lend the present value of $40.

Sell the call, buy the put; lend the present value of $40.

Buy the call, sell the put; borrow the present value of $40.

Sell the call, buy the put; borrow the present value of $40.

66.

A stock is trading at $50. You believe there is a 60% chance the price of the stock will increase by 10% over the next 3 months. You believe there is a 30% chance the stock will drop by 5%, and you think there is only a 10% chance of a major drop in price of 20%. At-the-money 3-month puts are available at a cost of $650 per contract. What is the expected dollar profit for a writer of a naked put at the end of 3 months?

$300

$200

$475

67.

A covered call strategy benefits from what environment?

Falling interest rates

Price stability

Price volatility

Unexpected events

68.

You sell one IBM July 90 call contract for a premium of $4 and two puts for a premium of $3 each. You hold the position until the expiration date, when IBM stock sells for $95 per share. You will realize a ______ on this strip.

$300 profit

$100 loss

$500 profit

$200 profit

69.

Which strategy benefits from upside price movement and has some protection should the price of the security fall?

Bull spread

Long put

Short call

Straddle

70.

What combination of puts and calls can simulate a long stock investment?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

71.

An investor purchases a long call at a price of $2.50. The expiration price is $35. If the current stock price is $35.10, what is the break-even point for the investor?

$32.50

$35

$37.50

$37.60

72.

An investor is bearish on a particular stock and decided to buy a put with a strike price of $25. Ignoring commissions, if the option was purchased for a price of $.85, what is the break-even point for the investor?

$24.15

$25

$25.87

$27.86

73.

Which of the following strategies makes a profit if the stock price stays stable?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

74.

Which of the following strategies makes a profit when the stock price declines and loses money when the stock price increases?

Long call and short put

Long call and long put

Short call and short put

Short call and long put

75.

If you combine a long stock position with selling an at-the-money call option, the resulting net payoff profile will resemble the payoff profile of a _______.

long call

short call

short put

long put

76.

What strategy could be considered insurance for an investment in a portfolio of stocks?

Covered call

Protective put

Short put

Straddle

77.

What strategy is designed to ensure a value within the bounds of two different stock prices?

Collar

Covered Call

Protective put

Straddle

78.

You are convinced that a stock's price will move by at least 15% over the next 3 months. You are not sure which way the price will move, but you believe that the results of a patent hearing are definitely going to have a major effect on the stock price. You are somewhat more bullish than bearish however. Which one of the following options strategies best fits this scenario?

Buy a strip.

Buy a strap.

Buy a straddle.

Write a straddle.

79.

When issued, most convertible bonds are issued _____________.

deep in the money

deep out of the money

slightly out of the money

slightly in the money

80.

A convertible bond is deep in the money. This means the bond price will closely track the __________.

straight debt value of the bond

conversion value of the bond

straight debt value of the bond minus the conversion value

straight debt value of the bond plus the conversion value

81.

Warrants differ from listed options in that: I. Exercise of warrants results in dilution of a firm's earnings per share. II. When warrants are exercised, new shares of stock must be created. III. Warrant exercise results in cash flows to the firm, whereas exercise of listed options does not.

I only

I and II only

II and III only

I, II, and III

82.

Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct? I. The value of the conversion option for bond A is $125. II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value. III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

II only

I and III only

III only

I, II, and III

83.

You find digital option quotes on jobless claims. You can buy a call option with a strike price of 300,000 jobless claims. This option pays $100 if actual claims exceed the strike price and pays zero otherwise. The option costs $68. A second digital call with a strike price of 305,000 jobless claims is available at a cost of $53. Suppose you buy the option with the 300,000 strike and sell the option with the 305,000 strike and jobless claims actually wind up at 303,000. Your net profit on the position is ______.

-$15

$200

$85

$185

84.

Bill Jones inherited 5,000 shares of stock priced at $45 per share. He does not want to sell the stock this year due to tax reasons, but he is concerned that the stock will drop in value before year-end. Bill wants to use a collar to ensure that he minimizes his risk and doesn't incur too much cost in deferring the gain. January call options with a strike of $50 are quoted at a cost of $2, and January puts with a $40 exercise price are quoted at a cost of $3. If Bill establishes the collar and the stock price winds up at $35 in January, Bill's net position value including the option profit or loss and the stock is _________.

$195,000

$220,000

$175,000

$215,000

85.

You own a stock portfolio worth $50,000. You are worried that stock prices may take a dip before you are ready to sell, so you are considering purchasing either at-the-money or out-of-the-money puts. If you decide to purchase the out-of-the-money puts, your maximum loss is __________ than if you buy at-the-money puts and your maximum gain is __________.

greater; lower

greater; greater

lower; greater

lower; lower

86.

You purchase one IBM July 90 call contract for a premium of $4. The stock has a 2-for-1 split prior to the expiration date. You hold the option until the expiration date, when IBM stock sells for $48 per share. You will realize a ______ on the investment.

$300 profit

$100 loss

$400 loss

$200 profit

87.

You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct? I. One way to hedge your position would be to buy puts. II. One way to hedge your position would be to write calls. III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

I only

II only

I and III only

I, II, and III

Student: ___________________________________________________________________________

Today's futures markets are dominated by trading in _______ contracts.

metals

agriculture

financial

commodity

A person with a long position in a commodity futures contract wants the price of the commodity to ______.

decrease substantially

increase substantially

remain unchanged

increase or decrease substantially

If an asset price declines, the investor with a _______ is exposed to the largest potential loss.

long call option

long put option

long futures contract

short futures contract

The clearing corporation has a net position equal to ______.

the open interest

the open interest times 2

the open interest divided by 2

zero

The S&P 500 Index futures contract is an example of a(n) ______ delivery contract. The pork bellies contract is an example of a(n) ______ delivery contract.

cash; cash

cash; actual

actual; cash

actual; actual

Which one of the following contracts requires no cash to change hands when initiated?

Listed put option

Short futures contract

Forward contract

Listed call option

Synthetic stock positions are commonly used by ______ because of their ______.

market timers; lower transaction cost

banks; lower risk

wealthy investors; tax treatment

money market funds; limited exposure

_____________ are likely to close their positions before the expiration date, while ____________ are likely to make or take delivery.

Investors; regulators

Hedgers; speculators

Speculators; hedgers

Regulators; investors

Futures contracts have many advantages over forward contracts except that _________.

futures positions are easier to trade

futures contracts are tailored to the specific needs of the investor

futures trading preserves the anonymity of the participants

counterparty credit risk is not a concern on futures

10.

An investor who is hedging a corporate bond portfolio using a T-bond futures contract is said to have _______.

an arbitrage

a cross-hedge

an over hedge

a spread hedge

11.

The open interest on silver futures at a particular time is the number of __________.

all outstanding silver futures contracts

long and short silver futures positions counted separately on a particular trading day

silver futures contracts traded during the day

silver futures contracts traded the previous day

12.

An investor who goes short in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

13.

An investor who goes long in a futures contract will _____ any increase in value of the underlying asset and will _____ any decrease in value in the underlying asset.

pay; pay

pay; receive

receive; pay

receive; receive

14.

The advantage that standardization of futures contracts brings is that _____ is improved because ____________________.

liquidity; all traders must trade a small set of identical contracts

credit risk; all traders understand the risk of the contracts

pricing; convergence is more likely to take place with fewer contracts

trading cost; trading volume is reduced

15.

The fact that the exchange is the counterparty to every futures contract issued is important because it eliminates _________ risk.

market

credit

interest rate

basis

16.

In the futures market the short position's loss is ___________ the long position's gain.

greater than

less than

equal to

sometimes less than and sometimes greater than

17.

A wheat farmer should __________ in order to reduce his exposure to risk associated with fluctuations in wheat prices.

sell wheat futures

buy wheat futures

buy a contract for delivery of wheat now and sell a contract for delivery of wheat at harvest time

sell wheat futures if the basis is currently positive and buy wheat futures if the basis is currently negative

18.

Which of the following provides the profit to a long position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

19.

You take a long position in a futures contract of one maturity and a short position in a contract of a different maturity, both on the same commodity. This is called a __________.

cross-hedge

reversing trade

spread position

straddle

20.

Interest rate futures contracts exist for all of the following except __________.

federal funds

Eurodollars

banker's acceptances

repurchase agreements

21.

Initial margin is usually set in the region of ________ of the total value of a futures contract.

5%-15%

10%-20%

15%-25%

20%-30%

22.

Margin must be posted by ________.

buyers of futures contracts only

sellers of futures contracts only

both buyers and sellers of futures contracts

speculators only

23.

The daily settlement of obligations on futures positions is called _____________.

a margin call

marking to market

a variation margin check

the initial margin requirement

24.

Which of the following provides the profit to a short position at contract maturity?

Original futures price - Spot price at maturity

Spot price at maturity - Original futures price

Zero

Basis

25.

Margin requirements for futures contracts can be met by ______________.

cash only

cash or highly marketable securities such as Treasury bills

cash or any marketable securities

cash or warehouse receipts for an equivalent quantity of the underlying commodity

26.

An established value below which a trader's margin may not fall is called the ________.

daily limit

daily margin

maintenance margin

convergence limit

27.

Which one of the following is a true statement?

A margin deposit can be met only by cash.

All futures contracts require the same margin deposit.

The maintenance margin is the amount of money you post with your broker when you buy or sell a futures contract.

The maintenance margin is the value of the margin account below which the holder of a futures contract receives a margin call.

28.

At maturity of a futures contract, the spot price and futures price must be approximately the same because of __________.

marking to market

the convergence property

the open interest

the triple witching hour

29.

A futures contract __________.

is a contract to be signed in the future by the buyer and the seller of a commodity

is an agreement to buy or sell a specified amount of an asset at a predetermined price on the expiration date of the contract

is an agreement to buy or sell a specified amount of an asset at whatever the spot price happens to be on the expiration date of the contract

gives the buyer the right, but not the obligation, to buy an asset some time in the future

30.

Which one of the following exploits differences between actual future prices and their theoretically correct parity values?

Index arbitrage

Marking to market

Reversing trades

Settlement transactions

31.

Which one of the following refers to the daily settlement of obligations on future positions?

Marking to market

The convergence property

The open interest

The triple witching hour

32.

The most actively traded interest rate futures contract is for ___________.

LIBOR

Treasury bills

Eurodollars

Treasury bonds

33.

The CME weather futures contract is an example of ______________.

a cash-settled contract

an agricultural contract

a financial future

a commodity future

34.

Single stock futures, as opposed to stock index futures, are _______________.

not yet being offered by any exchanges

offered overseas but not in the United States

currently trading on One Chicago, a joint venture of several exchanges

scheduled to begin trading in 2015 on several exchanges

35.

You are currently long in a futures contract. You instruct a broker to enter the short side of a futures contract to close your position. This is called __________.

a cross-hedge

a reversing trade

a speculation

marking to market

36.

A company that mines bauxite, an aluminum ore, decides to short aluminum futures. This is an example of __________ to limit its risk.

cross-hedging

long hedging

spreading

speculating

37.

Futures markets are regulated by the __________.

CFA Institute

CFTC

CIA

SEC

38.

A hog farmer decides to sell hog futures. This is an example of __________ to limit risk.

cross-hedging

short hedging

spreading

speculating

39.

On May 21, 2012, you could have purchased a futures contract from Intrade for a price of $5.70 that would pay you $10 if Barack Obama won the 2012 presidential election. This tells you _____.

that the market believed that Obama had a 57% chance of winning

that the market believed that Obama would not win the election

nothing about the market's belief concerning the odds of Obama winning

that the market believed Obama's chances of winning were about 43%

40.

An investor would want to __________ to exploit an expected fall in interest rates.

sell S&P 500 Index futures

sell Treasury-bond futures

buy Treasury-bond futures

buy wheat futures

41.

Forward contracts _________ traded on an organized exchange, and futures contracts __________ traded on an organized exchange.

are; are

are; are not

are not; are

are not; are not

42.

If the S&P 500 Index futures contract is overpriced relative to the spot S&P 500 Index, you should __________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

43.

A long hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

44.

Investors who take short positions in futures contract agree to ___________ delivery of the commodity on the delivery date, and those who take long positions agree to __________ delivery of the commodity.

make; make

make; take

take; make

take; take

45.

An investor would want to __________ to hedge a long position in Treasury bonds.

buy interest rate futures

buy Treasury bonds in the spot market

sell interest rate futures

sell S&P 500 futures

46.

Futures contracts are said to exhibit the property of convergence because _______________.

the profits from long positions and short positions must ultimately be equal

the profits from long positions and short positions must ultimately net to zero

price discrepancies would open arbitrage opportunities for investors who spot them

the futures price and spot price of any asset must ultimately net to zero

47.

In the context of a futures contract, the basis is defined as ______________.

the futures price minus the spot price

the spot price minus the futures price

the futures price minus the initial margin

the profit on the futures contract

48.

The __________ is among the world's largest derivatives exchanges and operates a fully electronic trading and clearing platform.

CBOE

CBOT

CME

Eurex

49.

Violation of the spot-futures parity relationship results in _______________.

fines and other penalties imposed by the SEC

arbitrage opportunities for investors who spot them

suspension of delivery privileges

suspension of trading

50.

When dividend-paying assets are involved, the spot-futures parity relationship can be stated as _________________.

F1 = S0(1 + rf)

F0 = S0(1 + rf - d)T

F0 = S0(1 + rf + d)T

F0 = S0(1 + rf)T

51.

An investor establishes a long position in a futures contract now (time 0) and holds the position until maturity (time T). The sum of all daily settlements will be __________.

F0 - FT

F0 - S0

FT - F0

FT - S0

52.

A short hedge is a simultaneous __________ position in the spot market and a __________ position in the futures market.

long; long

long; short

short; long

short; short

53.

Approximately __________ of futures contracts result in actual delivery.

less than 1% to 3%

less than 5% to 15%

less than 60% to 80%

54.

A long hedger will __________ from an increase in the basis; a short hedger will __________.

be hurt; be hurt

be hurt; profit

profit; be hurt

profit; profit

55.

At year-end, taxes on a futures position _______________.

must be paid if the position has been closed out

must be paid if the position has not been closed out

must be paid regardless of whether the position has been closed out or not

need not be paid if the position supports a hedge

56.

A speculator will often prefer to buy a futures contract rather than the underlying asset because: I. Gains in futures contracts can be larger due to leverage. II. Transaction costs in futures are typically lower than those in spot markets. III. Futures markets are often more liquid than the markets of the underlying commodities.

I and II only

II and III only

I and III only

I, II, and III

57.

On January 1, you sold one April S&P 500 Index futures contract at a futures price of 1,300. If the April futures price is 1,250 on February 1, your profit would be __________ if you close your position. (The contract multiplier is 250.)

-$12,500

-$15,000

$15,000

$12,500

58.

The current level of the S&P 500 is 1,250. The dividend yield on the S&P 500 is 3%. The risk-free interest rate is 6%. The futures price quote for a contract on the S&P 500 due to expire 6 months from now should be __________.

1,274.33

1,286.95

1,268.61

1,291.29

59.

The spot price for gold is $1,550 per ounce. The dividend yield on the S&P 500 is 2.5%. The risk-free interest rate is 3.5%. The futures price for gold for a 6-month contract on gold should be __________.

$1,504.99

$1,569.08

$1,554.04

$1,557.73

60.

If you expect a stock market downturn, one potential defensive strategy would be to __________.

buy stock-index futures

sell stock-index futures

buy stock-index options

sell foreign exchange futures

61.

At contract maturity the basis should equal ___________.

the risk-free interest rate

-1

62.

You believe that the spread between the September T-bond contract and the June T-bond futures contract is too large and will soon correct. This market exhibits positive cost of carry for all contracts. To take advantage of this, you should ______________.

buy the September contract and sell the June contract

sell the September contract and buy the June contract

sell the September contract and sell the June contract

buy the September contract and buy the June contract

63.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. The arbitrage profit implied by these prices is _____________.

$3.27

$4.39

$5.24

$6.72

64.

A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%. Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

Buy gold in the spot with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

65.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 1 year. If the T-bill rate is 5%, what should the futures price be?

$95.24

$100

$105

$107

66.

A hypothetical futures contract on a nondividend-paying stock with a current spot price of $100 has a maturity of 4 years. If the T-bill rate is 7%, what should the futures price be?

$76.29

$93.46

$107

$131.08

67.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. After Monday's close the balance on your margin account will be ________.

$2,700

$2,000

$3,137.50

$2,262.50

68.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. At the close of day on Tuesday your cumulative rate of return on your investment is _____.

16.2%

-5.8%

-.16%

-2.2%

69.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. On which of the given days do you get a margin call?

Monday

Tuesday

Wednesday

None of these options

70.

On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract's face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions. The cumulative rate of return on your investment after Wednesday is a ____.

79.9% loss

2.6% loss

33% gain

53.9% loss

71.

The volume of interest rate swaps increased from almost zero in 1980 to over __________ today.

$40 million

$400 million

$400 billion

$400 trillion

72.

If the risk-free rate is greater than the dividend yield, then we know that _______________.

the futures price will be higher as contract maturity increases

F0<S0

FT>ST

arbitrage profits are possible

73.

Sahali Trading Company has issued $100 million worth of long-term bonds at a fixed rate of 9%. Sahali Trading Company then enters into an interest rate swap where it will pay LIBOR and receive a fixed 8% on a notional principal of $100 million. After all these transactions are considered, Sahali's cost of funds is __________.

17%

LIBOR

LIBOR + 1%

LIBOR - 1%

74.

Interest rate swaps involve the exchange of ________________.

actual fixed-rate bonds for actual floating-rate bonds

actual floating-rate bonds for actual fixed-rate bonds

net interest payments and an actual principal swap

net interest payments based on notional principal, but no exchange of principal

75.

From the perspective of determining profit and loss, the long futures position most closely resembles a levered investment in a ____________.

long call

short call

short stock position

long stock position

76.

The _________ contract dominates trading in stock-index futures.

S&P 500

DJIA

Nasdaq 100

Russell 2000

77.

The ________ and the _______ have the lowest correlations with the large-cap indexes.

Nasdaq Composite; Russell 2000

NYSE; DJIA

S&P 500; DJIA

Russell 2000; S&P 500

78.

The use of leverage is practiced in the futures markets due to the existence of _________.

banks

brokers

clearinghouses

margin

79.

You purchase an interest rate futures contract that has an initial margin requirement of 15% and a futures price of $115,098. The contract has a $100,000 underlying par value bond. If the futures price falls to $108,000, you will experience a ______ loss on your money invested.

31%

41%

52%

64%

80.

You own a $15 million bond portfolio with a modified duration of 11 years. Interest rates are expected to increase by 5 basis points, or .05%. What is the price value of a basis point?

$10,400

$14,300

$16,500

$21,300

81.

The price of a corn futures contract is $2.65 per bushel when the contract is issued, and the commodity spot price is $2.55. When the contract expires, the two prices are identical. What principle is represented by this price behavior?

Convergence

Margin

Basis

Volatility

82.

A corporation will be issuing bonds in 6 months, and the treasurer is concerned about unfavorable interest rate moves in the interim. The best way for her to hedge the risk is to _________________.

buy T-bond futures

sell T-bond futures

buy stock-index futures

sell stock-index futures

83.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. What are the farmer's proceeds from the sale of corn?

$27,500

$31,875

$33,875

$35,950

84.

A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn. Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

$2,000

$31,875

$33,875

85.

A bank has made long-term fixed-rate mortgages and has financed them with short-term deposits. To hedge out its interest rate risk, the bank could ________.

sell T-bond futures

buy T-bond futures

buy stock-index futures

sell stock-index futures

86.

A market timer now believes that the economy will soften over the rest of the year as the housing market slump continues, and she also believes that foreign investors will stop buying U.S. fixed-income securities in the large quantities that they have in the past. One way the timer could take advantage of this forecast is to ________________.

buy T-bond futures and sell stock-index futures

sell T-bond futures and buy stock-index futures

buy stock-index futures and buy T-bond futures

sell stock-index futures and sell T-bond futures

87.

The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could: I. Engage in a swap to pay fixed and receive variable interest payments II. Engage in a swap to pay variable and receive fixed interest payments III. Buy T-bond futures IV. Sell T-bond futures

I and II only

I and IV only

II and III only

II and IV only

Student: ___________________________________________________________________________

A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

must have had superior stock selection ability.

must have had superior asset allocation ability.

must have had superior timing ability.

may or may not have outperformed the S&P 500 on a risk-adjusted basis.

The comparison universe is __________.

the bogey portfolio

a set of mutual funds with similar risk characteristics to your mutual fund

the set of all mutual funds in the United States

the set of all mutual funds in the world

Which one of the following performance measures is the Sharpe ratio?

Average excess return to beta ratio

Average excess return to standard deviation ratio

Alpha to standard deviation of residuals ratio

Average return minus required return

The M2 measure is a variant of ________________.

the Sharpe measure

the Treynor measure

Jensen's alpha

the appraisal ratio

A managed portfolio has a standard deviation equal to 22% and a beta of .9 when the market portfolio's standard deviation is 26%. The adjusted portfolio P* needed to calculate the M2 measure will have ________ invested in the managed portfolio and the rest in T-bills.

84.6%

118%

18%

15.4%

Your return will generally be higher using the __________ if you time your transactions poorly, and your return will generally be higher using the __________ if you time your transactions well.

dollar-weighted return method; dollar-weighted return method

dollar-weighted return method; time-weighted return method

time-weighted return method; dollar-weighted return method

time-weighted return method; time-weighted return method

Consider the Sharpe and Treynor performance measures. When a pension fund is large and well diversified in total and it has many managers, the __________ measure is better for evaluating individual managers while the __________ measure is better for evaluating the manager of a small fund with only one manager responsible for all investments, which may not be fully diversified.

Sharpe; Sharpe

Sharpe; Treynor

Treynor; Sharpe

Treynor; Treynor

Consider the theory of active portfolio management. Stocks A and B have the same beta and the same positive alpha. Stock A has higher nonsystematic risk than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

Suppose that over the same time period two portfolios have the same average return and the same standard deviation of return, but portfolio A has a higher beta than portfolio B. According to the Sharpe ratio, the performance of portfolio A __________.

is better than the performance of portfolio B

is the same as the performance of portfolio B

is poorer than the performance of portfolio B

cannot be measured since there is no data on the alpha of the portfolio

10.

Which model is preferred by academics, and is gaining in popularity with practitioners, when evaluating investment performance?

The Treynor-Black model

The single-index model

The Fama-French three-factor model

The Sharpe model

11.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the Treynor measure for portfolio A?

12.38%

2.38%

.91%

3.64%

12.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. What is the M2 measure for portfolio B?

.43%

1.25%

1.77%

1.43%

13.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

S&P 500

14.

The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below. Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

-1.33%

1.43%

15.

Which one of the following is largely based on forecasts of macroeconomic factors?

Security selection

Passive investing

Market efficiency

Market timing

16.

Based on the example used in the book, a perfect market timer would have made _______ by 2008 on a $1 investment made in 1926.

$100

$1,626

$1.5 million

$36.7 billion

17.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

18.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

fund A

fund B

fund C

The answer cannot be determined from the information given.

19.

The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%. You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

fund A

fund B

fund C

S&P 500

20.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total excess return on the managed portfolio was __________.

21.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total excess return was __________.

1.5%

2.5%

3.5%

22.

In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total excess return was __________.

1.5%

2.5%

3.5%

23.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The total extra return on the managed portfolio was __________.

24.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of asset allocation across markets to the total extra return was __________.

-1%

25.

In a particular year, Lost Hope Mutual Fund made the following investments in asset classes: The return on a bogey portfolio was 12%, based on the following: The contribution of security selection within asset classes to the total extra return was __________.

-1%

26.

Which one of the following averaging methods is the preferred method of constructing returns series for use in evaluating portfolio performance?

Geometric average

Arithmetic average

Dollar weighted

Internal

27.

The __________ calculates the reward to risk trade-off by dividing the average portfolio excess return by the portfolio beta.

Sharpe ratio

Treynor measure

Jensen measure

appraisal ratio

28.

28. In creating the P* portfolio, one mixes the original portfolio P and T-bills to match the _________ of the market.

alpha

beta

excess return

standard deviation

29.

The M2 measure of portfolio performance was developed by ______________.

Modigliani and Miller

Modigliani and Modigliani

Merton and Miller

Fama and French

30.

Probably the biggest problem with evaluating the portfolio performance of actively managed funds is the assumption that __________________________.

the markets are efficient

portfolio risk is constant over time

diversification pays off

security selection is more valuable than asset allocation

31.

Perfect-timing ability is equivalent to having __________ on the market portfolio.

a call option

a futures contract

a put option

a forward contract

32.

One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

51.3%

65.9%

67.1%

10.83%

33.

The Treynor-Black model is a model that shows how an investment manager can use security analysis and statistics to construct __________.

a market portfolio

a passive portfolio

an active portfolio

an index portfolio

34.

If an investor is a successful market timer, his distribution of monthly portfolio returns will __________.

be skewed to the left

be skewed to the right

exhibit kurtosis

exhibit neither skewness nor kurtosis

35.

Recent analysis indicates that the style of investing is a critical component of fund performance. In fact, on average about _____ of fund performance is attributable to the asset allocation decision.

68%

74%

88%

97%

36.

In the Treynor-Black model, the active portfolio will contain stocks with __________.

alphas equal to zero

negative alphas

positive alphas

some negative and some positive alphas

37.

Portfolio performance is often decomposed into various subcomponents, such as the return due to: I. Broad asset allocation across security classes II. Sector weightings within equity markets III. Security selection with a given sector The one decision that contributes most to the fund performance is _____.

III

All contribute equally to fund performance.

38.

The theory of efficient frontiers has __________.

no adherents among practitioners

a small number of adherents among practitioners

a significant number of adherents among practitioners

complete support by practitioners

39.

In the Treynor-Black model, security analysts __________.

analyze a relatively small number of stocks

analyze all stocks that are publicly traded

are redundant

devote their attention to market timing rather than fundamental analysis

40.

In the Treynor-Black model, security analysts __________.

analyze the entire universe of stocks

assume that markets are inefficient

treat market index as a baseline portfolio from which an active portfolio is constructed

focus on selecting the best-performing bogey

41.

Active portfolio management consists of: I. Market timing II. Security selection III. Sector selection within given markets IV. Indexing

I and II only

II and III only

I, II, and III only

I, II, III, and IV

42.

A market-timing strategy is one in which asset allocation in the stock market __________ when one forecasts that the stock market will outperform Treasury bills.

decreases

increases

remains the same

may increase or decrease

43.

In the Treynor-Black model, the contribution of individual security to the active portfolio should be based primarily on the stock's _________.

alpha

beta

residual variance

information ratio

44.

If all ______ are ______ in the Treynor-Black model, there would be no reason to depart from the passive portfolio.

alphas; zero

alphas; positive

betas; positive

standard deviations; positive

45.

In the Treynor-Black model, the weight of each analyzed security in the portfolio should be proportional to its __________.

alpha/beta

alpha/residual variance

beta/residual variance

none of these options

46.

The critical variable in the determination of the success of the active portfolio is the stock's __________.

alpha/nonsystematic risk ratio

alpha/systematic risk ratio

delta/nonsystematic risk ratio

delta/systematic risk ratio

47.

Consider the theory of active portfolio management. Stocks A and B have the same positive alpha and the same nonsystematic risk. Stock A has a higher beta than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

48.

Consider the theory of active portfolio management. Stocks A and B have the same beta and nonsystematic risk. Stock A has a higher positive alpha than stock B. You should want __________ in your active portfolio.

equal proportions of stocks A and B

more of stock A than stock B

more of stock B than stock A

The answer cannot be determined from the information given.

49.

The market-timing form of active portfolio management relies on __________ forecasting, and the security selection form of active portfolio management relies on __________ forecasting.

macroeconomic; macroeconomic

macroeconomic; microeconomic

microeconomic; macroeconomic

microeconomic; microeconomic

50.

Active portfolio managers try to construct a risky portfolio with _______.

a higher Sharpe ratio than a passive strategy

a lower Sharpe ratio than a passive strategy

the same Sharpe ratio as a passive strategy

very few securities

51.

In performance measurement, the bogey portfolio is designed to _________.

measure the returns to a completely passive strategy

measure the returns to a similar active strategy

measure the returns to a given investment style

equal the return on the S&P 500

52.

__________ portfolio managers experience streaks of abnormal returns that are hard to label as lucky outcomes, and _________ anomalies in realized returns have been sufficiently persistent that portfolio managers could use them to beat a passive strategy over prolonged periods.

No; no

No; some

Some; no

Some; some

53.

A passive benchmark portfolio is: I. A portfolio in which the asset allocation across broad asset classes is neutral and not determined by forecasts of performance of the different asset classes II. One in which an indexed portfolio is held within each asset class III. Often called the bogey

I only

I and III only

II and III only

I, II, and III

54.

The correct measure of timing ability is ____________ for a portfolio manager who correctly forecasts 55% of bull markets and 55% of bear markets.

-5%

10%

95%

55.

It is very hard to statistically verify abnormal fund performance because of all of the following except which one?

Inevitably, some fund managers experience streaks of good performance that may just be due to luck.

The noise in realized rates of return is so large as to make it hard to identify abnormal performance in competitive markets.

Portfolio composition is rarely stable long enough to identify abnormal performance.

Even if successful, there is really not much value to be added by active strategies such as market timing.

56.

The term alpha transport refers to _____.

establishing alpha and then using index products to hedge market exposure and reduce exposure to particular sectors.

establishing alpha and then using sector mutual funds to hedge market exposure and reduce exposure to the general market.

establishing alpha and then using sector mutual funds to hedge market exposure and gain exposure to the general market.

establishing alpha and then using index products to hedge market exposure and gain exposure to particular sectors.

57.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The correct measure of timing ability for Krueger is __________.

20%

60%

75%

120%

58.

Portfolio managers Martin and Krueger each manage $1 million funds. Martin has perfect foresight, and the call option value of his perfect foresight is $150,000. Krueger is an imperfect forecaster and correctly predicts 50% of all bull markets and 70% of all bear markets. The value of Krueger's imperfect forecasting ability is __________.

$30,000

$67,500

$108,750

$217,500

59.

Douglass, an imperfect forecaster, correctly predicts 57% of all bull markets and 68% of all bear markets. Simmonds is a perfect forecaster. If Douglass is able to charge a fee of $125,000, the fee that Roy Simmonds should charge is __________. Assume that both forecasters manage similar-size funds.

$31,250

$200,000

$500,000

$625,000

60.

A mutual fund invests in large-capitalization stocks. Its performance should be measured against which one of the following?

Russell 2000 Index

S&P 500 Index

Wilshire 5000 Index

Dow Jones Industrial Average

61.

Assume you purchased a rental property for $100,000 and sold it 1 year later for $115,000 (there was no mortgage on the property). At the time of the sale, you paid $3,000 in commissions and $1,000 in taxes. If you received $10,000 in rental income (all received at the end of the year), what annual rate of return did you earn?

11%

21%

25%

62.

The table presents the actual return of each sector of the manager's portfolio in column (1), the fraction of the portfolio allocated to each sector in column (2), the benchmark or neutral sector allocations in column (3), and the returns of sector indexes in column 4. What was the manager's return in the month?

2.07%

2.21%

2.24%

4.8%

63.

2.07%

2.21%

2.24%

4.8%

64.

Underperformance = .03%

Overperformance = .03%

Overperformance = .14%

Underperformance = 3%

65.

-.15%

.15%

-.3%

.3%

66.

-.18%

.18%

-.15%

.15%

67.

Morningstar's RAR produce results that are similar but not identical to ________.

Jensen's alpha

the Treynor ratio

the Sharpe ratio

68.

The Treynor-Black model assumes that security markets are _________.

completely efficient

nearly efficient

very inefficient

random walks

69.

The information ratio is equal to the stock's ____ divided by its ______.

diversifiable risk; beta

beta; alpha

alpha; beta

alpha; diversifiable risk

70.

Empirical tests to date show ______________.

that many investors have earned large rewards by market timing

little evidence of market-timing ability

clear-cut evidence of substantial market-timing ability

evidence that absolutely no market-timing ability exists

71.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the M2 measure of the portfolio if the risk-free rate is 5%?

.58%

.68%

.78%

.88%

72.

A portfolio generates an annual return of 17%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the M2 measure of the portfolio if the risk-free rate is 4%?

2.15%

2.76%

2.94%

3.14%

73.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Treynor measure of the portfolio if the risk-free rate is 5%?

.1143

.1233

.1354

.1477

74.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Treynor measure of the portfolio if the risk-free rate is 6%?

.0833

.1083

.1114

.1163

75.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is the Sharpe measure of the portfolio if the risk-free rate is 5%?

.3978

.4158

.4563

.4706

76.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is the Sharpe ratio of the portfolio if the risk-free rate is 6%?

.4757

.5263

.6842

.7252

77.

A portfolio generates an annual return of 13%, a beta of .7, and a standard deviation of 17%. The market index return is 14% and has a standard deviation of 21%. What is Jensen's alpha of the portfolio if the risk-free rate is 5%?

.017

.034

.067

.078

78.

A portfolio generates an annual return of 16%, a beta of 1.2, and a standard deviation of 19%. The market index return is 12% and has a standard deviation of 16%. What is Jensen's alpha of the portfolio if the risk-free rate is 6%?

.017

.028

.036

.078

79.

The portfolio that contains the benchmark asset allocation against which a manager will be measured is often called _____________.

the bogey portfolio

the Vanguard Index

Jensen's alpha

the Treynor measure

80.

An attribution analysis will not likely contain which of the following components?

Asset allocation

Index returns

Risk-free returns

Security selection

81.

Which of the following investment strategies would have produced the highest returns in the time period since 1926?

T-bills portfolio

S&P 500 Index fund

Perfect market timing

Random stock selection

82.

What phrase might be used as a substitute for the Treynor-Black model developed in 1973?

Solely active management

Enhanced index approach

Passive management

Random selection

83.

What is the term for the process used to assess portfolio manager performance?

Active analysis

Attribution analysis

Passive analysis

Treynor-Black Analysis

84.

A fund has excess performance of 1.5%. In looking at the fund's investment breakdown, you see that the fund overweighted equities relative to the benchmark and that the average return on the fund's equity portfolio was slightly lower than the equity benchmark return. The excess performance for this fund is probably due to _______________.

security selection ability

better sector weightings in the equity portfolio

the asset allocation decision

finding securities with positive alphas

85.

For a market timer, the _____________ will be higher when RM is higher.

portfolio's alpha and beta

portfolio's unsystematic risk

portfolio's beta and slope of the characteristic line

security selection component of the portfolio

86.

The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to: I. Improve the diversification of the overall portfolio II. Improve the overall portfolio's Sharpe ratio III. Reach a higher CAL than would otherwise be possible

I only

I and II only

II and III only

I, II, and III

Student: ___________________________________________________________________________

In 2011, U.S. securities represented ______ of the world market for equities.

less than 25%

more than two-thirds

between 30% and 40%

a consistent 50%

_____ has the highest market capitalization of listed corporations among developed markets.

The United States

Japan

The United Kingdom

Switzerland

Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.

$13.9

$23.4

$30.2

$45.5

If you limit your investment opportunity set to only the largest six countries in the world in terms of equity capitalization as a percentage of total global equity capital, you will include about _______ of the world's equity.

34%

44%

54%

64%

Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for _________ investor but probably does not make sense for ________ investor.

an active; a passive

a passive; an active

a security selection expert; a market timer

a fundamental; a technical

WEBS are ____________________.

investments in country-specific portfolios

traded exactly like mutual funds

identical to ADRs

designed to give investors foreign currency exposure to multiple countries

Which one of the following allows you to purchase the stock of a specific foreign company?

WEBS

MSCI

ADR

EAFE

Generally speaking, countries with ______ capitalization of equities ________.

larger; have higher GDP

smaller; are wealthier

larger; have smaller GDP

larger; are higher-growth countries

The 32 "developed" countries with the largest equity capitalization made up about _____ of the world GDP in 2011.

22%

44%

68%

85%

10.

According to a regression of GDP on market capitalization in 2010, virtually all developed countries had _______ per capita GDP than (as) predicted by the regression.

higher

lower

the same

sometimes lower and sometimes higher

11.

If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the indirect quote?

1.98

1.02

.02

1.05

12.

EAFE stands for _______.

Equity And Foreign Exchange

European, Australian, Far East

European, Asian, Foreign Exchange

European, American, Far East

13.

Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions?

Default risk

Foreign exchange risk

Market risk

Political risk

14.

The __________ index is a widely used index of non-U.S. stocks.

CBOE

Dow Jones

EAFE

Lehman Index

15.

Suppose that U.S. equity markets represent about 35% of total global equity markets and that the typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an example of _________.

home-country bias

excessive diversification

active management

passive management

16.

The four largest economies in the world in 2010 were ____________.

United States, India, China, and Japan

United States, China, Canada, and Japan

United States, China, Japan, and Germany

China, United Kingdom, Canada, and United States

17.

The proper formula for interest rate parity is ___________.

[1 + rf(foreign)]/[1 + rf(US)] = F1/E0

[1 + rf(US)]/[1 + rf(foreign)] = E0/F1

[1 + rf(US)]/[1 + rf(foreign)] = F0/E0

[1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1

18.

Research indicates that exchange risk of the major currencies has been _________ so far in this century.

relatively high

relatively low

declining slightly

declining rapidly

19.

It appears from empirical work that exchange rate risk ____________.

has been declining for individual investments in recent years

is mostly diversifiable

is mostly systematic risk

is unimportant for an investment in a single foreign country

20.

Passive investors with well-diversified international portfolios _________.

can safely ignore all political risk in emerging markets

can expect very large diversification gains from their international investing

do not need to be concerned with hedging exposure to foreign currencies

can expect returns to be better than the EAFE on a consistent basis

21.

Which stock market has the largest weight in the EAFE index?

Japan

Germany

United Kingdom

Australia

22.

The correlation coefficient between the U.S. stock market index and stock market indexes of major countries is __________.

between -1 and -.5

between -.50 and 0

between 0 and .5

between .5 and 1

23.

In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

24.

Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called ________.

local fat

nativism

home-country bias

misleading representation

25.

Corruption is _________ risk variable.

a firm-specific

a political

a financial

an economic

26.

A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss interest rates rise relative to U.S. interest rates, the value of the franc will rise. To limit the risk to the fund's dollar return, the fund manager should __________.

sell the Swiss franc bonds now

sell the Swiss franc forward

probably do nothing because the franc move will offset the lower bond price

enter into an interest rate swap to pay variable and receive fixed

27.

The annual inflation rate is ______ risk variable.

a firm-specific

a political

a financial

an economic

28.

A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is currently $1.36 per euro. If the insurer's goal is to limit its risk, should the insurer hedge this transaction? If so how?

The insurer need not hedge because the expected exchange rate move will be favorable.

The insurer should hedge by buying the euro forward even though this will cost more than the expected cost of not hedging.

The insurer should hedge by selling the euro forward because this will cost less than the expected cost of not hedging.

The insurer should hedge by buying the euro forward even though this will cost less than the expected cost of not hedging.

29.

A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.

×88.97

×145.34

×154.67

×164.56

30.

You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don't have to worry about affecting your returns is __________.

business-cycle risk

beta risk

inflation risk

currency risk

31.

According to the InternationalCountryRiskGuide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

Japan

United States

China

India

32.

Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the British security is ________.

5.06%

6.74%

8.48%

10.13%

33.

The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn by investing in the Canadian security is __________.

7.25%

20%

22.43%

34.

Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

₤.5150

₤.5142

₤.5123

₤.4859

35.

The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should be worth __________.

$1.83

$1.91

$2.08

$2.18

36.

The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.

$1.93

$2.22

$2.56

$2.76

37.

The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S. bill and the Canadian bill.

9.7%

2.9%

2.8%

38.

The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.

-3%

3.35%

8.72%

39.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________.

12%

12.5%

14%

15.5%

40.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on your portfolio would be __________.

10.96%

12.25%

13.42%

15.5%

41.

Inclusion of international equities in a U.S. investor's portfolio has historically produced ___________________.

a substantially reduced portfolio variance

a slightly reduced portfolio variance

a substantially poorer portfolio variance

a slightly poorer portfolio variance

42.

WEBS are _____________.

mutual funds marketed internationally on the Internet

synthetic domestic stock indexes

equity indexes that replicate the price and yield performance of foreign stock portfolios

single stock investments in a foreign security

43.

You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

-3.8%

2.2%

5.6%

15%

44.

Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won't move and that interest rate parity will hold, then ____________.

the yen-per-dollar exchange rate should rise

the dollar-per-yen exchange rate should rise

the exchange rate should stay the same if parity holds

The answer cannot be determined from the information given.

45.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. How many shares can the investor purchase?

140

100

71.43

None of these options

46.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated return?

14%

10%

9.3%

7.1%

47.

14%

10%

9.3%

7.1%

48.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

25.7%

16%

14.3%

9.3%

49.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

10%

6.43%

4.34%

2.12%

50.

You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________ quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.

a direct; an indirect

an indirect; a direct

a foreign; a U.S.

a U.S.; a foreign

51.

Among emerging countries the largest equity market in 2011 was located in _____________.

China

India

Brazil

Russia

52.

In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

0; 100

0; 50

50; 0

100; 0

53.

Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

Brazil

China

Columbia

Turkey

54.

The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?

$3,000 gain

$3,000 loss

$6,000 loss

No gain or loss

55.

An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer's gain or loss?

$529 gain

$529 loss

$619 gain

$619 loss

56.

A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country's composite rating is _________.

57.

The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

1.30

1.31

1.32

1.33

58.

The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

101

102

105

108

59.

The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

1.24%

2.35%

3.98%

5.35%

60.

In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________. I. Large budget deficit II. Large trade deficit III. Large amount of total debt

I only

I and II only

I and III only

I, II, and III

61.

The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

large institutional investors

individual investors

government agencies

central banks

62.

Of the following, which is the most commonly used international index?

DJIA

EAFE

Russell 2000

S&P 500

63.

WEBS differ from mutual funds in that: I. WEBS can be shorted. II. WEBS trade continuously on the AMEX. III. WEBS are passively managed.

II only

II and III only

I and III only

I, II, and III

64.

The variation in the betas of emerging markets suggests that ____________.

emerging markets are more uniform than developed markets

beta does not hold in international markets

international diversification may reduce portfolio risk

riskier emerging markets have uniformly lower betas

65.

One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$94,322

$55,345

$44,318

$33,595

66.

One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$60,384

$42,973

$68,422

$78,500

67.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager's performance. What is the difference in return of the manager's portfolio due to currency selection?

-5%

-3%

68.

-.60%

-.75%

.12%

.22%

69.

1.15%

3.25%

5.45%

6.13%

Student: ___________________________________________________________________________

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments, and derivative instruments IV. Professional management of assets

I and II only

II and III only

III and IV only

I, III, and IV only

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

commingled pool

unit trust

hedge fund

money market fund

Hedge funds are typically set up as _______________.

limited liability partnerships

corporations

REITs

mutual funds

A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

multistrategy

managed futures

dedicated short bias

event-driven

______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

Hedge funds

Closed-end funds

REITs

Mutual funds

Which of the following typically employ(s) significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds

I only

I and II only

III and IV only

I, II, and III only

As of 2012, hedge funds had approximately _____ under management.

$.5 trillion

$1.6 trillion

$2 trillion

$3.2 trillion

A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

transparency

a lock-up period

a back-end load

convertible arbitrage

Hedge fund managers are compensated by ___________________.

deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

deducting a percentage of any gains in asset value

selling shares in the trust at a premium to the cost of acquiring the underlying assets

charging portfolio turnover fees

10.

Management fees for hedge funds typically range between _____ and _____.

.5%; 1.5%

1%; 2%

2%; 5%

5%; 8%

11.

Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: I. Futures and options II. Merger arbitrage III. Currency contracts IV. Companies undergoing Chapter 11 restructuring and reorganization

I only

I and II only

I, II, and III only

I, II, III, and IV

12.

A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

$1,000; $5,000

$5,000; $25,000

$25,000; $250,000

$250,000; $1,000,000

13.

The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

allocate money to several other funds while long-short funds do not

invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

invest only in equities and bonds while long-short funds use only derivatives

14.

Convertible arbitrage hedge funds _________.

attempt to profit from mispriced interest-sensitive securities

hold long positions in convertible bonds and offsetting short positions in stocks

establish long and short positions in global capital markets

use derivative products to hedge their short positions in convertible bonds

15.

Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

Buy gold in the spot market, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

16.

An example of a neutral pure play is _______.

pairs trading

statistical arbitrage

convergence arbitrage

directional strategy

17.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

pairs trading

convergence play

statistical arbitrage

a long-short equity hedge

19.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________.

$68

$70.21

$71.25

$74.88

20.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is _____________.

$6.50

$5.44

$4.29

$3.25

21.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

Buy oil in the spot market with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the oil spot and invest the money earned.

Buy the oil spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the oil spot using borrowed money.

22.

Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase?

13,333

25,000

50,000

66,000

23.

$553,600

$625,000

$733,800

$764,000

24.

14.45%

15.18%

16%

17.73%

25.

Which of the following are not managed investment companies?

Hedge funds

Unit investment trusts

Closed-end funds

Open-end funds

26.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How many S&P 500 contracts do you need to sell to hedge your portfolio?

27.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

1.2

The answer cannot be determined from the information given.

28.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

29.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now?

$15,000,000

$15,450,000

$15,600,000

$16,000,000

30.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

statistical arbitrage

pure play

a short equity hedge

fixed-income arbitrage

31.

Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called ____________________.

asset allocation funds

multistrategy funds

event-driven funds

market-neutral funds

32.

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets.

$120; $20

$20; $120

$20; $20

$120; $120

33.

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

statistical arbitrage

an unhedged play

a tail event

a liquidity trap

34.

Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

Convergence arbitrage

Statistical arbitrage

Pairs trading

Convertible arbitrage

35.

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?

15.05%

15.5%

17.25%

18%

36.

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year?

$4,877,000

$4,900,000

$5,929,000

$6,446,000

37.

16.5%

18.04%

18.55%

21%

38.

Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

6.45%

8.52%

8.95%

9.46%

39.

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

pure play

leverage

directional bests

net short positions

40.

A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund?

$15

$15.60

$16.30

$17.55

41.

You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

5.35%

7.23%

8.19%

10%

42.

A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______.

143

157

196

218

43.

Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

zero; positive

positive; negative

positive; zero

negative; positive

44.

Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio ______ and a long position in portfolio __________.

A; A

A; B

B; A

B; B

45.

According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

equal to

considerably higher than

slightly lower than

slightly higher than

46.

Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

less liquid

more liquid

event-driven

shorter-maturity

47.

Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

market

liquidity

systematic

interest rate

48.

Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

A; A

A; B

B; A

B; B

49.

In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

September; lower

January; higher

January; lower

December; higher

50.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

long-short bias

survivorship bias

backfill bias

incentive bias

51.

Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

reporting bias

survivorship bias

backfill bias

incentive bias

52.

Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

about the same as

much lower than

much higher than

only slightly lower than

53.

Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

writing a call option

receiving a free call option

writing a put option

receiving a free put option

54.

A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

10%

20%

25%

55.

The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

other hedge funds

convertible securities and preferred stock

equities and bonds

managed futures and options

56.

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

when a fund stays flat

when a fund falls and does not recover to its previous high value

when a fund falls by 10% or more

none of these options. (Managers can always charge incentive fees.)

57.

If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________.

.2; S0

1; S0(1 + rf)

1.2; S0

.2; S0(1 + rf)

58.

$100

$105

$110

$115

59.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee?

$6.67

$8.18

$9.74

$10.22

60.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark?

$4.24

$3.84

$2.20

Student: ___________________________________________________________________________

Which one of the following is an example of "global" consumption smoothing?

Borrowing to buy a car

Borrowing to buy a home

Saving to send children to college

Saving during your working years for retirement

Inflation has an adverse effect on your savings because: I. It erodes the purchasing power of the dollars you have saved. II. It increases the real rate of return on the dollars you save. III. Unless sheltered, it increases the taxes owed on investment income.

I only

II and III only

I and III only

I, II, and III

If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

Career failure insurance

Disability insurance

Unemployment insurance

Moral hazard insurance

Which one of the following represents local consumption smoothing? I. Saving during your working years for retirement II. Borrowing money to buy a car III. Putting off a vacation for a year until you can afford it

I only

II and III only

I and II only

I, II, and III

In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk.

plan sponsor; employee

employee; plan sponsor

U.S. government; plan sponsor

plan sponsor; U.S. government

A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________.

make you better off

make you worse off

make you neither better off nor worse off

make you either better or worse off depending on your age

Tax shelters __________________.

postpone payment of tax liabilities

decrease investment risk

increase the pretax rate of return earned

benefit the government more than the investor

The tax effect of a traditional retirement plan is to _____ taxes.

evade

postpone

erase

avoid

The U.S. income tax code is generally _____.

regressive

progressive

flat

peaked

10.

Contributions to a _____________ are not tax deductible.

traditional retirement plan

Roth retirement plan

401k plan

403b plan

11.

No taxes are paid on withdrawals made during retirement from a _________.

traditional retirement plan

Roth retirement plan

401k

403b plan

12.

You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after-tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa).

4.5%

4.14%

4.02%

3.12%

13.

You work for Fun-A-Rama Corporation and receive stock options as an incentive for your performance on the job. You are counting on the stock options to provide the funds you'll need for your retirement. This is called _____________.

adverse selection

a 529 plan

a moral hazard

a Texas hedge

14.

You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts.

You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts.

You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts.

It makes no difference how you allocate your stock and bond investments among tax sheltered �� and nonsheltered accounts.

15.

Social Security is ____________.

a pension plan only

an insurance plan only

a combination of a pension and insurance plan

an involuntary intergenerational transfer

16.

The Social Security system _______________.

is financed in a regressive way

is regressive in the way it allocates benefits

is progressive in the way it is financed

is fully funded for the foreseeable future

17.

Total annuity income is positively correlated with: I. Longevity II. Durability of marriage III. Expected length of your base (Social Security) annuity

I only

I and II only

II and III only

I, II, and III

18.

The solvency of Social Security is threatened by ______________.

increasing population longevity

above-replacement growth of the U.S. population

alternative tax shelters

the growth of competing defined contribution plans

19.

A person in poor health trying to buy supplemental health insurance is an example of ________.

moral hazard

adverse selection

a Texas hedge

actuarial error

20.

A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________.

moral hazard

adverse selection

a Texas hedge

actuarial error

21.

It would be costly to provide wage insurance because of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

22.

You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____.

6.8%

3.69%

4.91%

4.25%

23.

As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of ____________.

manipulating tax shelters

involuntary intergenerational transfers

excessive savings

dynamic hedging

24.

Tilting your retirement savings plan toward your later years should only be done by investors _____________.

who are sufficiently risk averse

who are more tolerant of risk

who are unsure if their income growth will keep up with inflation

who want to retire early

25.

Employers commonly match at least some portion of employee contributions to: I. 401k plans II.403b plans III. Self-directed retirement plans

I only

I and II only

II only

I, II, and III

26.

A saver who expects to have a higher tax rate after retirement would prefer a ______.

Roth retirement plan

traditional retirement plan

401k plan

403b plan

27.

A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings.

income

sales

property

estate

28.

A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

10%

25%

50%

29.

Taxes are applied to the _______________________.

real value of sheltered investment income

nominal value of unsheltered investment income

nominal value of sheltered investment income

real value of unsheltered investment income

30.

One feasible way to hedge labor income is to ____________________.

diversify your investment portfolio away from the industry in which you work

save for retirement only from investment income

change careers every 7 years

invest heavily in the stock options provided by your firm

31.

Which one of the following is not likely to be subject to adverse selection?

Health insurance providers

Lifetime annuity providers

Life insurance providers

Social Security

32.

Average Indexed Monthly Earnings are used to compute ___________.

the consumer price index

your Social Security retirement benefits

your maximum 401k contribution

your maximum retirement plan contribution

33.

The Social Security Primary Insurance Amount formula favors ______.

older workers

high-income workers

younger workers

low-income workers

34.

Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________.

not tax deductible; not tax deducible

tax deductible; tax deductible

tax deductible; not tax deductible

not tax deductible; tax deductible

35.

How many years of Social Security contributions count for determination of benefits?

All yearly contributions count.

36.

Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare.

1.45%; 6.2%

6.2%; 1.45%

7.65%; 1.45%%

15.3%; 4.9%

37.

In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____.

$200,000; $10,000

$153,600; $7,600

$110,100; $0

$96,000; $10,000

38.

If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___.

15%

20%

27.5%

39.

A tax shelter that allows for tax-exempt saving for higher education is called a _____.

Roth savings plan

403b

401k

529 plan

40.

Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty.

59½; 10%

62; 5%

65; 7½ %

63½; 5%

41.

In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

$119,015

$125,316

$126,498

$128,420

42.

In planning for retirement, an investor decides she will save $11,000 every year for 40 years. At an 11% return on her investment, how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

$1,400,000

$2,800,000

$4,900,000

$6,400,000

43.

An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35 years old, has no savings, and expects to earn 8% per year on her investments, how much money must she set aside every year?

$15,546

$13,679

$11,892

$10,324

44.

An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost?

$296,928

$312,236

$333,552

$353.982

45.

A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem.

moral hazard

adverse selection

Texas hedge

actuarial error

46.

A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in today's dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

$30,353

$34,159

$37,398

$39,796

47.

An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3% assumed investment rate, how much should the annuity cost?

$696,928

$743,874

$833,552

$953.982

48.

A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000?

$65,000

$76,159

$98,398

$136,342

49.

An investor must decide between putting $2,000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

The investment in the regular retirement plan.

The investment in the Roth retirement plan.

Both investments will have the same future value after taxes.

The answer cannot be determined from the information given.

50.

A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that generates an 8% return for 20 years if the investor is taxed at the 28% level?

$16,779

$20,135

$21,685

$23,305

51.

What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years?

$12,174

$13,684

$14,652

$15,523

52.

The employees of a firm complain that they cannot afford to contribute $8,000 per year to a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%?

$5,360

$6,340

$7,637

$8,000

53.

An employee uses her firm's 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year?

$3,080

$4,210

$7,920

$11,000

54.

An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________.

$2,400

$8,000

$10,400

$24,150

55.

Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________.

taxable; not taxable

not taxable; taxable

tax deductible; not tax deductible

not tax deductible; tax deductible

56.

If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________.

a traditional retirement plan is probably a better choice than a Roth retirement plan

a Roth retirement plan is probably a better choice than a traditional retirement plan

a SEP is probably a better choice than Medicare

a 401k is probably a better choice than a 403b

57.

Which one of the following statements about 401k plans is not correct?

The employer will typically match some portion of an employee's contributions to a 401k.

A 401k plan is a defined contribution plan.

Allowable contributions to 401k plans are limited.

Withdrawals from 401k plans are not taxed upon retirement.

58.

Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in _________.

a bond portfolio

stocks with high dividend yields

a blended stock and bond portfolio containing zero-coupon bonds

stocks with low or zero dividend yields

59.

A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.

after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio

after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio

after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio

after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

60.

Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years.

15; 20

16; 19

18; 22

19; 24

61.

Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

$15,000

$32,000

$45,000

$75,000

62.

An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the individual invests $2,000 per year for 20 years, the real future value of this investment is ________. (All investments occur at year-end).

$73,571

$66,334

$53,251

$48,732

63.

An individual wants to have $95,000 per year to live on when she retires in 30 years. The individual is planning on living for 20 years after retirement. If the investor can earn 6% during her retirement years and 10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

$9,872

$8,234

$7,908

$6,624

64.

If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____.

equal to the life span of your children

100 years, or your lifetime, whichever ends first

infinite

double what it would have been without the bequest

65.

You want to minimize your current tax bill by maximizing your contributions to your _____________.

taxable bond portfolio

Roth retirement plan

401k or 403b plan

taxable savings account

66.

Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return. How much money will Sharon have in her retirement plan after 6 years?

$30,000

$35,575

$38,578

$41,451

67.

$554,856

$623,245

$740,480

$1,311,805

68.

A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is the amount of the total contribution to his 403b if John contributes 5% of his own money?

$5,600

$8,400

$11,200

$12,500

69.

A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. What is John's effective salary reduction if he is in the 25% tax bracket?

$2,100

$2,800

$5,600

$8,400

70.

$2,100 cost

$2,800 cost

$700 benefit

$3.500 benefit

71.

The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier.

moral hazard

adverse selection

risk aversion

interest rate risk

72.

An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________.

3.91%

6.15%

5.28%

10.72%

73.

An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).

3.9%

4.75%

6.5%

9.9%

Student: ___________________________________________________________________________

To _____ means to mitigate a financial risk.

invest

speculate

hedge

renege

In a defined benefit pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

In a defined contribution pension plan, the _____ bears all of the fund's investment performance risk.

employer

employee

fund manager

government

My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.

a defined benefit plan

a defined contribution plan

an endowment fund

a variable annuity

A ______ insurance policy provides death benefits, with no buildup of cash value.

whole-life

universal life

variable life

term life

If the maturity of a bank's assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may _________.

prefer to invest in long-term bonds in its asset portfolio

prefer to invest in equities in its asset portfolio

prefer to invest in variable-rate assets

decide to increase its fixed-rate mortgage holdings

You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A's _______ return will be higher than asset B's, but you can't be sure if asset A's _______ return will be higher than asset B's.

realized; expected

real; nominal

expected; realized

nominal; expected

A mutual fund may not hold more than ______ of the shares of any publicly traded company.

10%

25%

50%

Which one of the following would be considered a "cash equivalent" investment?

Treasury bills

Common stock

Corporate bonds

Real estate

10.

For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.

insurance premium

interest rate spread

risk premium

term premium

11.

Price volatility is greatest on which one of the following investments?

Commercial paper

20-year zero-coupon bonds

Treasury notes

Treasury bills

12.

A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy.

passive-aggressive

passive core

passively active

balanced fund

13.

The major asset most people have during their early working years is their ________.

home

stock portfolio

earning power derived from their skills

bond portfolio

14.

At the early stage of an individual's working career, his or her retirement portfolio should probably consist mostly of _______.

annuities

stocks

bonds

commodities

15.

If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

a money market fund

a growth stock fund

several different money market instruments

several different stocks

16.

Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance?

You sell to avoid further worry and buy something else.

You do nothing and wait for the investment to come back.

You buy more, thinking that if it was a good investment before, now it's not only good but cheap too.

You sue your financial adviser.

17.

To become a CFA, you must do all of the following except which one?

Pass three exams designed to ensure that you have sufficient knowledge of investments.

Obtain 3 years of work experience in money management.

Become a member of a local Society of the Financial Analysts Federation.

Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

18.

Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

Investment management ethics

Securities analysis

Securities marketing techniques

Portfolio management

19.

As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______.

human capital; financial capital

financial capital; human capital

intellectual capital; physical capital

investable capital; noninvestable capital

20.

The two most important factors in describing an individual's or organization's investment objectives are ________________.

income level and age

income level and risk tolerance

age and risk tolerance

return requirement and risk tolerance

21.

The term hedge refers to an investment that is used ________________.

primarily for tax-loss selling purposes

to mitigate specific financial risks

to conceal one's true investment strategy from other market participants

primarily to defer capital losses

22.

The price of your investment increases 20% one month after you buy it. You do not believe that the stock's prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion?

You hang on to the stock, anticipating that it will go higher.

You buy more stock, anticipating that it will go higher.

You sell all of your stock holdings immediately.

You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

23.

An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting ____________________.

like a person who is risk-neutral

like a person who is risk averse

like a person who is a risk lover

irrationally

24.

Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

Banks

Thrifts

Mutual funds

Pension funds

25.

If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________.

a personal trust

a charitable trust

an endowment fund

a mutual fund

26.

Personal trusts are typically allowed to engage in which of the following investment activities? I. Buying and selling futures contracts. II. Short-selling securities. III. Purchasing and writing options. IV. Buying stock on margin.

I only

II and III only

II and IV only

None of the given activities are allowed.

27.

If a defined benefit pension fund's actual rate of return is _____ than the actuarial assumed rate, then the ___________.

greater; employees will benefit

greater; firm's shareholders will benefit

lower; employees will benefit

lower; firm's shareholders will benefit

28.

An employee has an average wage of $60,000 and has worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive _______ per year upon retirement.

$18,000

$37,500

$45,325

$55,250

29.

Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.

long-term bonds

money market mutual funds

savings accounts

short-term commercial paper

30.

A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability?

$1,212,587

$1,363,154

$1,533,333

$1,666,667

31.

The risk that a downturn in the market may substantially reduce your investment principal is called _______.

purchasing power risk

interest rate risk

market risk

liquidity risk

32.

The possibility that you are too conservative and your money doesn't grow fast enough to keep pace with inflation is called ________.

purchasing power risk

liquidity risk

timing risk

market risk

33.

A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan, but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

$65,437

$79,985

$89,462

$95,320

34.

Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________.

firm's return on equity

plan's assumed actuarial rate of return

economic inflation rate because wages often increase with inflation

estimated stock market return

35.

_______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

Term life

Whole life

Variable life

Universal life

36.

Empirical evidence confirms that investors become __________ as they approach retirement.

greedier

less interested in investments

more risk averse

more risk tolerant

37.

_______ is a life insurance policy that will provide a death benefit only and has no savings plan.

Term life

Whole life

Variable life

Universal life

38.

Of the following, the investment time horizon is typically the shortest for __________.

banks

endowment funds

life insurance companies

pension funds

39.

A passive asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

40.

An active asset allocation strategy involves _________.

investing in the stock of companies that are price takers

maintaining approximately the same proportions of a portfolio in each asset class over time

varying the proportions of a portfolio in each asset class in response to changing market conditions

selecting individual securities in different sectors that are believed to be undervalued

41.

Endowment funds are held by __________.

financial intermediaries

individuals

profit-oriented firms

nonprofit institutions

42.

Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy's cash value?

Term life

Whole life

Variable life

Industrial life

43.

Under a "passive core" portfolio management strategy, a manager would ___________.

index the entire portfolio

index part of the portfolio and actively manage the rest

delegate the management of core segments of the portfolio to other managers

actively manage the entire portfolio

44.

Of the following, the most flexible type of life insurance policy from the policyholder's perspective is probably a ___________ policy.

term life

whole life

variable life

universal life

45.

The amount of risk an individual should take depends on his or her: I. Return requirements II. Risk tolerance III. Time horizon

I only

I and II only

II and III only

I, II, and III

46.

Earnings on variable life and universal life insurance policies are ___________.

never taxed

taxed only at the capital gains tax rate

not taxed until the money is withdrawn

not taxed at the federal level but are taxed at the state level

47.

When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan's assets.

employee; employee

employee; employer

employer; employee

employer; employer

48.

Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate individual and do not intend to sell the stocks during the holding period, __________.

stock A will have a higher after-tax holding-period return than stock B

the after-tax holding period returns on stocks A and B will be the same

stock B will have a higher after-tax holding-period return than stock A

The answer cannot be determined from the information given.

49.

The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

broader; more risk averse

broader; less risk averse

more limited; more risk averse

more limited; less risk averse

50.

The prudent investor rule requires __________.

executives of companies to avoid investing in options of companies they work for

executives of companies to disclose their transactions in stocks of companies they work for

professional investors who manage money for others to avoid all risky investments

professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

51.

The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers.

fiduciary responsibility

fiscal responsibility

monetary responsibility

marketing procedures

52.

An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint.

tax

risk-tolerance

liquidity

social

53.

When used in the context of investment decision making, the term liquidity refers to _____________.

the ease and speed with which an asset can be sold at any value possible

the ease and speed with which an asset can be sold without having to discount the value

an aspect of monetary policy

the proportion of short-term to long-term investments held in an investor's portfolio

54.

The term investment horizon refers to __________.

the proportion of short-term to long-term investments held in an investor's portfolio

the planned liquidation date of an investment

the average maturity date of investments held in a portfolio

the maturity date of the longest investment in the portfolio

55.

The choice of an active portfolio management strategy rather than a passive strategy assumes ___________.

the ability to continuously adjust the portfolio to provide superior returns

asset allocation involving only domestic securities

stable economic conditions over the short term

the ability to minimize trading costs

56.

Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________.

income; high growth

income; moderate growth

moderate-growth; high growth

high-growth; moderate growth

57.

The first step any investor should take before beginning to invest is to __________.

establish investment objectives

develop a list of investment managers with superior records to interview

establish asset allocation guidelines

decide between active management and passive management

58.

Which of the following is the least likely to be included in the portfolio management process?

Monitoring market conditions and relative values

Monitoring investor circumstances

Identifying investor constraints and preferences

Organizing the investment management process itself

59.

A clearly understood investment policy statement is not critical for which one of the following? I. Mutual funds II. Individuals III. Defined benefit pension funds

II only

III only

I only

None of these options (A policy statement is necessary for all three.)

60.

An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint.

return requirement

risk-tolerance

liquidity

social

61.

Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________.

investing in conservative fixed-income assets

paying benefits to retired employees

counseling employees in the selection of asset classes

paying employees the market rate of return on employee contributions

62.

A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal?

High-yield utility stocks

5-year zero-coupon bonds

10-year coupon bonds

Money market investments rolled over as needed

63.

An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is reevaluating the fund's total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

87.4%

88.5%

90%

91.6%

64.

An investor with high risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 12%, historical standard deviation = 17%

Expected return = 14%, historical standard deviation = 19%

Expected return = 16%, historical standard deviation = 21%

Expected return = 18%, historical standard deviation = 23%

65.

An investor with low risk aversion will likely prefer which of the following risk and return combinations?

Expected return = 11%, historical standard deviation = 12%

Expected return = 12%, historical standard deviation = 14%

Expected return = 14%, historical standard deviation = 18%

Expected return = 17%, historical standard deviation = 21%

66.

Medfield College's $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true? I. The fund should have a target rate of return of at least 10%. II. The limitations on spending require that the fund limit its considerations to growth stocks. III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund's rate of return.

I only

II only

I and III only

I, II, and III

67.

An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

Fixed annuity

Defined benefit plan

Defined contribution plan

Bonds invested in a retirement plan

68.

Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?

10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks

0% money market; 60% long-term bonds; 40% stocks

10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks

5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

69.

A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family's situation?

10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

0% money market; 60% intermediate-term bonds; 40% stocks

10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks

5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

70.

Your sister, an avid outdoors person, works in the airline industry, and she has come to you (the financial guru) for investment advice. She is looking into purchasing stocks she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines), and Cabela's Sporting Goods. Based only on the information given, which stock should you recommend for her?

Boeing

Lockheed Martin

United Technologies

Cabela's

71.

In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________.

annuities

endowments

mutual funds

personal trusts

72.

Which one of the following institutions typically has the longest investment horizon?

Mutual funds

Pension funds

Property and casualty insurers

Banks

73.

For which one of the following institutions is liquidity usually the most important?

Mutual funds

Pension funds

Life insurers

Banks

74.

One of the major functions of the investment committee is to ________________.

determine security selection of each portfolio operated by the investment company

translate the objectives and constraints of the investment company into an asset universe

determine the percentages of each security in the total investment company portfolio

calculate and report the overall rate of return to investment company constituents

75.

For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

Real estate

Bonds

Domestic stocks

International stocks

76.

The asset universe is the _____________________.

set of investments in which an investment company can legally invest

existing set of assets the investment company currently owns in one or more of its portfolios

list of assets approved by the investment committee that may be placed into the investment company's portfolio

market portfolio of all available risky assets

77.

Go Global Investment Management has an asset allocation strategy of 60% U.S. investments and 40% global investments. Within the United States, Go Global has allocated 70% of its portfolio to equities and 30% to bonds. Go Global now holds 3% of its U.S. equity portfolio in the stock of Wally World. Internationally, Go Global has allocated 55% to equities and 45% to bonds. About what percentage of Go Global's total portfolio is invested in Wally World?

1.26%

1.5%

1.77%

78.

Major functions of the investment committee include all but which one of the following?

Engage in security selection for each portfolio managed

Broadly determine the overall asset allocation of the investment company

Determine the asset-class weights for each portfolio

Determine the asset universe

79.

A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

80.

A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of ____________.

a passively managed core with an actively managed component

a totally passively managed fund

passive asset allocation with active security selection

active asset allocation with passive security selection

81.

One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________.

holding long-term bonds

holding equities

holding short-term bonds

exercising its right to terminate the policy

#FIN 320 Week 11 Final Exam – Strayer

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FIN 317 Week 11 Final Exam – Strayer

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Chapters 7 Through 15

Part 1: Chapters 7 Through 11

Part 2: Chapters 12 Through 15

CHAPTER 7

TYPES AND COSTS OF FINANCIAL CAPITAL

True-False Questions

1. The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.

2. Traditional accounting does not focus on the implicit cost of equity that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers.

3. Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs.

4. Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features.

5. A venture’s “riskiness” in terms of poor performance or failure is usually very high during the maturity stage of its life cycle.

6. A venture’s “riskiness” in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle.

7. First-round financing during a venture’s survival stage comes primarily from venture capitalists and investment banks.

8. Startup financing usually comes from entrepreneurs, business angels, and investment bankers.

9. Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles.

10. A venture’s “riskiness” in terms of the likelihood of poor performance or failure decreases as it moves from its development stage through to its rapid-growth stage.

11. A nominal interest rate is an observed or stated interest rate.

12. The “real interest rate” (RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate.

13. The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk.

14. Inflation premium is the rising prices not offset by increasing quality of goods being purchased.

15. “Default-risk” is the risk that a borrower will not pay the interest and/or the principal on a loan.

16. The “prime rate” is the interest rate charged by banks to their highest default risk business customers.

17. Bond ratings reflect the inflation risk of a firm’s bonds.

18. The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates.

19. The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve.

20. Liquidity premiums reflect the risk associated with firms that possess few liquid assets.

21. Subordinated debt is secured by a venture’s assets, while senior debt has an inferior claim to a venture’s assets.

22. Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures.

23. Investment risk is the chance or probability of financial loss on one’s venture investment, and can be assumed by debt, equity, and founding investors.

24. A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns.

25. Historically, large-company stocks have averaged higher long-term returns than small-company stocks.

26. The coefficient of variation measures the standard deviation of a venture’s return relative to its expected return.

27. Closely held corporations are those companies whose stock is traded over-the-counter.

28. Typically, the stocks of closely held corporations aren’t publicly traded.

29. Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically.

30. Market cap is determined by multiplying a firm’s current stock price by the number of shares outstanding.

31. The excess average return of long-term government bonds over common stock is called the market risk premium.

32. The weighted average cost of capital is simply the blended, or weighted cost of raising equity and debt capital.

33. Venture capital holding period returns (all stages) for the 10-year period ending in 2012 were about the same as the returns on the S&P 500 stocks.

Multiple-Choice Questions

1. Which one of the following markets involve liquid securities with standardized contract features such as stocks and bonds?

a. private financial market

b. derivatives market

c. commodities market

d. real estate market

e. public financial market

2. Which of the following markets involve direct two-party negotiations over illiquid, non-standardized contracts such as bank loans and direct placement of debt?

a. primary market

b. secondary market

c. options market

d. private financial market

e. public financial market

3. Which of the following is an example of rent on financial capital?

a. interest on debt

b. dividends on stock

c. collateral on equity

d. a and b

e. a, b, and c

4. Which of the following describes the observed or stated interest rate?

a. real rate

b. nominal rate

c. risk-free rate

d. prime rate

e. inflation rate

5. Which of the following describes the interest rate in addition to the inflation rate expected on a risk-free loan?

a. real rate

b. nominal rate

c. risk-free rate

d. prime rate

e. inflation rate

6. Which of the following describes the interest rate on debt that is virtually free of default risk?

a. real rate

b. nominal rate

c. risk-free rate

d. prime rate

e. inflation rate

7. Which of the following describes the interest rate charged by banks to their highest quality customers?

a. real rate

b. nominal rate

c. risk-free rate

d. prime rate

e. inflation rate

8. Which of the following is not a component in determining the cost of debt?

a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. interest rate premium

9. The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?

a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. investment risk premium

10. The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?

a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. investment risk premium

11. The added interest rate charged due to the inherent increased risk in long-term debt is called?

a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. investment risk premium

12. Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture’s debt capital?

a. 13%

b. 14%

c. 15%

d. 16%

e. 17%

13. A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture’s weighted average cost of capital?

a. 8.0%

b. 7.2%

c. 7.0%

d. 6.2%

e. 6.0%

14. Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital including both debt and equity of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture’s EVA?

a. $400,000

b. $200,000

c. $ 0

d. ($180,000)

e. ($300,000)

15. The “risk-free” interest rate is the sum of:

a. a real rate of interest and an inflation premium

b. a real rate of interest and a default risk premium

c. an inflation premium and a default risk premium

d. a default risk premium and a liquidity premium

e. a liquidity premium and a maturity premium

16. Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “startup” stage of their life cycles:

a. 20%

b. 25%

c. 40%

d. 50%

17. Which one of the following components is not used when estimating the cost of risky debt capital?

a. real interest rate

b. inflation premium

c. default risk premium

d. market risk premium

e. liquidity premium

18. Which of the following components is not typically included in the rate on short-term U.S. treasuries?

a. liquidity premium

b. default risk premium

c. market risk premium

d. b and c

e. a, b, and c

19. The word “risk” developed from the early Italian word “risicare” and means:

a. don’t care

b. take a chance

c. to dare

d. to gamble

20. The difference between average annual returns on common stocks and returns on long-term government bonds is called a:

a. default risk premium

b. maturity premium

c. risk-free premium

d. liquidity premium

e. market risk premium

21. What has been the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s?

a. 10%

b. 16%

c. 25%

d. 30%

e. 40%

22. Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “development” stage of their life cycles:

a. 15%

b. 20%

c. 25%

d. 40%

e. 50%

23. Corporate bonds might involve which of the following types of “premiums.”

a. inflation premium

b. default risk premium

c. liquidity premium

d. maturity premium

e. all of the above

none of the above

24. Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?

a. Development stage

b. Startup stage

c. Survival stage

d. Rapid-growth stage

e. Maturity stage

25. A venture’s “riskiness” in terms of possible poor performance or failure would be considered to be “very high” in which of the following life cycle stages:

a. Startup stage

b. Survival stage

c. Rapid-growth stage

d. Maturity stage

26. Which of the following types of financing would be associated with the highest target compound rate of return?

a. public and seasoned financing

b. second-round and mezzanine financing

c. first-round financing

d. startup financing

e. seed financing

27. The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the firm?

a. 10%

b. 12%

c. 13%

d. 15%

28. Use the SML model to calculate the cost of equity for a firm based on the following information: the firm’s beta is 1.5; the risk free rate is 5%; the market risk premium is 2%.

a. 4.5%

b. 8.0%

c. 9.5%

d. 10.5%

29. Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%.

a. 7%

b. 10%

c. 13.5%

d. 17.5%

e. 20%

30. Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%.

a. 11.5%

b. 13.9%

c. 15.0%

d. 16.6%

31. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and a tax rate = 25%.

a. 10%

b. 16%

c. 19.8%

d. 22.8%

e. 30%

32. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and a tax rate = 25%.

a. 15%

b. 16.4%

c. 20.2%

d. 22.8%

e. 30%

33. Venture capital holding period returns (all stages) for the 20-year period ending in 2012, had a compound average return of approximately:

a. 35%

b. 28%

c. 21%

d. 14%

e. 7%

Supplemental Problems related to Chapter 7 Appendix A (and Chapter 4 Appendix A)

1. Estimate a firm’s NOPAT based on: Net sales = $2,000,000; EBIT = $600,000; Net income = $20,000; and Effective tax rate = 30%.

a. $600,000

b. $420,000

c. $150,000

d. $70,000

e. $40,000

2. Estimate a firm’s economic value added (EVA) based on: NOPAT = $400,000; amount of financial capital used = $1,600,000; and WACC = 19%.

a. $26,000

b. $36,000

c. $96,000

d. $54,000

e. $64,000

3. Find a venture’s “economic value added” (EVA) based on the following information: EBIT = $200,000; financial capital used = $500,000; WACC = 20%; effective tax rate = 30%.

a. $20,000

b. $25,000

c. $30,000

d. $40,000

e. $50,000

CHAPTER 8

SECURITIES LAW CONSIDERATIONS WHEN OBTAINING VENTURE FINANCING

True-False Questions

1. The securities Exchange act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.

2. The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Ac

3. The Investment Advisers Act of 1940 provides a definition of an investment company.

4. According to the Investment Advisers Act of 1940, a bank would not be classified as an “investment advisor”.

5. The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the U.S.

6. The Securities Exchange Act was passed in 1933 and the Securities Act was passed in 1934.

7. The trading of securities is regulated under the Securities and Exchange Act of 1954.

8. Regulation of investment companies (including professional venture capital firms) is carried out under the Investment Company Act of 1940.

9. State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws.

10. Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws.

11. Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings.

12. The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

13. Investor liability in a limited liability company (LLC) is limited to the owners’ investments.

14. Investor liability in a proprietorship or corporation is unlimited.

15. The life of a proprietorship is determined by the owner.

16. It is usually easier to transfer ownership in a proprietorship relative to a corporation.

17. The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions.

18. The Securities Act of 1933 provides a very narrow definition as to what constitutes a security.

19. SEC Rule 147 provides guidance on the issuer’s diligent responsibilities in assuring that offerees are in-state and that securities don’t move across state lines.

20. A private placement, or transactions by an issuer not involving any public offering, is exempt from registering the security.

21. Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues.

22. The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

23. In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2) of the Securities Act of 1933.

24. SEC Regulation D requires the registration of securities with the SEC.

25. An early stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements.

26. SEC Regulation D took effect in 1932 and provides the basis for “safe harbor” as a private placemen

27. Rule 504 under Regulation D has a $2 million financing limit (i.e., applies to sales of securities not exceeding $2 million).

28. A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors.

29. A Regulation D Rule 505 offering cannot exceed $5 million in a twelve-month period.

30. A Regulation D Rule 505 offering is limited to 35 accredited investors.

31. A Regulation D Rule 506 offering has no limit in terms of the dollar amount of the offering but is limited to 35 unaccredited investors.

32. Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placemen

33. Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated.

34. Regulation A issuers are allowed to “test the waters” before preparing the offering circular (unlike almost all other security offerings).

35. Regulation A offerings are allowed up $10 million and do not have limitations on the number or sophistication of offerees.

36. The objective of the Jumpstart Our Business Startups Act of 2012 is to stimulate the initiation, growth, and development of small business companies.

37. Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings.

Note: Following are true-false questions relating to materials presented in Appendix B of Chapter 8.

1. The definition of an “accredited investor,” initially defined in the Securities Act of 1933, was expanded in Rule 501 of Reg D.

2. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is a net worth greater than $1,000,000.

3. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is individual annual income greater than $500,000.

4. Regulation D Rule 502 focuses, in part, on resale restrictions imposed on privately-placed securities.

5. Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities.

Multiple-Choice Questions

1. Which of the following is not true regarding the Securities Act of 1933?

a. it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression

b. it covers securities fraud

c. it requires securities to be registered formally with the federal government

d. it set of the nature and authority of the Securities and Exchange Commission

e. it focuses on those who provide investment advice

2. The U.S. federal law that impacts the creation and sales of securities is:

a. Securities Exchange Act of 1934

b. Securities Act of 1933

c. Investment Company Act of 1940

d. Investment Advisers Act of 1940

3. The efforts to regulate the trading of securities takes place under which of the following securities laws?

a. Securities Act of 1933

b. state “blue-sky” laws

c. Securities and Exchange Act of 1934

d. Investment Company Act of 1940

e. Investment Advisers Act of 1940

4. Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?

a. Securities Act of 1933

b. state “blue-sky” laws

c. Securities and Exchange Act of 1934

d. Investment Company Act of 1940

e. Investment Advisers Act of 1940

Both a and b

g. Both a and c

5. In securities law, which of the following is (are) true?

a. ignorance is no defense

b. security regulators may alter your investment agreement to the benefit of the investors

c. Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement

d. Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement

e. a, b, and c above

a, b, c, and d above

6. Which of the following is not a security?

a. treasury stock

b. debenture

c. put option

d. real property

e. call option

7. State securities regulations are referred to as:

a. Regulation A legislation

b. “stormy day” laws

c. “blue sky” laws

d. SEC oversight legislation

8. Which of the following is not true about registering securities with the SEC?

a. it is a time consuming process

b. it required the disclosure of accounting information

c. it is usually done with the help of an investment bank

d. it is an inexpensive process

e. it provides information to prospective investors

9. All of the following do not create any securities registration responsibilities except?

a. Treasury securities

b. Municipal bonds

c. securities issued by publicly held companies

d. securities issued by banks

e. securities issued by the government

10. Ventures that reach their survival stage of their life cycles and seek first-round financing are typically organized as:

a. proprietorships or partnerships

b. LLCs or corporations

c. corporations

d. partnerships or LLCs

e. proprietorships or corporations

11. Investor liability is “unlimited” under which of the following types of business organizational forms?

a. proprietorship

b. limited liability company (LLC)

c. corporation

d. S corporation

e. S limited liability company (SLLC)

12. Which one of the following is not a requirement for registration of securities with the SEC?

a. the name under which the issuer is doing business

b. the name of the state where the issuer is organized

c. the names of all products sold by the issuer

d. the names and addresses of the directors

e. the names of the underwriters

13. The returning of all funds to equity investors as a common “remedy” for a “fouled up” securities offering is called:

a. just action

b. fraud

c. second round financing

d. a rescission

e. mezzanine financing

14. “Security” exemptions from registration with the SEC include which of the following:

a. securities issued by banks and thrift institutions

b. government securities

c. intrastate offerings

d. securities issued by large, high quality corporations

e. a, b, and c above

f. a, b, c, and d above

15. The basic types of “transaction” exemptions for registration with the SEC are:

a. private placement exemption

b. “too big to fail” exemption

c. accredited investor exemption

d. intrastate offering exemption

e. a and c above

b and d above

16. In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of the following were considerations in determining an offering to be a private placement except:

a. there must be an arm’s length relationship between the issuer of the security and the prospective purchaser

b. the number of offerees must be limited

c. the size and the manner of the offering must not indicate widespread solicitation

d. the offerees must be sophisticated

e. some relationship between the offerees and the issuer must be present

17. Which SEC Regulation took effect in 1982 and provides the basis for “safe harbor” as a private placement?

a. Regulation A

b. Regulation B

c. Regulation C

d. Regulation D

e. Regulation E

18. Unless your security is exempted, what Section of the Securities Act of 1933 requires you to file a registration statement with the SEC?

a. Section 1

b. Section 2

c. Section 3

d. Section 4

e. Section 5

19. Which one of the following is not an exemption method for making an offering exempt from SEC registration?

a. 4(2) private offering

b. accredited investor

c. Regulation D

d. Regulation A

e. Regulation Z

20. Exemptions for private placement offerings and sales of securities in the amount of $2 million are handled under which one of the follow rules under Regulation D?

a. Rule 501

b. Rule 502

c. Rule 503

d. Rule 504

e. Rule 505

21. Which one of the following SEC registration exemptions has a financing limit in a 12-month period and permits a maximum of 35 unaccredited investors?

a. Section 4(2)

b. Reg D: Rule 504

c. Reg D: Rule 505

d. Reg D: Rule 506

e. Regulation A

22. Rule 504 of Regulation D limits the total number of investors to:

a. 35

b. 100

c. 35 unaccredited investors and any number of accredited investors

d. there is no limit on the number of accredited or unaccredited

investors

23. Offerings exempted from registration under rule 505 of Regulation D may raise up to $5 million in a:

a. 6-month period

b. 9-month period

c. 12-month period

d. 18-month period

e. 24-month period

24. Rule 506 of Regulation D is limited in terms of the number of unaccredited investors to:

a. 20

b. 25

c. 30

d. 35

e. 40

25. Which one of the following “rules” under Regulation D has a $5 million financing limit?

a. Rule 504

b. Rule 505

c. Rule 506

d. Rule 507

e. Rule 508

26. While Section 4(2) does not limit the dollar amount of an offering, the interpretation of the law has stipulated that:

a. the investors must be sophisticated

b the number of investors must be limited to 35

c. the funds must be raised within a 12-month period

d. the offering must be extended to the public, and not only investors

who have a relationship with the issuer

27. An offering that raises $2,500,000 over a 12-month period, involving 35 unaccredited investors and 5 accredited investors, might be exempt from registration under:

a. Section 4(6)

b. Regulation D: Rule 504

c. Regulation D: Rule 505

d. none of the above

28. Which one of the following is not a characteristic of Regulation A?

a. An offering is limited to $5 million

b. the number offerees or investors is limited to 35

c. the offering is a public offering

d. the securities issued can generally be freely resold

29. Of the following, which is not true about Regulation A?

a. it is shorter and simpler than the full registration

b. it does not have limitations on the number or sophistication of offerees.

c. it is a public offering rather than a private placement

d. it can generally be freely sold

e. it requires no offering statement be filed with the SEC

30. Which of the following exemptions involves a public, and not a private, offering?

a. Section 4(2)

b. Rule 501

c. Rule 505

d. Rule 506

e. Regulation A

31. Under Regulation A, which one of the following is not true?

a. issuers are allowed to test the waters prior to preparing the offering circular

b. after filing a SEC statement, the issuer can communicate with perspective investors orally, in writing, by advertising in newspapers, radio, television, or via the mail to determine investor interest

c. issuers can take commitments or funds

d. there is a formal delay of 20 calendar days before sales are made

e. if the interest level is insufficient, the issuer can drop Regulation A filing

32. The JOBS Act of 2012 provides for which of the following:

a. establishes a new business classification called “Emerging Growth Company”

b. lifts restrictions on general solicitation and advertising for Reg D 506 accredited investor offerings

c. establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet :crowd” (security crowd funding)

d. a and b above

e. a, b, and c

Note: Following are multiple-choice questions relating to materials presented in Appendix B of Chapter 8.

1. Rule 501 of Regulation D expands the categories of accredited investors. Which is not one of the categories?

a. any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million

b. any director or executive officer of the issuer of securities being sold

c. any individual whose net worth exceeds $1 million

d. any partnership

e. any trust with total assets greater the $5 million

2. Which of the following is not a condition of a Regulation D offering under Rule 502?

a. integration

b. offering

c. information

d. solicitation

e. resale

3. Which of the following are requirements of natural persons to be accredited investors under Regulation D Rule 501?

a. net worth greater than $5 million

b. total assets greater than $1 million

c. individual (single) annual income greater than $200,000

d. stock market portfolio greater than $2 million

e. all of the above

4. Rule 502 of Regulation D deals with:

a. integration

f. information

g. solicitation

h. resale

i. a and b above

e. a, b, c, and d above

5. Rule 503 dictates that for all Reg D exemptions, a Form D should be filed within how many days after the first sale of securities?

a. 1 day

b. 15 days

c. 30 days

d. six months

e. one year

6. The primary exemption from the prohibition of resale of unregistered securities (including, but not limited to, securities safely harbored in Rules 505 and 506 offerings) is:

a. Rule 111

b. Rule 122

c. Rule 133

d. Rule 144

e. Rule 147

CHAPTER 9

PROJECTING FINANCIAL STATEMENTS

True-False Questions

1. Long-term financial planning begins with a forecast of annual working capital needs.

2. In a typical venture’s life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

3. Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

4. Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

5. The weighted average of a set of possible outcomes or scenarios is known as expected values.

6. A customer-driven or “bottom-up” approach to forecasting sales is used primarily to forecast industry sales growth rates.

7. Sales forecasting accuracy is usually highest during a venture’s startup stage in its life cycle.

5. “Public or seasoned financing” typically occurs during the survival stage of a venture’s life cycle.

8. The volatility of a firm’s cash balance will steadily decreases as the firm progresses from the survival stage to the rapid-growth stage.

9. “First-round financing” usually occurs during a venture’s rapid-growth life cycle stage.

10. Sales forecasting accuracy is usually lowest during a venture’s development stage in its life cycle.

11. “Internally generated funds” is the cash produced from operating a firm over a specified time period.

12. The rate at which a firm can grow sales based on the retention of business profits is known as sustainable sales growth rate.

13. A firm’s maximum sustainable sales growth rate occurs at a retention ratio of 100%.

14. When using the beginning of period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

15. The sustainable sales growth rate is equal to ROA times the retention ratio.

16. “Financial capital needed” (FCN) is the amount of funds needed to acquire assets necessary to support a firm’s sales growth.

17. The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

18. The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

19. “Additional funds needed” (AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

20. Increases in accounts receivable and accounts payable that accompany sales increases are called “spontaneously generated funds”.

21. “Spontaneously generated funds” are increases in accounts receivable and accounts payable that accompany sales increases.

22. Increases in accounts payable and notes payable are examples of spontaneously generated funds.

23. A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed.

24. An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset accoun

25. The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.

26. The “constant-ratio forecasting method” is a variant of the “percent-of- sales forecasting method.”

27. The constant ratio forecasting method makes projections based on the assumption that certain costs and some balance sheet items are best expressed as a percentage of sales.

Multiple-Choice Questions

1. Which of the following is not a step in forecasting sales for a seasoned firm?

a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios.

b. attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm’s own past market share.

c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers.

d. take into consideration the likely impact of major operating changes within the firm on the sales forecas

e. consider the effects of changes in the firm’s debt/equity blend on the sales forecasts.

2. Which of the following statements is incorrect?

a. forecasting sales is the first step in creating projected financial

statements

b. financial forecasting tends to be more accurate for mature ventures

than for early-stage ventures

c. forecasting is relatively unimportant for early-stage ventures with

little historical financial data

d. a and b

e. a and c

3. During which round of financing is a venture typically most accurate in forecasting sales?

a. seasoned financing

b. mezzanine financing

c. first round financing

d. startup financing

e. seed financing

4. During which life cycle stage is a venture typically most accurate in forecasting sales?

a. rapid growth stage

b. startup stage

c. development stage

d. early-maturity stage

e. survival stage

5. Public or seasoned financing is generally associated with which one of the following life cycle stages:

a. development stage

b. startup stage

c. survival stage

d. rapid-growth stage

e. early-maturity stage

6. A “new” venture usually begins its sales forecast by first:

a. forecasting industry sales and expressing the venture’s sales as a percent of industry sales

b. using a “bottom-up” market-driven approach

c. extrapolating past sales

d. working with existing and potential customers

7. An “expected value” is:

a. a simple average of a set of scenarios or possible outcomes

b. a weighted average of a set of scenarios or possible outcomes

c. the highest scenario value or outcome

d. the lowest scenario value or outcome

8. Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture?

a. 47%

b. 49%

c. 51%

d. 53%

9. Which one of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy?

a. early-maturity

b. rapid-growth

c. survival

d. start-up

e. development

10. Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?

a. operating income

b. operating cash flow

c. net income

d. net cash flow

e. pre-tax income

11. Which of the following is not part of the financial forecasting process used to project financial statements?

a. forecast sales

b. forecast tax rates

c. project the income statement

d. project the balance sheet

e project the statement of cash flows

12. A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm’s sustainable growth rate is:

a. 5%

b. 18.75%

c. 6.25%

d. 4.69%

e. none of the above

13. A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?

a. 5%

b. 15%

c. 6.25%

d. 4.69%

e. none of the above

14. A sales growth rate based on the retention of profits is referred to as the:

a. real sales growth rate

b. sustainable sales growth rate

c. spontaneous sales growth rate

d. nominal sales growth rate

e. weighted average sales growth rate

15. Which one of the following ratios is not part of the “standard” return on equity (ROE) model?

a. net profit margin

b. asset turnover

c. equity multiplier

d. retention rate

16. If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is:

a. 33%

b. 40%

c. 50%

d. 67%

e. 75%

17. Use the following information to estimate a venture’s sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.

a. 50%

b. 25%

c. 20%

d. 10%

e. 5%

18. If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be:

a. 10%

b. 17.5%

c. 35%

d. 40%

e. 20.5%

19. If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:

a. 10%

b. 16%

c. 20%

d. 24%

e. 40%

20. If a venture has a return on assets (ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:

a. 10%

b. 20%

c. 30%

d. 40%

e. 50%

21. A venture’s common equity was $50,000 at the end of last year. If the venture’s common equity at the end of this year was $60,000, what was its sustainable sales growth rate?

a. 5%

b. 10%

c. 15%

d. 20%

e. 25%

22. A venture’s common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?

a. 5%

b. 10%

c. 15%

d. 20%

e. 25%

23. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.

a. 10%

b. 15%

c. 20%

d. 25%

e. 30%

24. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.

a. 10%

b. 16%

c. 20%

d. 24%

e. 30%

25. Determine a firm’s “financial policy” multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.

a. 1.00

b. 1.25

c. 1.50

d. 1.75

e. 2.00

26. Determine a firm’s “return on assets” percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.

a. 10.0%

b. 12.5%

c. 15.0%

d. 17.5%

e. 20.0%

27. The financial funds needed to acquire assets necessary to support a firm’s sales growth is called: a. spontaneously generated funds

b. additional funds needed

c. addition in retained earnings

d. financial capital needed

28. The increase in accounts payables and accruals that occur with a sales increase is called:

a. spontaneously generated funds

b. additional funds needed

c. addition in retained earnings

d. financial capital needed

29. The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:

a. spontaneously generated funds

b. additional funds needed

c. addition in retained earnings

d. financial capital needed

30. Which one of the following would increase a firm’s need for additional funds?

a. an increasing profit margin

b. a decreasing expected sales growth rate

c. an increase in accruals

d. an increasing dividend payout rate

e. a decrease in assets

31. Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?

a. $200,000

b. $600,000

c. $840,000

d. $960,000

e. $1,400,000

32. Which of the following is a forecasting method used to project financial statements?

a. percent-of-sales method

b. percent-of-expenses method

c. GNP-ratio method

d. a and b

e. a, b, and c

33. When projecting financial statements, one would first , and then proceed to :

a. project of the balance sheet, forecast sales.

b. forecast sales, project the income statement

c. forecast sales, project the balance sheet

d. forecast sales, project the statement of cash flows

CHAPTER 10

VALUING EARLY-STAGE VENTURES

True–False Questions

1. The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF).

2. The stepping stone year is the first year before the explicit forecast period.

3. The terminal or horizon value is the value of a venture at the end of its explicit forecast period.

4. The “stepping stone” year is the second year after the explicit forecast period when valuing a venture.

5. The explicit forecast period is the two to ten year period in which the venture’s financial statements are explicitly forecas

6. The maximum dividend valuation method involves explicitly forecasted dividends to provide surplus cash which is positive.

7. The easiest way to value a venture is to discount the projected maximum dividend/issue stream.

8. The pseudo dividend method treats surplus cash as a free cash flow to equity.

9. The reversion value of a venture is the present value of the venture’s terminal value.

10. A venture’s reversion value is the present value of ongoing expenses.

11. The “reversion value” is the future value of the terminal value.

12. The “terminal” value is the value of the venture at the beginning of the explicit forecast period.

13. As used in this textbook, the “terminal” value is the same as the “horizon” value.

14. Finding the present value of the horizon value produces the venture’s reversion value.

15. Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made.

16. Surplus cash is the cash remaining after required cash, all operating expenses, reinvestments, and dividends payouts are made.

17. Required cash is the amount of cash required to operate a venture through its day-to-day business.

18. Surplus cash is the amount of cash required to pay scheduled dividends for next quarter.

19. The capitalization or “cap” rate is the spread between the discount rate and the growth rate of cash flow in the terminal value period.

20. Pre-money valuation is the present value of a venture prior to a new money investmen

21. Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture’s founders.

22. “Net operating working capital” is current assets other than surplus cash less non-interest-bearing current liabilities.

23. “Equity valuation cash flow” is defined as: net sales + depreciation and amortization expense – change in net operating working capital (excluding surplus cash) – capital expenditures + net debt issues.

24. The “pseudo dividend method” (PDM) is a valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.

25. A “post-money” valuation differs from a “pre-money” valuation by the cost of financial capital.

26. Applying the “maximum dividend method” (MDM) and the “pseudo dividend method” (PDM) result in different valuation estimates.

27. The “maximum dividend method” assumes that all surplus cash will be paid out as dividends.

28. A pseudo dividend involves excess cash that does not need to be invested in a venture’s assets or operations, and may be invested elsewhere for a period of time.

29. The pseudo dividend method treats equity infusions and withdrawals in a “just in time” fashion.

30. The pseudo dividend method treats surplus cash either as stripped out while not in use or as employed outside the venture and stored in a zero NPV investmen

31. The wider the capitalization or “cap” rate (i.e., the discount rate minus the growth rate in the terminal period), the higher the terminal value.

Multiple-Choice Questions

1. The present value of the venture’s expected future cash flows is called?

a. going-concern value

b. present value

c. terminal value

d. reversion value

e. net present value

2. The value today of all future cash flows discounted to the present at the investor’s required rate of return is called?

a. going-concern value

b. present value

c. terminal value

d. reversion value

e. net present value

3. The value of the venture at the end of the explicit forecast period is called the horizon value, or what?

a. going-concern value

b. present value

c. terminal value

d. reversion value

e. net present value

4. The present value of the terminal value is called?

a. going-concern value

b. present value

c. terminal value

d. reversion value

e. net present value

5. The present value of a set of future flows plus the current undiscounted flow is called?

a. going-concern value

b. present value

c. terminal value

d. reversion value

e. net present value

6. The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.

a. cash

b. debt

c. equity

d. non-interest-bearing liabilities

e. net income

7. Equity valuation cash flow = Net income plus

a. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues

b. Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues

c. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues

d. Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues

e. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues

8. In a wildly successful first year in business that started and ended with no required cash, your firm has operating income of $989,000, net income of $637,000, current assets of $900,000, current liabilities of $659,000, net capital expenditures were $690,000, and depreciation was $460,000. The firm has never financed itself with deb What is your equity valuation cash flow?

a. $648,000

b. $900,000

c. $2,028,000

d. $166,000

9. Your firm has been in business for two years. In its first year, the firm ended with $227,000 of current assets, long-term assets of $143,000, $70,000 in surplus cash, current liabilities of $52,000, and long-term assets of $68,000. At the end of the second year, current assets were $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm’s change in net operating working capital?

a. $22,000

b. $62,000

c. $42,000

d. $244,000

e. $32,000

10. The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called?

a. maximum dividend method

b. pseudo dividend method

c. sustainable growth method

d. dividend payout method

11. The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called?

a. maximum dividend method

b. pseudo dividend method

c. sustainable growth method

d. dividend payout method

12. “Just in time” capital injections by equity investors is a reference to

a. sustainable growth

b. the present value of the terminal value

c. equity investors’ providing money only when needed

d. dividend payout

13. The maximum dividend method is

a. the cleanest for valuing assets, but creates problems valuing surplus cash

b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position

c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends

d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

14. The pseudo dividend method is

a. the cleanest for valuing assets, but creates problems valuing surplus cash

b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position

c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends

d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

15. “Required cash” is?

a. the cash needed to pay interest expense

b. a valuation method for early stage ventures

c. cash needed to cover a venture’s day-to-day operations

d. cash available to pay as a dividend

16. Most discounted cash flow valuations involve using cash flows from an:

a. historical period, an explicit forecast period, and a terminal value

b. historical period and a terminal value

c. historical period and an explicit forecast period

d. explicit forecast period and a terminal value

17. Which one of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?

a. maximum dividend method

b. pseudo dividend method

c. sustainable growth method

d. return on equity method

18. When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This “cap” rate is measured as the:

a. equity discount rate minus the perpetuity growth rate

b. equity discount rate plus the perpetuity growth rate

c. risk-free rate plus the perpetuity growth rate

d. risk-free rate minus the perpetuity growth rate

19. A venture’s going-concern value is the:

a. present value of the expected future cash flows

b. net present value of the current and expected future cash flows

c. future value of the expected cash flows

d. net future value of the current and expected cash flows

20. The purpose of the stepping stone year is?

a. to assure that there is sufficient required cash

b. to assure that future dividends are constant

c. to assure that investment flows are consistent with terminal growth rates

d. to allow for a final year of higher-than-sustainable growth

21. When estimating the terminal value of a cash flow perpetuity, which one of the following is not a component?

a. the next period’s cash flow

b. a constant discount rate

c. a constant growth rate

d. the payback period

22. Which one of the following components is not a component of the equity valuation cash flow?

a. NOPAT

b. depreciation and amortization expense

c. change in net operating working capital (without surplus cash)

d. capital expenditures

e. net debt issues

23. What is the difference between pre-money valuation and post-money valuation?

a. size of the capitalization rate

b. amount of money injected by new investors

c. revision value

d. amount of money previously contributed by founders

e. amount of money previously contributed by venture investors

24. To calculate a terminal value, one divides the next period’s cash flow by the:

a. constant discount rate plus a constant growth rate

b. constant discount rate plus a variable growth rate

c. constant discount rate minus a constant growth rate

d. constant growth rate minus constant discount rate

e. constant growth rate plus a variable discount rate

25. The MDM equity valuation method is an abbreviation for:

a. minimum dividend method

b. maximum discount method

c. maximum dividend method

d. minimum discount method

e. Montgomery design method

26. The PDM equity valuation method is an abbreviation for:

a. pseudo dividend method

b. proximate dividend method

c. pseudo discount method

d. proximate discount method

e. pre-money discount method

27. Estimate a venture’s equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.

a. $6,487

b. $5,487

c. $4,487

d. $3,787

e. $5,787

28. Estimate a venture’s terminal value based on the following information: current year’s net income = $20,000; next year’s expected cash flow = $26,000; constant future growth rate = 7%; and venture investors’ required rate of return = 20%.

a. $156,846

b. $285,714

c. $200,000

d. $150,000

e. $428,571

29. Estimate a venture’s required rate of return based on the following information: terminal value = $400,000; current year’s net income = $20,000; next year’s expected cash flow = $25,000; and a constant growth rate = 7%.

a. 6%

b. 7%

c. 8%

d. 9%

e. 10%

30. Estimate a venture’s constant growth rate (g) based on the following information: terminal value = $400,000; current year’s net income = $20,000; next year’s expected cash flow = $25,000; and a required rate of return of 20%.

a. 2%

b. 4%

c. 6%

d. 8%

e. 10%

31. Which one of the following components is not a component of the equity valuation cash flow calculation?

a. net income

b. depreciation and amortization expense

c. change in net operating working capital (without surplus cash)

d. capital expenditures

e. net equity repurchases

32. Estimate a venture’s terminal value based on the following information: current year’s net sales = $500,000; next year’s expected cash flow = $16,000; constant future growth rate = 10%; and venture investors’ required rate of return = 20%.

a. $156,846

b. $285,714

c. $200,000

d. $150,000

e. $160,000

33. Estimate a venture’s cash flow expected next year based on the following information: current year’s net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors’ required rate of return = 20%.

a. $20,000

b. $40,000

c. $50,000

d. $60,000

e. $80,000

CHAPTER 11

VENTURE CAPITAL VALUATION METHODS

True–False Questions

1. The venture capital valuation method estimates the venture’s value by projecting both intermediate and terminal/exit flows to investors.

2. Venture investors returns depend on the venture’s ability to generate cash flows or to find an acquirer for the venture.

3. The value of the venture’s equity is equal to the value the financing contributed in the first venture capital round.

4. A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.

5. The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization.

6. Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor’s not receiving an adequate number of shares to ensure the required percent ownership at the time of exi

7. Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.

8. If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture’s net worth at exit time.

9. The utopia discount process allows the venture investors to value their investment using only the business plan’s explicit forecasts, discounting it at a bank loan interest factor.

10. The internal rate of return is the simple (non-compounded) interest rate that equates the present value of the cash inflows received with the initial investmen

11. The basic venture capital method estimates a venture’s value using only terminal/exit flows to all the venture’s owners.

12. The basic venture capital method estimates a venture’s value using only terminal/exit flows to founders.

13. Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.

14. Staged financing is financing provided in sequences of rounds rather than all at one time.

15. In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to inves

16. The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.

17. The internal rate of return (IRR) is the compound rate of return that equates the present value of the cash inflows received with the initial investmen

18. The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that would be applied to the business plan cash flows.

19. All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.

20. The discount rate applied in an Expected PV approach should be the same rate across scenarios.

21. The expected present value method incorporates the present values of different scenarios, as well as their probabilities, into the valuation process.

Note: The following TF questions relate to Learning Supplements 11A and 11B:

1. The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends.

2. A price-earnings ratio is related to the level and growth of earnings.

3. The Venture Capital ShortCut (VCSC) method is a post-money version of the Delayed Dividend Approximation (DDA).

4. The VSCS and DDA methods are “just-in-time” capital methods which do not assess capital charges for idle cash.

5. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA methods will typically give lower valuations than the MDM and PDM.

6. The VSCS is like a post-money version of the DDA.

7. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a higher valuation than the DDA.

8. The DDA and VCSC methods give the same valuation.

Multiple-Choice Questions

1. The return to venture investors directly depends on which of the following?

a. venture’s ability to generate cash flows

b. ability to convince an acquirer to buy the firm

c. the amount of its short-term liabilities

d. both a and b

e. all of the above

2. To obtain the percent ownership to be sold in order to expect to provide the venture investor’s target return, one must consider the:

a. cash investment today and the cash return at exit multiplied by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV

b. cash investment today and the cash return at exit discounted by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV

c. cash investment today and the cash return at exit multiplied by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV

d. cash investment today and the cash return at exit discounted by the venture investor’s target return, then multiply today’s cash investment by the venture’s NPV

3. The value of the existing venture without the proceeds from the potential new equity issue is known as?

a. pre-money valuation

b. post money valuation

c. staged financing

d. the capitalization rate

4. The value of the existing venture plus the proceeds from the potential new equity issue is known as?

a. pre-money valuation

b. post money valuation

c. staged financing

d. the capitalization rate

5. Financing provided in sequences of rounds rather than all at one time is

known as?

a. pre-money valuation

b. post money valuation

c. staged financing

d. the capitalization rate

[Note: Use the following information for Problems 6 through 11.]

A potential investor is seeking to invest $500,000 in a venture, which currently has 1,000,000 million shares held by its founders, and is targeting a 50% return five years from now. The venture is expected to produce half a million dollars in income per year at year 5. It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.

6. What is the percent ownership of our venture that must be sold in order to provide the venture investor’s target return?

a. 33.33%

b. 75.94%

c. 12.76%

d. 15.00%

7. What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?

a. 3,156,276

b. 1,578,138

c. 4,156,276

d. 2,578,138

8. What is the issue price per share?

a. $0.1939

b. $0.1203

c. $0.3168

d. $0.1584

9. What is the pre-money valuation?

a. $120,300

b. $316,800

c. $158,400

d. $193,900

10. What is the post-money valuation?

a. $658,354

b. $499,954

c. $408,377

d. $249,977

11. What is the value of the venture in year five using direct capitalization?

a. $500,000

b. $5,000,000

c. $1,000,000

d. $100,000

12. For early stage ventures, which of the following is a strong reason for having an equity component in employee compensation?

a. the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to employees

b. as a way to motivate employees to strive for the same goal of high equity value

c. because any dividends received as part of the equity compensation reduces taxable income

d. both a and b

e. all of the above

13. During the exit period, which of the following will have last crack at the venture’s wealth?

a. banks giving loans to the venture

b. convertible debt holders of the venture

c. initial equity investors of the venture

d. participating preferred equity holders

14. Suppose your venture’s expected mean cash flows are $(85,000) initially, followed by expected mean cash flows at the end of the first, second, and third years of $40,000, $40,000, and $35,000. What is the internal rate of return?

a. 13.9%

b. 14.7%

c. 16.2%

d. 17.2%

e. 19.2%

15. A P/E multiple refers to:

a. price/expectations multiple

b. price/earnings multiple

c. profit/EBIT multiple

d. profit/earnings multiple

e. price/EBITDA multiple

16. Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and earnings per share for the target firm = $3.00.

a. $10.00

b. $20.00

c. $30.00

d. $40.00

e. $50.00

17. Estimate the value of a privately-held firm based on the following information: total market value (or capitalization value) of a comparable firm = $200,000; net income of a comparable firm = $40,000; number of shares outstanding for the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target firm = 10,000.

a. $5.00

b. $7.50

c. $10.00

d. $12.50

e. $15.00

18. Determine the market value of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of “comparable” firm = $500,000.

a. $4 million

b. $7.5 million

c. $10 million

d. $12.5 million

e. $15 million

19. Determine the net income of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of “comparable” firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm.

a. $450,000

b. $500,000

c. $550,000

d. $600,000

e. $700,000

20. Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20.00 per shares; 100,000 shares outstanding; and net income of $50,000.

a. $1.0 million

b. $1.4 million

c. $1.6 million

d. $2.0 million

21. Which of the following financing rounds dilutes the ownership founders?

a. first-round

b. second-round

c. incentive ownership round

d. a and b

e. a, b, and c

22. The utopian approach to valuation ignores which of the following venture scenarios:

a. black hole scenarios

b. living dead scenarios

c. both a and b

d. neither a or b

23. Which of the following is not a variation of the venture capital valuation method?

a. venture capital method

b. expected present value

c. utopian discount process

d. none of the above

Following are MC questions relating to Learning Supplements 11A and 11B:

1. When a firm has growth that only meets, rather than exceeds, the cost of capital, we would expect its price-earnings multiple to be approximately equal to:

a. the reciprocal of its required return on equity

b. its earnings per share

c. its book-to-market ratio

d. its debt-to-value ratio

2. The two “just-in-time” capital methods are:

a. DDA and VCSC

b. DDA and PDM

c. VSCS and MDM

d. MDM and PDM

3. For the typical venture investing project, the valuation will be highest under:

a. DDA

b. PDM and MDM

c. VCSC

d. initial book value of equity

CHAPTER 12

PROFESSIONAL VENTURE CAPITAL

True–False Questions

1. In addition to having personal financial stakes in their portfolio of investments, professional venture capitalists have raised funds from other investors to invest in the portfolio.

2. The establishment of the Small Business Administration was the first major government foray into venture investing.

3. Created by the Small Business Administration, Small Business Investment Companies possess important tax advantages and were eligible to borrow amounts up to four times their equity base from the governmen

4. Initially, Small business Investment Companies access to borrowed funds appeared attractive. This was because venture investing and debt service commitments are an ideal mixture of financing for start-ups.

5. Professional venture capital, as we know it today, did not exist before World War II.

6. Most venture investing came from wealthy individuals and families prior to World War II.

7. The beginning of professional venture capitalists began with the formation of American Research and Development in 1966.

8. In 1958 the Small Business Administration created Small Business Investment Companies.

9. The first major government foray into venture investing came with the formation of the Small Business Administration (SBA) in 1947.

10. The American Research and Development (ARD) company was formed in 1946.

11. Internet financing led the record level of venture investing in the 1999-2000 time period.

12. The phrase “two and twenty shops” refers to investment management firms having a contract that gives them two percent carried interest and 20 percent of assets annual management fee.

13. When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow.

14. The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process.

15. In the venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan.

16. The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is known as the statement of strengths and weaknesses.

17. “Carried interest” is the portion of profits paid to the professional venture capitalist as incentive compensation.

18. The term “capital call” refers to the flow of business plans and term sheets involved in the venture capital investing process.

19. Pension funds are the dominant source of funds for venture investing.

20. Individuals and families are more important suppliers of venture capital relative to finance and insurance firms.

21. Endowments and foundations are more important suppliers of venture capital relative to individuals and families.

22. “Due diligence,” in venture investing context, is the process of ascertaining the viability of a business plan.

23. When a syndicate of VCs invests in a venture, the investor in charge of organizing the due diligence process is known as the “lead investor.”

24. SLOR stands for “standard letter of recognition.”

25. SLOR stands for “standard letter of rejection.”

26. A “term sheet” is a summary of the investment terms and conditions accompanying an investment by venture capitalists.

27. Term sheets consist of the terms and conditions accompanying an investment, as stipulated by the founders of the venture.

28. Two typical issues addressed in a term sheet are valuation and the size and staging of financing.

29. Term sheets may contain demands regarding the voting rights of shares issued to venture investors.

30. Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method of returning the proceeds (less the carried interest) must be determined.

31. Annual VC investments, as indicated in Figure 12.1, reached an all-time high in the year 2000.

32. According to Figure 12.4, individuals and families were the largest supplier of venture capital in 2009.

Multiple-Choice Questions

1. The beginning of professional venture capitalists is considered to have occurred:

a. prior to World War II

b. 1946

c. 1956

d. 1966

e. after the Vietnam War

2. The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:

a. Small Business Administration

b. Small Business Investment Companies

c. American Research and Development organization

d. Professional Venture Capitalists organization

3. Which of the following was the largest source of venture capital funds in 2009 (as reported in Figure 12.4)?

a. pension funds and corporations

b. individuals and families

c. endowments and foundations

d. finance and insurance

4. Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?

a. industry type

b. venture stage

c. size of investment

d. management style

e. geographic area

5. As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except:

a. determine the general partners

b. establishing a fee structure

c. a profit sharing arrangement

d. establish its governance

e. the management team assigned to each borrower

6. All of the following are typically part of a venture fund’s typical compensation and incentive structure except:

a. some percent annual fee on invested capital

b. a percent share of any profits to the managing general partner

c. carried interest

d. salary for the general partners

7. When evaluating the prospects of a new venture, venture capital firms consider which of the following?

a. characteristics of the proposal

b. characteristics of the entrepreneur/team

c. nature of the proposed industry

d. both b and c

e. all of the above

8. When screening prospective new ventures, venture capital firms consider their own funds’ requirements. Which of the following is not one of the venture firm’s requirements relating to its own funds?

a. investor control

b. rate of return

c. size of investment

d. probable stock listing exchange for the mature venture

e. financial provisions for investors

9. When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?

a. its background and experience

b. its managerial capabilities

c. management’s stake in the firm

d. the VC firms’ ability to cash out

e. the capability to sustain an effort

10. When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry?

a. market attractiveness

b. managerial references

c. potential size

d. technology

e. threat resistance

11. Professional venture investing usually involves setting up a venture capital firm as a:

a. proprietorship

b. corporation

c. partnership

d. S corporation

12. After a new professional venture capital fund is organized, the fund managers:

a. conduct due diligence and actively invest

b. solicit investments and obtain commitments

c. arrange harvest or liquidation

d. identify prospective venture investments and then solicit investments

13. After determining the next fund’s objectives and policies, the “professional venture investing cycle’s” next step is:

a. solicit investments in new fund

b. organize the new fund

c. obtain commitments for a series of capital calls

d. conduct due diligence and actively invest

e. arrange harvest or liquidation

14. The term “carried interest” refers to:

a. interest not currently paid but which must be paid in the future by a professional venture capitalist

b. interest transported directly to a bank

c. interest owed on a loan in default

d. the portion of profits paid to the professional venture capitalist as incentive compensation

15. If an investment management firm is known to be a “two and twenty shop”, this implies that the firm:

a. receives an annual 2% fee on invested capital, and a 20% carried interest

b. receives an annual 20% fee on invested capital, and a 2% carried interest

c. receives an annual 2% fee on gross operating profits, and a 20% carried interest

d. receives an annual 20% fee on gross operating profits, and a 2% carried interest

16. A venture fund calls upon its investors to deliver their investment funds. This is known as:

a. due diligence

b. deal flow

c. a capital call

d. carried interest

e. a SLOR

17. All of the following are typical issues addressed in a term sheet except?

a. valuation

b. board structure

c. registration rights

d. management fees

e. employment contracts

18. Term sheets are usually drafted by:

a. the mangers of the venture seeking VC funding

b. the VC fund seeking to fund the venture

c. management and founders

d. it is usually done by an third party, in order to

ensure the fair treatment of both parties

19. In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:

a. the primary investor

b. the lead investor

c. a small group of secondary investors

d. the investor in charge of issuing SLORs for the syndicate

e. it is a democratic process that is shared by all investors in the group

20. A summary of the investment terms and conditions accompanying an investment is referred to as a:

a. term sheet

b. business plan

c. fund created by professional venture capitalists

d. due diligence in venture investing

e. capital call

21. When screening possible investments, a venture capital firm might issue an SLOR which stands for:

a. standard letter of rejection

b. standing letter of reconciliation

c. standard letter of reassessment

d. senior letter of reference

22. Which of the following is not one of the four likely outcomes of the venture firm’s screening process?

a. seek the lead investor position

b. seek a non-lead investor position

c. close the capital fund

d. refer the venture to more appropriate financial market participants

e. issue a standard letter of rejection

Note: The following MC questions relate to Figure 12.3 Elements of a Venture Capital Fund Placement Memorandum

1. In a Venture Capital Fund Placement Memorandum, which of the following is not a front matter declaration?

a. description of limited manner of the offering

b. targeted fund size

c. imposition of confidentiality

d. notice of lack of SEC registration

e. declaration of the highly risky nature of investment

2. In a Venture Capital Fund Placement Memorandum, which of the following is not part of the offering summary?

a. objective of formation

b. declaration of general partner

c. management fee

d. minimum capital restrictions

e. targeted fund size

3. In a Venture Capital Fund Placement Memorandum, which of the following is not part of the fund overview?

a. fund size

b. investment focus

c. fund management

d. portfolio size

e. general partners’ capital contributions

4. In a Venture Capital Fund Placement Memorandum, all of the following are part of the executive summary except?

a. special limited partners

b. general partners’ capital contributions

c. limitation of liability

d. allocation of gains and losses

e. imposition of confidentiality

5. In a Venture Capital Fund Placement Memorandum, all of the following are included in the summary of terms except?

a. indemnification

b. objective

c. liquidation

d. valuation

e. expenses

CHAPTER 13

OTHER FINANCING ALTERNATIVES

True–False Questions

1. Despite the high risk and costs of using a facilitator or up-front fee solicitor to obtain financing, many start-ups never-the-less seek them as a source of funds due to the length of time it takes to raise new funds.

2. Collateral plays an important role in determining the willingness to lend and the amount and terms of the loan, making it the most important factor in the lending process.

3. Commercial loan officers have the expertise to project new venture’s business successes, and thus are as willing to make funds available to entrepreneurs on the same basis as other businesses.

4. Because investors and commercial lenders both seek returns on the funds given to start-up firms, entrepreneurs can obtain financing as easily from either source.

5. Because of loan restrictions, obtaining funding from commercial lenders is prohibitive for entrepreneurs.

6. Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms.

7. Among start-ups, it is widely understood that bank debt (outside of Small Business Administration loans), is not a very realistic source of financing for ventures with less than two years operating results.

8. Compensation received by commercial loan officers makes them more likely to finance early-stage ventures.

9. Warrants allow lenders to buy equity at a specified price.

10. Warrants are a debt instrument frequently used by commercial banks when financing entrepreneurial ventures.

11. Credit cards issued to start-ups have proven to be an alternative source of start-up financing.

12. The returns to venture bank lenders are generated solely from interest payments made by borrowers plus the return of the loan principal.

13. Commercial banks receive a portion of their returns from warrants in addition to the receipt of interest and the repayment of the principal that was len

14. By an act of Congress, the Small Business Administration (SBA) was created for the purpose of fostering the initiation and growth of small businesses.

15. The Small Business Administration was created by an Act of Congress in 2003.

16. Microloans in the SBA credit program are intended for very small businesses with a maximum amount of $35,000 to be used for general purposes.

17. The SBA’s role in its microloan credit program is to approve the loans and guarantee up to 85% of the loan value.

18. Microloans in the SBA credit program are made by not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs).

19. The SBA’s venture capital credit program works through Community Development Financial Institutions (CDFIs).

20. The 7(a) loan traditionally has been the SBA’s primary loan program

21. SBA 7(a) loans are made usually for 1 to 3 years in amounts up to $5,000,000, require collateral, and can be used for most business purposes.

22. The SBA approves the standard 7(a) loan and guarantees up to 85% of the loan value.

23. For the 504 loan, the SBA approves and guarantees the development company’s portion of the debt but does not guaranteed the debt of the participating commercial bank.

24. Factoring is the sale of payables to a third party at a discount to their face value.

25. In a factoring arrangement, the third party makes its money by purchasing the receivables at a discount from the total amount due on the receivables.

26. With venture leasing, one component of the return to the lessor is the opportunity to take an equity interest in the venture.

27. Receivables lending is the use of receivables as collateral for an equity issue.

28. Factoring is the selling of receivables to a third party at a discount from their face value.

29. Direct public offerings have recently become a serious challenge to traditional venture capital firms.

30. The Immigration and Nationality Act (INA) of 1990 provided an opportunity for foreign nationals to obtain a “green card” through the EB-5 immigrant visas program.

31. A foreign national may seek Lawful Permanent Resident (LPR) status by investing $1 million in the U.S. that will preserve or create at least 100 jobs for U.S. workers.

Multiple-Choice Questions

1. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The ability of the entrepreneur to repay borrowed funds is known as:

a. capacity

b. capital

c. collateral

d. conditions

e. character

2. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The money the entrepreneur has invested in the business, which is an indication how much is at risk if the business should fail is known as:

a. capacity

b. capital

c. collateral

d. conditions

e. character

3. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The guarantees, or additional forms of security (such as assets), the entrepreneur can provide the lender is known as:

a. capacity

b. capital

c. collateral

d. conditions

e. character

4. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The focus on the intended purpose of the loan is known as:

a. capacity

b. capital

c. collateral

d. conditions

e. character

5. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The general impression the entrepreneur makes on the potential lender or investor is known as:

a. capacity

b. capital

c. collateral

d. conditions

e. character

6. All of the following are common loan restrictions except?

a. limits on total debt

b. limits on total equity

c. restrictions on dividends or other payments to owners and/or investors

d. restrictions on additional capital expenditures

e. performance standards on financial ratios

7. Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms. In return for providing additional debt financing, these venture banks receive in return all of the following except?

a. interest payments

b. repayment of principal

c. implementation of loan restrictions

d. tax breaks on the interest

e. right to buy equity at a specific price

8. Bank debt is not a realistic source of financing for start-ups due to all of the following reasons except?

a. a large portion of the assets are intangible and provide no collateral

b. payables either don’t yet exist or its history is inadequate

c. the start-up’s dependence on a small number of irreplaceable people is not a good match to demand deposits or other bank liabilities

d. receivables collection track record is incomplete

e. in the event of a default, it is now plausible for the bank to install a management team to help right the operations

9. A provision that allows lenders to acquire equity at a specific price is known as a(n):

a. factor

b. warrant

c. venture lease

d. equity carve-out

10. Personal credit cards have proven to be a source of financing for start-up firms for all of the following reasons except?

a. credit card debt is not based on the firm’s ability to repay, but rather the individual card holder’s ability to repay

b. teaser rates afford initial low cost borrowing

c. balance transfer at below-prime rates

d. credit card debt can create problems if the firm doesn’t generate cash flows to cover credit card payments once low introductory rates expire

11. In the context of new ventures, what does SBA stand for?

a. Standard Business Arrangement

b. Small Business Association

c. Small Business Administration

12. By an act of Congress, the Small Business Administration (SBA) was created in which one of the following years?

a. 1953

b. 1968

c. 1973

d. 1985

e. 1993

13. Which is not a duty of the Small Business Administration?

a. provide capital and credit to entrepreneurial start-ups

b. guaranteeing general business loans

c. provide equity financing for start-ups

d. help create new jobs in small businesses

e. help small firms obtain Federal contracts

14. Which of the following is not a Small Business Administration program?

a. loan guaranty programs

b. certified and preferred lender programs

c. low documentation loan programs

d. energy and conservation loan programs

e. certified financial planner funding programs

15. Which of the following is not a source of debt funding for a start-up firm?

a. accounts payable

b. vendor financing

c. factoring

d. trade notes

e. leasing

16. Venture banks seek loan returns from:

a. interest received

b. principal repayments

c. warrants being exercised

d. all of the above

e. none of the above

17. Which one of the following is not a current Small Business Administration (SBA) credit program?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

18. In which of the following credit programs does the SBA approve and guarantee a not-for-profit Certified Development Company’s portion of the debt?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

19. In which of the following credit programs does the SBA approve a loan and guarantees up to 85% of loan value?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

20. In which of the following credit programs is the SBA role in the loan one of providing a direct loan to a community organization, which reloans the funds in small amounts?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

21. In which of the following credit programs does the SBA borrow money to be lent Small Business Investment Companies (SBICs) and guarantees payment to investors?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

22. Commercial banks, credit unions, and/or financial services firms are lenders in which of the following SBA credit programs?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

23. Commercial banks, jointly with not-for-profit Certified Development Companies, are lenders in which of the following SBA credit programs?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

24. Not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs) are lenders in which of the following SBA credit programs?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

25. Small Business Investment Companies (SBICs) are lenders in which of the following SBA credit programs?

a. 7(a) loan

b. 504 loan

c. microloan

d. venture capital loan

e. credit card loan

26. Concerning factoring, all of the following are true except:

a. factors prefer business over consumer accounts

b. factoring is done at a discount to the third party purchaser

c. factoring discounts are often a function of the riskiness of the receivables

d. factoring speeds the inflow of cash to the seller of the receivables

e. receivable lending is the process of factoring

27. The use of receivables as collateral for a loan is known as:

a. capital leasing

b. warehouse financing

c. receivables lending

d. a microloan

e. venture leasing

28. Selling receivables to a third party at a discount from their face value is referred to as:

a. factoring

b. receivables lending

c. venture banking

d. vendor financing

e. mortgage lending

29. Which of the following is/are not a type of leasing arrangement?

a. factoring

b. capital lease

c. venture lease

d. mortgage lease

e. both a and d

30. Arranging for partial ownership as a component of the expected return to a lessor is known as:

a. venture leasing

b. capital leasing

c. investment leasing

d. none of the above

CHAPTER 14

SECURITY STRUCTURES AND DETERMINING ENTERPRISE VALUES

True–False Questions

1. Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds.

2. For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

3. Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date.

4. If a share of preferred stock has a $10 par value, and the stock has a 2:1 conversion ratio, then the conversion price would be $5.

5. By issuing preferred stock, and thus forfeiting bankruptcy rights from the use of debt, the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

6. A call option is the obligation to purchase a specific asset at a pre-determined price.

7. Options generally have no effect on the value of a venture capital investmen

8. For American and Bermudan embedded options, the exercise price can change over time as specified in the security agreemen

9. An American-style option is an option that can be exercised only at the expiration date

10. A European-Style Option may only be exercised on a specific date.

11. A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time.

12. An option granting the right to sell a stock at $10 when that stock currently has a market price $8 is “in the money.”

13. If a call option can be bought for $12 and the stock’s market value is $12, it’s said to be “at the money”.

14. As the underlying stock price increases in value, a put option to sell it becomes more valuable.

15. The value of a warrant can be directly derived from the value of a call option.

16. A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

17. Convertible debt is debt that converts into preferred stock.

18. An option is a right to buy or sell additional shares of stock.

19. A warrant is a type of call option.

20. An option not currently worth exercising is said to be an out of the money option.

21. Owning a put option on a stock is the same as selling a call option on that same stock.

22. The enterprise method of valuation can be executed with either an after-tax or before-tax weighted cost of capital as long as the rate is applied to the appropriate enterprise cash flows.

23. Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure (D/V).

24. The concept of an enterprise value is that it is the combined value of all of venture’s financing, typically equity plus all of the deb

25. The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.

Note: The following TF questions relate to Learning Supplements 14A and 14B:

1. An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

2. Warrant valuation (as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

3. The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share.

4. The Black and Scholes model requires the stock price as an inpu

5. The Black and Scholes model requires the inflation rate as an inpu

6. The Black and Scholes model requires an exercise price as an inpu

Multiple-Choice Questions

1. Which of the following have the least senior claim on a venture’s asset?

a. common Stock

b. preferred stock

c. convertible preferred stock

d. convertible debt

e. American-style option

2. The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called:

a. stock option

b. stock warrant

c. preemptive right

d. participating stock

e. paid-in-kind preferred stock

3. Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders?

a. paid in kind preferred stock

b. cumulative preferred stock

c. participating preferred stock

d. convertible preferred stock

e. non-cumulative preferred stock

4. Which of the following provides the option to transform preferred stock into common stock?

a. paid in kind preferred stock

b. cumulative preferred stock

c. participating preferred stock

d. convertible preferred stock

e. non-cumulative preferred stock

5. Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security?

a. paid in kind preferred stock

b. cumulative preferred stock

c. participating preferred stock

d. convertible preferred stock

e. non-cumulative preferred stock

6. Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?

a. paid in kind preferred stock

b. cumulative preferred stock

c. participating preferred stock

d. convertible preferred stock

e. non-cumulative preferred stock

7. Which of the following is never a component of a preferred stock’s security structure?

a. the right to participate in any dividends paid to common stock shareholders

b. payment of dividends in the form of additional shares of preferred stock

c. the option for the holder to convert preferred stock into common stock

d. the option for the venture to call outstanding preferred stock

e. none of the above; all of these may be included in the structure of

preferred stock

8. A round of financing where shares sell for a lower price than previous rounds is known as a:

a. down round

b. recessive round

c. reset round

d. a and c

9. Which of the following are components of common equity?

a. common stock

b. preferred stock

c. a and b

d. none of the above

10. Convertible debt has all of the following except:

a. bankruptcy rights

b. regular dividend payments

c. it can be structured to provide senior interest in specific assets

d. a tax shield due to interest expense

e. a security interest in the firms’ assets

11. Which of the following is not a type of option?

a. call option

b. put option

c. warrant

d. LBO

12. The right to buy a specified asset at a specified price on a specified date is called:

a. a forward contract

b. an American-style put option

c. an American-style call option

d. a European-style call option

e. a European style put option

13. The right to sell a specified asset at a specified price up until a specified date is called:

a. a forward contract

b. an American-style put option

c. an American-style call option

d. a European-style call option

e. a European style put option

14. An option that can be exercised at any time until its expiration is called a:

a. forward contract

b. lookback option

c. American-style option

d. European-style option

e. Bermuda-style option

15. An option that can be exercised only at its expiration date is called a:

a. forward contract

b. lookback option

c. American-Style option

d. European-Style option

e. Bermuda-Style option

16. An option that can be exercised only at a specific set of dates is called a:

a. forward contract

b. lookback option

c. American-Style option

d. European-Style option

e. Bermuda-Style option

17. Which of the following is an example of a call option which is out of the money?

a. The option to sell at $11, the stock is worth $12.

b. The option to buy at $13, the stock is worth $12.

c. The option to buy at $12, the stock is worth $12.

d. The option to sell at $13, the stock is worth $12.

e. The option to buy at $11, the stock is worth $12.

18. Which of the following is an example of a call option which is in the money?

a. The option to sell at $11, the stock is worth $12.

b. The option to buy at $13, the stock is worth $12.

c. The option to buy at $12, the stock is worth $12.

d. The option to sell at $13, the stock is worth $12.

e. The option to buy at $11, the stock is worth $12.

19. Which of the following is an example of a put option which is out of the money?

a. The option to sell at $11, the stock is worth $12.

b. The option to buy at $13, the stock is worth $12.

c. The option to buy at $12, the stock is worth $12.

d. The option to sell at $13, the stock is worth $12.

e. The option to buy at $11, the stock is worth $12.

20. Which of the following is an example of a put option which is in the money?

a. The option to sell at $11, the stock is worth $12.

b. The option to buy at $13, the stock is worth $12.

c. The option to buy at $12, the stock is worth $12.

d. The option to sell at $13, the stock is worth $12.

e. The option to buy at $11, the stock is worth $12.

21. Which of the following is an example of a put option which is at the money?

a. The option to sell at $11, the stock is worth $12.

b. The option to buy at $13, the stock is worth $12.

c. The option to sell at $12, the stock is worth $12.

d. The option to sell at $13, the stock is worth $12.

e. The option to buy at $11, the stock is worth $12

22. Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific price?

a. common stock

b. preferred stock

c. convertible debt

d. none of the above

23. To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement?

a. net sales

b. operating profit

c. (earnings before interest and taxes) × (1 - enterprise tax rate)

d. net income

e. net income times the enterprise tax rate

24. When consistent assumptions are used, we

a. get the same value for equity under the enterprise and equity methods of valuation

b. we get a higher value of equity under the equity method of valuation

c. we get a lower value of equity under the equity method of valuation

d. we get equity values that cannot be compared across the equity and enterprise methods of valuation

Note: The following MC questions relate to Learning Supplement 14B:

1. The Black and Scholes model is intended to be used to value

a. stocks

b. bonds

c. options

d. futures contracts

2. Which of the following is not an input to the Black and Scholes model?

a. earnings per share

b. stock price

c. risk free rate

d. volatility

3. N(h) in the Black and Scholes model involves the use of

a. the number of shares issued

b. the next time that a venture capitalist will invest money

c. the normal distribution cumulative density function

d. the number of times that the venture will have to raise money

CHAPTER 15

HARVESTING THE BUSINESS VENTURE INVESTMENT

True–False Questions

1. The process of exiting the privately held business venture to unlock the owners’ investment value is known as harvesting.

2. When harvesting a venture, the methodical distribution of assets directly to the owners is known as a systematic liquidation.

3. When harvesting a venture, the outright purchase of the going concern by managers, employees, or external buyers is known as going public.

4. When harvesting a venture, the two-step public equity registration and sale is known as an outright sale.

5. When an initial business plan is prepared, attention should be paid to the investors’ and founders’ desire for eventual liquidity by anticipating a harvest for the venture investors.

6. An advantage of an exit strategy that pays out the venture’s investment value over several years can make it more difficult for entrepreneurs to start a new venture because adequate capital has not been released from the existing venture.

7. When an industry is in decline, systematic liquidation is typically the most attractive harvest strategy.

8. Exit values for many mature ventures are usually determined by (1) discounted cash flow (DCF) methods or (2) relative valuation models based on some form of multiples analysis.

9. In determining a harvest value, non-monetary items such as culture, managerial succession, and employee retention are not factored in.

10. Harvesting is the process of exiting the privately held business venture to unlock the owners’ investment value.

11. Valuation methods that estimate a firm’s worth using value-related multiples of comparable firms are sometimes known as “relative value methods.”

12. The two discounted cash flow (DCF) methods covered in this text are the enterprise method and the debt funds method.

13. One method of harvesting a venture is through systematic distribution of assets directly to the owners.

14. One method of harvesting a successful venture is through systematic distribution of assets directly to lenders.

15. Other than when the venture is operating in a declining industry, it is difficult to think of cases where the disadvantages of liquidation outweigh the advantages.

16. A special type of harvesting process where the firm’s top management continues to run the firm and has a substantial equity position in the reorganized firm is known as a leveraged buyou

17. A leveraged buyout (LBO) takes place when the purchase price of a firm is financed largely with debt financial capital.

18. Ultimately for harvesting purposes, we need to decide on the venture’s value at exit and how that exit value pie will be divided up among investors.

19. An “initial public offering” is the only method used by entrepreneurs when exiting a venture.

20. A management buyout (MBO) is a special type of leveraged buyout (LBO).

21. A leveraged buyout (LBO) is a special type of management buyout (MBO).

22. ESOP stands for “employee stock ownership plan.”

23. An obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy securities is known as a red herring.

24. The sale of new shares of common stock is a secondary offering.

25. The sale of used shares of common stock is a secondary market offering.

26. Most companies choose “best efforts” agreements in order to minimize the inherent risks of going public.

27. IPO underpricing results in a direct loss to the venture’s owners.

28. While not a direct loss to a venture, underpricing can represent a significant opportunity cost to the venture’s owners.

29. A “lockup provision” prohibits insiders from selling their existing shares for a specified period of time.

30. In a typical venture’s life cycle, the rapid-growth stage involves managing ongoing operations, maintaining and adding value, and obtaining seasoned financing.

31. In a typical venture’s life cycle, the examining of exit opportunities often occur during the rapid-growth stage.

Multiple-Choice Questions

1. Which of the following is not a way to harvest a venture?

a. systematic liquidation

b. outright sale

c. chapter 11 bankruptcy

d. going public

2. When registering equity and selling it via an IPO of new shares followed by a secondary offering of existing shares, this venture harvesting process is known as:

a. systematic liquidation

b. outright sale

c. chapter 11 bankruptcy

d. going public

3. The acquisition of the venture by family members, managers, or outside buyers is a venture harvesting process known as:

a. systematic liquidation

b. outright sale

c. chapter 11 bankruptcy

d. going public

4. The distribution of the venture’s cash flows directly to the owners is a venture harvesting process known as:

a. systematic liquidation

b. outright sale

c. chapter 11 bankruptcy

d. going public

5. Which of the following is not an advantage of a systematic liquidation?

a. maintaining control throughout the harvest period

b. harvesting of the investment value can be spread out over a number of years

c. the taxation treatment of liquidation proceeds as ordinary income

d. the time, effort, and costs of finding a buyer for the venture can be avoided

6. Which of the following is not a disadvantage of a systematic liquidation?

a. the treatment and taxation of liquidation proceeds as ordinary income rather than capital gains

b. the commitment of the entrepreneur’s resources and focus on a dying venture rather than on other more lucrative ventures

c. the harvesting of the investment gets spread out over a number of years

d. the acceleration of the venture’s rate of decline as other industry participants respond to the reduction in investment

7. A venture can be harvested in which of the following ways?

a.. systematic liquidation, outright sale, going public

b. outright sale, going public, acquisition

c. going public, acquisition

d. acquisition, systematic liquidation

8. Which of the following is not a candidate for a leveraged buyout?

a. a venture with stable and adequate operating cash flows

b. a venture with a high amount of equity relative to debt

c. a venture with the ability to protect market share

d. a venture with a high debt ratio

9. Which of the following is the premium that would be applied to venture valuation due to an investor’s majority ownership of a venture?

a. proxy premium

b. control premium

c. influence premium

d. liquidity premium

e. illiquidity premium

10. Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public are known as:

a. primary offering

b. secondary offering

c. initial public offering

d. shelf offering

11. In an outright sale of a venture, the venture can be sold to:

a. family members

b. managers

c. employees

d. outside (external) buyers

e. all of the above

12. The sale of new securities is known as:

a. primary offering

b. secondary offering

c. initial public offering

d. shelf offering

13. The sale of used shares is known as:

a. primary offering

b. secondary offering

c. initial public offering

d. shelf offering

14. The NYSE participates in:

a. the sale of new securities to private investors

b. primary offerings

c. secondary offerings

d. b and c

15. In the investment banking process, which of the following is a duty of the investment bank?

a. to be the targeted investors for a firm’s securities

b. to provide banking services such as checking accounts to firms

c. to find buyers for a firm’s securities

d. both a and b

e. all of the above

16. Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders’ purchase price $.50; venture investors’ purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.

a. 100%

b. 400%

c. 600%

d. 800%

17. Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders’ purchase price $1.00; venture investors’ purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.

a. 100%

b. 400%

c. 600%

d. 900%

18. Assume that a venture is expected to have an EBITDA of $1,500,000 at the end of five years from now. If the venture’s value is expected to be $12,000,000, what “valuation multiple” was being assumed?

a. 1 time

b. 4 times

c. 8 times

d. 10 times

e. 12 times

19. A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

a. 10%

b. 20.2%

c. 25%

d. 28.8%

e. 32%

20. A venture is expected to have an exit value of $10,000,000 five years from now. If venture investors invest $1,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?

a. 10.5%

b. 20.1%

c. 24.9%

d. 28.8%

e. 32.5%

21. If venture investors invest $1,000,000 now, will receive 50% of the exit value, and expect a 20% compounded rate of return on their investment, what will be the amount of the exit value at the end of two years?

a. $1,000,000

b. $1,440,000

c. $2,880,000

d. $5,000,000

e. $5,760,000

22. If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years?

a. $1,000,000

b. $2,490,000

c. $4,980,000

d. $7,470,000

e. $9,950,000

23. If venture investors invest $6,750,000 now, will receive 32% of the exit value, and expect a 22% compounded rate of return on their investment, what is the exit value at the end of seven years?

a. $27,153,298

b. $39,931,321

c. $69,552,505

d. $84,854,057

e. $103,521,949

24. The difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm is known as:

a. IPO underpricing

b. due diligence

c. firm commitment

d. best efforts

e. underwriting spread

25. A type of agreement with an investment bank employing only marketing and distribution efforts without the actual transfer of securities ownership to the investment banking syndicate is called:

a. IPO underpricing

b. due diligence

c. firm commitment

d. best efforts

e. underwriting spread

26. An agreement with an investment bank that involves the purchase and distribution of new securities is known as:

a. IPO underpricing

b. due diligence

c. firm commitment

d. best efforts

e. underwriting spread

27. The investment banks process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent is known as:

a. IPO underpricing

b. due diligence

c. firm commitment

d. best efforts

e. underwriting spread

28. The arrangement where an underwriter has the option of selling additional shares when the issue is heavily oversubscribed is known as

a. green shoe

b. red herring

c. best efforts

d. lockup

29. Which of the following describes when a syndicate’s offering price is less than the market price immediately following the offering?

a. IPO underpricing

b. due diligence

c. firm commitment

d. best efforts

e. underwriting spread

30. In the aftermarket trading for the venture’s securities, an order that is to be executed as soon as possible at the prevailing market price is known as a:

a. put order

b. market order

c. limit order

d. stop order

31. In the aftermarket trading for the venture’s securities, an order that converts to a market order once a certain price is achieved is known as a:

a. put order

b. market order

c. limit order

d. stop order

32. An order to purchase stock that can be executed only at a specified price or better is called a:

a. market order

b. limit order

c. stop order

d. stock order

e. private order

33. Which of the following is not a type of trading order?

a. market order

b. limit order

c. stop order

d. none of the above

34. The letters IPO stand for:

a. investment pricing organization

b. initial public offering

c. institutional pricing overhead

d. immediate pricing opportunity

35. The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called:

a. a seasoned offering

b. an unseasoned offering

c. underpricing

d. an underwriting spread

e. a lockup provision

36. An initial public offering (IPO) involves:

a. sale of new securities to private investors

b. sale of used securities to the public

c. a venture’s first offering of SEC-registered securities to the public

d. all of the above

e. none of the above

37. The type of agreement with an investment bank involving the investment bank’s underwritten purchase and resale of securities is called:

a. firm commitment

b. best efforts commitment

c. due diligence

d. making a red herring disclaimer

e. a private placement

#FIN 317 Week 11 Final Exam – Strayer

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ECO 550 Final Exam Solution

Chapter 9—Applications of Cost Theory

MULTIPLE CHOICE

1. Evidence from empirical studies of short-run cost-output relationships lends support to the:

existence of a non-linear cubic total cost function

hypothesis that marginal costs first decrease, then gradually increase over the normal operating range of the firm

hypothesis that total costs increase quadratically over the ranges of output examined

hypothesis that total costs increase linearly over the range of output examined

none of the above

ANS: PTS: 1

2. The short-run cost function is:

where all inputs to the production process are variable

relevant to decisions in which one or more inputs to the production process are fixed

not relevant to optimal pricing and production output decisions

crucial in making optimal investment decisions in new production facilities

none of the above

ANS: PTS: 1

3. Theoretically, in a long-run cost function:

all inputs are fixed

all inputs are considered variable

some inputs are always fixed

capital and labor are always combined in fixed proportions

b and d

ANS: PTS: 1

4. 4. Break-even analysis usually assumes all of the following except:

a. a. in the short run, there is no distinction between variable and fixed costs.

b. b. revenue and cost curves are straight-lines throughout the analysis.

c. c. there appears to be perfect competition since the price is considered to remain the same regardless of quantity.

d. d. the straight-line cost curve implies that marginal cost is constant.

e. e. both c and d

ANS: PTS: 1

4. 5. What is another term meaning the degree of operating leverage?

a. a. The measure of the importance of fixed cost.

b. b. The operating profit elasticity.

c. c. The measure of business risk.

d. d. D.O.L.

e. e. All of the above.

ANS: PTS: 1

4. 6. In a study of banking by asset size over time, we can find which asset sizes are tending to become more prominent. The size that is becoming more predominant is presumed to be least cost. This is called:

a. a. regression to the mean analysis.

b. b. breakeven analysis.

c. c. survivorship analysis.

d. d. engineering cost analysis.

e. e. a Willie Sutton analysis.

ANS: PTS: 1

a. 7. George Webb Restaurant collects on the average $5 per customer at its breakfast & lunch diner. Its variable cost per customer averages $3, and its annual fixed cost is $40,000. If George Webb wants to make a profit of $20,000 per year at the diner, it will have to serve__________ customers per year.

b. a. 10,000 customers

c. b. 20,000 customers

d. c. 30,000 customers

e. d. 40,000 customers

f. e. 50,000 customers

ANS: PTS: 1

8. In determining the shape of the cost-output relationship only ____ depreciation is relevant.

direct

indirect

usage

time

scheduled

ANS: PTS: 1

9. Which of the following is not a limitation of the survivor technique for measuring the optimum size of firms within an industry?

since the technique does not employ actual cost data in the analysis, there is no way to assess the magnitude of the cost differentials between firms of varying size and efficiency.

the managerial and entrepreneurial aspects of the production process are not included in the analysis

because of legal factors, the long-run cost curve derived by this technique may be distorted and may not measure the cost curve postulated in economic theory

a and b

b and c

ANS: PTS: 1

10. The primary disadvantage of engineering methods for measuring cost functions is that they deal with the managerial and entrepreneurial aspects of the production process or plant.

true

false

ANS: PTS: 1

11. A linear total cost function implies that:

marginal costs are constant as output increases

average total costs are continually decreasing as output increases

a and b

none of the above

ANS: PTS: 1

12. A ____ total cost function implies that marginal costs ____ as output is increased.

linear; increase linearly

quadratic; increase linearly

cubic; increase linearly

a and b

none of the above

ANS: PTS: 1

13. A ____ total cost function implies that marginal costs ____ as output is increased.

linear; increase linearly

quadratic; are constant

cubic; increase linearly

linear; are constant

none of the above

ANS: PTS: 1

14. A ____ total cost function yields a U-shaped average total cost function.

cubic

quadratic

linear

a and b only

a, b, and c

ANS: PTS: 1

15. In the linear breakeven model, the difference between selling price per unit and variable cost per unit is referred to as:

variable margin per unit

variable cost ratio

contribution margin per unit

target margin per unit

none of the above

��ANS: PTS: 1

16. Which of the following is not an assumption of the linear breakeven model:

constant selling price per unit

decreasing variable cost per unit

fixed costs are independent of the output level

a single product (or a constant mix of products) is being produced and sold

all costs can be classified as fixed or variable

ANS: PTS: 1

17. In the linear breakeven model, the breakeven sales volume (in dollars) is equal to fixed costs divided by:

unit selling price less unit variable cost

contribution margin per unit

one minus the variable cost ratio

a and b only

a, b, and c

ANS: PTS: 1

18. The degree of operating leverage is equal to the ____ change in ____ divided by the ____ change in ____.

percentage; sales; percentage; EBIT

unit; sales; unit; EBIT

percentage; EBIT; percentage; sales

unit; EBIT; unit; sales

none of the above

ANS: PTS: 1

19. The linear breakeven model excludes ____ from the analysis.

financing costs

taxes

contribution margin

a and b only

a, b, and c

ANS: PTS: 1

20. In the linear breakeven model, the relevant range of output is that range where the linearity assumptions of the model are assumed to hold.

true

false

ANS: PTS: 1

21. In the linear breakeven model, the breakeven sales volume (in dollars) can be found by multiplying the breakeven sales volume (in units) by:

one minus the variable cost ratio

contribution margin per unit

selling price per unit

standard deviation of unit sales

none of the above

ANS: PTS: 1

22. In the linear breakeven model, a firm incurs operating losses whenever output is less than the breakeven level.

true

false

ANS: PTS: 1

PROBLEMS

1. For each of the following cost-output relationships, describe the shape (U-shape, decreasing, increasing, constant) of the average total cost and marginal cost functions (C = total cost, Q = output):

(a)

C = 42,500,000 + 2550Q

(b)

C = 8.48 + 0.65Q + .00220Q2

ANS:

PTS: 1

2. Offshore Petroleum's fixed costs are $2,500,000 and its debt repayment requirements are $1,000,000. Selling price per barrel of oil is $18 and variable costs per barrel are $10.

(a)

Determine the breakeven output (in dollars).

(b)

Determine the number of barrels of oil that offshore must produce and sell in order to earn a target (operating) profit of $1,500,000.

(c)

Determine the degree of operating leverage at an output of 400,000 barrels.

(d)

Assuming that sales of oil are normally distributed with a mean of 362,500 barrels and a standard deviation of 100,000 barrels, determine the probability that Offshore will incur an operating loss.

ANS:

PTS: 1 NOTE: Part (d) requires the use of statistical tables.

Chapter 10—Prices, Output, and Strategy: Pure and Monopolistic Competition

MULTIPLE CHOICE

1. The main difference between perfect competition and monopolistic competition is:

a. The number of sellers in the market

b. The ease of entry and exit in the industry

c. The degree of information about market price

d. The degree of product differentiation

e. Whether it is the short run or the long run

ANS: PTS: 1

2. Long distance telephone service has become a competitive market. The average cost per call is $0.05 a minute, and it’s declining. The likely reason for the declining price for long distance service is:

a. Governmental pressure to lower the price

b. Reduced demand for long distance service

c. Entry into this industry pushes prices down

d. Lower price for a barrel of crude oil

e. Increased cost of providing long distance service

ANS: PTS: 1

3. What is the profit maximization point for a firm in a purely competitive environment?

a. The output where P = MC

b. The output where P < MC

c. The output where P > MC

d. The output where MR = MC

e. The output where AVC < P

ANS: PTS: 1

4. All of the following are true for both competition and monopolistic competition in the long run, except one of them. Which is it?

a. P = MC

b. P = AC

c. Economic profits become zero in the long-run

d. The barriers to entry and exit are relatively easy

e. None of the above is an exception

ANS: PTS: 1

5. Which of the following statements is (are) true concerning a pure competition situation?

Its demand curve is represented by a vertical line.

Firms must sell at or below market price.

Marginal revenue is equal to price.

both b and c

both a and b

ANS: PTS: 1

6. In pure competition:

the optimal price-output solution occurs at the point where marginal revenue is equal to price

a firm's demand curve is represented by a horizontal line

a firm is a price-taker since the products of every producer are perfect substitutes for the products of every other producer

a and b only

a, b, and c

ANS: PTS: 1

7. In the short-run for a purely competitive market, a manufacturer will stop production when:

the total revenue is less than total costs

the contribution to fixed costs is zero or less

the price is greater than AVC

operating at a loss

a and b

ANS: PTS: 1

8. In the purely competitive case, marginal revenue (MR) is equal to:

cost

profit

price

total revenue

none of the above

ANS: PTS: 1

9. In long-run equilibrium, all firms in a pure competition market situation operating under a condition of certainty will have identical costs even though they may use different production and operation techniques.

true

false

ANS: PTS: 1

10. If price exceeds average costs under pure competition, ____ firms will enter the industry, supply will ____, and price will be driven ____.

more; decrease; down

more; decrease; up

more; increase; down

more; increase; up

none of the above

ANS: PTS: 1

11. A firm in pure competition would shut down when:

price is less than average total cost

price is less than average fixed cost

price is less than marginal cost

price is less than average variable cost

ANS: PTS: 1

12. In the long-run, firms in a monopolistically competitive industry will

earn substantial economic profits

tend to just cover costs, including normal profits

seek to increase the scale of operations

seek to reduce the scale of operations

ANS: PTS: 1

13. Uncertainty includes all of the following except ____.

unknown effects of deliberate actions

incomplete information as to the type of competitor

random disturbances

unverifiable claims

accidents due to weather hazards

ANS: PTS: 1

14. Experience goods are products or services

that the customer already knows

whose performance is highly unusual

whose quality is undetectable when purchased

not likely to cause repeat purchases

all of the above

ANS: PTS: 1

15. Buyers anticipate that the temporary warehouse seller of unbranded computer equipment will

deliver high quality products consistent with expectations

not attempt to establish any warranty enforcement mechanisms

offer several prices and qualities

produce only one quality

none of the above

ANS: PTS: 1

16. All of the following are mechanisms which reduce the adverse selection problem except ____.

warranties from established enterprises with non-redeployable assets

high interest rates

large collateral requirements

brand names and product-specific promotions and retail displays

higher prices in repeat customer transactions

ANS: PTS: 1

17. Asset specificity is largest when

value in first best use is large

value in second best use is large

customers choose their supplier at random

very valuable assets are non-redeployable

customers are loyal to a particular seller

ANS: PTS: 1

18. Under asymmetric information,

you never get what you pay for

you sometimes get cheated

you always get cheated

at best you get what you pay for

sellers make profits in excess of competitive returns

ANS: PTS: 1

19. To escape adverse selection and elicit high quality experience goods buyers can

offer price premiums to new firms in the market

seek out unbranded goods

buy from generic storefronts that have leased temporary space

secure warranties from warehouse retailers

none of the above

ANS: PTS: 1

20. The problems of asymmetric information exchange arise ultimately because

one party to the exchange possesses different information than another

one party has more information than another

one party knows nothing

one party cannot independently verify the information of another

information is scarce

ANS: PTS: 1

21. The market for "lemons" is one in which

the rational buyer discounts

the seller's product claims are unverifiable at the point of purchase

"the bad apples drive out the good"

the problem of adverse selection is rampant

all of the above

ANS: PTS: 1

22. The fraudulent delivery of low quality experience goods at high prices is more likely if

interest rates decline

information about notorious firms is speedily disseminated

price premiums for allegedly high quality increase

sellers invest in non-transferable reputation

none of the above

ANS: PTS: 1

f. 23. An "experience good" is one that:

g. a. Only an expert can use

h. b. Has undetectable quality when purchased

i. c. Can be readily experienced simply by touching or tasting

j. d. Improves with age, like a fine wine

k. e. All of the above

ANS: PTS: 1

g. 24. A "search good" is:

h. a. One that depends on how the product behaves over time

i. b. A product whose quality is only found out over time by finding how durable it is

j. c. Like a peach that can be examined for flaws

k. d. Like a used car, since it is easy to determine its inherent quality

l. e. None of the above

ANS: PTS: 1

a. 25. The price for used cars is well below the price of new cars of the same general quality. This is an example of:

b. a. The Degree of Operating Leverage

c. b. A Lemon's Market

d. c. Redeployment Assets

e. d. Cyclical Competition

f. e. The Unemployment Rate

ANS: PTS: 1

PROBLEMS

1. Sunrise Juice Company sells its output in a perfectly competitive market. The firm's total cost function is given in the following schedule:

Output

Total Cost

(Units)

($)

120

170

210

260

330

430

Total costs include a "normal" return on the time (labor services) and capital that the owner has invested in the firm. The prevailing market price is $7 per unit.

(a)

Prepare (i) marginal cost and (ii) average total cost schedules for the firm.

(b)

What is the firm's profit maximizing output level?

(c)

Is the industry in long-run equilibrium? Justify your answer.

ANS:

PTS: 1

2. Superior Metals Company has seen its sales volume decline over the last few years as the result of rising foreign imports. In order to increase sales (and hopefully, profits), the firm is considering a price reduction on luranium--a metal that it produces and sells. The firm currently sells 60,000 pounds of luranium a year at an average price of $10 per pound. Fixed costs of producing luranium are $250,000. Current variable costs per pound are $5. The firm has determined that the variable cost per pound could be reduced by $.50 if production volume could be increased by 10 percent (fixed costs would remain constant). The firm's marketing department has estimated the arc elasticity of demand for luranium to be −1.5.

(a)

How much would Superior Metals have to reduce the price of luranium in order to achieve a 10 percent increase in the quantity sold?

(b)

What would the firm's (i) total revenue, (ii) total cost, and (iii) total profit be before and after the price cut?

ANS:

PTS: 1

Chapter 11—Price and Output Determination: Monopoly and Dominant Firms

MULTIPLE CHOICE

5. 1. Unique Creations has a monopoly position in magnometers. If the marginal cost for a magnometer is $50 and the price elasticity for magnometers is -4, what is the optimal monopoly price?

Hint: P (1 +1/E) = MC.

a. $37.50

b. $41.25

c. $66.67

d. $75.00

e. $82.50

ANS: PTS: 1

2. Land’s End estimates a demand curve for turtleneck sweaters to be:

Log Q = .41 + 2.3 Log Y - 3 Log P

where Q is quantity, P is price, and Y is a measure on national income. If the marginal cost of imported turtleneck sweaters is $9.00. (Hint: P (1 +1/E) = MC). The optimal monopoly price would be:

a. P = $13.50

b. P = $26.50

c. P = $27.50

d. P = $34.50

e. P = $56.22

ANS: PTS: 1

3. Declining cost industries

l. a. have upward rising AC curves.

m. b. have upward rising demand curves.

n. c. have -shaped total costs.

o. d. have diseconomies of scale.

p. e. have marginal cost curves below their average cost curve.

ANS: PTS: 1

m. 4. A monopolist seller of Irish ceramics faces the following demand function for its product: P = 62 - 3Q. The fixed cost is $10 and the variable cost per unit is $2. What is the maximizing QUANTITY for this monopoly? Hint: MR is twice as steep as the inverse demand curve: MR = 62 – 6 Q. (Pick closest answer)

n. a. Q = 10

o. b. Q = 15

p. c. Q = 22

q. d. Q = 37

r. e. Q = 41

ANS: PTS: 1

g. 5. Globo Public Supply has $1,000,000 in assets. Its demand curve is: P = 206 - .20•Q and its total cost function is: TC = 20,000 + 6•Q where TC excludes the cost of capital. If Globo Public Supply is UNREGULATED, find Globo's optimal price.

h. a. $206

i. b. $106

j. c. $56

k. d. $6

l. e. $3

ANS: PTS: 1

a. 6. A monopolist faces the following demand curve: P = 12 - .3Q with marginal costs of $3. What is the monopolistic PRICE?

b. a. P = $5.50

c. b. P = $6.50

d. c. P = $7.50

e. d. P = $8.50

f. e. P = $9.50

g. 7.

h. 8.

i. 9.

j. 10.

k. 11.

l. 12.

ANS: PTS: 1

a. 7. In natural monopoly, AC continuously declines due to economies in distribution or in production, which tends to found in industries which face increasing returns to scale. If price were set equal to marginal cost, then:

a. price would equal average cost.

b. price would exceed average cost.

c. price would be below average cost.

d. price would be at the profit maximizing level for natural monopoly

e. all of the above

ANS: PTS: 1

8. The profit-maximizing monopolist, faced with a negative-sloping demand curve, will always produce:

at an output greater than the output where average costs are minimized

at an output short of that output where average costs are minimized

at an output equal to industry output under pure competition

a and c

none of the above

ANS: PTS: 1

9. In the case of pure monopoly:

one firm is the sole producer of a good or service which has no close substitutes

the firm's profit is maximized at the price and output combination where marginal cost equals marginal revenue

the demand curve is always elastic

a and b only

a, b, and c

ANS: PTS: 1

10. A monopoly will always produce less than a purely competitive industry, ceteris paribus.

true

false

ANS: PTS: 1

11. The demand curve facing the firm in ____ is the same as the industry demand curve.

pure competition

monopolistic competition

oligopoly

pure monopoly

none of the above

ANS: PTS: 1

12. When the cross elasticity of demand between one product and all other products is low, one is generally referring to a(n) ____ situation.

oligopoly

monopoly

pure competition

substitution

monopolistic competition

ANS: PTS: 1

14. Of the following, which is not an economic rationale for public utility regulation?

production process exhibiting increasing returns to scale

constant cost industry

avoidance of duplication of facilities

protection of consumers from price discrimination

none of the above

ANS: PTS: 1

15. The practice by telephone companies of charging lower long-distance rates at night than during the day is an example of:

inverted block pricing

second-degree price discrimination

peak-load pricing

first-degree price discrimination

none of the above

ANS: PTS: 1

16. In the electric power industry, residential customers have relatively ____ demand for electricity compared with large industrial users. But contrary to price discrimination, large industrial users generally are charged ____ rates.

similar, similar

elastic, lower

elastic, higher

inelastic, lower

inelastic, higher

ANS: PTS: 1

17. ____ as practiced by public utilities is designed to encourage greater usage and therefore spread the fixed costs of the utility's plant over a larger number of units of output.

Peak load pricing

Inverted block pricing

Block pricing

First degree price discrimination

none of the above

ANS: PTS: 1

18. Regulatory agencies engage in all of the following activities except _______.

controlling entry into the regulated industries

overseeing the quality of service provided by the firms

setting federal and state income tax rates on regulated firms

setting prices that consumers will pay

none of the above

ANS: PTS: 1

PROBLEMS

1. The Zinger Company manufactures and sells a line of sewing machines. Demand per period (Q) for a particular model is given by the following relationship:

Q = 400−.5P

where P is price. Total costs (including a "normal" return to the owners) of producing Q units per period are:

TC = 20,000 + 50Q + 3Q2

(a)

Express total profits () in terms of Q.

(b)

At what level of output are total profits maximized? What price will be charged? What are total profits at this output level?

(c)

What model of market pricing has been assumed in this problem? Justify your answer.

ANS:

PTS: 1

2. Zar Island Gas Company is the sole producer of natural gas in the remote island country of Zar. The company's operations are regulated by the State Energy Commission. The demand function for gas in Zar has been estimated as:

P = 1,000−.2Q

where Q is output (measured in units) and P is price (measured in dollars per unit). Zar Island's cost function is:

TC = 300,000 + 10Q

This total cost function does not include a "normal" return on the firm's invested capital of $4 million.

(a)

In the absence of any government price regulation, determine Zar Island's optimal (i) output level, (ii) selling price, (iii) total profits, and (iv) rate of return on its asset base.

(b)

The State Energy Commission has ordered the firm to charge a price which will provide it with no more than a 12 percent return on its total assets. Determine Zar Island's (i) output level, (ii) selling price, and (iii) total profits under this constraint.

Hint: The roots of the quadratic equation:

ANS:

PTS: 1

Chapter 12—Price and Output Determination: Oligopoly

MULTIPLE CHOICE

1. "Conscious parallelism of action" among oligopolistic firms is an example of ____.

intense rivalry

a formal collusive agreement

informal, or tacit, cooperation

a cartel

none of the above

ANS: PTS: 1

2. The kinked demand curve model was developed to help explain:

fluctuations of prices in pure competition

rigidities observed in prices in oligopolistic industries

fluctuations observed in prices in oligopolistic industries

all of the above

none of the above

ANS: PTS: 1

3. An oligopoly is characterized by:

a relatively small number of firms

either differentiated or undifferentiated products

actions of any individual firm will affect sales of other firms in the industry

a and b

a, b, and c

ANS: PTS: 1

4. Which of the following is an example of an oligopolistic market structure?

public utilities

air transport industry

liquor retailers

wheat farmers

none of the above

ANS: PTS: 1

5. In the Cournot duopoly model, each of the two firms, in determining its profit-maximizing price-output level, assumes that the other firm's ____ will not change.

price

output

marketing strategy

inventory

none of the above

ANS: PTS: 1

6. If a cartel seeks to maximize profits, the market share (or quota) for each firm should be set at a level such that the ____ of all firms is identical.

average total cost

average profit

marginal profit

marginal cost

marginal revenue

ANS: PTS: 1

7. In the absence of any legally binding enforcement mechanism, individual cartel producers may find it advantageous to cheat on the agreements and engage in secret price concessions.

true

false

ANS: PTS: 1

8. A(n) ____ is characterized by a relatively small number of firms producing a product.

monopoly

syndicate

cooperative

oligopoly

none of the above

ANS: PTS: 1

9. The distinctive characteristic of an oligopolistic market structure is that there are recognizable interdependencies among the decisions of the firms.

true

false

ANS: PTS: 1

10. Factors that affect the ability of oligopolistic firms to successfully engage in cooperation include ____.

number and size distribution of sellers

size and frequency of orders

product heterogeneity

a and b only

a, b, and c

ANS: PTS: 1

11. Effective oligopolistic collusion is more likely to occur when customer orders are small, frequent, and received on a regular basis as compared with large orders that are received infrequently at irregular intervals.

true

false

ANS: PTS: 1

12. Effective collusion generally is more difficult as the number of oligopolistic firms involved increases.

true

false

ANS: PTS: 1

13. The largest problem faced in cartel pricing agreements such as OPEC is:

detecting violations of quota barriers by cartel participants

arriving at a profit maximizing price

attracting participants in the cartel

none of the above

ANS: PTS: 1

6. 14. Some market conditions make cartels MORE likely to succeed in collusion. Which of the following will make collusion more successful?

a. The products are heterogeneous

b. The orders are small and frequent

c. The firms are all about the same size

d. Costs differ across the firms

e. Firms are geographically widely scattered

ANS: PTS: 1

15. Even ideal cartels tend to be unstable because

a. firms typically prefer competition to collusion as competition, because it leads to more profits.

b. collusion leads to lowest possible overall profits in the industry.

c. oligopolistic managers are extremely risk loving.

d. firms can benefit by secretly selling more than they promised the other firms

e. all of the above

ANS: PTS: 1

16. Suppose that in a perfectly competitive industry the equilibrium industry quantity is 10,000 units. Suppose that the monopoly output is 5,000. For a2-firm Cournot Oligopoly (N =2) known as a duopoly, what is a likely Cournot QUANTITY for the industry?

a. 3,000 units

b. 5,000 units

c. 6,667 units

d. 10,000 units

e. 15,000 units

ANS: PTS: 1

17. A cartel is a situation where firms in the industry

a. have an agreement to restrict output.

b. agree to produce identical products.

c. obey the rules of dominant firm price leadership.

d. experience the pain of a kinked demand curve.

e. have a barometric price leader

ANS: PTS: 1

q. 18. In a kinked demand market, whenever one firm decides to lower its price,

r. a. other firms will automatically follow.

s. b. none of the other firms will follow.

t. c. one half of the firms follow and one half of the firms don't follow the price cut.

u. d. other firms all decide to exit the industry

v. e. all of the other firms raise their prices.

ANS: PTS: 1

s. 19. The existence of a kinked demand curve under oligopoly conditions may result in

t. a. volatile prices

u. b. competitive pricing.

v. c. prices above the monopoly price.

w. d. an increase in the coefficient of variation of prices.

x. e. price rigidity

ANS: PTS: 1

20. Barometric price leadership exists when

a. one firm in the industry initiates a price change and the others follow it as a signal of changes in cost or demand in the industry.

b. one firm imposes its best price on the rest of the industry.

m. c. all firms agree to change prices simultaneously.

n. d. one company forms a price umbrella for all others.

o. e. the firms are all colluding.

ANS: PTS: 1

21. Some industries that have rigid prices. In those industries, we tend to

m. a. find that output is also rigid over the business cycle

n. b. find that output varies greatly over the business cycle

o. c. find the employment in these industries is quite stable over the business cycle

p. d. find that the rate of return is negative in boom times

q. e. all of the above.

ANS: PTS: 1

PROBLEMS

1. Two companies (A and B) are duopolists that produce identical products. Demand for the products is given by the following demand function:

P = 10,000−QA−QB

where QA and QB are the quantities sold by the respective firms and P is the selling price.

Total cost functions for the two companies are:

TCA = 500,000 + 200QA + .5QA2

TCB = 200,000 + 400QB + QB2

Assume that the two firms act independently as in the Cournot model (that is, each firm assumes that the other firm's output will not change). Determine the long-run equilibrium output and selling price for each firm.

ANS:

PTS: 1

2. Two companies (A and B) are duopolists that produce identical products. Demand for the products is given by the following demand function:

P = 10,000−QA−QB

where QA and QB are the quantities sold by the respective firms and P is the selling price.

Total cost functions for the two companies are:

TCA = 500,000 + 200QA + .5QA2

TCB = 200,000 + 400QB + QB2

Assume that the firms form a cartel to maximize total industry profits (sum of Firm A and Firm B profits). Determine the optimum output and selling price for each firm.

3. The Winston Tobacco Company feels that it is faced with the following segmented demand function for its cigarettes:

where Q is the number of cartons sold and P is the price per carton.

(a)

Why is such a segmented demand function likely to exist? What type of industry structure is indicated by this relationship?

(b)

Determine Winston's marginal revenue function.

(c)

Given that Winston's total cost function (including a "normal" return to the owners) is

TC1 = 80 + 2.6Q + .05Q2

determine Winston's profit maximizing price and output level.

(d)

Given that Winston's total cost function increases to

TC2 = 90 + 3.4Q + .05Q2

what is their profit maximizing price and output level?

ANS:

PTS: 1

Chapter 13—Best Practice Tactics: Game Theory

MULTIPLE CHOICE

1. In ____ 2-person, nonzero-sum games there is no communication between the participants and no way to enforce agreements.

noncooperative

cooperative

a and b

none of the above

ANS: PTS: 1

2. A strategy game is

any pricing competition among firms

a situation arising from independent decision making among economic participants

interpendent choice behavior by individuals or groups who share a common goal

none of the above

ANS: PTS: 1

3. Essential components of a game include all of the following except:

players

payoffs

actions

an information set

cooperation

ANS: PTS: 1

4. In a zero-sum game

all players receive a $0 payoff

all players can simultaneously win

the gains to the winners equal the losses of the losers

none of the above

ANS: PTS: 1

5. When airlines post prices on an electronic bulletin board at 8:00 a.m. each morning, the decision-makers are engaged in

a single play game

a sequential game

an entry decision

a simultaneous game

an infinite repetition game

ANS: PTS: 1

6. The starting point of many methods for predicting equilibrium strategy in sequential games is

designing proactive reactions to rival actions

information sets

uncertain outcomes

backwards induction based on an explicit order of play

endgame analysis

ANS: PTS: 1

7. 7. Consider the game known as the Prisoner's Dilemma. What's the dilemma?

a. By both not confessing, both get to the cooperative solution and minimize time in prison.

b. By both confessing, both get to the noncooperative solution and both serve significant time in prison.

c. As a group, they are better off cooperating by not confessing, but each player has an incentive to be first to confess in a double cross.

d. The problem is that the spies should never have been caught; they should move to Rio.

ANS: PTS: 1

8. When there is an Equilibrium (or a Nash Equilibrium), we expect that:

a. once the firm’s get there, no one will change their strategy.

b. firms will tend to select a randomized strategy.

c. neither firm will care what it does.

d. this is always a dominated strategy.

ANS: PTS: 1

9. The Prisoner’s Dilemma involves two spies who are held in separate soundproof rooms. But even if the two spies could communicate, what makes it difficult for them to achieve the cooperative solution (both not confessing)?

a. The problem is their lack of information.

b. The problem is that it is a nonzero sum game.

c. The problem is that both spies have incentives to double cross each other.

d. The problem is that all the outcomes are not particularly good for either player.

ANS: PTS: 1

w. 10. When there is no Equilibrium (or no Nash Equilibrium), we expect that:

a. the firms end up in the cooperative strategy.

b. a firm will follow a randomized strategy.

c. a firm will not care what it does.

d. a firm will very likely have a dominant strategy.

ANS: PTS: 1

11. In a game, a dominated strategy is one where:

a. It is always the best strategy

b. It is always the worst strategy

c. It is the strategy that is the best among the group of worst possible strategies.

d. Is sometimes the best and sometimes the worst strategy

ANS: PTS: 1

12. If two firms operate in a market that is characterized as being a Prisoner’s Dilemma, and the two strategies given them are to restrict output or expand output, which of the following strategy pairs would represent the cooperative solution in a duopoly for firm 1 and firm 2, and firm 1 given first in each pair?

a. a. {expand output, restrict output}

b. b. {restrict output, expand output}

c. c. {restrict output, restrict output}

d. d. {expand output, expand output}

ANS: PTS: 1

13. A key to analyzing subgame perfect equilibrium strategy in sequential games is

predictable behavior

an explicit order of play for at least some participants

information sets that are known with certainty

credible threats clearly communicated

randomness

ANS: PTS: 1

14. Credibility in threats and commitments in sequential games is based on

randomizing one's actions so they are unpredictable

explicit communications with competitors

effective scenario planning

analyzing best reply responses

none of the above

ANS: PTS: 1

15. In making promises that are not guaranteed by third parties and in imposing penalties that are not enforced by third parties, all of the following are credibility-enhancing mechanisms except

establishing a bond forfeited by violating the commitment

investing in a non-redeployable reputational asset tied to the promise or threat

interrupting the communication of negotiated compromises

offering a warranty

delivering a hostage (e.g., a patent license triggered by violating the promise)

ANS: PTS: 1

16. The difference between cooperative and non-cooperative games is

cooperative games allow side payments to support collusion

non-cooperative games encourage communication of sensitive information between arms-length competitors

cooperative games involve randomized behavior

cooperative games necessitate an explicit order of play

inconsequential except when players have contractual relationships

ANS: PTS: 1

17. An illustration of a non-credible commitment is the promise

to not increase capacity in a declining industry

to match a new entrant's discount price

to enter a profitable industry

to restrain output to the quota assigned by a cartel

to exit in the face of projected losses.

ANS: PTS: 1

18. A dominant strategy differs from a Nash equilibrium strategy in that

Nash equilibrium strategy does not assume best reply responses

dominant strategy assumes best reply responses

only Nash strategy applies to simultaneous games

one dominant strategy is sufficient to predict behavior in a multi-person game

Nash strategy is often unique

ANS: PTS: 1

19. In adopting mixed Nash equilibrium strategy, a player is attempting to

randomize his or her own behavior

make the opponent favor a course of action preferred by the first player

randomize the outcome of actions

make the opponent indifferent between one action and another

none of the above

ANS: PTS: 1

20. To trust a potential cooperator until the first defection and then never cooperate thereafter is

a dominant strategy

an irrational strategy

a grim trigger strategy

a non-cooperative finite game strategy

a subgame imperfect strategy

ANS: PTS: 1

21. Non-cooperative sequential games can incorporate all the following features except

a single decision-maker in the endgame

no communication

finite or infinite time periods

third-party enforceable agreements

an explicit order of play

ANS: PTS: 1

22. If one-time gains from defection are always less than the discounted present value of an infinite time stream of cooperative payoffs at some given discount rate, the decision-makers have escaped

the Folk Theorem

the law of large numbers

the Prisoner's dilemma

the paradox of large numbers

the strategy of recusal

ANS: PTS: 1

23. The chain store paradox of an incumbent who accommodates a finite stream of potential entrants threatening to enter sequentially numerous markets illustrates

backwards induction

the unraveling problem

subgame perfect equilibrium

best reply responses

all of the above

ANS: PTS: 1

24. Cooperation in repeated prisoner's dilemma situations seems to be enhanced by all of the following except

limited punishment schemes

clarity of conditional rewards

grim trigger strategy

provocability--i.e., credible threats of punishment

tit for tat strategy

ANS: PTS: 1

25. Credible promises and hostage mechanisms can support a continuous stream of cooperative exchanges except when

the promisor is better off fulfilling than ignoring his promise

neither party has a prior dominant strategy

the hostage can be revoked for just causes

the hostage is more valuable than any given exchange

the hostage is difficult to replace

ANS: PTS: 1

PROBLEMS

Exhibit 13-1

Consider the information below when answering the following question(s):

PIZZA SPINNERS' CHOICE

SIX

SEVEN

Harry's

$550

$750

SIX

$700

$100

Harry's

$120

$370

SEVEN

$640

$350

(Note: Payoffs in the upper right corner go to Pizza Spinners and payoffs in the lower left go to Harry's).

1. In choosing whether to deliver to six or seven neighborhoods, Pizza Spinners has to take into account not only its own costs, but also the delivery area response of its competitor Harry's Pizzeria. If the payoffs per week from delivering in six and seven neighborhoods are as displayed in the exhibit above, what will Pizza Spinner's choose and why?

ANS:

2. In choosing whether to deliver to six or seven neighborhoods, Harry's Pizzeria has to take into account not only its own costs but the delivery area response of its competitor Pizza Spinners. If the payoffs per week from delivering in six and seven neighborhoods are as displayed in Exhibit 13-1, what will Harry's Pizzeria choose and why?

ANS:

PTS: 1

3. If the city-pair route from Orlando to New Orleans is served by only two air carriers, Northwest and Delta, and if the payoffs from discounting or maintaining high prices are as below, what behavior would you predict for Delta in a one-play game and why?

DELTA'S CHOICES

MAINTAIN

DISCOUNT

Northwest's

$26,000

$32,000

MAINTAIN

$24,000

$18,000

Northwest's

$21,000

$16,000

DISCOUNT

$28,000

$12,000

ANS:

4. Retailers A and B anticipate many repetitions of the following pricing game in which they must choose between discounting or maintaining higher prices. Under what circumstances will store A resist discounting and choose MAINTAIN?

STORE A's CHOICES

MAINTAIN

DISCOUNT

STORE B

$550

$950

MAINTAIN

$700

$100

STORE B

$120

$370

DISCOUNT

$640

$350

ANS:

PTS: 1

5. Suppose a new low cost discount firm must decide in advance between introducing LARGE or SMALL capacity in a licensed cable TV market where the incumbent then will decide on a HIGH or MATCHING pricing response. If the following table describes the payoffs from various combinations of these strategies, what capacity will the new entrant choose and why?

Incumbent Profit

Entrant Profit

With LARGE Capacity

HIGH Prices

$50

$10

MATCHING Prices

$70

With SMALL Capacity

HIGH Prices

$90

MATCHING Prices

$60

ANS:

Chapter 14—Pricing Techniques and Analysis

MULTIPLE CHOICE

1. The segmenting of customers into several small groups such as household, institutional, commercial, and industrial users, and establishing a different rate schedule for each group is known as:

first-degree price discrimination

market penetration

third-degree price discrimination

second-degree price discrimination

none of the above

ANS: PTS: 1

2. Which of the statements about price discrimination is (are) false?

It must be possible to segment the market.

It must be difficult to transfer the seller's product from one market segment to another.

Public utilities practice first-degree price discrimination.

There must be differences in the elasticity of demand from one segment to another.

c and d

ANS: PTS: 1

3. Which of the following pricing policies best identifies when a product should be expanded, maintained, or discontinued?

full-cost pricing policy

target-pricing policy

marginal-pricing policy

market-share pricing policy

markup pricing policy

ANS: PTS: 1

4. Second-degree price discrimination:

is also known as block rate setting

is imperfect in the eyes of a monopolist

is regularly practiced by public utilities

is effective only in the case of services or products which are sold in easily metered units

all of the above

ANS: PTS: 1

5. In ____ price discrimination, the entire consumer surplus is captured by the producer.

first-degree

second-degree

third-degree

a and b

none of the above

ANS: PTS: 1

6. In ____ price discrimination, the monopolist charges each consumer the highest price that purchaser is willing to pay for each unit purchased (provided that this price exceeds the marginal cost of production).

first-degree

second-degree

third-degree

a and b

none of the above

ANS: PTS: 1

7. ____ is a new product pricing strategy which results in a high initial product price. This price is reduced over time as demand at the higher price is satisfied.

Prestige pricing

Price lining

Skimming

Incremental pricing

None of the above

ANS: PTS: 1

8. ____ is the price at which an intermediate good or service is transferred from the selling to the buying division within the same firm.

Incremental price

Marginal price

Full-cost price

Transfer price

none of the above

ANS: PTS: 1

9. For a monopolist that engages in price discrimination, when the price elasticity in market 1 is less (in absolute value) than in market 2, the optimal price in market 1 will exceed the optimal price in market 2.

true

false

ANS: PTS: 1

10. To maximize profits, a monopolist that engages in price discrimination must allocate output in such a way as to make identical the ____ in all markets.

ratio of price to marginal cost

ratio of marginal cost to marginal utility

ratio of price to elasticity

marginal revenue

none of the above

ANS: PTS: 1

11. Barbers give a price discount to kids. According to price discrimination, if barbers use price discrimination, this implies demand for hair cuts by kids is more elastic.

8. True

9. False

ANS: PTS: 1

12. Third-degree price discrimination exists whenever:

f. a. the seller knows exactly how much each potential customer is willing to pay and will charge accordingly.

g. b. different prices are charged by blocks of services.

h. c. the seller can separate markets by geography, income, age, etc., and charge different prices to these different groups.

i. d. the seller will bargain with buyers in each of the markets to obtain the best possible price.

ANS: PTS: 1

13. The following are possible examples of price discrimination, EXCEPT:

5. a. prices in export markets are lower than for identical products in the domestic market.

6. b. senior citizens pay lower fares on public transportation than younger people at the same time.

7. c. a product sells at a higher price at location A than at location B, because transportation costs are higher from the factory to A.

8. d. subscription prices for a professional journal are higher when bought by a library than when bought by an individual.

ANS: PTS: 1

14. Firms that have a cover charge for their customers and charge for each item they purchase as well are exhibiting

f. a. universal access price discrimination

g. b. declining block price discrimination.

h. c. mixed bundling price discrimination.

i. d. two-part price discrimination.

j. e. uniform pricing

ANS: PTS: 1

5. 15. A manufacturer produces two types of computer software, Word processing (W) and Spreadsheet (S), which is offered to two different retail outlets (#1 and #2). The following table shows the maximum price each retail outlet is willing to pay for each individual software product.

Product W Product S

Retail #1 $170 $105

Retail #2 $95 $135

What is the optimal pricing strategy that will maximize revenue for the manufacturer, given the maximum the retail outlets are willing to pay?

y. a. Bundle both products (W and S) and sell them at $230.

z. b. Price product W at $170 and Product S at $135.

aa. c. Price product W at $170 and Product S at $170.

bb. d. Price product W at $95 and Product S at $105.

cc. e. Bundle both products (W and S) and sell them at $275.

ANS: PTS: 1

16. Vacation tours to Europe invariably package visits to disparate regions: cities, mountains, and the seaside. Bundling, a type of second degree price discrimination, is most profitable when:

p. a. the preference rankings of vacationers travelling together are negatively correlated.

q. b. a preference for cities is always higher than preferences for mountain vistas.

r. c. preference rankings of vacationers travelling together are positively correlated.

s. d. preference for the seaside is always higher than preferences for city excursions.

t. e. no one wants to take a European vacation package to cities, mountains, and the seaside.

ANS:

17. The optimal mark-up is: m = -1/ (E+1). When the mark-up on cookware equals 50%, then demand elasticity (E) for cookware is:

r. a. -1

s. b. -1.5

t. c. -2

u. d. -3

ANS: PTS: 1

18. [Advanced Material] Cross functional revenue management examines capacity, pricing, and customer account management in order to maximize revenue.

Capacity Planning

Pricing Customer Account Management

If the MegaPlex Movie Theater finds that too often they have to turn customers away from their theaters at peak movie times for blockbusters creating too much slippage, cross functional revenue management suggests:

b. a. They could consider increasing the capacity of each theater to be able to seat more customers.

c. b. They could lower the price at the peak times to reduce the problem of spoilage.

d. c. They could stop showing blockbuster movies and select more critically acclaimed art films to decrease spoilage.

e. d. They could stop showing movies at night.

ANS: PTS: 1

b. 19. [Advanced Material] Restaurants try to buy just enough fish to match the expected walk-ins and reservations. If they buy a lot more fish, in the language of revenue management:

a. a. Spoilage increases

b. b. Spillage increases

c. c. Overbooking increases

ANS: PTS: 1

a. 20. [Advanced Material] If an airline company decides to buy smaller jets with fewer seats, then the problem of:

a. a. spillage and spoilage both increase.

b. b. spillage decreases, but spoilage increases.

c. c. spillage and spoilage both decrease.

d. d. spoilage decreases, but spillage increases.

ANS: PTS: 1

a. 21. [Advanced Material] If airlines found that the number of no-shows starts to increase, then its policy for optimal overbooking would tend to:

a. a. make them reduce the amount of overbooking.

b. b. cause them to increase the amount of overbooking.

c. c. let them keep the same amount of overbooking.

ANS: PTS: 1

PROBLEM

1. Consolidated Salt Company sells table salt to both retail grocery chains and commercial users (e.g., bakeries, snack food makers, etc.). The demand function for each of these markets is:

Retail grocery chains:

P1 = 180−8Q1

Commercial users:

P2 = 100−4Q2

where P1 and P2 are the prices charged and Q1 and Q2 are the quantities sold in the respective markets. Consolidated's total cost function (which includes a "normal" return to the owners) for salt is:

TC = 50 + 20(Q1 + Q2)

(a)

Determine Consolidated's total profit function.

(b)

Assuming that Consolidated is effectively able to charge different prices in the two markets, what are the profit-maximizing price and output levels for the product in the two markets? What is Consolidated's total profit under this condition?

(c)

Assuming that Consolidated is required to charge the same price in each market, what are the profit-maximizing price and output levels? What is Consolidated's total profit under this condition?

ANS:

PTS: 1

Chapter 15—Contracting, Governance, and Organizational Form

MULTIPLE CHOICE

1. Non-redeployable durable assets that are dependent upon unique complementary and perfectly redeployable assets to achieve substantial value-added will typically be organized as

an export trading company

a spot market contract

a vertically integrated firm

an on-going relational contract

a joint stock company.

ANS: PTS: 1

2. Vertical integration may be motivated by all of the following except:

Upstream market power

Economies of ever wider spans of managerial control

Technological interdependencies

Reduced search and bargaining cost

The hold-up problem.

ANS: PTS: 1

3. Contracts are distinguished from tactical alliances by which of the following characteristics:

involve sequential responses

require third-party enforcement

raise shareholder value

elicit diminished reactions from competitors

ANS: PTS: 1

4. When manufacturers and distributors establish credible commitments to one another, they often employ

vertical requirements contracts

third-party monitoring

credible threat mechanisms

non-price tactics

ANS: PTS: 1

5. Which of the following is not among the functions of contract?

to provide incentives for efficient reliance

to reduce transaction costs

to discourage the development of asymmetric information

to provide risk allocation mechanisms

ANS: PTS: 1

6. Buying electricity off the freewheeling grid at one quarter 'til the hour for delivery on the hour illustrates:

relational contracts with distributors

vertical requirements contracts

spot market transactions

variable price agreements

ANS: PTS: 1

7. When someone contracts to do a task but fails to put full effort into the performance of an agreement, yet the lack of effort is not independently verifiable, this lack of effort constitutes a

breach of contractual obligations

denial of good guarantee

loss of reputation

moral hazard

ANS: PTS: 1

8. When retail bicycle dealers advertise and perform warranty repairs but do not deliver the personal selling message that Schwinn has designed as part of the marketing plan but cannot observe at less than prohibitive cost, the manufacturer has encountered a problem of ____.

reliance relationships

uncertainty

moral hazard

creative ingenuity

insurance reliance

ANS: PTS: 1

9. Which of the following are not approaches to resolving the principal-agent problem?

ex ante incentive alignment

deferred stock options

ex post governance mechanism

straight salary contracts

monitoring by independent outside directors

ANS: PTS: 1

10. To accomplish its purpose a linear profit-sharing contract must

induce the employee to moonlight

communicate a code of conduct that will be monitored and enforced

meet either the participation or the incentive compatibility constraint

establish a separating equilibrium

not realign incentives

ANS: PTS: 1

11. Mac trucks and their dealers would likely have an organizational form of

fixed profit sharing franchise contracts

spot market recontracting

alliances

vertical integration

ANS: PTS: 1

12. Reliant assets are always all of the following except:

durable

have substantially less value in second best use

dependent on unique complementary inputs

pivotal in designing strategy

ANS: PTS: 1

13. Governance mechanisms are designed

to increase contracting costs

to resolve post-contractual opportunism

to enhance the flexibility of restrictive covenants

to replace insurance

none of the above

ANS: PTS: 1

14. When borrowers who do not intend to repay are able to hide their bad credit histories, a lender's well-intentioned borrowers should

complain to regulatory authorities

withdraw their loan applications

offer more collateral in exchange for lower interest charges

divulge still more information on their loan applications

hope for a pooling equilibrium

ANS: PTS: 1

15. Each of the following is an example of moral hazard in which people modify their behavior in an opportunistic way, often frustrating the intent of governmental or management policies. Which is NOT an example of moral hazard?

a. After a firm gets a loan from a bank to purchase inventory, the borrower instead decides to use it to invest in call options on stocks.

b. Based on motorcycle accident data, a state passes a law requiring motorcyclists to wear helmet, but then the motorcyclist wearing helmets start to drive faster and more recklessly.

c. Bank and nonbank mortgage lenders make money granting loans. But the Government through Freddie Mac and Fannie Mae decides to purchase these loans. The mortgage lenders find that they earn a fee for each mortgage that they grant and then sell to Freddie Mac or Fannie Mae. Since they never intended on holding on to the mortgage, the mortgage granters are not too particular on whether the customer can really pay it back. The lowest quality loans are sold to the Government.

d. A fellow buys a $1 million life insurance policy and then travels to Nepal to climb Mount Everest.

e. A student learns that if he or she reads the chapter and studies lecture notes, the student does better on the next test.

ANS: PTS: 1

16. Agency problems appear in many settings within a firm. All of the following are examples, except which is NOT a good example of this problem?

a. Diversified stockholders are more enthusiastic on accepting business risks than are firm managers.

b. Firm managers receive cash bonuses based on the performance of the firm.

10. Employees sometime take items from the store in which they work.

11. Lenders to firms want the managers to invest in safe projects to protect their collateral in the project but managers want to invest in projects that will make a name for them and warrant promotion.

12. Firm managers sometime want to relax on the job.

ANS: PTS: 1

PROBLEMS

1. Cooperative agreements between manufacturers and retailers concerning retail promotion and manufacturer advertising are often the key to the success of new products. Analyze the following sequential product promotion game, and then predict 1) whether the product will be updated by the manufacturer (Man), 2) whether the retail distributor (RET) will promote the product, and 3) whether the manufacturer will advertise the product. No explanation necessary.

2. In the following sequential marketing game, is a threat by the manufacturer (Man) not to advertise a newly updated product unless the retailer (RET) promotes it a credible threat?

Chapter 16—Government Regulation

MULTIPLE CHOICE

1. Patents have been defended by some on the grounds that they stimulate inventive activity. Others have argued for changes in current patent laws because:

resources are misallocated by the grant of a patent monopoly

patents may not be necessary to encourage inventive activity

the current patent monopoly period (17 years) is too short to encourage any inventive activity.

a and b only

all of the above

ANS: PTS: 1

2. The Sherman Act prohibits:

contracts in restraint of commerce

monopolization of an industry

price discrimination

a and b

a, b, and c

ANS: PTS: 1

3. The sentiment for increased deregulation in the late 1970's and early 1980's has been felt most significantly in the price regulation of

coal

grain

transportation

automobiles

electric power generation

ANS: PTS: 1

4. Which of the following public policies has (have) the effect of restricting competition?

licensing

patents

import quotas

a and b only

a, b, and c

ANS: PTS: 1

5. The concept of market structure refers to three main characteristics of buyers and sellers in a particular market. These include ____.

the degree of seller and buyer concentration in the market

the degree of actual or imagined differentiation between the products or services of competing producers

the pricing behavior of the firms

a and b

a, b, and c

ANS: PTS: 1

6. The concept of market conduct includes such things as ____.

pricing behavior of the firm or group of firms

product policy of the firm or group of firms

the degree of seller and buyer concentration in the market

a and b only

a, b, and c

ANS: PTS: 1

7. ____ yields the same results as the theory of perfect competition, but requires substantially fewer assumptions than the perfectly competitive model.

Baumol's sales maximization hypothesis

The Pareto optimality condition

The Cournot model

The theory of contestable markets

none of the above

ANS: PTS: 1

8. The lower the barriers to entry and exit, the more nearly a market structure fits the ____ market model.

monopolistic competition

perfectly contestable

oligopoly

monopoly

none of the above

ANS: PTS: 1

9. The Herfindahl-Hirschman index (also shortened to just the Herfindahl index) is a measure of ____.

market concentration

income distribution

technological progressiveness

price discrimination

none of the above

ANS: PTS: 1

10. The ____ is equal to the some of the squares of the market shares of all the firms in an industry.

market concentration ratio

Herfindahl-Hirschman index

correlation coefficient

standard deviation of concentration

none of the above

ANS: PTS: 1

11. Industry A has market shares of 50, 30, and 20. Industry B has market shares of 45, 40, and 15. Hint: HHI = (si2), where si is the market shares of the i-th firm in the industry.

The Herfindahl index for A is 100.

The Herfindahl index for A is 3,800.

The Herfindahl index for B is 3,600

The Herfindahl index for A is greater than for B.

The Herfindahl index is for B is 4,000.

ANS: PTS: 1

12. The antitrust laws regulate all of the following business decisions except ____.

collusion

mergers

monopolistic practices

price discrimination

wage levels

ANS: PTS: 1

13. ____ occurs whenever a third party receives or bears costs arising from an economic transaction in which the individual (or group) is not a direct participant.

Pecuniary benefits and costs

Externalities

Intangibles

Monopoly costs and benefits

none of the above

ANS: PTS: 1

14. The Coase Theorem works best in places that transaction costs for contracts among people is low. Often in the world of torts and externalities both parties can claim that they have rights to impose on others. One case is that of a railroad that is noisy and scares the cattle and the rancher whose cattle sometimes wander in front of moving trains causing damage to them and the train. What does the Coase say would happen?

The train should have property right to be safe from wandering cattle, and the rancher should be liable for train damage of rampaging cattle.

The rancher should have the property right to be safe from noisy trains, and the railroad should be liable for weight loss of cattle from train whistles and rumbling noise.

If transaction costs are low, the efficient activity will occur, either the rancher or railroad installing fences to protect from rampaging cattle and/or sound insulation with trees, or if it is cheaper, fewer train trips per day. The cheapest or most efficient solution will happen, regardless of who is assigned the original property right.

ANS: PTS: 1

Chapter 17—Long-Term Investment Analysis

MULTIPLE CHOICE

1. Capital expenditures:

are easily reversible

are forms of operating expenditures

Affect long-run future profitability

Involve only money, not machinery

none of the above

ANS: PTS: 1

2. Any current outlay that is expected to yield a flow of benefits beyond one year in the future is:

a capital gain

a wealth maximizing factor

a capital expenditure

a cost of capital

a dividend reinvestment

ANS: PTS: 1

3. If the acceptance of Project A makes it impossible to accept Project B, these projects are:

contingent projects

complementary projects

mutually inclusive projects

mutually exclusive projects

none of the above

ANS: PTS: 1

4. Which of the following is (are) a guideline(s) to be used in the estimation of cash flows?

cash flows should be measured on an incremental basis

cash flows should be measured on an after-tax basis

all the indirect effects of the project should be included

all of the above

none of the above

ANS: PTS: 1

5. In order to help assure that all relevant factors will be considered, the capital-expenditure selection process should include the following steps except:

generating alternative capital-investment project proposals

estimating cash flows for the project proposals

reviewing the investment projects after they have been implemented

allocate manpower to the various divisions within the firm

a and d

ANS: PTS: 1

6. Which of the following would not be classified as a capital expenditure for decision-making purposes?

purchase of a building

investment in a new milling machine

purchase of 90-day Treasury Bills

investment in a management training program

all of the above are capital expenditures

ANS: PTS: 1

7. The decision by the Municipal Transit Authority to either refurbish existing buses, buy new large buses, or to supplement the existing fleet with mini-buses is an example of:

independent projects

mutually exclusive projects

contingent projects

separable projects

none of the above

ANS: PTS: 1

8. Which of the following is (are) a basic principle(s) when estimating a project's cash flows?

cash flows should be measured on a pre-tax basis

cash flows should ignore depreciation since it is a non-cash charge

only direct effects of a project should be included in the cash flow calculations

cash flows should be measured on an incremental basis

all of the above

ANS: PTS: 1

9. Which of the following items is (are) not considered as part of the net investment calculation?

installation and shipping charges

acquisition cost of new asset

salvage value of old equipment that is being replaced

first year's net cash flow

c and d

ANS: PTS: 1

10. The relationship between NPV and IRR is such that :

both approaches always provide the same ranking of alternatives

the IRR of a project is equal to the firm's cost of capital when the NPV of a project is $0

if the NPV of a project is negative, then the IRR must be greater than the cost of capital

all of the above

none of the above

ANS: PTS: 1

11. Project post-audit reviews are rarely of practical value because capital investments are sunk, irreversible costs.

true

false

ANS: PTS: 1

12. The cost of capital can be thought of as the rate of return required by investors in the firm's securities.

true

false

ANS: PTS: 1

13. In cost of capital calculations, the flotation cost on new debt is usually ignored because the flotation cost percentage for large debt issues is relatively low.

true

false

ANS: PTS: 1

14. The cost of internal equity (retained earnings) is ____ the cost of external equity (new common stock).

greater than

equal to

less than

ANS: PTS: 1

15. The expected rate of return from a share of stock consists of:

a dividend return

capital appreciation (or depreciation)

interest

a and b only

a, b, and c

ANS: PTS: 1

16. The weights used in calculating the firm's weighted-average cost of capital are equal to the proportion of debt and equity ____.

used to finance the project

used to finance the projects undertaken last year

in the industry average capital structure

in the firm's target capital structure

none of the above

ANS: PTS: 1

17. In determining the optimal capital budget, one should choose those project's whose ____ exceeds the firm's ____ cost of capital.

internal rate of return, average

internal rate of return, marginal

internal rate of return, historic

average rate of return, marginal

none of the above

ANS: PTS: 1

18. In the constant-growth dividend valuation model, the required rate of return on common stock (i.e., cost of equity capital) can be shown to be equal to the sum of the dividend yield plus the ____.

yield-to-maturity

present value yield

risk-free rate

dividend growth rate

none of the above

ANS: PTS: 1

19. The ____ depicts the risk-return relationship in the market for all securities:

characteristic line

security market line

investment opportunity curve

marginal cost of capital schedule

none of the above

ANS: PTS: 1

20. Beta in the CAPM is ____.

one measure of the systematic risk of a stock

estimated as the slope of a regression line between an individual security's returns and returns for the market index.

useful in estimating the firm's cost of debt capital

a and b only

a, b, and c

ANS: PTS: 1

21. The effect of changes in the level of interest rates on security returns is an example of ____.

systematic risk

unsystematic risk

nondiversifiable risk

a and c only

b and c only

ANS: PTS: 1

22. The ____ method assumes that the cash flows over the life of the project are reinvested at the ____.

net present value; computed internal rate of return

internal rate of return; firm's cost of capital

net present value; firm's cost of capital

net present value; risk-free rate of return

none of the above

ANS: PTS: 1

23. All of the following except ____ are shortcomings of cost-benefit analysis.

difficulty in measuring third-party costs

difficulty in measuring third-party benefits

failure to consider the time value of benefits and costs

difficulty of accounting for program interactions

a and b

ANS: PTS: 1

24. Which of the following should not be counted in a cost-benefit analysis?

direct benefits and costs

real secondary benefits

technological secondary costs

pecuniary benefits

intangibles

ANS: PTS: 1

25. The social rate of discount is best approximated by:

the cost of government borrowing

the opportunity cost of resources taken from the private sector

3 percent

30 percent

none of the above

ANS: PTS: 1

26. In cost-effectiveness analysis, constant cost studies:

are rarely used

attempt to specify the output which may be achieved from a number of alternative programs, assuming all are funded at the same level

are useless because they fail to adequately evaluate program benefits

try to find the least expensive way of achieving a certain objective

none of the above

ANS: PTS: 1

27. Cost-benefit analysis is the public sector counterpart to ____ used in private, profit-oriented firms.

ratio analysis

break-even analysis

capital budgeting techniques

economic forecasting

none of the above

ANS: PTS: 1

28. Direct costs of a public sector investment project are generally easier to measure than the direct benefits.

true

false

ANS: PTS: 1

29. In calculating the benefit-cost ratio, social benefits and costs are discounted at the

internal rate of return

federal funds rate

Treasury Bill rate

long-term government bond rate

none of the above

ANS: PTS: 1

30. The discount rate utilized in public sector budgeting performs the functions of:

allocating funds between the public and private sectors

allocating funds between present consumption and investment (i.e., future consumption)

allocating funds between debt and equity securities

a and b only

none of the above

ANS: PTS: 1

31. In cost-benefit analysis, a low discount rate tends to favor projects with relatively ____ lives.

short

long

ANS: PTS: 1

32. The social discount rate used in cost-benefit analysis is equal to a weighted average of the Treasury Bill rate and the long-term government borrowing rate.

true

false

ANS: PTS: 1

33. Public sector investment projects are economically justifiable only when:

the discounted social benefits exceed the discounted social costs

the internal rate of return exceeds the social discount rate

the benefit-cost ratio exceeds zero

a and b only

a, b, and c

ANS: PTS: 1

34. In cost-benefit analysis, intangibles include such factors as:

quality of life considerations

changes in land values resulting from a project

aesthetic contributions

a and b only

a and c only

ANS: PTS: 1

PROBLEMS

1. RCB Corporation is considering the purchase of a machine for which the initial cash outlay will be $100,000. Predicted net cash inflows before depreciation and taxes are $25,000 per year for the next five years. The machine will be depreciated (using the straight-line method) over the 5-year period with a zero estimated salvage value at the end of the period. The corporation's marginal tax rate is 40 percent and its cost of capital is 12 percent.

(a)

Determine the annual net cash flow after depreciation and taxes for years 1-5.

(b)

Determine the internal rate of return.

(c)

Determine the net present value.

(d)

Should RCB purchase the machine? Why or why not?

NOTE: This problem requires the use of present value tables or a financial calculator.

ANS:

PTS: 1

2. The capital structure of Wildcat Wells, an independent petroleum exploration and drilling company, consists of 40 percent debt and 60 percent equity capital. Debt capital consists of a bond (which matures in 10 years) issued five years ago at an interest rate of 10 percent. Since then market interest rates have risen substantially. The firm has been advised by its investment banker that additional debt financing (bonds) could be obtained at a rate of 12 percent. In the last six years of operations, Wildcat Wells has averaged a 12 percent compound rate of growth in earnings and dividends. This rate is expected to continue for the foreseeable future. Next year's dividend is projected to be $.75 per share. The firm's stock is currently selling for $25 per share. Wildcat Wells has a 40 percent marginal income tax rate.

(a)

What is the firm's after-tax cost of debt financing?

(b)

What is the firm's after-tax cost of internal equity capital?

(c)

Assuming that Wildcat Wells plans to maintain its present capital structure, what is the firm's weighted cost of capital?

ANS:

PTS: 1

3. The production superintendent of the Holloway Company has proposed that the firm purchase a new $40,000 grinding machine for use in the plant. The machine is expected to generate $10,000 per year in pre-tax cash savings (labor and spoilage) for the next 10 years. At the end of 10 years the salvage value of the machine is estimated to be $5,000. Holloway uses straight-line depreciation and its marginal income tax rate is 40 percent. The firm's cost of capital is 12 percent.

(a)

What are the net cash inflows after depreciation and taxes for the machine in years 1-10?

(b)

What is the net present value for the machine?

(c)

What is the internal rate of return for the machine?

(d)

Would you recommend purchasing the machine? Why or why not?

NOTE: This problem requires the use of present value tables or a financial calculator.

ANS:

PTS: 1

4. Aspen Industries currently pays an annual common stock dividend of $5.00 per share. The company's dividend has grown steadily over the past 10 years at a 7 percent rate and this rate is expected to continue for the foreseeable future. The company's stock currently sells for $70 per share. The company can issue new common stock at a net price of $65 per share.

(a)

Determine the firm's cost of internal equity capital using the dividend capitalization (constant-growth) model.

(b)

Determine the firm's cost of external equity capital using the dividend capitalization (constant-growth) model.

ANS:

PTS: 1

5. Piedmont Power Company's common stock has a beta, ß, estimated to be .85. The risk-free rate is 8 percent and the expected market return is 14 percent. Compute Peidmont's cost of equity capital.

PTS: 1

6. The Jackson Company has the following capital expenditure projects available for possible investment next year:

Investment

Internal

Project

(Million)

Rate of Return

$10

22%

The company has developed the following costs of various increments of capital needed to finance its capital budget for next year:

Amount of

Capital Raised

Cost of

(Million)

Capital

Up to $50

11.0

$50-$125

12.5

Over $125

14.5

Determine the optimal capital budget for the company.

ANS:

7. The Ministry of Recreation has decided to consider a proposal to build a new regional park. A piece of land is available which can be purchased, after condemnation proceedings, for $1,000,000. A private developer has offered the owner of the land $2 million. The value of direct recreational benefits from the park is estimated at $175,000 per year for 25 years. In addition, indirect benefits of $12,500 per year for 25 years have been projected. Increased values in land surrounding the project will provide immediate, one-time pecuniary benefits to the land-owners of $1,000,000.

The direct cost to operate and maintain the park is estimated at $50,000 per year. The Ministry believes a 10% discount rate is appropriate to evaluate projects of this sort. Should the park be built? Justify your answer using cost benefit analysis.

ANS:

#ECO 550 Final Exam – Strayer New

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ECO 450 Week 11 Final Exam – Strayer

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Chapters 8 Through 18

ECO 450 Week 6 Quiz

Chapter 8

Social Security and Social Insurance

True/False Questions

1. The Social Security pension system is a fully funded retirement plan.

2. Social Security pension benefits are transfers from workers to retirees.

3. Social Security pensions are financed by voluntary contributions by workers.

4. The gross replacement rate measures the ratio of taxes paid per year by workers to their annual Social Security pension when they retire.

5. In the year prior to retirement, a worker earned $20,000 and paid $5,000 in taxes on those earnings. His annual Social Security pension is $10,000 per year. Then it follows that his net replacement rate is 50 percent.

6. The gross replacement rate for Social Security pensions is the same for all workers independent of their preretirement earnings.

7. The annual growth in wages subject to Social Security taxes is 3 percent. Given the payroll tax rate, the growth in funds available to pay pension benefits is also 3 percent.

8. The asset-substitution effect of Social Security pensions discourages saving.

9. The availability of Social Security pensions to workers over normal retirement age results in an income effect unfavorable to work but no substitution effect.

10. The bequest effect of Social Security encourages workers to save less.

11. The normal retirement age for Social Security old-age pensions is 67 for people born in the United States in 1960 or later.

12. Workers in the United States can retire under Social Security at age 62 with lower pensions than they would receive at their normal retirement age.

13. As of 2009, retired workers between the ages of 62 and their normal retirement age were subject to an “earnings test” that reduced their pension by $1 for each $2 of earnings after a certain minimum level of earnings.

14. Reducing the replacement rate will have no effect on the tax rate necessary to finance pensions under a pay-as-you-go, tax-financed pension system.

15. Workers who quit their jobs are eligible for unemployment insurance benefits in the United States.

16. By 2050, the expected percentage of the U.S. population that is considered elderly will be less than 20%.

17. Social Security was created in 1965.

18. On average, the elderly are less likely to be poor when compared to the rest of the U.S. population.

Multiple Choice Questions

1. The Social Security retirement system:

a. is a fully funded pension system.

b. is a tax-financed system that pays benefits from taxes that are invested to return principal and interest to workers when they retire.

c. is a tax-financed retirement system that finances pensions by taxing workers each year and transferring the bulk of revenues obtained directly to retirees.

d. does not use taxes on workers to pay pensions to retirees.

2. The gross replacement rate:

a. measures a worker’s monthly retirement benefit divided by monthly earnings before taxes in the year prior to retirement.

b. measures a worker’s monthly retirement benefit divided by monthly earnings after taxes in the year prior to retirement.

c. is an increasing function of gross monthly earnings prior to retirement.

d. is independent of gross monthly earnings prior to retirement.

3. A worker earns $2,000 per month before taxes. He pays $140 per month payroll tax on those wages.In addition, the income taxes on those wages are $360 per month. On retirement, the worker receives a Social Security pension of $750 per month. Which of the following statements is true?

a. The worker’s gross replacement rate is 50 percent.

b. The worker’s net replacement rate is 50 percent.

c. The worker’s net replacement rate is 38 percent.

d. The worker’s net replacement rate is 75 percent.

4. The growth in hourly wages over the past 50 years has averaged about 2 percent per year. However, the growth in Social Security pensions has far exceeded this 2-percent rate. The growth in tax revenue to finance Social Security benefits in excess of 2 percent per year can be accounted for by:

a. increases in payroll tax rates.

b. use of other taxes beside the payroll tax to pay Social Security benefits.

c. an increase in the number of workers paying Social Security taxes.

d. either (a) or (b)

e. either (a) or (c)

5. Given the structure and level of gross replacement rates and the expected future growth of labor earnings subject to the payroll tax, the tax rates used to tax payrolls were increased in the 1980s because:

a. the number of retirees per worker will increase.

b. the number of retirees per worker will decrease.

c. wages are expected to decline.

d. the size of the work force is expected to increase.

6. Which of the following is likely to increase the net federal debt as a share of GDP?

a. a federal budget surplus.

b. a federal budget deficit.

c. a recession.

d. either b or c.

7. The asset-substitution effect of the Social Security retirement system leads all workers to:

a. save more for retirement.

b. save less for retirement.

c. save absolutely nothing for retirement.

d. work more

8. Which of the following is a consequence of a growing federal budget deficit in the United States?

a. A decrease in the federal debt outstanding.

b. An increase in the federal debt outstanding.

c. A decrease in the portion share of federal government expenditures that must be allocated to interest in the future.

d. An increase in national saving.

9. The induced-retirement effect of the Social Security pension system induces workers to:

a. save less for retirement.

b. save more for retirement.

c. reduce savings for retirement to zero.

d. work more after retirement.

10. Unemployment insurance benefits are:

a. financed by payroll taxes levied on workers.

b. financed by payroll taxes levied on employers.

c. both (a) and (b)

d. financed by sales taxes.

11. Which of the following is true about the Social Security pension system in the United States?

a. Pensions received by retired workers are based entirely on their contributions to the Social Security pension trust fund and the investment return on that fund.

b. Pensions received by married retirees with dependents are greater than that received by those without dependents.

c. Gross replacement rates are inversely related to preretirement earnings.

d. both (b) and (c)

12. Which of the following can decrease tax rates necessary to pay pensions for a pay-as-you-go pension system?

a. an increase in replacement rates

b. a decrease in the retirement age

c. an increase in the size of the work force

d. an increase in the number of retirees

13. Unless legislation is introduced to change the normal retirement age, people born in 1960 or later will be able to retire with full Social Security benefits at age:

a. 62.

b. 65.

c. 66.

d. 67.

14. The earnings test for retirees:

a. increases their incentive to work.

b. is applied to all retirees.

c. is applied only to retirees below normal retirement age.

d. reduces pension benefits by $1 for each $2 of earnings.

e. both (c) and (d)

15. A nation has 40 million current retirees and a work force of 100 million. Which of the following is true?

a. The replacement rate is 40 percent.

b. The replacement is 2.5.

c. The dependency ratio is 0.4.

d. The dependency ratio is 2.5.

16. Social Security tax rates can be reduced if:

a. taxable wages decline.

b. the retirement age is lowered.

c. the retirement age is raised.

d. the work force decreases in size.

17. A retiree subject to the earnings test under Social Security:

a. can earn as much as he or she chooses without losing Social Security pension benefits.

b. has his or her Social Security pension benefits reduced by one dollar for each dollar of labor earnings.

c. has his or her Social Security pension benefits reduced immediately by one dollar for each three dollars of labor earnings.

d. has his or her Social Security pension benefits reduced by one dollar for each two dollars of earnings after a certain minimum amount per year.

18. A pay-as-you-go social security retirement system is:

a. exemplified by the current U.S. social security system.

b. exemplified by the current Chilean social security system.

c. designed to have retirees set aside a contribution specifically for themselves during their earlier working life.

d. both (a) and (b).

19. Approximately, what percentage of beneficiaries of U.S. Social Security are retired workers?

a. 50%

b. 60%

c. 70%

d. 80%

20. The Social Security Act was implemented in the United States in:

a. 1927.

b. 1935.

c. 1947.

d. 1965.

Chapter 9

Government and Health Care

True/False Questions

1. In the United States the government pays the health bills of 90 percent of the population.

2. The American system of health care is financed by a mix of private and government insurance programs that pay over 80 percent of the health care bills for U.S. citizens.

3. Spending per person on health care in the United States is less than in the United Kingdom where national health insurance finances health expenditures.

4. Government spending on health care is declining as a percent of total government spending.

5. Medicare is a government program of health insurance for the elderly.

6. Exclusion of employer-provided health insurance to employees is an indirect subsidy to private provision of health insurance.

7. Third-party payments for health care services increase the quantity of health care demanded by reducing out-of-pocket costs to patients.

8. An increase in coinsurance and deductibles for health insurance can contribute to a reduction in expenditures on health care.

9. Half of Americans do not have health insurance coverage.

10. Under national health insurance in Great Britain, the price system is used to ration health care.

11. Approximately 16 percent of GDP was allocated to provision of health care in the United States as of 2006.

12. Individuals in the United States, on average, pay 50 percent of their health care costs out-of-pocket, and the remaining 50 percent is paid by insurance, governments, and charity.

13. Asymmetric information in the market for health care occurs when sellers of medical care are better informed about cost and quality of care than buyers.

14. Because of third-party payment for services in the market for health care, the price paid by buyers is less than the payment sellers receive, and the marginal social cost of health care exceeds its marginal social benefit.

15. Medicaid costs are paid entirely by the federal government.

16. Healthcare expenditures in the U.S. are projected to be 20% of GDP by 2017.

17. Asymmetric information can occur when the provider of a service is better informed than the consumer of the service.

18. A risk averse individual prefers to pay certain modest costs in exchange for possible unforeseen high costs.

Multiple Choice Questions

1. Most of the medical bills of Americans in the United States are paid by:

a. the patients.

b. private and government health insurance.

c. charities.

d. Medicaid.

2. Since 1960, expenditures on health care as a percent of GDP has:

a. been cut in half.

b. nearly tripled.

c. remained the same.

d. doubled.

3. The government program that provides the health insurance to the poor in the United States is called:

a. national health insurance.

b. Medicare.

c. Medicaid.

d. employer-provided health insurance.

4. Which of the following programs accounts for the greatest amount of government expenditures on public health in the United States?

a. Medicare

b. worker’s compensation

c. the Public Health Service

d. medical research

5. Which of the following subsidizes private provision of health insurance?

a. Medicare

b. Medicaid

c. the Public Health Service

d. tax exclusion of the value of employer-provided health insurance to workers

6. Which of the following could help decrease the rate of increase of spending on health care in the United States?

a. a reduction in the deductibles on private health insurance policies

b. an increase in the coinsurance rate on health insurance and subjecting a larger volume of services to coinsurance

c. extension of Medicaid insurance to all persons who are poor

d. a reduction in the coinsurance rate on health insurance and subjecting a smaller volume of services to coinsurance

7. Which of the following is an example of the “moral hazard of health insurance”?

a. an increase in the number of surgeries prescribed for benign prostate disease beyond the point at which the marginal benefit equals the marginal cost

b. a decreased willingness of individuals to go to the doctor for minor ailments because of increases in coinsurance rates

c. an underallocation of resources to medical care because of monopoly power of hospitals

d. experience rating of health insurance groups by health insurers

8. A third-party payment system for health care:

a. results because of externalities in the production of health care services.

b. encourages more than the efficient amount of resources to be allocated to health care.

c. encourages patients and health care providers to economize on the use of health care resources.

d. means that patients pay the full price for health care services they consume.

9. Which of the following services is typically not covered under private health insurance and Medicare in the United States?

a. treatment for heart attack

b. surgery

c. office visits to physicians

d. long-term care services

10. Under national health insurance as operated in Great Britain,

a. the British system pays fees equal to half of the costs of services provided to them.

b. general practice physicians are paid on a per-patient rather than on a per-unit-of-service basis.

c. patients requiring surgery can pick their surgeons and can usually obtain the surgery in a matter of days, even if it is not an emergency.

d. there are no government limits on health care spending by hospitals.

11. Which of the following is true about the Medicaid program in the United States?

a. It is a program of health insurance for the elderly.

b. Its costs are paid entirely by the federal government.

c. It is a program of health insurance for the poor.

d. Its costs have been declining in recent years.

12. In the United States, individuals pay approximately what percent of the cost of their medical care directly to providers?

a. 100 percent

b. 50 percent

c. 15 percent

d. zero

13. The percent of total health care costs in the United States paid for by governments is approximately:

a. 90 percent.

b. 45 percent.

c. 25 percent.

d. 10 percent.

14. The system of third-party payment for medical care in the United States has which of the following effects in the market for health care?

a. It improves efficiency in the market.

b. It causes the marginal social benefit of health care to exceed its marginal social cost.

c. It causes the marginal social cost of health care to exceed its marginal social benefit.

d. It results in less than the efficient quantity of health care services.

15. Which of the following is true about the Medicare program in the United States?

a. It is only available to those who pass a means test.

b. It is available to all citizens over the age of 65.

c. The costs are completely financed by fees paid by insurees.

d. It places no limits on reimbursement to medical care providers.

16. What would be the effect of having no health insurance available?

a. The quantity of healthcare would be set at where the marginal benefit and marginal cost are equal.

b. Excess demand for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit exceeds the marginal cost.

c. Excess supply for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit would be below the marginal cost.

d. the quantity of healthcare would be at an inefficient level.

17. The elderly are what proportion of beneficiaries of Medicare?

a. 95%

b. 85%

c. 77%

d. 70%

18. What is the moral hazard associated with third party payment for health services?

a. The recipient of the service is not as informed as the provider of the service.

b. The recipient of services tends to decline more services than they should.

c. The recipient of services tends to have more services than what is needed relative to the efficient level of services.

d. There is no moral hazard.

19. Which is not reason for excalating healthcare costs in the U.S.?

a. Increase in malpractice insurance.

b. Cross-subsidization of patients who cannot pay for healthcare or insurance.

c. Overuse of new technology.

d. Both (b) and (c).

20. If the quantity of healthcare is more than the efficient quantity, what is the consequence?

a. Some will not have access to healthcare that would have access at the efficient level.

b. The healthcare will suffer in quality.

c. Capital could be more efficiently spent elsewhere leading to less overall productivity.

d. Lower marginal costs and marginal benefits.

ECO 450 Week 7 Quiz

Chapter 10

Introduction to Government Finance

True/False Questions

1. Taxes simultaneously ration and finance government goods and services.

2. The federal government finances only half of its expenditures with taxes.

3. The benefit principle argues that the means of financing government goods and services should be linked to the benefits received from those goods and services.

4. Horizontal equity is achieved when individuals of the same economic capacity pay the same amount of taxes over a given period.

5. A flat-rate income tax is a proportional tax on an income base.

6. The marginal tax rate will eventually exceed the average tax rate if the tax rate structure is proportional.

7. The marginal tax rate for a payroll tax is 7 percent on all wages up to $60,000 per year. The marginal tax rate for wages in excess of $60,000 per year is zero. The payroll tax is therefore a regressive tax.

8. Tax evasion would be less of a problem if tax rates were lowered.

9. The user charge for a congestible public good should be zero at all times.

10. Zero prices for price-excludable government services provide benefits only to the poor.

11. The gasoline tax is an example of a general tax on consumption.

12. For a proportional tax, the marginal tax rate is always equal to the average tax rate.

13. Tax avoidance is an illegal activity in the United States.

14. An increase in marginal tax rates is likely to increase tax evasion.

15. Most studies indicate that state-run lotteries are equivalent to a progressive tax on gambling.

16. Government activity requires the reallocation of resources from government to private use.

17. A flat income tax (i.e. a fixed amount paid by every taxpayer) is an example of a selective tax.

18. The average tax rate and marginal tax rate are the same under a progressive tax rate structure.

Multiple Choice Questions

1. According to the benefit principle,

a. taxes should be distributed according to ability to pay.

b. user charges are an ideal source of finance for government goods and services.

c. the progressive income tax represents the ideal way of distributing taxes among citizens.

d. flat-rate taxes are always the best kind.

2. If horizontal equity is achieved in taxation,

a. vertical equity will also be achieved.

b. individuals of equal economic capacity will pay equal taxes.

c. a flat-rate tax will be used.

d. the tax system will not result in losses in efficiency in markets.

3. The tax base of a payroll tax is:

a. consumer expenditures.

b. interest income.

c. labor income.

d. both (b) and (c)

4. A 5-percent retail sales tax on all consumer purchases in a state is imposed. The sales tax is:

a. a flat-rate tax.

b. a tax with a regressive rate structure.

c. levied on an income base.

d. all of the above

5. A tax on the value of real estate holdings is a:

a. selective tax on wealth.

b. general tax on wealth.

c. general tax on income.

d. selective tax on income.

6. An excise tax is a:

a. general consumption tax.

b. selective consumption tax.

c. general wealth tax.

d. selective tax on wealth.

7. A proportional income tax has an average tax rate that:

a. always is less than the marginal tax rate.

b. always exceeds the marginal tax rate.

c. equals the marginal tax rate at first and then becomes less than the marginal tax rate.

d. always equals the marginal tax rate.

8. A payroll tax taxes a worker’s wages at 14 percent until the worker earns $60,000 per year. All labor earnings in excess of $60,000 are not subject to tax. The tax rate structure of the payroll tax is therefore:

a. proportional.

b. progressive.

c. regressive.

d. flat-rate.

9. A bridge becomes congested after 100 vehicles per hour use it on any day. To achieve efficiency, a toll:

a. that charges all users of the bridge, no matter how many vehicles use it per hour, should be imposed.

b. on additional users in excess of 100 per hour should be imposed.

c. on all users should be imposed, if more than 100 users per hour are expected.

d. is not required.

10. A government prints money to finance its expenditures. As a result,

a. the economy can operate at a point outside its production possibility curve.

b. inflation will occur.

c. consumers will give up private goods to finance the increased government expenditures.

d. both (b) and (c)

11. Taxes are likely to affect:

a. market equilibrium.

b. political equilibrium.

c. the distribution of income.

d. all of the above

12. Taxes:

a. are voluntary payments to governments.

b. are unlikely to affect market supply and demand.

c. never affect efficiency in the allocation of resources.

d. are compulsory payments associated with certain activities.

13. A tax on real estate is a:

a. general wealth tax.

b. general consumption tax.

c. selective wealth tax.

d. selective income tax.

14. The marginal tax rate will eventually exceed the average tax rate for a:

a. proportional tax.

b. regressive tax.

c. progressive tax.

d. flat-rate tax.

15. Marginal tax rates were reduced in 2001. Other things being equal, this is likely to:

a. increase tax evasion.

b. decrease tax evasion.

c. have no effect on tax evasion.

d. increase tax avoidance.

16. What is an example of a normative criterion that a government must trade-off in its method of

taxation?

a. Equity

b. Efficiency

c. Administrative ease

d. all of the above

17. Tax avoidance is:

a. a means of tax evasion.

b. a means of decreasing taxes paid by adjusting behavior.

c. a political process explicitly for the reduction of taxation.

d. a means to avoid tax owed.

18. If the marginal tax rate is 20% under a proportional tax rate structure, the average tax rate:

a. should be 20%.

b. should be above 20%.

c. should be below 20%.

d. cannot be determined.

19. If the average tax rate under a progressive tax rate structure is 35%, a possible marginal tax rate is:

a. 30%.

b. 25%.

c. 42%.

d. not able to be determined.

20. Which of the following countries has the highest average tax rate relative to GDP?

a. Japan

b. Sweden

c. Iceland

d. United Kingdom

ECO 450 Week 8 Quiz

Chapter 11

Taxation, Prices, Efficiency, and the Distribution of Income

True/False Questions

1. A lump-sum tax results in both income and substitution effects.

2. A consumer currently pays $500 a year retail sales taxes. She would be better off if she paid the same amount annually as a lump-sum tax.

3. Clothing is sold in perfectly competitive markets where no externalities prevail. An excise tax on clothing will result in a market price for clothing that equals the marginal social benefit and marginal social cost of service.

4. Assuming that the income effects are negligible and that beer is sold in a competitive market, a 10‑cent per can tax on beer that causes a 10,000 can per month decline in sales will result in an excess burden of $1,000 per month.

5. A tax on land results in an income effect on landlords but no substitution effect. Then it follows that the excess burden of a tax on land will be zero.

6. The excess burden of a tax on interest income is $5 billion per year. Total interest income per year is $50 billion. The tax currently collects $15 billion in revenue per year. The efficiency-loss ratio of the tax is therefore 0.33.

7. A payroll tax results in a difference between the gross wages paid by employers and the net wages received by workers.

8. If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour.

9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to consumers than would be the case if the same good were produced by a competitive industry.

10. A study indicates that taxes in the United States reduce the Gini coefficient for the nation by 10 percent. This implies that taxes make the income distribution more equal.

11. A lump-sum tax only results in income effects.

12. An income tax is an example of a price-distorting tax.

13. The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.

14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per gallon, the excess burden of the tax will quadruple.

15. If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.

16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services.

17. Lump-sum taxes can vary in amount based on income level.

18. A lump-sum tax can distort prices and affect consumption behavior.

Multiple Choice Questions

1. A lump-sum tax:

a. distorts market prices so that they do not simultaneously equal MSB and MSC.

b. can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC.

c. results in substitution effects that change prices.

d. results in both substitution effects and income effects that change prices.

2. The current price of compact discs, which are traded in perfectly competitive markets, is $10. A $1 per unit tax is levied on the discs. Annual record sales decline from five million to four million as a result of the tax. Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:

a. $500,000 per year.

b. $1 million per year.

c. $2 million per year.

d. $2.5 million per year.

3. The elasticity of supply of land is zero.A tax on land results only in an income effect to landlords. Then it follows that a 10-percent tax on land rents will:

a. have a positive excess burden.

b. be shifted forward to tenants.

c. be paid entirely by landlords.

d. have zero excess burden.

e. both (c) and (d)

4. Currently, a 10-cent per gallon tax is levied on gasoline consumption.The tax is increased to 20 cents per gallon. The excess burden of the tax will:

a. remain the same.

b. double.

c. increase four times.

d. decline.

5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax,

a. the price received by sellers will fall by $400.

b. the price paid by buyers, including the tax, will increase by $400.

c. the quantity of cars sold per year will be unchanged.

d. the excess burden of the tax will be zero.

e. both (c) and (d)

6. Other things being equal, the more inelastic the demand for a taxed good,

a. the greater the portion of the tax paid by sellers.

b. the greater the excess burden of the tax.

c. the greater the portion of the tax paid by buyers.

d. the less the portion of a tax on sellers that can be shifted to buyers.

7. The market supply of labor is perfectly inelastic. However, the income effect of tax-induced wage changes are believed to be substantial. Then it follows that a tax on labor income will:

a. have zero excess burden.

b. have positive excess burden.

c. be paid entirely by workers as a reduction in net wages.

d. both (a) and (c)

e. both (b) and (c)

8. Suppose an economy is comprised of only two markets: one for food and the other for housing. A tax on food used to finance transfer payments is likely to:

a. decrease the price of food.

b. increase the price of housing.

c. decrease the price of housing.

d. have no effect on either the price of food or housing.

9. Differential tax incidence measures the effect:

a. that a tax and the expenditures it finances have on the distribution of income.

b. that one tax alone has on the distribution of income.

c. on the distribution of income of substituting one tax for another while holding the size and composition of the budget fixed.

d. on the distribution of income of substituting one tax for another while changing the kinds of government services financed.

10. Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services. This implies that the:

a. supply of those input services is very elastic.

b. supply of those input services is of unitary elasticity.

c. supply of those input services is perfectly inelastic.

d. demand for those input services is perfectly elastic.

11. Most studies show that the price elasticity of demand for gasoline is –0.2. If the price elasticity of supply is 2, then a tax on gasoline will:

a. have no effect on the market equilibrium price of gasoline.

b. cause the market equilibrium price of gasoline to fall.

c. cause the market equilibrium price paid by buyers to rise.

d. cause the net price received by sellers to fall.

e. both (c) and (d)

12. The demand for medical care is very inelastic. If a 10-percent tax is levied on the sale of medical services and is collected from medical-care providers, then:

a. the incidence of the tax is likely to be borne entirely by medical-care providers.

b. most of the tax is likely to be shifted to those who purchase medical care.

c. the market equilibrium price of medical care will fall.

d. the excess burden of the tax is likely to be very high.

13. Which of the following is true about a lump-sum tax?

a. It prevents efficiency from being attained in competitive markets.

b. It causes substitution effects.

c. It causes income effects.

d. It causes both income effects and substitution effects.

14. Housing construction is generally believed to be an industry of constant costs. In the long run, whichof the following is true if a $10 per square foot tax on housing construction is collected directly from builders?

a. The incidence of the tax will be borne by builders.

b. The excess burden of the tax will be zero.

c. The quantity of new construction supplied will be unaffected.

d. The tax will be fully shifted to buyers of new construction.

15. If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is –2, then which of the following is likely to result from a tax on labor earnings?

a. The tax will be fully borne by workers.

b. Some of the tax will be shifted to employers as market equilibrium wages increase.

c. Market equilibrium wages will decline.

d. There will be no effect on market equilibrium wages.

16. If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:

a. remains unchanged.

b. increases.

c. decrease.

d. can increase and decrease in different regions.

17. Viewed from origin a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.

a. less steep

b. more steep

c. similar

d. varying

18. A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units. What is the deadweight loss (ignore price elasticities)?

a. $300.00

b. $100.00

c. $150.00

d. Cannot be determined.

19. If a per unit tax is imposed, but the quantity supplied and demanded does not change then:

a. the demand is perfectly inelastic.

b. the supply is perfectly inelastic.

c. there is no deadweight loss.

d. All of the above.

20. The efficiency-loss ratio relative to tax is:

a. the deadweight loss less the tax revenue.

b. the deadweight loss divided by the tax revenue reduced by one.

c. the excess burden divided by the tax revenue.

d. None of the above.

Chapter 12

Budget Balance and Government Debt

True/False Questions

1. From 1950 to 2009, the federal government budget has been in balance in most years.

2. The high employment budget deficit implies that increases in economic activity will not eliminate the actual deficit.

3. Other things being equal, an increase in government borrowing is likely to increase interest rates.

4. If taxpayers anticipate future tax increases when government borrows to finance deficits, increased government borrowing will increase interest rates.

5. As of 2008, the amount of federal debt outstanding was equal to twice the annual GDP.

6. From 1950 to 1980, the value of the federal debt as a percent of GDP declined.

7. More than 50 percent of the federal debt in recent years has been outside debt.

8. An increase in market rates of interest tends to decrease the market value of outstanding government debt.

9. Deficit finance postpones taxation from the present to the future.

10. The burden of the debt is borne by those who purchase government bonds.

11. The federal government budget recorded surpluses between 1998 and 2001.

12. State and local governments are usually required by state law to keep the budgets in balance.

13. If business and personal saving are constant, then a federal budget deficit will have no impact on national saving.

14. Other things being equal, a government surplus increases the supply of loanable funds available for investment.

15. State revenue bonds are backed by the taxing power of state governments.

16. A federal budget surplus can lead to more credit being available for productive activity.

17. A federal budget deficit can strain credit markets forcing the real rate of interest to decrease.

18. The U.S. deficit in the 1980s was structural in the sense that federal spending would exceed federal revenue even at a level of full employment.

Multiple Choice Questions

1. The outstanding federal debt will decline in value if:

a. budget deficits continue.

b. the government runs a budget surplus.

c. the market rate of interest increases.

d. either (b) or (c)

2. The federal budget has been in deficit:

a. for every year between 1970 and 1997.

b. for every year between 1950 and 1997.

c. only since 1980.

d. for every year between 1960 and 1997.

3. The high employment deficit is estimated at $100 billion. Assuming that the economy is operating below full employment and that it will not overheat during the year,

a. the actual budget is not in deficit.

b. increasing GDP will eliminate the deficit.

c. increasing GDP will not eliminate the deficit.

d. the actual budget is in surplus.

4. An increase in government borrowing has no effect on the willingness of citizens to save or on the demand for credit. Increased borrowing to cover deficits will therefore:

a. reduce interest rates.

b. increase interest rates.

c. have no effect on interest rates.

d. not require increased taxes in the future.

5. As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will:

a. reduce private investment.

b. increase private investment.

c. have no effect of private investment.

d. increase interest rates.

e. both (a) and (d)

6. The total dollar value of the federal debt outstanding is:

a. more than 50 percent of GDP.

b. more than 100 percent of GDP.

c. less than 50 percent of GDP.

d. less than 10 percent of GDP.

7. The federal government, its agencies, and the Federal Reserve System:

a. are not permitted to hold outstanding federal debt.

b. hold 50 percent of the outstanding federal debt.

c. hold between 15 and 25 percent of the outstanding federal debt.

d. hold 75 percent of the outstanding federal debt.

8. The largest portion of the net federal debt outstanding is owed to:

a. foreigners.

b. U.S. citizens and companies.

c. federal government agencies.

d. state and local governments.

9. The debt of state and local governments is mostly:

a. internal.

b. external.

c. owed to citizens of other nations.

d. worthless.

10. Government borrowing will:

a. postpone taxation to the future.

b. increase government interest cost.

c. both (a) and (b)

d. eliminate taxes.

11. Which of the following is true about the federal government budget balance in the United States?

a. The federal budget has never had a surplus.

b. The federal budget had a surplus every year from 1970 to 2008.

c. The federal budget had a surplus from 1998 until 2001.

d. The federal budget had a deficit from 1998 until 2001.

12. Which of the following can contribute to a decrease in national saving?

a. a federal budget deficit

b. an increase in the state and local government aggregate surplus

c. a federal budget surplus

d. an increase in personal saving

13. Other things being equal, a government budget surplus:

a. increases the demand for loanable funds.

b. increases the supply of loanable funds.

c. is likely to increase market equilibrium interest rates.

d. is unlikely to affect market equilibrium interest rates.

14. If the federal government runs a surplus consistently, then which of the following is likely to occur?

a. National saving will decline.

b. The gross federal debt will increase.

c. The gross federal debt will decrease.

d. Market equilibrium interest rates are likely to rise as a result of the surpluses.

15. General obligation bonds of state and local governments are:

a. backed by revenue from public facilities such as sports stadiums.

b. backed by the taxing power of state and local governments.

c. usually used to finance transfer payments.

d. usually used to finance capital expenditures.

e. both (b) and (d)

16. A bond that is backed by the tolls collected from a bridge to be constructed from the proceeds of the bond is an example of:

a. a general obligation bond.

b. a non-obligation bond.

c. a revenue bond.

d. none of the above.

17. Evidence of “crowding out” in the market for loanable funds at a rate of 8% could be:

a. private investors who will borrow only at a rate lower than 8%.

b. private investors who are willing to accept a rate higher than 8% for borrowing.

c. a government surplus.

d. a social security surplus.

18. High-employment deficit or surplus is:

a. an extreme economic situation requiring emergency measures.

b. the amount of deficit or surplus available assuming current employment levels.

c. the amount of deficit or surplus available when employment is at its approximately full capacity.

d. the amount of deficit or surplus available when unemployment is at a relatively high level.

19. A government’s internal debt is:

a. debt owed to other government agencies.

b. debt owed to other governments.

c. debt owed to its citizens.

d. both (a) and (c).

20. The National Income and Product Accounts budget balance reflects:

a. an inflation-adjusted budget balance less social security surplus.

b. new debt resulting from a federal budget deficit.

c. the real budget balance.

d. the nominal budget balance.

ECO 450 Week 9 Quiz

Chapter 13

The Theory of Income Taxation

True/False Questions

1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.

2. Comprehensive income excludes unrealized capital gains.

3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.

4. Homeowners earn rental income-in-kind from their home that would be taxable under a comprehensive income tax.

5. A comprehensive income tax is a lump-sum tax.

6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.

7. A comprehensive income tax will always reduce work effort by taxpayers.

8. The substitution effect of a tax-induced decline in wages always leads workers to work less.

9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero.

10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.

11. Comprehensive income is the sum of annual consumption and the change in net worth.

12. A tax on interest income does not prevent credit market from efficiently allocating resources.

13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.

14. Because a tax on interest income results in income and substitution effects, it is not possible to predict the effect it will have on saving.

15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.

16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.

17. The Haig-Simons definition of income is different from comprehensive income.

18. Comprehensive income equals consumption plus the change in net worth.

Multiple Choice Questions

1. Comprehensive income:

a. is the sum of annual consumption and realized capital gains.

b. is the sum of annual consumption and changes in net worth.

c. excludes corporation income.

d. is the sum of annual consumption and net worth.

2. A tax on labor income:

a. results only in an income effect that always decreases hours worked per year.

b. results in a substitution effect that always decreases hours worked per year.

c. results in an income effect that increases hours worked per year if leisure is a normal good.

d. both (a) and (b)

e. both (b) and (c)

3. The market supply of labor is perfectly inelastic. Then it follows that:

a. the substitution effect of wage changes is zero.

b. the income effect of wage changes is zero.

c. leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.

d. the excess burden of a tax on labor income will be zero.

4. The compensated labor supply curve:

a. will always be vertical.

b. will always be upward sloping.

c. will always be downward sloping.

d. reflects both the income and substitution effects of wage changes.

5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:

a. result in an accurate estimate of the excess burden.

b. overestimate the excess burden.

c. underestimate the excess burden.

d. accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.

6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:

a. very elastic.

b. almost perfectly inelastic.

c. always upward sloping.

d. perfectly elastic.

7. A flat-rate tax on labor income will:

a. always reduce hours worked per year.

b. always increase hours worked per year.

c. either increase or decrease hours worked per year.

d. never have any effect on the amount of leisure hours per year.

8. A tax on interest income:

a. causes the gross interest rate paid by investors to exceed the net interest rate received by savers.

b. will always reduce saving.

c. will always increase saving.

d. is equivalent to a lump-sum tax.

9. If the market supply curve of savings is upward sloping, a tax on interest income will:

a. increase the amount of saving.

b. increase the market rate of interest.

c. decrease the market rate of interest.

d. have no effect on the market rate of interest.

10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:

a. borne by employers as a reduction in profits.

b. split between workers and employers.

c. paid entirely by workers.

d. shifted forward to consumers.

11. Which of the following is true about comprehensive income?

a. Only labor income is included.

b. Only capital income is included.

c. Capital gains are not included.

d. Both realized and unrealized capital gains are included.

12. Which of the following will increase a person’s comprehensive income?

a. an increase in the market value of the person’s home

b. a decrease in the value of the person’s stock portfolio

c. a decrease in labor income

d. a decrease in consumption

13. A tax on labor income will:

a. increase the net wage received by workers.

b. decrease the net wage received by workers.

c. cause that net wage received by workers to decline below the gross wage paid by employers.

d. both (b) and (c)

14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:

a. r

b. t

c. (1 + r)

d. [1 + r(1 – t)]

15. The higher the compensated elasticity of supply of savings,

a. the lower the excess burden of a tax on capital income.

b. the higher the excess burden of a tax on capital income.

c. the higher the excess burden of a tax on labor income.

d. both (b) and (c)

16. The Haig-Simons definition of income:

a. is the sum of annual consumption and realized capital gains.

b. is the sum of annual consumption and changes in net worth.

c. excludes corporation income.

d. is the sum of annual consumption and net worth.

17 Comprehensive income:

a. includes realized capital gains, but not unrealized capital gains

b. includes both realized and unrealized capital gains.

c. excludes cash from the sale of assets.

d. excludes increases in the value of assets.

18. Income-in-kind:

a. is exemplified by nonpecuniary returns.

b. is generally non-taxable because there is no monetary transaction.

c. is generally taxable.

d. both (a) and (b).

19. An example of a nonpecuniary return is:

a. job satisfaction.

b. unemployment benefits.

c. employer contributions to a retirement plan.

d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?

a. 90%

b. 75%

c. 60%

d. 50%

Chapter 14

Taxation of Personal Income in the United States

True/False Questions

1. Taxable income in the United States exceeds adjusted gross income.

2. Taxable income in the United States includes all capital gains earned, whether or not they are realized.

3. Taxable income in the United States amounts to less than 50 percent of personal income.

4. Tax preferences are really subsidies to certain activities.

5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.

6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.

7. The U.S. personal income tax is not a progressive tax.

8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent.

9. Under current rules, only real interest earned is subject to income tax.

10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation.

11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.

12. Tax credits vary with a person’s marginal tax rate.

13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax preferences.

14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.

15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.

16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.

17. Tax preferences are exclusions, exemptions, and deductions from the tax base.

18. Income-in-kind is not considered a tax preference.

Multiple Choice Questions

1. Adjusted gross income, as defined by the United States Tax Code,

a. exceeds taxable income.

b. equals taxable income.

c. is less than taxable income.

d. is greater than comprehensive income.

2. Tax preferences:

a. are exclusions, exemptions, and deductions from the tax base.

b. are in the tax code by accident.

c. are extra taxes on certain taxpayers.

d. increase the amount of income that is taxable.

e. both (a) and (d)

3. Currently, the tax treatment of capital gains in the United States is such that:

a. all capital gains are taxed.

b. all realized capital gains are taxed.

c. most realized capital gains are taxed.

d. only capital gains adjusted for inflation are taxed.

4. The exclusion of interest of state and local bonds from taxation by the federal government:

a. decreases interest costs for state and local governments.

b. increases interest costs for state and local governments.

c. benefits lower-income taxpayers more than upper-income taxpayers.

d. discourages borrowing by local governments.

5. The value of personal exemptions in terms of taxes saved:

a. is the same for all taxpayers.

b. varies with family size.

c. varies with taxpayers’ marginal tax rates.

d. both (b) and (c)

6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:

a. 6 percent.

b. 9 percent.

c. 20 percent.

d. 25 percent.

7. Tax expenditures are:

a. expenditures made to collect taxes.

b. losses in revenue due to tax preferences.

c. less than 1 percent of tax revenue.

d. both (b) and (c)

8. Under the federal personal income tax rules prevailing as of 2009,

a. all interest expense is tax deductible.

b. the interest expense for mortgages on first and second homes is tax deductible.

c. the interest expense for mortgages only on first homes is tax deductible.

d. no interest is tax deductible.

9. The reduction in marginal tax rates will:

a. increase the excess burden of tax preferences.

b. increase tax expenditures.

c. decrease the excess burden of tax preferences.

d. have no effect of tax expenditures.

10. “Bracket creep” is no longer a problem in the United States because:

a. the tax brackets are indexed.

b. capital gains are now fully taxable.

c. only real interest is taxed.

d. capital gains are indexed.

11. Which of the following is true for the federal income tax in the United States?

a. All income irrespective of its source or use is taxed at the same rate.

b. Comprehensive income is the tax base.

c. The tax base is less than 50 percent of comprehensive income.

d. All realized and unrealized capital gains are included in the tax base.

12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:

a. only 15 percent.

b. higher than that paid by upper-income taxpayers.

c. zero.

d. negative.

13. The excess burden of tax preferences:

a. depends on average tax rates.

b. will be higher, the higher the marginal tax rate is.

c. will be lower, the higher the marginal tax rate is.

d. is independent of marginal tax rates.

14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:

a. reduce the tax burden on upper-income groups.

b. increase the tax burden on upper-income groups.

c. increase the share of taxes paid by lower-income groups.

d. both (a) and (c)

15. Removing savings from the tax base of the personal income tax is likely to:

a. increase work effort.

b. decrease work effort.

c. lower market equilibrium interest rates by increasing the supply of loanable funds.

d. increase market equilibrium interest rates, thereby increasing the demand for loanable funds.

16. Which is a justification for tax preferences?

a. administrative difficulties

b. improving equity

c. encouraging private expenditures that create external benefits

d. all of the above

17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:

a. more than $10 million.

b. less than $10 million.

c. remain at $10 million.

d. none of the above is certain to occur

18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?

a. reduction of the highest marginal tax rate

b. increased the marriage penalty

c. created a new 40% tax bracket

d. both (a) and (c)

19. As of 2009, the highest marginal tax rate is:

a. 39.6%

b. 38%

c. 35%

d. 32.5%

20. Which is an example of an itemized deduction under the U.S. code as of 2009?

a. state and local income tax

b. state and local property tax

c. all medical expenses

d. both (a) and (b)

Chapter 17

Taxes on Wealth, Property, and Estates

True/False Questions

1. Wealth is a flow.

2. A wealth tax is equivalent to a tax on the return to saving.

3. If the supply of savings is perfectly inelastic, a comprehensive wealth tax will increase the market rate of interest.

4. Assuming that the supply curve of savings is upward sloping, a comprehensive wealth tax will reduce annual investment.

5. As administered in the United States, the local property tax is mainly a tax on real estate.

6. The property tax in the United States is likely to reduce the equilibrium return to investment.

7. The town of Oz has raised its property tax rates considerably above the national average.Other things being equal, capital is likely to flow into Oz in the long run because of the tax.

8. If a real estate tax causes rents to rise, it cannot be fully capitalized.

9. A tax on the value of land is likely to be fully capitalized.

10. The local property tax is likely to result in less than the efficient amount of investment in real estate.

11. A general tax on wealth will cause efficiency loss in labor markets.

12. The local property tax, as administered in the United States, is a general tax on wealth.

13. The local property tax in the United States will reduce the return to real estate only in the long run.

14. Other things being equal, if the property tax rate is above the national average for a jurisdiction, capital can be expected to flow out of the region in that area.

15. If a local property tax increase is fully capitalized, property owners at the time of the increase cannot shift any of the current or future tax increase to buyers if they sell the property.

16. A person who never saves any income and receives no gifts and inheritances will never accumulate wealth.

17. Wealth taxes are a relatively new form of taxation.

18. Total wealth definitions never include intangible personal property.

Multiple Choice Questions

1. Wealth is:

a. a flow.

b. a stock.

c. the market value of accumulated assets.

d. both (b) and (c)

2. A comprehensive wealth tax base includes:

a. all real tangible, intangible, and human wealth, less any claims against those assets.

b. only real property.

c. only intangible assets.

d. only tangible assets.

3. If the interest elasticity of supply of savings is zero, a comprehensive wealth tax will:

a. increase the market rate of interest.

b. reduce the income of savers.

c. reduce the income of workers.

d. both (b) and (c)

4. If the supply curve of savings is upward sloping, a comprehensive wealth tax will:

a. increase the market rate of interest.

b. reduce the market rate of interest.

c. have zero excess burden.

d. have no effect on investment.

5. A comprehensive wealth tax will:

a. impair efficiency in labor markets.

b. impair efficiency in investment markets.

c. both (a) and (b)

d. have no excess burden.

6. Assuming that investors seek to maximize the return on their investment, the long-run effect of a national tax on real estate will be to:

a. reduce the return to investment in real estate only.

b. reduce the return to investment in all assets.

c. reduce wages only.

d. increase the return to all investors.

7. A local property tax, such as that used in the United States, is likely to:

a. increase investment in the economy.

b. cause a flow of investment among jurisdictions.

c. decrease the return to saving in all uses.

d. both (b) and (c)

8. If a property tax on real estate is capitalized,

a. the price of real estate will rise.

b. the price of real estate will fall.

c. the price of real estate will be unaffected.

d. the burden of the tax will be transferred to buyers of real estate.

e. both (b) and (d)

9. Suppose that the current market rate of interest is 10 percent.The market rent on a parcel of land is $6,000 per year.A 10-percent land tax is imposed.As a result of the tax, the price of the land parcel:

a. falls from $60,000 to $30,000.

b. increases from $30,000 to $60,000.

c. falls 10 percent.

d. falls 20 percent.

10. If a tax on real estate results in a decrease in the supply of housing, the tax will be:

a. fully capitalized.

b. only partially capitalized.

c. not capitalized at all.

d. borne entirely by renters.

11. If the supply of saving is not perfectly inelastic in the nation, then which of the following taxes will cause efficiency loss in capital markets?

a. a general wealth tax

b. a national tax on real estate

c. a consumption tax

d. both (a) and (b)

12. The local property tax in the United States is levied primarily on:

a. personal property.

b. intangible property.

c. business property.

d. real estate.

13. Which of the following would not be included in a comprehensive wealth tax base?

a. real estate

b. personal property

c. intangible assets

d. residential rents

14. If the supply of real estate is not perfectly inelastic, then the local real estate property tax differentials:

a. cannot be shifted to tenants.

b. can be shifted to tenants through increases in rents.

c. will be fully capitalized.

d. both (a) and (c)

15. If the supply of saving is not perfectly inelastic, then substituting a value-added tax for an equal-yield general wealth tax will:

a. decrease market equilibrium interest rates.

b. increase the efficiency loss in labor markets.

c. decrease the efficiency loss in labor markets.

d. decrease efficiency in capital markets.

e. both (a) and (b)

16. Intangible personal property includes:

a. stock in companies.

b. corporate bonds.

c. cash.

d. all of the above

17. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is perfectly inelastic?

a. annual savings remains $10 billion

b. annual savings increases above $10 billion

c. annual savings falls below $10 billion

d. no particular effect is guaranteed to happen

18. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is responsive?

a. annual savings remains $10 billion

b. annual savings increases above $10 billion

c. annual savings falls below $10 billion

d. no particular effect is guaranteed to happen

19. From the point of view of the locality, increasing property taxes:

a. increases the price of locally produced goods.

b. decreases income of owners of land in the associated community.

c. does not affect buyers of locally produced goods fro outside of the community.

d. both (a) and (b)

20. Tax capitalization is:

a. a decrease in the value of a taxed asset at a level related to the discounted value of the future tax liability.

b. partially recognized when the supply of taxed asset is perfectly inelastic.

c. only partially recognized on assets like land.

d. both (b) and (c)

Chapter 18

Fiscal Federalism and State and Local Government Finance

True/False Questions

1. A federal system of government allows a wider diversity of preferences for government-provided services to be accommodated when compared to nonfederal, centralized government.

2. Income redistribution is a service likely to be most effectively administered by the federal government.

3. Economic stabilization can be easily supplied to citizens by local governments.

4. When each local government supplies goods and services to its citizens, the political equilibrium in each jurisdiction corresponds to the median most-preferred outcome of all national voters.

5. A federal system of government allows both centralized and decentralized collective choices.

6. Local tax bases are less elastic than national tax bases.

7. Tax exporting occurs if the price of goods produced in the state and purchased by out-of-state residents rises as a result of in-state taxes.

8. Matching categorical grants can be used to internalize interjurisdictional positive externalities.

9. Matching grants only result in income effects.

10. A matching grant will increase local government expenditures by more than an equal-value, general purpose grant.

11. A federal system of government only has a central government that supplies all public goods and services.

12. According to the Tiebout model of fiscal federalism, a system of many local governments improves the efficiency of allocation of resources to and among public goods.

13. If a local jurisdiction’s tax base is elastic, an increase in tax rates will decrease tax revenue.

14. Taxing hotel rooms and restaurant meals in a city with lots of tourism is an example of tax exporting.

15. Financing local schooling with the local property tax can guarantee equality of opportunity in education.

16. According to Tiebout, individuals will self-select into communities where the government budget best satisfies their own personal preferences.

17. Mobility between communities is not critical to the Tiebout model.

18. Interjurisdictional externalities are costs or benefits of local government goods and services to residents in other political jurisdictions.

Multiple Choice Questions

1. Under a federal system of government,

a. all government goods and services are supplied by a central government.

b. all government goods and services are supplied by local governments.

c. both central and noncentral governments supply goods and services.

d. all public choices are made nationally.

2. Economic stabilization is most effectively provided by:

a. a central government.

b. state governments.

c. local governments.

d. regional governments.

3. A decentralized system of government:

a. tends to result in uniformity in the quantity and quality of government services in all jurisdictions.

b. allows diversity in the quantity and quality of government goods and services.

c. conducts national elections on all issues.

d. is undemocratic.

4. The political equilibrium in a local jurisdiction for a given public good corresponds to the median most-preferred outcome of:

a. all national voters.

b. the President.

c. local voters.

d. both (a) and (c)

5. In general, local tax bases tend to be:

a. less elastic than national tax bases.

b. more elastic than national tax bases.

c. equally elastic when compared with national tax bases.

d. very inelastic.

6. According to the Tiebout model of local government expenditure,

a. all local governments will supply the same kinds and amounts of services.

b. mobile citizens respond to differences in taxes and expenditures by moving to the jurisdiction that maximizes their well-being.

c. the average costs of government services is constant.

d. tax rates do not influence a citizen’s choice of residence.

7. A categorical grant:

a. does not restrict the use of transferred funds.

b. usually specifies the use to which the funds must be applied.

c. is used rarely in the United States.

d. is not used at all in the United States.

8. A federal highway grant will provide funds for roads supplied by state and local governments if these governments pay 50 percent of the cost of the roads. This grant is an example of:

a. revenue sharing.

b. a matching categorical grant.

c. a general purpose grant.

d. a nonmatching block grant.

9. A grant received by a local government will:

a. not affect the political equilibrium in that jurisdiction.

b. change the political equilibrium in that jurisdiction.

c. always increase government expenditures in the recipient jurisdiction by the amount of grant.

d. both (b) and (c)

10. Matching grants:

a. will not increase government spending in recipient jurisdictions.

b. increase government expenditures in recipient jurisdictions more than nonmatching grants of an equal amount.

c. increase government expenditures in recipient jurisdictions less than nonmatching grants of an equal amount.

d. increase tax rates in recipient jurisdictions.

11. Which of the following is true about a federal system of government?

a. There is only one level of government.

b. There are several levels of government.

c. A central government directs local governments to supply all public goods at levels determined nationally.

d. There are only local governments.

12. The central economic problem of fiscal federalism is:

a. the division of taxing and expenditure functions among different levels of government.

b. the choice of the collective choice rule for central governments only.

c. the level of public goods to be provided by a central government only.

d. how to achieve an equitable distribution of income.

13. Which of the following is best supplied by local governments?

a. national defense

b. income redistribution

c. money

d. fire protection

14. Local public goods:

a. are pure public goods for the entire nation.

b. are those whose benefits are nonrival only for the population of a particular geographical area.

c. have benefits that are subject to exclusion by pricing for local consumers.

d. are best provided by a central government.

15. An increase in the local retail sales tax rate will increase revenue collected by a local government:

a. if the tax base is elastic.

b. if the tax base is unit elastic.

c. if the tax base in inelastic.

d. no matter what the value of the elasticity of the tax base.

16. Which is an example of a interjurisdictional externality?

a. residential property tax

b. local sales tax

c. wage tax on all workers in a community

d. both (b) and (c)

17. Mobility:

a. is not essential to the Tiebout model.

b. can hamper a jurisdiction’s ability to raise revenues.

c. may be part of the reason for the reliance on local property taxes for the raising of local government revenue.

d. both (b) and (c)

18. A local wage tax can:

a. create tax competition if a neighboring jurisdiction does not have such a tax.

b. export tax onto workers in the local jurisdiction who live outside of the local jurisdiction.

c. prevent tax competition among other local jurisdictions.

d. both (a) and (b)

19. Fiscal capacity:

a. decreases with the ability of the jurisdiction to export tax.

b. is a measure of the ability of a jurisdiction to finance government-provided services.

c. is always enhanced by mobility.

d. is not dependent on the wealth of the community.

20. What is generally the best measure of fiscal capacity for local governments?

a. income per capita

b. per capita retail sales

c. assessed valuation per capita

d. per capita expenditure

#ECO 450 Week 11 Final Exam – Strayer

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ECO 410 Week 11 Quiz – Strayer

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Quiz 10 Chapter 19 and 20

Working Capital Management

19.1 Trident Brazil's Operating Cycle

Multiple Choice

1) Working capital management involves the management of:

A) current and long-term assets.

B) current assets and current liabilities.

C) current liabilities and long-term assets.

D) current liabilities and long-term debt and equity.

2) The cash conversion cycle:

A) is a subset of the operating cycle.

B) occurs in the latter stages of the operating cycle.

C) is a subset of the accounts receivable period.

D) all of the above.

3) The proper order of events for the operating cycle is:

A) input serving period, accounts receivable period, inventory period, quotation period.

B) quotation period, accounts receivable period, inventory period, input servicing period.

C) quotation period, input servicing period, inventory period, accounts receivable period.

D) accounts receivable period, input servicing period, quotation period, inventory period.

4) TrinityApps Corporation (US) has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the:

A) quotation period.

B) input sourcing period.

C) cash conversion cycle.

D) accounts payable cycle.

5) The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period.

A) quotation

B) input sourcing

C) accounts payable

D) accounts receivable

6) The accounts payable period of the operating cycle:

A) is equal to the inventory period.

B) may run concurrently but shorter than the inventory period.

C) may run concurrently but longer than the inventory period.

D) Any one of the above may be true.

True/False

1) Typically, the inventory period and the accounts payable period at least partially overlap in the firms operating cycle.

2) Typically, the inventory period and the accounts receivable period at least partially overlap in the firms operating cycle.

3) The operating cycle begins with the quotation period and ends with the accounts payable period.

19.2 Trident's Repositioning Decisions

Multiple Choice

1) Of the following, which would NOT be a significant decision-making factor in a multinational firm's repositioning decision-making?

A) the subsidiary's tax environment (high or low)

B) the stability of the local currency

C) the ability to move capital in and out of the subsidiary's country

D) All of the above are significant factors.

True/False

1) In a country with a relatively high tax rate, it make sense the the MNE to reposition cash flows TO that country.

2) The MNE would prefer to leave capital with a firm in a country with high growth prospects over the alternative of leaving capital with a firm in a country with low growth prospects (other factors equal).

19.3 Constraints on Repositioning Funds

Multiple Choice

1) Each of the following is listed by your authors as a constraint on repositioning funds by an MNE EXCEPT:

A) political constraints.

B) tax constraints.

C) transaction costs.

D) All of the above are listed by your authors.

True/False

1) Local liquidity needs sometimes impact a firm's worldwide optimal cash position.

2) The constraints on repositioning of funds that occur when exchanging one currency for another are considered to be primarily political constraints.

3) Political constraints can block the transfer of funds either overtly or covertly. OVERT blockage occurs when dividends or other forms of fund remittances are severely limited, heavily taxed, or excessively delayed by the need for bureaucratic approval.

19.4 Conduits for Moving Funds by Unbundling Them

Multiple Choice

1) ________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.

A) Unbundling funds

B) Bundling funds

C) Coordinating funds

D) none of the above

2) Unbundling of funds by an MNE may be a useful practice for which of the following reasons?

A) An increase in the funds flow (charges) in any of the before-tax categories reduces the taxable profits of the foreign subsidiary if the host-country tax authorities acknowledge the charge as a legitimate expense.

B) An item-by-item matching of remittance to input, such as royalties for intellectual property, and fees for patents and advice, is equitable to the host country and foreign investor alike.

C) Unbundling facilitates allocation of overhead from a parent''s international division, so-called shared services, to each operating subsidiary in accordance with a predetermined formula.

D) All of the reasons listed above

True/False

1) If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

2) The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

19.5 International Dividend Remittances

Multiple Choice

1) In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:

A) interest rate differences between the two countries.

B) the negative impact on host country relations.

C) defection on the part of executives in the home headquarters.

D) MNEs must be concerned with all of the above.

True/False

1) Political risk may motivate parent firms to require foreign subsidiaries to remit all locally generated funds above that required to internally finance growth in sales and planned capital expansions.

19.6 Net Working Capital

Multiple Choice

1) One possible definition of net working capital (NWC) provided by your authors is:

A) NWC = A/R + inventory - A/P.

B) NWC = cash + A/P - inventory.

C) NWC = A/P + A/R - short-term loans.

D) NWC = A/R + inventory - long-term debt.

2) Which of the following actions will result in an increase in NWC?

A) an increase in A/P that exceeds an increase in A/R

B) a reduction in inventory

C) a reduction in A/P plus a smaller reduction in A/R

D) an increase in A/P and a smaller reduction in inventory

3) Which of the following statements is true?

A) A/R provide part of the funding for inventory.

B) A/P provide part of the funding for A/R and inventory.

C) Inventory pays for A/R and A/P.

D) None of the above is true.

TABLE 19.1

Use the information to answer following question(s).

TrinityApps Corporation Balance Sheet December 31, 20xx

4) Refer to Table 19.1. The NWC for TrinityApps is:

A) $80,000

B) $680,000

C) $35,000

D) $45,000

5) Refer to Table 19.1. If TrinityApps increases inventory by $10,000 and A/P also by $10,000, the net change in NWC is:

A) $20,000

B) $10,000

C) $0

D) none of the above

6) Refer to Table 19.1. NWC currently makes up what percentage of total firm value for TrinityApps?

A) 6.6%

B) 5.1%

C) 11.8%

D) 9.2%

Instruction 19.1:

Use the information to answer the following question(s).

Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.

7) Refer to Instruction 19.1. What is the amount of money Sunny Manufacturing will save on accounts payable if they accept the discount?

A) $400,000

B) $8,000

C) $33,333

D) $20,000

8) Refer to Instruction 19.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?

A) 7.3%

B) 9.5%

C) 10.4%

D) 22.9%

9) Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered by Sun Chemical?

A) Yes, Sunny Manufacturing will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.

B) No, Sunny Manufacturing will not have to pay any interest if they just pay in 45 days.

C) Yes, Sunny Manufacturing's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%.

D) No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better off paying the full amount in 45 days.

10) Days working capital is equal to:

A) days payables + days receivables - days inventory.

B) days inventory + days receivables - days payables.

C) days payables + days inventory + days receivables.

D) none of the above

11) Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:

A) accounts receivable are so much longer than accounts payable.

B) accounts payable are so much longer than accounts receivable.

C) accounts receivable and accounts payable are equal.

D) This doesn't really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.

True/False

1) In principle, the firm tries to minimize its NWC balance.

2) Other things equal, managers prefer a lower "days working capital" to a higher one.

3) The authors present empirical evidence that shows the days sales basis for working capital to be 30 days GREATER in the U.S. compared to a similar industry in Europe.

Essay

1) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.

19.7 International Cash Management

Multiple Choice

1) Other things equal, a firm would rather have ________ in a depreciating currency, and ________ in an appreciating currency.

A) accounts receivable; accounts payable

B) accounts receivable; accounts receivable

C) accounts payable; accounts receivable

D) none of the above

2) Which of the following is NOT a precautionary motive for holding cash?

A) Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region.

B) The firm has several short-term obligations in unhedged foreign currency-denominated contracts.

C) The firm must pay ordinary wages in two days.

D) All are precautionary motives.

3) Increases to cash flows can be anticipated if which of the following occurs?

A) A receivables contract is denominated in an appreciating foreign currency.

B) Sales are less than anticipated.

C) Days in accounts receivable increase by 15 days.

D) none of the above

4) A centralized depository benefits the firm primarily by:

A) reducing the cost of repatriating funds.

B) positioning profits where taxes are lowest.

C) reducing the total amount of capital employed within the total firm.

D) earning a higher rate of return than in domestic banking deposits.

5) The Clearing House Interbank Payment System (CHIPS) is:

A) the largest publicly operated payments system in the world.

B) owned and operated by the world's seven largest central banks.

C) a computerized network that connects banks globally.

D) none of the above

6) An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is:

A) a centralized depository.

B) a reinvoicing center.

C) a cost center.

D) a syndicated bank.

7) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.

A) Syndicated banking

B) Centralized depositing

C) Multilateral netting

D) Debt cancellation

True/False

1) In an inflationary economy, demand for credit usually exceeds supply.

2) For disbursement purposes, it is to the benefit of the firm to minimize float.

3) Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does not.

4) A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

5) A reason for holding all precautionary balances in a central pool is that the total pool, if centralized, can be reduced in size without any loss in the level of protection.

6) A disadvantage of a centralized cash management system is that managers will not be able to get the lowest average rate available for the firm. Instead, it misses out on the really low borrowing rates.

Essay

1) Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

19.8 Financing Working Capital

Multiple Choice

1) A precautionary cash balance:

A) is used to replace spoiled or damaged inventory.

B) is held to facilitate cash disbursements when receipts slow down.

C) is used for normal day-to-day operations.

D) is held for the benefit of a sister affiliate.

2) An in-house bank:

A) is a separate bank chartered to operate within a business firm.

B) is in fact a set of functions performed by the firm's existing treasury department.

C) assesses the credit standing of the bank's customers.

D) provides banking services for employees.

3) A foreign banking office that is separately incorporated in the host country is:

A) a correspondent bank.

B) a representative office.

C) a bank subsidiary.

D) an Edge Act corporation.

True/False

1) An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations.

2) Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

3) Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions.

Chapter 20 International Trade Finance

20.1 The Trade Relationship

Multiple Choice

1) The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:

A) unaffiliated known.

B) affiliated party.

C) unaffiliated unknown.

D) any of the above

2) Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business?

A) affiliated party

B) unaffiliated unknown party

C) known unaffiliated party

D) domestic supplier

3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an:

A) unaffiliated known party transaction.

B) unaffiliated unknown party transaction.

C) affiliated party transaction.

D) none of the above

True/False

1) Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).

2) Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex.

3) An advantage of trading with an affiliated party for an MNE, compared to an unaffiliated party, could be reduced contracting costs and less to even no need to protect against nonpayment.

20.2 The Trade Dilemma

Multiple Choice

1) Which of the following is NOT a financial instrument that may be included in an international trade transaction?

A) Letter of Credit

B) Sight Draft

C) Order bill of lading

D) Federal funds transaction

True/False

1) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.

20.3 Benefits of the System

Multiple Choice

1) The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following?

A) the risk of noncompletion

B) the risk of foreign exchange risk (when combined with a various hedging techniques)

C) the risk that financing will not be available due to foreign exchange risk

D) All of these risks are reduced when using these trade implements.

True/False

1) If a foreign exchange transaction calls for payment in the importer's currency, the exporter has the foreign exchange risk.

2) If a foreign exchange transaction calls for payment in the exporter's currency, the importer has the foreign exchange risk.

3) In the case of international trade, the risk of nonpayment is essentially eliminated with the use of a letter of credit issued through a trustworthy bank.

20.4 Key Documents

Multiple Choice

1) Which of the following is NOT true regarding a letter of credit?

A) The importer and exporter agree on a transaction.

B) The importer applies to its local bank for the issuance of a letter of credit.

C) The exporter applies to its local bank for the issuance of a letter of credit.

D) The importer's bank cuts a sales contract based on its assessment of the creditworthiness of the importer.

2) A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment.

A) irrevocable

B) revocable

C) confirmed

D) unconfirmed

3) A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.

A) irrevocable; unconfirmed

B) revocable; confirmed

C) confirmed; irrevocable

D) unconfirmed; confirmed

4) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.

A) exporter's; portfolio risk

B) importer's; blocked foreign exchange

C) exporter's; blocked foreign exchange

D) none of the above

5) The draft is the instrument normally used in international commerce to:

A) transfer product.

B) prove ownership.

C) transfer title.

D) initiate the sale.

6) The ________ is the instrument normally used to actually effect payment in international commerce.

A) banker's acceptance

B) bill of exchange

C) bill of lading

D) letter of credit

7) The person or company initiating the draft or bill of exchange is known as the:

A) maker.

B) drawer.

C) originator.

D) any of the above

8) The person or company to whom the draft or bill of exchange is addressed is the:

A) drawee.

B) drawer.

C) maker.

D) originator.

9) Drafts that have been accepted by banks become:

A) clean drafts.

B) nonmarketable.

C) banker's acceptances.

D) none of the above

10) Which of the following purposes is NOT served by the bill of lading?

A) It acts as a receipt.

B) It acts as a contract.

C) It acts as a document of title.

D) It acts as all of the above.

11) The ________ is issued to the exporter by a common carrier transporting the merchandise.

A) bill of lading

B) draft

C) banker's acceptance

D) line of credit

12) A straight bill of lading is most likely to be used under which of the following circumstances?

A) when the merchandise has not been paid for in advance

B) when the transaction is being financed by a bank

C) when the shipment is to an affiliate

D) none of the above

13) To become a negotiable instrument, a draft must conform to the following requirements EXCEPT:

A) it must be in writing and signed by the maker or drawer.

B) it must be payable to order or to bearer.

C) it must be written in English.

D) it must be payable on demand or at a fixed or determinable future date.

True/False

1) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.

2) The primary advantage of a letter of credit is that it reduces risk.

3) The major advantage of a letter of credit to the exporter is that the exporter does not receive any funds until the documents have arrived at a local port or airfield.

4) To constitute a true letter of credit transaction, the issuing bank must receive a fee or other valid business consideration for issuing the L/C.

5) To constitute a true letter of credit transaction, the bank's L/C must contain a specified expiration date or a definite maturity.

6) To constitute a true letter of credit transaction, the bank's commitment must be open-ended and cannot have a stated maximum amount of money.

7) A revocable L/C is intended to serve as a means of arranging payment but not as a guarantee of payment.

8) A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment.

9) A draft is sometimes called a revocable letter of credit.

10) A time draft is payable on presentation to the drawee; the drawee must pay at once or dishonor the draft. A sight draft, allows a delay in payment.

11) The bill of lading is issued to the exporter by a common carrier transporting the merchandise. It serves three purposes: a receipt, a contract, and a document of title.

Essay

1) Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.

20.5 Example: Documentation in a Typical Trade Transaction

Multiple Choice

1) In a typical international trade transaction, the order of activity would be which of the following?

A) The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The buyer's bank submits payment to the manufacturer's bank.

B) The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance.

C) The foreign buyer places an order; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The domestic manufacturer ships to the buyer; The buyer's bank submits payment to the manufacturer's bank.

D) The domestic manufacturer ships to the buyer; The manufacturer's bank presents a draft and documents to the buyer's bank for acceptance; The foreign buyer places an order; The buyer's bank submits payment to the manufacturer's bank.

True/False

1) Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.

Comment: Few international transactions are typical and often require flexibility or creativity on the part of management.

20.6 Government Programs to Help Finance Exports

Multiple Choice

1) The Export-Import Bank is an independent agency of the U.S. government established in 1934 to:

A) ship money abroad.

B) import agricultural products during the recession.

C) facilitate and stimulate foreign trade of the United States.

D) none of the above

2) In the United States, the Foreign Credit Insurance Corporation:

A) is a subsidiary of the Export-Import Bank.

B) provides letters of credit for U.S. importers.

C) provides letters of credit for U.S. exporters.

D) provides policies that protect U.S. exporters against default by foreign importers.

Instruction 20.1:

Use the information to answer the following question(s).

Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster's of Australia. Because the two companies have never done business with each other, Cypress requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.

3) Refer to Instruction 20.1. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months?

A) $7,000

B) $5,000

C) $12,000

D) $14.000

4) Refer to Instruction 20.1. What is the size of the commission Cypress will pay the bank for the banker's acceptance?

A) $7,000

B) $5,000

C) $12,000

D) $14,000

5) Refer to Instruction 20.1. What is the total Cypress can expect to receive if the firm takes payment today?

A) $993,000

B) $995,000

C) $988,000

D) $996,000

6) Refer to Instruction 20.1. ________ is an unsecured promissory note.

A) A banker's acceptance

B) An overdraft

C) A securitized loan

D) Commercial paper

7) Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?

A) 14.82%

B) 13.00%

C) 12.00%

D) 9.09%

True/False

1) The Foreign Credit Insurance Association is a branch of the U.S. federal government.

2) The Export-Import Bank (also called Eximbank) is an independent agency of the U.S. government, established in 1934 to stimulate and facilitate the foreign trade of the United States.

3) Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase of U.S. goods and services.

4) Banker's acceptances can be used to finance only international trade receivables but not domestic trade receivables.

Essay

1) What is a banker's acceptance? How are they initiated? Why are they desirable for the exporter?

20.7 Forfaiting: Medium- and Long-Term Financing

Multiple Choice

1) ________ is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government is perceived by the exporter to be too risky for open account credit.

A) Forfeiting

B) Marketable Bank Shares

C) Forfaiting

D) Banker's Acceptances

True/False

1) In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk.

#ECO 410 Week 11 Quiz – Strayer

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ECO 405 Week 11 Quiz – Strayer

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Quiz 10 Chapter 14 and 15

Government Spending, Taxation, And The National Debt: Who Wins And Who Loses?

Multiple Choice Questions

1. The Fears Of People Concerning The Size Of Government Are A. Always Without Any Foundation B. Well-Founded In Some Instances And Not Well-Founded In Some Instances C. Difficult To Appreciate D. Due To Low Income And Low Educational Levels Of Many People E. Based Solely On Economic Efficiency

2. The Fears Of People Concerning Distribution Of Taxes Are Related To A. Equity Or Justice In Taxation B. Ample Evidence That There Are Tax Inequities In The Tax System At All Levels Of Government C. The Complete Lack Of Understanding That People Have About The Purpose Of Taxes D. Both (A) And (B) E. All Of The Above

3. Total Government Expenditures Currently Represent Approximately What Percentage Of Gdp? A. 20% B. 30% C. 40% D. 50% E. 10%

4. A Cash Payment From The Government To An Individual, Based On Need, Is An Example Of A A. Transfer Payment B. Government Purchase Of A Service C. Government Purchase Of A Good D. Transaction Payment E. Government Receipt

5. A Payment From The Government To A Federal Employee Is A A. Transfer Payment B. Government Purchase Of A Service C. Government Purchase Of A Good D. Transaction Payment E. Government Receipt

6. An Efficient Level Of Government Expenditures Is That Level Where A. Total Costs Are Minimized B. Total Benefits Are Maximized C. Marginal Benefits Are Equal To Marginal Costs D. Marginal Benefits Are Greater Than Marginal Costs E. Marginal Benefits Are Less Than Marginal Costs

7. Public Goods And Services Have Characteristics That Make Them A. Possible To Exclude People From Consuming Them B. Less Available For One Person When Another Consumes Them C. Easy To Provide Through Private Markets D. All Of The Above E. None Of The Above

8. The Size Of Government Is Growing At A. A Slower Rate Than The Rest Of The Economy B. Approximately The Same Rate As The Rest Of The Economy C. A Faster Rate Than The Rest Of The Economy D. Twice The Rate Of The Rest Of The Economy E. A Negative Rate

9. Assuming Negative Externalities In Production, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs C. A Subsidy To Consumers Equal To Marginal External Benefits D. A Subsidy To Consumers Greater Than Marginal External Benefits E. None Of The Above

10. Assuming Positive Externalities In Consumption, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs C. A Subsidy On Each Unit Consumed Equal To Marginal External Benefits D. A Subsidy On Each Unit Consumed Greater Than Marginal External Benefits E. None Of The Above

11. Shifting Income From Those Who Are Relatively Productive To Those Who Are Relatively Unproductive, Say Through Taxes And Subsidies, Must Be Based On A. Sound Economic Principles B. The Laws Of Demand And Supply C. The Values Of People As To What Constitutes A "Fair" Distribution Of Income D. Marginal Cost And Marginal Benefit E. Both (A) And (D)

12. A National Crime Lab Used To Prevent Criminal Activity Nationwide Is An Example Of A A. Negative Externality B. Positive Externality C. Transfer Payment D. Public Good E. Private Good

13. Tax Equity Means That A. All People Should Pay Equal Taxes B. Only The "Rich" Should Pay Taxes C. People In The Same Economic Circumstances Should Pay Equal Taxes, And People In Different Economic Circumstances Should Pay Unequal Taxes D. The Distribution Of Income After Taxes Should Be Equal E. None Of The Above

14. An Efficient Tax Would Be A Tax For Which A. The Excess Burden" From Taxes Is Zero B. Taxes Should Have A Neutral Effect On The Operation Of The Economy C. Taxes Should Be Levied At Progressive Rates D. (A) And (B) E. All Of The Above

15. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Government Purchase Is A. Greater Than The Benefit Of The Last Dollar Spent In The Private Sector B. Less Than The Benefit Of The Last Dollar Spent In The Private Sector C. Equal To The Benefit Of The Last Dollar Spent In The Private Sector D. Paid For Out Of Current Tax Collections E. None Of The Above

16. An Efficient Level Of Government Expenditures Is That Level At Which A. Marginal Benefits Exceed Marginal Costs B. Total Benefits Equal Total Costs C. The Net Benefits To Society Are Maximized D. The Total Costs Are Minimized E. None Of The Above

17. Where Marginal Benefits Are Greater Than The Marginal Costs, Government Expenditures Should A. Be Increased B. Remain The Same C. Be Decreased Then Increased To Their Original Level D. Be Increased Then Decreased To Their Original Level E. Do None Of The Above

18. Characteristics Of Public Goods And Services Include Which Of The Following? A. The Demand For These Goods And Services Is Divisible On The Basis Of Individual Quantity Demanded B. The Supply Of These Goods And Services Is Generally Not Divisible Into Small Units C. These Goods And Services Are Easily Provided By The Market System D. The Costs Of These Goods Fall On Other Than The Buyer E. None Of The Above

19. Which Of The Following Is An Example Of A Public Good Or Service? A. A Public Highway B. Free Cheese Offered By The Government C. Food Stamps D. Social Security E. Automobiles

Questions 20 - 24 Refer To The Graph Below.

20. Assuming No External Benefits Or Costs, The Efficient Price And Quantity Would Be A. P2, Q2 B. P2, Q1 C. P1, Q1 D. P0, Q0 E. P0, Q2

21. Suppose There Are External Benefits Associated With The Production Of The Good. The Efficient Price And Quantity Are A. P2, Q2 B. P2, Q1 C. P1, Q1 D. P0, Q0 E. P0, Q2

22. If External Benefits Are Associated With The Consumption Of The Good, Consumers Could Be Induced To Purchase The Efficient Quantity If The Price Were Set At A. P2 B. P1 C. P0 D. 0 E. None Of The Above

23. To Assure Consumers Purchase The Efficient Quantity When There Are Positive External Benefits, The Government Would Lower Price To A. P2 B. P1 C. P2- P1 D. P0- P1 E. P0

24. Marginal External Benefits Are Represented On The Graph As The Distance A. Ab B. Q2a C. Ea D. Cf E. Af

25. Which Of The Following Is The Major Tax Source Of The Federal Government? A. Income Taxes B. Excise Taxes C. Property Taxes D. Wealth Taxes E. Sales Taxes

26. A Progressive Tax Rate Means That The Ratio Of Tax Collections To Income A. Falls As Income Rises B. Rises As Income Rises C. Remains The Same As Income Rises D. Either (A) And (B) E. May Fall, Rise, Or Remain The Same As Income Rises

27. In The Us, Major Sources Of Tax Revenues Are: A. Income Taxes At The Federal Level, Property Taxes At The State Level B. Sales Taxes At The Federal Level And Income Taxes And Property Taxes At The State Level C. Income Taxes At The Federal Level And Income And Sales Taxes At The State Level D. Income Taxes At The Federal Level And Payroll Taxes At The State Level

28. The Ability To Pay The Principle Of Taxation Suggests That People With More Income Should Pay More Taxes. This Means That A. Progressive Income Rates Are Consistent With The Ability To Pay Principle B. Proportional Income Rates Are Consistent With The Ability To Pay Principle C. Regressive Income Rates May Or May Not Be Consistent With The Ability To Pay Principle Depending On The Rate Of Regression D. Sales Taxes Are Consistent With The Ability To Pay Principle E. None Of The Above

Questions 29 - 33 Refer To The Graph Below.

29. The Demand Curve For This Product Can Be Described As A. Perfectly Elastic B. Perfectly Inelastic C. Unitary Elastic D. Hyper Elastic E. Price Elastic

30. Given Demand Curve D, If An Output Tax Per Unit Of P- P2 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward? A. None B. One-Fourth C. Half D. All E. It Can Not Be Determined

31. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good? A. D To D1 B. D1 To D C. S To S1 D. S1 To S E. None Of The Above

32. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output? A. D To D1 B. D1 To D C. S To S1 D. S1 To S E. None Of The Above

33. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward? A. None B. One-Fourth C. Half D. All E. Cannot Be Determined

Questions 34 - 38 Refer To The Graph Below.

34. The Demand Curve For This Product Can Be Described As A. Perfectly Elastic B. Perfectly Inelastic C. Unitary Elastic D. Hyper Elastic E. Price Elastic

35. Given Demand Curve D, If An Output Tax Per Unit Of P- P1 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward? A. None B. One-Fourth C. Half D. All E. Cannot Be Determined

36. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good? A. D To D1 B. D1 To D C. S To S1 D. S1 To S E. None Of The Above

37. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output? A. D To D1 B. D1 To D C. S To S1 D. S1 To S E. None Of The Above

38. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward? A. None B. One-Fourth C. Half D. All E. Cannot Be Determined

39. An Output Tax Will Be Shifted Completely A. Backward If Demand Is Price Inelastic B. Forward If Demand Is Perfectly Price Inelastic C. Forward If Demand Is Price Elastic D. Backward, Regardless Of Elasticity E. All Of The Above

40. A Tax Levied Independent Of Output, Such As A Tax Levied On Net Income Of Corporations, Will A. Be Shifted If Demand Is More Elastic Than Supply B. Be Shifted If Supply Is More Elastic Than Demand C. Not Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax D. Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax E. Do None Of The Above

41. Government Borrowing Is Argued To Have The Effect Of Raising Interest Rates—The "Crowding-Out Effect." In Conjunction With Government Spending, Does Government Spending And Borrowing Have A Positive Or Negative Impact On The Economy? A. Negative, Since Borrowing Exceeds Spending B. A Positive Impact, Since Expenditures Often Exceed Borrowing C. A Neutral Effect, Since The Budget Is Always In Balance D. Government Spending And Borrowing Have A Minimal Effect On The Economy E. Government Spending And Borrowing Must Be Considered Separately

42. The Gasoline Tax Is Often Used To Illustrate The Benefits Received Principle Of Taxation Because A. Everyone Benefits From The Gasoline Tax B. Those Who Pay The Tax Receive Benefits, Since The Revenues Are Used For Road And Highway Construction And Maintenance C. The Amount We Pay Is Consistent With Our Incomes D. Everyone Knows When They Pay The Tax E. The Gasoline Tax Is A Poor Example Of The Benefits Received Principle

43. Vertical Equity Implies That A. People In Different States Should Pay The Same Taxes B. People With Comparable Incomes Should Pay The Same Taxes C. People In Different Economic Circumstances Should Pay Different Amounts D. Taxes Should Rise As The Size Of Your Family Increases E. Taxes Should Be Based Upon How Tall The Taxpayer Is

44. Proportional Tax Rates Mean That The Ratio Of Tax Collection To Income A. Falls As Income Rises B. Rises, As Income Rises C. Remains The Same As Income Rises D. Rises As Income Falls E. Falls As Income Falls

45. Regressive Tax Rates Mean That The Ratio Of Tax Collections To Income A. Falls As Income Rises B. Rises As Income Rises C. Remains The Same As Income Rises D. Remains The Same As Income Falls E. Falls As Income Falls

46. The Us Federal Personal Income Tax Is An Example Of A(N) A. Regressive Tax Rate Structure B. Proportional Tax Rate Structure C. Progressive Tax Rate Structure D. More Regressive Than Proportional Tax Rate Structure E. Equitable Tax Rate Structure

47. If Demand For A Product Is Perfectly Inelastic, An Output Tax Will Be Shifted A. Completely Backward B. Completely Forward C. Completely To The Poor D. Completely To The Rich E. Completely To The Producer

48. A Tax That Is Shifted Forward Is A Tax That Falls On A. The Consumer In The Form Of Higher Prices B. The Producer Through Lower Sales C. The Government D. Foreign Investors E. None Of The Above

49. A Tax That Is Shifted Backward Is A Tax That Falls On A. The Consumer In The Form Of Higher Prices B. The Owners Of Resources In The Form Of Lower Resource Prices C. The Government D. Foreign Investors E. None Of The Above

50. At The Federal Level, The Largest Revenue Generating Tax Is The A. Corporate Income Tax B. Personal Income Tax C. Property Tax D. Sales Tax E. Customs Duty

51. If The Ratio Of Tax Collections To Income Rises As Income Rises, Then The Tax Rate Is A. Regressive B. Proportional C. Progressive D. Regressive Then Proportional E. None Of The Above

52. The Federal Government Lowered Tax Rates In A. 1986 And 2001 B. 1986 C. 2001 D. Neither Year E. 1909 And Has Raised Them Ever Since

53. Suppose There Are Two Individuals Who Each Earn $25,000 Per Year. One Individual Pays $2,500 In Taxes And The Other Pays $2,000. This Is A Violation Of A. The Benefits Received Principle B. The Ability To Pay Principle C. Vertical Equity D. Horizontal Equity E. None Of The Above

54. Suppose One Individual Earns $25,000 Per Year And Another Individual Earns $15,000 Per Year. If The Individual Earning $25,000 Per Year Pays $750 More Per Year In Taxes Than The Person Earning $15,000, This Is An Illustration Of A. The Benefits Received Principle B. The Ability To Pay Principle C. The Equal Tax Treatment Principle D. The Equitable Payment Doctrine E. None Of The Above

55. If We Levy A Tax On Profits That Is Neither Shifted Neither Forward Nor Backward, It Is A. An Output Tax B. An Input Tax C. A Tax Independent Of Output D. A Tax Dependent On Output E. None Of The Above

56. The Federal Tax System In The United States Can Be Described As A. Regressive B. Highly Progressive C. Slightly Progressive D. Proportional E. None Of The Above

57. A Tax System That Will Not Alter The Distribution Of Income Is A. Proportional B. Regressive C. Slightly Progressive D. Very Progressive E. None Of The Above

58. Which Of The Following Countries Has The Lowest Taxes Collected (As A Percent Of Gdp)? A. The United States B. Germany C. Italy D. France E. The United Kingdom

59. The Highest Effective Federal Tax Rate In The United States Is Approximately A. 10% B. 15% C. 20% D. 24% E. 34%

60. The Highest Effective Federal Tax Rate In The United States Falls On Which Income Category? A. The Lowest Quintile B. The Middle Quintile C. The Top 10% D. The Top 5% E. The Top 1%

61. The Single Most Important Source Of Tax Revenue For The Local Governments In The United States Is The A. Real Property Tax B. Personal Income Tax C. National Sales Tax D. Cigarette Tax E. Inheritance Tax

62. Enforcement And Collection Of Personal Income Taxes Is The Responsibility Of The A. Treasury Department B. Individual State Governments C. Federal Reserve System D. Internal Revenue Service E. Department Of Labor

63. The Federal Government Uses Taxes To A. Generate Revenue B. Encourage Saving For Education And Retirement C. Discourage Certain Behaviors D. Promote The Purchase Of Houses E. Do All Of The Above

64. The 1986 Tax Reform Act ________ The Number Of Tax Brackets And _______ The Highest Tax Bracket. A. Increased; Increased B. Increased; Decreased C. Decreased; Increased D. Decreased; Decreased E. Decreased; Did Not Change

65. Since 2004, The Highest Personal Income Tax Bracket Has Been A. 10% B. 15% C. 25% D. 28% E. 35%

66. The Economic Growth And Taxpayer Relief Reconciliation Act Passed By Congress And Signed By President George W. Bush Did Which Of The Following? A. Immediately Cut Federal Tax Rates By One-Third B. Gave A $300 Check To Each Taxpayer C. Decreased The Tax On Income From Financial Investments D. Decreased The Federal Budget Deficit E. Increased The Number Of Personal Income Tax Brackets

67. The First Budget Surplus Since 1969 Occurred In A. 1993 B. 1995 C. 1998 D. 1999 E. 2000

68. The Budget Surpluses Of The Late 1990’s And The Early 2000’s Could Be Attributed To Which Of The Following Government Policies? A. The Value Added Tax Act B. The Tax Reform Act Of 1986 C. The Economic Growth And Taxpayer Relief Reconciliation Act D. Increased Government Debt E. All Of The Above

69. If A Government Bond With A Maturity Value Of $10,000 Sells For $9,000 And Pays Annual Interest Of $1,000, What Is The Rate Of Interest On The Bond? A. 1% B. 10% C. 11.1% D. 88.9% E. 90%

70. An Increase In Government Borrowing Will Cause Which Of The Following? A. A Decrease In The Demand For Loanable Funds B. A Decrease In The Supply Of Bonds C. An Increase In The Interest Rate D. An Increase In The Price Of Bonds E. All Of The Above

71. Federal Debt Reduction Will Cause Which Of The Following? A. A Decrease In The Interest Rate B. An Increase In Private Investment C. A Decrease In The Supply Of Bonds D. An Increase In The Price Of Bonds E. All Of The Above

72. The Federal Government Ended Its Most Recent Period Of Budget Surpluses And Returned To Deficits In A. 1999 B. 2000 C. 2001 D. 2002 E. 2003

73. The Federal Deficit Was Increased In 2002 As A Result Of A. The 2001 Recession B. The War On Terrorism C. The 2001 Tax Cut D. Increased Defense Spending E. All Of The Above

74. Retiring The Federal Debt Will A. Decrease The Supply Of Government Bonds B. Increase Government Bond Prices C. Lower The Interest Rate On Government Bonds D. Decrease The Demand For Money E. Do All Of The Above

True / False Questions

75. The Fears That People Have Concerning Government Are Related To The Size Of Government And The Distribution Of Taxes.

76. Some Of The Fears That People Have Concerning Government Are Well-Founded And Some Are Not.

77. Government Expenditures Have Grown Faster Than The Gdp Since 1958, Representing About Fifty Percent Of Gdp Today.

78. Government Transfer Payments, Such As Public Assistance Payments And Social Security Payments, Have Been A Constant Percentage Of The Gdp Since 1960.

79. Government Purchases Of Goods And Services Have Remained A Constant Percentage Of The Gdp For The Last Two Decades.

80. Before An Intelligent Decision Can Be Made About Whether Government Is Too Large Or Small, The Benefits And Costs Must Be Weighed.

81. An Efficient Level Of Government Expenditures Is That Level Where Net Benefits To Society Are Maximized.

82. Public Goods And Services Can Be Supplied In The Market Because They Are Easily Divisible Into Small Units And Can Be Priced To The Individual Demander.

83. The Existence Of Externalities In Production Or Consumption Does Not Negate The Possibility That These Goods And Services Can Be Supplied Efficiently In The Market.

84. A Great Deal Of Government Activity Is Based On The Idea That People In Society Should Determine The Extent To Which The Distribution Of Income Should Be Altered.

85. The Major Tax Source Of The Federal Government Is The Highly Regressive Sales Tax.

86. The Federal Income Tax System Results In A Mildly Progressive Tax Structure.

87. The Major Tax Source Of State Governments Is The Property Tax.

88. Progressive Income Tax Rates Are Consistent With The Ability To Pay Principle Of Taxation But Are Inconsistent With The Tax Criterion Of Economic Efficiency.

89. The Relative Tax Treatment Doctrine Would Call For All Taxpayers To Pay Equal Taxes.

90. Since Gasoline Taxes Are Used Primarily To Finance Highways, Gasoline Taxes Can Be Defended On The Benefits Received Principle Of Taxation.

91. The Excess Tax Burden Is In The Form Of The Loss In Private Production That May Take Place If Incentives To Work And To Produce Are Discouraged.

92. A Tax Levied On Each Unit Produced Will Likely Be Shifted Forward And Backward Depending Upon The Elasticities Of Demand And Supply.

93. If An Output Tax Is Levied On A Product That Has A Perfectly Elastic Demand, The Tax Will Be Shifted Completely To The Consumer In The Form Of Higher Prices.

94. Federal Budget Deficits Occurred Throughout The 1970's And 1980's But In The Late 1990's Deficits Turned Into Budget Surpluses.

95. The Tax Reform Act Of 1986 Increased The Highest Marginal Tax Rate To 50% From 38%.

96. In General, A Tax Levied On Net Income Of A Corporation Would Be Shifted To Consumers In The Short Run.

97. Tax Equity Would Probably Be Reduced If Federal Tax Exclusions, Such As Interest On State And Local Government Securities, Were Eliminated.

98. Demand For Public Goods And Services Is Not Generally Divisible On The Basis Of Individual Quantity Demanded.

99. The Tax Base Is What A Tax Is Levied On, Such As Income, Sales, Or The Value Of Property.

100. Regressive Tax Rates Mean That The Ratio Of Tax Collection To Income Rises As Income Rises.

101. Tax Equity Means That All People Should Pay Equal Taxes.

102. An Output Tax Will Be Shifted Completely Forward If Demand Is Price Elastic.

103. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Purchase Is Greater Than The Last Dollar Of Cost.

104. When Marginal Benefits Equal Marginal Costs Then Net Benefits Are Maximized.

105. Horizontal Equity Means That People In Identical Economic Positions Should Pay Equal Taxes.

106. Transfer Payments Are Government Expenditures For Currently Produced Goods And Services.

107. In The Absence Of Externalities, Government Actions Are Needed To Ensure The Efficiency Of The Market System.

108. According To The Equal Tax Treatment Doctrine, People In Identical Economic Circumstances Should Pay Equal Taxes.

109. The Equal Tax Treatment Doctrine Pertains To Vertical Equity.

110. The Federal Tax System Is Much More Progressive Than Is Generally Believed.

111. The Economic Growth And Taxpayer Relief Reconciliation Act, The Job Creation And Worker Assistance Act, And The Jobs And Growth Tax Relief Act Each Reduced Effective Tax Rates On Income.

112. The United States Has Not Had A Federal Budget Surplus Since The 1960s.

113. The Personal Income Tax Is The Single Most Important Source Of Tax Revenue For The Federal Government Of The United States.

114. The Enforcement And Collection Of The Personal Income Tax Is The Responsibility Of The Internal Revenue Service.

115. There Are Currently 14 Tax Brackets Ranging From 11% To 50%.

116. The Federal Government Uses The Tax Code To Encourage Certain Behaviors.

117. Bond Prices And Interest Rates Are Inversely Related.

118. The First Budget Surplus Since 1969 Occurred In 1998.

119. A Budget Deficit Occurs When Tax Revenues Exceed Government Spending.

120. A Lower Interest Rate Encourages Private Investment Spending.

121. The National Debt Is The Sum Of Past Budget Deficits.

122. The Government Owes Almost One Third Of The National Debt To Itself.

123. An Increase In Government Borrowing Increases The Demand For Loanable Funds.

124. An Increase In Government Borrowing Increases The Supply Of Loanable Funds.

125. The Federal Budget Has Been In Deficit Each Year Since The Beginning Of The 1970s.

Chapter 15

Social Security And Medicare: How Secure Is Our Safety Net For The Elderly?

Multiple Choice Questions

1. Government Programs That Guarantee Citizens Financial Benefits For Events Beyond Their Personal Control And That Are Financed Through Tax Revenues Are Called A. Social Insurance Programs B. Entitlement Programs C. Private Insurance Programs D. Welfare Programs E. Transfer Programs

2. The Largest Social Insurance Program In The United States Is A. Temporary Assistance For Needy Families B. Social Security C. Medicaid D. Federal Flood Insurance E. Job Corps

3. The Most Significant Factor That Threatens The Financial Stability Of The Social Security System Is The A. Increasing Number Of Young Workers B. Relatively High Rates Of Social Security Taxes C. Population Bulge Created By The "Baby Boom" Generation D. Generosity Of Current Social Security Benefits E. Threat Of Foreign Workers Entering The U.S. Due To Nafta

4. Which Of The Following Nations Was The First To Offer Its Citizens A Modern Social Insurance Program? A. United States B. Great Britain C. Russia D. Germany E. Japan

5. In The United States, Social Security Was Established In When President Signed The Social Security Act Into Law. A. 1903; Theodore Roosevelt B. 1929; Herbert Hoover C. 1965; Lyndon Johnson D. 1865; Abraham Lincoln E. 1935; Franklin Roosevelt

6. Which Of The Following Statements Is Concerning The Scope Of The Social Security Program? A. Social Security Has Narrowed Its Scope Over Time To Focus On The Economic Stability Of The Individual B. The Scope Of Social Security Has Remained Constant Throughout Its History C. Social Security Has Broadened Its Scope Over Time To Focus On The Economic Stability Of The Family D. The Scope Of Social Security Has Always Focused On The Family Unit E. None Of The Above

7. How Many Americans Receive A Monthly Check From The Social Security Administration? A. Fewer Than 10 Million B. More Than 50 Million C. About 27 Million D. Roughly 38 Million E. More Than 100 Million

8. As Originally Designed, Social Security Was To Be Financed As A A. Private Insurance Program B. Pure Income Transfer Program C. Pay-As-You-Go Insurance Program D. Fully-Funded Insurance Program E. Means-Tested Benefits Program

9. How Are Social Security Tax Revenues Allocated Today? A. They Are Used To Pay Today's Social Security Beneficiaries, And Any Extra Is Placed Into The Social Security Trust Fund B. All Of Today's Revenues Are Placed In The Social Security Trust Fund To Pay For Tomorrow's Beneficiaries C. Tax Revenues Are Placed Into Accounts For Each Worker Who Will Draw Upon The Balance When They Retire D. The Revenues Are Invested In Government Securities And In The Stock Market E. No One Really Knows

10. Current Projections Estimate That The Social Security Trust Fund Will Be Completely Depleted A. In Late 2003 B. During 2010-2020 C. In About 100 Years D. Around 2100 E. Before 2040

11. Given The Way Social Security Is Financed, Which Of The Following Is ? A. Social Security Results In A Transfer Of Income From The Old To The Young B. Social Security Results In A Transfer Of Income From The Young To The Old C. Social Security Has A Neutral Effect On The Nation's Income Distribution D. The Purchasing Power Of The Elderly Has Been Diminished By Social Security Taxes E. (A) And (D)

12. Social Security Taxes Are A. Paid Only By Workers B. Levied On Salaries And Wages C. Paid Only By Employers D. Paid By Both Workers And Employers E. (B) And (D)

13. Currently, The Total Combined Tax Rate Collected By Social Security Is A. 21.6% Of Earnings B. 15.3% Of Earnings C. 7.65% Of Earnings D. 6.20% Of Earnings E. 1.45% Of Earnings

14. Which Of The Following Is Concerning Social Security's Retirement Benefit Structure? A. All Eligible Retired Workers Are Entitled To The Same Benefits B. High Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Low Wage Workers C. Retired Female Workers Are Entitled To Higher Benefits Than Retired Male Workers D. Low Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Do High Wage Workers E. Retired Workers Living In Cities Receive Larger Benefits Than Those Living In Rural Areas

15. Most Of Today's College Student Population Will Be Eligible To Receive Full Social Security Retirement Benefits When They Reach The Age Of A. 62 B. 65 C. 67 D. 70 E. 72

16. The Cost Of Living Adjustment (Cola) Employed By Social Security Is Based On The A. Current Level Of Gdp B. Local Rate Of Inflation C. Consumer Price Index D. Producer Price Index E. Annual Poverty Threshold

17. How Many Elderly Households Receive Social Security Benefits? A. More Than 90% B. Less Than 50% C. About 75% D. Only About 15% E. None Of The Above

18. Which Of The Following Statements Is ? A. 20% Of Elderly Households Receive Social Security As Their Only Source Of Income B. Approximately 90% Of Elderly Households Receive Social Security Benefits C. Just Under 30% Of Elderly Households Receive Private Pension Benefits D. For Nearly Two Thirds Of Elderly Households, Social Security Represents More Than 50% Of Total Income E. None Of The Above. All Are

19. If People Choose To Work Fewer Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The A. Substitution Effect B. Bequest Effect C. Income Effect D. Wealth Effect E. Real Wage Effect

20. If People Choose To Work More Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The A. Substitution Effect B. Bequest Effect C. Income Effect D. Wealth Effect E. Real Wage Effect

21. Empirical Evidence Suggests That Social Security Has _______ The Overall Supply Of Labor. A. Had No Effect On B. Reduced C. Increased D. Stimulated E. Done None Of The Above To

22. Social Security May Increase The Level Of Personal Saving Due To A. The Retirement Effect B. The Bequest Effect C. The Wealth Substitution Effect D. (A) And (B) E. (B) And (C)

23. Empirical Studies Indicate That Social Security Has A. Increased The Level Of Personal Savings B. Had A Neutral Effect On The Level Of Personal Savings C. Reduced The Level Of Personal Savings D. Increased The Number Of Older Workers E. Raised The Average Age At Which Workers Choose To Retire

24. The Effect Of Social Security On Personal Savings Is Important Because A. The Level Of Savings Determines The Pool Of Investment Funds B. Savings Are Necessary To Finance The Social Security Trust Fund C. Personal Savings Are Negatively Related To Economic Growth D. Savings Are A Major Source Of Income For All Elderly Households E. The Level Of Savings Reflects The Magnitude Of Future Consumption

25. Why Can't Social Security Rely On A Strict Pay-As-You-Go Financial Structure? A. The Current Generation Of Workers Is Too Small To Support Future Retirees B. A Pay-As-You-Go Financial Structure Is Inherently Unstable C. The Current Generation Of Retirees Will Bankrupt The System Before The "Baby Boom" Retires D. Inflation Erodes The Value Of Contributions That Must Be Saved To Pay Future Retirees E. None Of The Above

26. The Most Simple And Direct Way To Postpone The Looming Social Security Financial Crisis Is To A. Invest Social Security Taxes In The Stock Market B. Raise Social Security Taxes And/Or Lower Benefits C. Privatize The Social Security Administration D. Eliminate The Social Security System And Force Everyone To Buy Private Insurance E. Subsidize Social Security With General Tax Revenues

27. The Most Significant Argument Against Privatizing Social Security Is That A. Benefits Would Have To Be Cut B. It Has Not Worked In Other Countries C. Future Benefits Levels Cannot Be Guaranteed D. It Is Too Complicated To Be Practical E. Taxes Would Have To Be Raised

28. Why Do Some People Favor Investing The Social Security Trust Fund In The Stock Market? A. Because For Most Beneficiaries The Historic Return On Their Social Security Taxes Has Been Less Than What Would Have Been Earned If Those Dollars Were Invested In The Stock Market B. Because Investment In The Stock Market Will Guarantee Higher Rates Of Return Over The Long Run For All Retirees C. Because Investments In The Stock Market Carry Very Little Risk And Offer The Potential For Excessive Short-Run Gains With Little Or No Potential For Loss D. Because The Stock Market Offers The Safest Form Of Investment E. All Of The Above

Questions 29 - 33 Refer To The Graph Below.

29. The Results Of The Retirement Effect Are Illustrated On The Graph As A Movement From Point A. E To F B. A To C C. E To G D. F To E E. None Of The Above

30. The Results Of The Bequest Effect Are Illustrated On The Graph As A Movement From Point A. E To F B. A To C C. E To G D. F To E E. None Of The Above

31. The Results Of The Wealth Substitution Effect Are Illustrated On The Graph As A Movement From Point A. E To F B. A To C C. E To G D. F To E E. None Of The Above

32. A Change In Consumption From Ce To Cf Could Be Caused By Which Of The Following? A. The Bequest Effect B. The Retirement Effect C. The Wealth Substitution Effect D. All Of The Above E. None Of The Above

33. A Movement From Point E To Point F As A Result Of Social Security Would Result In Which Of The Following Costs To Society? A Long-Run Movement To A. Ppc Cd Rather Than Gh B. Ppc Gh Rather Than Cd C. Point B Rather Than Point A D. Point A Rather Than Point B E. If To Cf

34. If I Start Saving More During My Working Life Because I Anticipate Retiring Earlier Thanks To Social Security, I Am Exhibiting Which Of The Following Effects? A. Retirement B. Bequest C. Wealth Substitution D. Opportunity Cost E. None Of The Above

35. If I Spend More Each Year Because I Know That I Will Receive Social Security Payments When I Retire, I Am Exhibiting Which Of The Following Effects? A. Retirement B. Bequest C. Wealth Substitution D. Opportunity Cost E. None Of The Above

36. If I Put Extra Into A Savings Account So That I Can Leave Assets To My Children To Compensate Them For Their Payments Into The Social Security System, I Am Exhibiting Which Of The Following Effects? A. Retirement B. Bequest C. Wealth Substitution D. Opportunity Cost E. None Of The Above

37. If Inflation Increases, What Will Happen To The Social Security Cola? It Will A. Expire B. Increase C. Decrease D. Be Divided Among Social Security Recipients E. Be Added To The Social Security Trust Fund

38. "An Agreement To Pay A Premium To A Company In Return For A Guarantee Of Financial Benefits In The Event Of An Undesired Circumstance" Defines A. Social Insurance B. Private Insurance C. Private Investment D. Asset Management E. Retirement Savings

39. Social Insurance Uses Tax Revenues To Guarantee Citizens Financial Benefits For Events Including A. Old Age B. Disability C. Poor Health D. Death Of A Spouse E. All Of The Above

40. If A Program's Benefits Are Funded By Interest Earned On Accumulated Payments, It Is Which Type Of System? A. An Investment System B. A Fully Funded Scheme C. An Interest Scheme D. A Pay-As-You-Go System E. An Endowed System

41. If A Program's Benefits Are Funded Out Of Current Payments, It Is Which Type Of System? A. An Investment System B. A Fully Funded Scheme C. A Pyramid Scheme D. A Pay-As-You-Go System E. An Endowed System

42. When Was The Medicare Program Established? A. 1935 B. 1945 C. 1955 D. 1965 E. 1975

43. Today, The Health Care Sector Of The U.S. Economy Accounts For About Percent Of National Income. A. 3 B. 5 C. 8 D. 12 E. 18

44. A Person With Health Insurance Will Tend To A. Have A Lower Demand For Health Care Services B. Have A Much Greater Concern For Preventive Care C. Buy A Lower Quantity Of Health Care At A Higher Price D. Demand More Health Care Services Than A Person Without Insurance E. Do None Of The Above

45. The Payment And Delivery Of Health Care Service Under A Managed Care System Is Based On A. A Fee-For-Service Market Principle B. A Prearranged Schedule Of Fixed Prices C. The Ability To Pay Principle D. Price Negotiation Between The Consumer And Provider E. None Of The Above

46. The Medicare Program A. Was Established As A Socialistic Takeover Of Health Care Providers B. Has Reduced The Demand For Health Care Services C. Affects Persons 65 And Older, Regardless Of Income D. Enrolls All Poor People Regardless Of Age E. Does None Of The Above

47. Part C Of The Medicare Program (Medicare + Choice) A. Provides Health Care Plan Choices To The Beneficiaries Of Medicare B. Restricts Medicare Beneficiaries To A Simple Fee-For-Service Health Care Plan C. Provides Comprehensive Health Insurance Coverage For All Poor People D. Is Only Available To Disabled Retirees Receiving Social Security E. Does None Of The Above

48. A Potential Benefit Of Managed Care Plans To Medicare Enrollees Is That These Plans A. Typically Require Less Cost Sharing B. Provide A Higher Quality Of Health Care C. Provide A Greater Quantity Of Health Care D. Require Less Paper Work E. Do All Of The Above

49. Part A Of The Medicare Program (Hospital Insurance) Is Financed Primarily By A. A Monthly Premium B. A 2.9% Tax Levied On Wages And Salaries C. An Allocation From General Tax Revenues D. User Fees Paid By Patients E. Insurance Deductibles

50. What Percent Of The Average Health Care Dollar Spent In The United States Comes Directly From The Consumer? A. 100 B. 83 C. 50 D. 34 E. 12

51. Which Of The Following Factors Has Contributed Most To The Tremendous Increase In Health Care Expenditures Experience In The U.S. During The Past Fifty Years? A. Health Care Inflation B. The Aging Of The Population C. Increased Public Support For Health Care D. Private Health Insurance E. Growth In Medicaid

52. Which Of The Following Receives The Largest Share Of Expenditures Made On Health Care In The United States? A. Physicians B. Nursing Homes C. Hospitals D. Personal Health Care Product And Service Providers E. Pharmacies

53. In A Fee-For-Service Health Care System, Consumers Pay The A. Insurance Company A Fee Every Time They Use A Service B. Full Cost Of The Services They Receive C. Hmo When They Receive Care D. Doctor A Small Payment Called A "Co-Pay." E. Prearranged, Fixed Fee For Services They Receive

54. How Are Payments To Health Care Providers Determined Under A Managed Care System? By The A. Government B. Market C. Insurance Company And The Provider D. Provider And The Consumer E. Ama (American Medical Association)

55. Which Of The Following Is An Example Of A Managed Health Plan? A. Hmo B. Ppo C. Pos D. Physicians Network E. All Of The Above

Questions 56 - 59 Refer To The Graph Below.

56. With A Market Allocation Of Medical Services, Equilibrium Quantity Will Be A. 0 B. 50 C. 2,000 D. 2,800 E. 4,000

57. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Demanded? A. 0 B. 2,000 C. 2,800 D. 4,000 E. An Infinite Amount

58. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Supplied? A. 0 B. 50 C. 2,000 D. 2,800 E. 4,000

59. The Supply Of Medical Services In This Market Is A. Elastic B. Inelastic C. Unit Elastic D. Price Elastic E. Infinite

60. Under Most Insurance Systems, Patients Are Responsible For Which Of The Following Payments For Health Care Services? A. Deductible B. Co-Insurance C. Fee-For-Service Charges D. All Of The Above E. None Of The Above

61. A Patient May Be Required To Pay A Percentage Of The Cost Of Their Health Care Above The Fixed Fee They Pay. This Is Known As A. The Deductible B. Co-Insurance C. Fee-For-Service D. The Health Care Tax E. Medicare Tax

62. If Your Insurance Company Agrees To Pay A Fixed Fee For You To Receive A Given Treatment (For Example, $5,000 For An Appendectomy), The Company Is Using Which Of The Following? A. A Fee-For-Service System B. A Managed Care System C. A Co-Insurance System D. A Prospective Payment System E. A Social Insurance System

63. If Your Deductible Is $200 And You Pay Co-Insurance Of 20%, How Much Will You Have To Pay For A $3,000 Hospital Stay? A. $200 B. $560 C. $600 D. $760 E. $800

64. If Your Deductible Is $400 And You Have Co-Insurance Of 25%, How Much Will You Have To Pay For A $5,000 Hospital Stay? A. $400 B. $1,150 C. $1,250 D. $1,550 E. $1,650

Questions 65 - 69 Refer To The Graph Below.

65. If Patients Pay The Full Price For Office Visits, What Price Will Be Charged In The Market? A. $0 B. $25 C. $50 D. $75 E. More Than $75

66. If Patients Pay The Full Price For Of Office Visits, How Many Office Visits Will They Make? A. 0 B. 30 C. 50 D. 70 E. More Than 70

67. If A Third Party Guarantees A Maximum Patient Price Of $25, What Quantity Of Office Visits Will Patients Demand? A. 0 B. 30 C. 50 D. 70 E. More Than 70

68. If A Third Party Guarantees A Maximum Patient Price Of $25, What Total Price Must Be Paid Per Office Visit To Assure The Quantity Of Office Visits Demanded Will Be Provided? A. $0 B. $25 C. $50 D. $75 E. More Than $75

69. If A Third Party Guarantees A Maximum Patient Price Of $25, How Much Must The Third Party Pay Per Office Visit? A. $0 B. $25 C. $50 D. $75 E. More Than $75

70. Health Insurance Results In A. An Increase In The Quantity Of Health Care Demanded B. An Increase In The Quantity Of Health Care Provided C. An Increase In The Total Cost Of Providing Health Care D. All Of The Above E. None Of The Above

71. The Medicare Modernization Act, Passed In 2003, Established A. The First Long Term Care Coverage For Medicare Recipients B. Lowered Deductibles For Most Medicare Recipients C. Added A Prescription Drug Benefit To The Medicare Program D. Instituted Stringent Price Controls On The Fees Doctors And Hospitals Can Charge E. Restricted The Benefits That High Income Medicare Recipients Can Receive

72. The Prescription Drug Benefit That Is Part Of The Medicare Modernization Act Of 2003 Requires That Recipients Pay: A. A Monthly Premium B. A Co-Pay C. A Deductible D. All Of The Above E. None Of The Above, These Benefits Are Provided To Recipients At No Charge

True / False Questions

73. Social Insurance Is Private Insurance Purchased By The Government.

74. Programs That Provide Citizens With Benefits For Events That Are Beyond An Individual Person's Control Are Called Social Insurance Programs.

75. Both Social Security And Medicare Are Social Insurance Programs.

76. The Major Underlying Factor That Endangers Social Security's Financial Stability Is The Population Bulge Created By The "Baby Boom" Generation.

77. The United States Was The First Nation To Provide Social Insurance Programs For Its Citizens.

78. The Original Design Of The Social Security System Called For A Pay-As-You-Go Financing Scheme.

79. The Social Security Act Was Signed Into Law By President Franklin Roosevelt In 1935.

80. Over Time, Social Security Has Evolved To Focus More On The Family And Less On The Individual.

81. Currently, About 20 Million Americans Receive Social Security Benefits.

82. All American Citizens Are Entitled To Receive Social Security And Medicare Benefits When They Retire.

83. Today, Social Security Is Financed Under A Pay-As-You-Go Financial System.

84. All Current Social Security Taxes Collected By The Government Are Used To Pay Current Beneficiaries, With Nothing Left Over.

85. Social Security And Medicare Are Financed Through A Flat Tax On Wages Paid Up To A Predetermined Limit.

86. Workers And Their Employers Share The Burden Of Social Security Taxes.

87. The Social Security Trust Fund Currently Has A Negative Balance.

88. Social Security Benefits Are Adjusted Each Year For Inflation Using The Consumer Price Index (Cpi).

89. About 50% Of All Elderly Households Receive Some Form Of Social Security Benefits.

90. Today, In The Aggregate, Social Security Accounts For Over 35% Of Senior Citizens' Income.

91. Without Social Security, Nearly 50 Percent Of Elderly Households Would Live Below The Poverty Threshold.

92. The Substitution Effect Of Social Security Taxes Causes Some People To Work More Hours.

93. The Income Effect Of Social Security Taxes Causes Some People To Work Less Hours.

94. Studies Show That Social Security Has Caused Some Workers To Retire Earlier Than They Would If Social Security Did Not Exist.

95. The Bequest Effect Of Social Security Causes Some People To Save Less During Their Lifetimes.

96. The Empirical Evidence Suggests That, Overall; Social Security Causes People To Increase Their Personal Savings.

97. Because Social Security Increases Savings, More Funds Are Available For Investment In The Overall Economy.

98. Current Estimates Indicate That The Social Security Trust Fund Will Be Depleted Before 2040.

99. A Modest Increase In Taxes Could Postpone Social Security's Financial Crisis For Decades.

100. Privatization Of The Social Security System Would Reduce The Financial Risks Faced By Retiring Workers.

101. Chile And Other Nations Have Successfully Privatized All Or Part Of Their Social Insurance Programs.

102. Oasdi Is Social Security's Medical Insurance Program.

103. The Most Important Factor Explaining The Growth In Personal Health Care Expenditures On Hospital And Physician Services Is Higher Prices For These Services.

104. Third-Party Payments Increase The Efficiency Of Medical Markets.

105. A Dominant Feature Of The U.S. Health Care Industry Is Price Competition Among Providers.

106. Medicare And Medicaid Have Reduced The Demand For Health Care Services.

107. The Purpose Of A Prearranged Payment And Delivery System, Such As A Managed Care Plan, Is To Take Away Any Incentive For The Provider To Supply Unnecessary Care.

108. The Demand For Health Services Is Characterized By Well-Informed Consumers.

109. The Medicare Program Affects Persons Aged 65 And Older, Regardless Of Their Income Level.

110. A Consumer With Health Insurance Is Likely To Buy More Health Services Than One Who Is Not Insured.

111. A Reduction In The Price Of Medical Services Will Cause The Demand Curve To Shift To The Right.

112. Health Care Providers Are Paid The Amount Of A Patient's Deductible By The Health Insurance Company.

113. The Amount A Patient Must Pay Above The Deductible Is Known As Co-Insurance.

114. Projections Indicate That The Medicare Hi Program Will Be Depleted Of Funds By 2025.

115. More Than 70% Of All Privately Insured Employees Are Covered By Managed Care Plans.

116. The Medicare Program Could Be Secured By An Increase In The Payroll Tax That Supports The Program.

117. The Medicare Program Could Be Secured By Increasing Premiums, Deductibles And Co Payments.

118. Medicare's Fee-For-Service Plan Provides Incentives For Supplying Excessive Services.

119. Managed Care Plans Provide Incentives For Supplying Excessive Services.

120. Third-Party Payments For Health Care Increase The Quantity Of Services Demanded.

121. Third-Party Payments For Health Care Decrease The Price Consumers Pay For Services.

122. The Fee-For-Service Delivery And Payment System Is The Primary Means By Which Most Elderly Americans Receive Their Health Care.

123. Third-Party Payments For Health Care Result In Less Usage Of The Health Care System.

124. Managed Care Leads To Higher Costs Of Providing Health Care Services.

125. Investments Of Social Security Tax Payments Result In High Returns On The Contributions Made By Taxpayers.

#ECO 405 Week 11 Quiz – Strayer

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ECO 305 Week 11 Quiz – Strayer

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Quiz 10 Chapter 16 and 17

MACROECONOMIC POLICY IN AN OPEN ECONOMY

MULTIPLE CHOICE

1. A nation experiences internal balance if it achieves:

a. Full employment

b. Price stability

c. Full employment and price stability

d. Unemployment and price instability

2. A nation experiences external balance if it achieves:

a. No net changes in its international gold stocks

b. Productivity levels equal to those of its trading partners

c. An increase in its money supply equal to increases overseas

d. Equilibrium in its balance of payments

3. A nation experiences overall balance if it achieves:

a. Balance-of-payments equilibrium, full employment, and price stability

b. Balance-of-payments equilibrium, maximum productivity, and price stability

c. Full employment, price stability and no change in its money supply

d. Full employment, price stability, and maximum productivity

4. Most industrial countries generally considered ____ as the most important economic goal.

a. External balance

b. Internal balance

c. Maximum efficiency for business

d. Maximum efficiency for labor

5. Which policies are expenditure-changing policies?

a. Currency devaluation and revaluation

b. Import quotas and tariffs

c. Monetary and fiscal policy

d. Wage and price controls

6. Which policy is an expenditure-switching policy?

a. Increase in the money supply

b. Decrease in government expenditures

c. Increase in business and household taxes

d. Decrease in import tariffs

7. An expenditure-increasing policy would consist of an increase in:

a. Import tariffs

b. Import quotas

c. Governmental taxes

d. The money supply

8. An expenditure-reducing policy would consist of a decrease in:

a. The par value of a currency

b. Government expenditures

c. Import duties

d. Business or household taxes

9. Given fixed exchange rates, assume Mexico initiates expansionary monetary and fiscal policies to combat recession. These policies will also:

a. Increase both imports and exports

b. Increase exports and reduce imports

c. Reduce a balance-of-payments surplus

d. Reduce a balance-of-payments deficit

10. Given fixed exchange rates, assume Mexico initiates contractionary monetary and fiscal policies to combat inflation. These policies will also:

a. Reduce a balance-of-payments surplus

b. Reduce a balance-of-payments deficit

c. Increases both imports and exports

d. Decrease both imports and exports

11. The appropriate expenditure-switching policy to correct a current account surplus is:

a. Currency revaluation

b. Currency devaluation

c. Expansionary monetary policy

d. Contractionary fiscal policy

12. The appropriate expenditure-switching policy to correct a current account deficit is:

a. Contractionary monetary policy

b. Expansionary fiscal policy

c. Currency devaluation

d. Currency revaluation

13. Suppose the United States faces domestic recession and a current account deficit. Should the United States devalue the dollar, one would expect the:

a. Recession to become less severe--deficit to become less severe

b. Recession to become more severe--deficit to become less severe

c. Recession to become less severe--deficit to become more severe

d. Recession to become more severe--deficit to become more severe

14. Suppose the United States faces domestic inflation and a current account surplus. Should the United States revalue the dollar, one would expect the:

a. Inflation to become more severe--surplus to become less severe

b. Inflation to become less severe--surplus to become less severe

c. Inflation to become less severe--surplus to become more severe

d. Inflation to become more severe--surplus to become more severe

15. Suppose Brazil faces domestic recession and a current account surplus. Should Brazil revalue its currency, one would expect the:

a. Recession to become less severe--surplus to become less severe

b. Recession to become more severe--surplus to become more severe

c. Recession to become more severe--surplus to become less severe

d. Recession to become less severe--surplus to become more severe

16. Suppose that Brazil faces domestic inflation and a current account deficit. Should Brazil devalue its currency, one would expect the:

a. Inflation to become more severe--deficit to become less severe

b. Inflation to become more severe--deficit to become more severe

c. Inflation to become less severe--deficit to become less severe

d. Inflation to become less severe--deficit to become more severe

17. In a closed economy, which of the following will cause the economy's aggregate demand curve to shift to the right?

a. decreases and wages and salaries paid to employees

b. increases in the prices of oil and natural gas

c. decreases in income taxes for households

d. decreases in the productivity of labor

18. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy

a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output

b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output

c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output

d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

19. A problem that economic policy makers confront when attempting to promote both internal and external balance for the nation is that monetary or fiscal policies aimed at the domestic sector also have impacts on:

a. Trade flows only

b. Capital flows only

c. both trade flows and capital flows

d. Neither trade flows nor capital flows

20. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy

a. cause aggregate demand to increase, thus strengthening the policy's expansionary effect on real output

b. cause aggregate demand to decrease, thus eliminating the policy's expansionary effect on real output

c. have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect on real output

d. have conflicting effects on aggregate demand, thus strengthening the policy's expansionary effect on real output

21. A system of fixed exchange rates and high capital mobility strengthens which policy in combating a recession:

a. Expansionary fiscal policy

b. Expansionary monetary policy

c. Contractionary fiscal policy

d. Contractionary monetary policy

22. A system of floating exchange rates and high capital mobility strengthens which policy in combating a recession:

a. Expansionary fiscal policy

b. Expansionary monetary policy

c. Contractionary fiscal policy

d. Contractionary monetary policy

23. Given an open economy with high capital mobility, all of the following statements are true except:

a. fiscal policy is strengthened under fixed exchange rates

b. monetary policy is weakened under fixed exchange rates

c. monetary policy is strengthened under floating exchange rates

d. fiscal policy is strengthened under floating exchange rates

24. Under a system of managed-floating exchange rates with heavy exchange rate intervention:

a. Fiscal policy is successful in promoting internal balance, while monetary policy is unsuccessful

b. Monetary policy is successful in promoting internal balance, while fiscal policy is unsuccessful

c. Both fiscal policy and monetary policy are successful in promoting internal balance

d. Neither fiscal policy nor monetary policy are successful in promoting internal balance

25. Given a system of floating exchange rates, an expansionary monetary policy by the Federal Reserve will cause

a. the dollar to appreciate and will decrease U.S. net exports

b. the dollar to appreciate and will increase U.S. net exports

c. the dollar to depreciate and will increase U.S. net exports

d. the dollar to depreciate and will decrease U.S. net exports

26. Given a system of floating exchange rates, a contractionary monetary policy by the Federal Reserve will cause

a. the dollar to appreciate and will decrease U.S. net exports

b. the dollar to appreciate and will increase U.S. net exports

c. the dollar to depreciate and will increase U.S. net exports

d. the dollar to depreciate and will decrease U.S. net exports

27. All of the following are obstacles to international economic policy coordination except:

a. Different national objectives and institutions

b. Different national political climates

c. Different phases in the business cycle

d. Different national currencies

28. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

a. domestic money supply to decrease and a decline in aggregate demand

b. domestic money supply to increase and a decline in aggregate demand

c. domestic money supply to decrease and a rise in aggregate demand

d. domestic money supply to increase and a rise in aggregate demand

29. At the ____, the Group-of-Five nations agreed to intervene in the currency markets to promote a depreciation in the U.S. dollar's exchange value.

a. Plaza Agreement of 1985

b. Louvre Accord of 1987

c. Bonn Summit of 1978

d. Tokyo Summit of 1962

30. The Plaza Agreement of 1985 and Louvre Accord of 1987 are examples of:

a. Tariff trade barrier formation

b. Nontariff trade barrier formation

c. International economic policy coordination

d. Beggar-thy-neighbor policies

Exhibit 16.1

At the Plaza Accord of 1985, the Group-of-Five nations agreed to drive the value of the dollar downward (i.e., depreciation) so as to help reduce the U.S. trade deficit. Answer the following question(s) on the basis of this information.

31. Refer to Exhibit 16.1. To help drive the dollar's exchange value downward, the Federal Reserve would:

a. Reduce taxes

b. Increase taxes

c. Decrease the money supply

d. Increase the money supply

32. Refer to Exhibit 16.1. The Federal Reserve might refuse to support the accord on the grounds that when helping to drive the dollar's exchange value downward, it promotes an increase in the U.S.:

a. Rate of inflation

b. Budget deficit

c. Unemployment level

d. Economic growth rate

33. Under a fixed exchange-rate system and high capital mobility, an expansion in the domestic money supply leads to:

a. Trade-account deficit and a capital-account surplus

b. Trade-account deficit and a capital-account deficit

c. Trade-account surplus and a capital-account surplus

d. Trade-account surplus and a capital-account deficit

34. Under a fixed exchange-rate system and high capital mobility, a contraction in the domestic money supply leads to a:

a. Trade-account deficit and a capital-account surplus

b. Trade-account deficit and a capital-account deficit

c. Trade-account surplus and a capital-account surplus

d. Trade-account surplus and a capital-account deficit

35. Under a fixed exchange-rate system and high capital mobility, an expansionary fiscal policy leads to a:

a. Trade-account deficit and a capital-account surplus

b. Trade-account deficit and a capital-account deficit

c. Trade-account surplus and a capital-account surplus

d. Trade-account surplus and a capital-account deficit

36. Under a fixed exchange-rate system and high capital mobility, a contractionary fiscal policy leads to a:

a. Trade-account deficit and a capital-account surplus

b. Trade-account deficit and a capital-account deficit

c. Trade-account surplus and a capital-account surplus

d. Trade-account surplus and a capital-account deficit

37. Suppose a central bank prevents a depreciation of its currency by intervening in the foreign exchange market and buying its currency with foreign currency. This causes the

a. domestic money supply to decrease and a decline in aggregate demand

b. domestic money supply to increase and a decline in aggregate demand

c. domestic money supply to decrease and a rise in aggregate demand

d. domestic money supply to increase and a fall in aggregate demand

38. Suppose a central bank prevents an appreciation of its currency by intervening in the foreign exchange market and selling its currency for foreign currency. This causes the

a. domestic money supply to decrease and a decline in aggregate demand

b. domestic money supply to increase and a decline in aggregate demand

c. domestic money supply to decrease and a rise in aggregate demand

d. domestic money supply to increase and a fall in aggregate demand

39. Assume a system of floating exchange rates. In response to relatively high interest rates abroad, suppose domestic investors place their funds in foreign capital markets. The result would be

a. a depreciation of the domestic currency and a rise in net exports

b. a depreciation of the domestic currency and a fall in net exports

c. an appreciation of the domestic currency and a rise in net exports

d. an appreciation of the domestic currency and a fall in net exports

40. Assume a system of floating exchange rates. In response to relatively high domestic interest rates, suppose that foreign investors place their funds in domestic capital markets. The result would be

a. a depreciation of the domestic currency and a rise in net exports

b. a depreciation of the domestic currency and a fall in net exports

c. an appreciation of the domestic currency and a rise in net exports

d. an appreciation of the domestic currency and a fall in net exports

41. When a nation realizes external balance

a. it can have a current account deficit

b. it can have a current account surplus

c. it has neither a current account deficit nor a current account surplus

d. Both a and b

42. Direct controls may take the form of

a. Tariffs

b. Export subsidies

c. Export quotas

d. All of the above

43. With a fixed exchange rate system, internal balance is most effectively achieved by using

a. Expansionary monetary policy to combat recession

b. Expansionary fiscal policy to combat inflation

c. Contractionary monetary policy to combat recession

d. Contractionary fiscal policy to combat recession

44. Policy coordination is complicated by

a. Different economic objectives

b. Different national institutions

c. Different phases in the business cycle

d. All of the above

TRUE/FALSE

1. A nation realizes internal balance if economy achieves full employment and price stability.

2. Nations have typically placed greater importance to the goal of internal balance than to the goal of external balance.

3. A nation realizes external balance when its current account is in equilibrium.

4. A nation realizes overall balance when it achieves full employment and current account equilibrium.

5. Expenditure-changing policies modify the direction of aggregate demand, shifting it between domestic output and imports.

6. Expenditure-switching policies include fiscal policy and monetary policy.

7. Economic policymakers have typically adopted expenditure-increasing policies to combat inflation and expenditure-reducing policies to combat recession.

8. Expenditure-switching policies alter the level of total spending (aggregate demand) for goods and services produced domestically and those imported.

9. Currency devaluation and revaluation are considered to be expenditure-changing policies since they alter a country's aggregate demand for goods and services.

10. Expenditure-switching policies include currency revaluation, currency devaluation, and direct controls such as tariffs, quotas, and subsidies.

11. Given an open economy with high capital mobility and floating exchange rates, suppose an expansionary monetary policy is implemented to combat recession. The initial and secondary effects of the policy have conflicting effects on aggregate demand, thus weakening the policy's expansionary effect.

12. Given an open economy with high capital mobility and fixed exchange rates, suppose an expansionary fiscal policy is implemented to combat recession. The initial and secondary effects of the policy cause aggregate demand to increase, thus strengthening the policy's expansionary effect.

13. When the economy is in deep recession or depression, it is operating on that portion of its aggregate supply curve that is horizontal.

14. Changes in a country's net exports, investment spending, or government spending will cause its aggregate demand curve to shift.

15. Given an open economy with high capital mobility, fiscal policy is strengthened under fixed exchange rates.

16. Given an open economy with high capital mobility, monetary policy is strengthened under fixed exchange rates.

17. Under floating exchange rates and high capital mobility, an expansionary monetary policy would help a country resolve a recession and a current account deficit.

18. Exchange rate management policies require international policy coordination because a depreciation of one nation's currency implies an appreciation of its trading partner's currency.

19. Currency devaluation and revaluation primarily affect the economy's current account and have secondary effects on domestic employment and inflation.

20. Fiscal and monetary policies are generally used to combat domestic recession and inflation and have secondary effects on the balance of payments.

21. The Group of five (G-5) nations include Japan, Germany, China, and Australia.

22. The Bonn Summit of 1978 and Plaza Accord of 1985 are examples of international policy coordination.

23. International policy coordination is plagued by differing national economic objectives, institutions, political climates, and phases in the business cycle.

24. The goals of the Plaza Agreement of 1985 were to combat protectionism in the U.S. Congress, promote world economic expansion by stimulating demand in Germany and Japan, and to ease the burden of the U.S. debt service.

SHORT ANSWER

1. What policy instrument should be used when demand-pull inflation exists?

2. What happens to the balance of payments under a fixed exchange rate system, when expansionary or contractionary monetary policy is used?

ESSAY

1. Was the Plaza Agreement of 1985 a success?

2. What is international economic policy coordination?

CHAPTER 17—INTERNATIONAL BANKING: RESERVES, DEBT, AND RISK

MULTIPLE CHOICE

1. Which of the following assets makes use of the basket valuation technique?

a. Swap agreements

b. Oil facility

c. Buffer stock facility

d. Special drawing rights

2. Swap agreements are generally conducted by the:

a. Federal Reserve with foreign central banks

b. Federal Reserve with foreign commercial banks

c. U.S. Treasury with foreign central banks

d. U.S. Treasury with foreign commercial banks

3. Which of the following is a main central bank function of the International Monetary Fund?

a. The conduct of open market operations

b. The issuance of gold certificates

c. The provision of monetary policy for member nations

d. The granting of loans to member nations

4. The Federal Reserve's swap network represents:

a. Efforts to stabilize only the value of the dollar

b. Efforts to stabilize only the value of foreign currencies

c. Long-term borrowing among countries

d. Short-term borrowing among countries

5. International trade and investment are most frequently financed by the U.S. dollar and the:

a. Japanese yen

b. British pound

c. Australian dollar

d. Swiss franc

6. The purpose of international reserves is to finance:

a. Short-term surpluses in the balance of payments

b. Long-term surpluses in the balance of payments

c. Short-term deficits in the balance of payments

d. Long-term deficits in the balance of payments

7. The currencies generally referred to as "reserve currencies" are the:

a. Japanese yen and U.S. dollar

b. Swiss franc and Japanese yen

c. British pound and U.S. dollar

d. Swiss franc and British pound

8. Which of the following does not represent a form of international liquidity?

a. IMF reserve positions

b. General arrangements to borrow

c. U.S. government securities

d. Reciprocal currency arrangements

9. Which of the following is not considered an "owned" reserve?

a. National currencies

b. Gold

c. Special drawing rights

d. Oil facility

10. Which of the following is not considered a "borrowed" reserve?

a. Special drawing rights

b. Oil facility

c. IMF drawings

d. Reciprocal currency arrangement

11. Eurodollars are:

a. Dollar-denominated deposits in overseas banks

b. European currencies used to finance transactions in the United States

c. Dollars that U.S. residents spend in Europe

d. European currencies used to finance imports from the United States

12. Which of the following is not a characteristic of the Eurodollar market? It:

a. Is mainly located in the United Kingdom and continental Europe

b. Operates as a financial intermediary, bringing together lenders and borrowers

c. Deals in interest-bearing time deposits and loans to governments

d. Grew in response to the deregulation of interest rate ceilings on U.S. savings accounts

13. Which of the following assets was (were) created in 1970 to provide additional international liquidity, in the belief that increasing world trade requires more liquidity for larger expected payments imbalances?

a. Eurodollar market

b. Special drawing rights

c. Reciprocal currency arrangements

d. General arrangements to borrow

14. Which of the following constitute(s) the largest component of the world's international reserves?

a. Gold

b. Special drawing rights

c. IMF drawings

d. Foreign currencies

15. With an international gold standard, if a country ended up with a deficit from the balances on its current and capital accounts, it would:

a. Import gold to settle the balance

b. Export gold to settle the balance

c. Officially decrease the price of gold

d. Officially increase the price of gold

16. Which of the following is not a condition of the international gold standard? That a nation must:

a. Convert gold into paper currency, and vice versa, at a stipulated rate

b. Permit gold to be freely imported and exported

c. Tolerate wide fluctuations in its exchange rate

d. Define its monetary unit in terms of a stipulated amount of gold

17. All of the following exchange-rate systems require international reserves to finance balance-of-payments disequilibriums except:

a. Pegged or fixed exchange rates

b. Managed floating exchange rates

c. Adjustable pegged exchange rates

d. Freely floating exchange rates

18. A dollar shortage would indicate that the dollar is:

a. Undervalued in international markets

b. Overvalued in international markets

c. Overvalued in terms of gold

d. Overvalued in terms of special drawing rights

19. The U.S. gold outflow that began in the late 1940s and continued through the 1960s was due in part to:

a. Crawling pegged exchange rates

b. Freely floating exchange rates

c. An undervalued dollar

d. An overvalued dollar

20. The U.S. dollar glut of the 1960s was due in part to:

a. An undervalued dollar

b. An overvalued dollar

c. Freely floating exchange rates

d. Crawling pegged exchange rates

21. For developing countries such as Mexico and Brazil, severe economic problems in the 1980s were caused by:

a. A fall in the world demand for products produced by developing countries

b. High prices of basic raw materials and other commodities

c. Low real interest rates in the United States

d. High levels of income and imports for the United States

22. In response to the international debt problem, the United States set up a special fund in 1986 to help make up for lost oil revenues. Under the plan, the United States would make more money available as world oil prices fell. This plan was designed to help:

a. Argentina

b. Saudi Arabia

c. Mexico

d. Brazil

23. Which indicator of international debt burden schedules interest and principal payments on long-term debt as a percent of export earnings?

a. Debt service ratio

b. Debt-to-export ratio

c. Ratio of external debt to gross domestic product

d. Ratio of external debt to gross national product

24. Which term best describes the process in which the International Monetary Fund provides loans to countries facing balance-of-payments difficulties provided that they initiate programs holding promise of correcting these difficulties?

a. Conditionality

b. Debt service

c. Reciprocal currency arrangement

d. Swap agreement

25. All of the following are major goals of the International Monetary Fund except:

a. Promoting international cooperation among member countries

b. Fostering a multilateral system of international payments

c. Making long-term development and reconstruction loans

d. Promoting exchange-rate stability and the elimination of exchange restrictions

26. Which international reserve asset was officially phased out of the international monetary system by the United States in the early 1970s?

a. Special drawing rights

b. Swap agreements

c. General arrangements to borrow

d. Gold

27. Bilateral agreements between central banks, which provide for an exchange of currencies to help finance temporary balance-of-payments disequilibriums, are referred to as:

a. IMF drawings

b. Special drawing rights

c. Buffer stock facility

d. Swap agreements

28. Which organization is largely intended to make long-term reconstruction loans to developing nations?

a. Export-Import Bank

b. World Bank

c. International Monetary Fund

d. United Nations

29. "Owned" international reserves consist of:

a. Special drawing rights

b. Oil facility

c. IMF drawings

d. Reciprocal currency arrangements

30. "Borrowed" international reserves consist of:

a. IMF drawings

b. Foreign currencies

c. Gold

d. Special drawing rights

31. Concerning international lending risk of commercial banks, ____ refers to the probability that part/all of the interest/principal of a loan will not be repaid.

a. Country risk

b. Credit risk

c. Currency risk

d. Presidential risk

32. Concerning international lending risk of commercial banks, ____ is closely related to political developments in a borrowing country, especially the government's views concerning international investments and loans.

a. Economic risk

b. Credit risk

c. Country risk

d. Currency risk

33. Concerning international lending risk of commercial banks, ____ is associated with possible changes in the exchange value of a nation's currency.

a. Political risk

b. Country risk

c. Credit risk

d. Currency risk

34. To reduce their exposure to developing country debt, lending commercial banks have practiced all of the following except:

a. Making outright loan sales to other commercial banks

b. Reducing their capital base as a cushion against losses

c. Dealing in debt-for-debt swaps with foreign governments

d. Dealing in debt/equity swaps with foreign governments

35. To reduce losses on developing country loans, commercial banks sometimes sell their loans, at a discount, to a developing country government for local currency which is then used to finance purchases of ownership shares in developing country industries. This practice is known as:

a. Debt forgiveness

b. Debt buyback

c. Debt-for-debt swap

d. Debt/equity swap

36. Concerning international debt, ____ refers to a negotiated reduction in the contractual obligations of the debtor country and includes schemes such as markdowns and write-offs of debt.

a. Debt/equity swap

b. Debt-for-debt swap

c. Debt forgiveness

d. Debt sales

37. The exchange of borrowing country debt for an ownership position in the borrowing country is known as:

a. Debt forgiveness

b. Debt-for-debt swap

c. Debt reduction

d. Debt/equity swap

38. "Country risk" analysis is concerned with all of the following except:

a. Depreciation of the borrowing country's currency

b. Political instability in the borrowing country

c. Economic growth in the borrowing country

d. External debt of the borrowing country

39. Debt reduction

a. Refers to any voluntary scheme that lessens the burden on the debtor nation

b. May be accomplished through debt rescheduling

c. May be achieved through debt/equity swaps

d. All of the above

40. Most analysts feel that the financial difficulties in East Asia were triggered by

a. Misallocation of investment

b. Unavailability of cheap foreign labor

c. Lack of alignment of the exchange rate with the dollar

d. Surpluses in the trade accounts of the Asian countries

41. A nation may experience debt-servicing problems because of

a. Pursuit of improper macroeconomic policies

b. Inadequate borrowing

c. Adverse economic events

d. Both a and c

42. Swap arrangements

a. Are agreements between governments

b. Require repayment within a stipulated period

c. Are usually multilateral agreements

d. Are never initiated by telephone

TRUE/FALSE

1. Under a system of fixed exchange rates, international reserves are needed to bridge the gap between monetary receipts and monetary payments.

2. International reserves allow a country to finance disequilibria in its balance-of-payments position.

3. An advantage of international reserves is that they allow countries to sustain temporary balance-of-payments deficits until acceptable adjustment measures can operate to correct the disequilibrium.

4. With floating exchange rates, countries require sizable amounts of international reserves for the stabilization of exchange rates.

5. When exchange rates are fixed by central bankers, the need for international reserves disappears.

6. When exchange rates are fixed by central bankers, international reserves are necessary for financing payments imbalances and the stabilization of exchange rates.

7. There exists a direct relationship between the degree of exchange rate flexibility and the need for international reserves.

8. With floating exchange rates, payments imbalances tend to be corrected by market-induced fluctuations in the exchange rate, and the need for exchange-rate stabilization and international reserves disappears.

The diagram below represents the exchange market position of the United States in trade with the United Kingdom. Starting at the equilibrium exchange rate of $3 per pound, suppose the demand for pounds rises from D0 to D1.

Figure 17.1 Foreign Exchange Market

9. Refer to Figure 17.1. Under a fixed exchange rate system, U.S. monetary authorities would have to supply 8 million pounds in exchange for dollars to keep the exchange rate at $3 per pound.

10. Refer to Figure 17.1. If the exchange rate was allowed to rise to $4 per pound, U.S. monetary authorities would have to supply 6 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

11. Refer to Figure 17.1. Under a floating exchange rate system, the exchange rate would rise to $4 and U.S. monetary authorities would have to supply 4 million pounds to the foreign exchange market in exchange for dollars to maintain this rate.

12. To the extent that adjustments in prices, interest rates, and income levels promote balance-of-payments equilibrium, the demand for international reserves decreases.

13. The greater a nation's propensity to apply tariffs and quotas to key sectors, the greater will be the need for international reserves.

14. The demand for international reserves is negatively related to the level of world prices and income.

15. The demand for international reserves tend to increase with the level of world income and trade activity.

16. If a nation with a balance-of-payments deficit is willing and able to initiate quick actions to increase export receipts and decrease import payments, the amount of international reserves needed will be relatively large.

17. The supply of international reserves consists of owned reserves and borrowed reserves.

18. Foreign currencies constitute the smallest component of the world's international reserves.

19. Gold constitutes the largest component of the world's international reserves.

20. The U.S. dollar has been considered a reserve (key) currency because trading nations have been willing to hold it as an international reserve asset.

21. The U.S. dollar, Japanese yen, British pound, and Mexican peso are the major reserve currencies of the international monetary system.

22. By the 1990s, the British pound had replaced the U.S. dollar as the world's key currency.

23. A goal of the International Monetary Fund is to make short-term loans to member nations so as to allow them to correct balance of payments disequilibriums without resorting to measures that would destroy national prosperity.

24. When granting loans to financially troubled nations, the International Monetary Fund requires some degree of conditionality, meaning that the borrowing nation must agree to implement economic policies as mandated by the IMF.

25. The International Monetary Fund has sometimes demanded that financially-troubled nations, that borrow from the IMF, undergo austerity programs including slashing of public spending and private consumption.

26. The main purpose of the International Monetary Fund is to grant long-term loans to developing nations to help them finance the development of infrastructure such as roads, dams, and bridges.

27. Gold is currently the most widely used asset in the international monetary system.

28. In 1974 the United States revoked a 41-year ban on U.S. citizen's ownership of gold.

29. In 1975 the official price of gold was abolished as the unit of account for the international monetary system. As a result, gold was demonetized as an international reserve asset.

30. In the 1970s, the major industrial countries abandoned the managed-floating exchange rate system and adopted a system of fixed exchange rates tied to the price of gold.

31. Created by the International Monetary Fund, special drawing rights (SDRs) are unconditional rights to draw currencies of other nations, thus enabling countries to finance their current-account deficits.

32. The value of the SDR is tied to a currency basket consisting of the U.S. dollar, German mark, Japanese yen, French franc, and British pound.

33. The SDR has replaced the dollar, yen, and mark as the key asset of the international financial system.

34. Because the value of the SDR is tied directly to the value of the U.S. dollar, a 10 percent dollar depreciation would result in a 10 percent decrease in the SDR's value.

35. A main purpose of the International Monetary Fund is to make loans of foreign currencies to member countries which are experiencing current-account surpluses.

36. When a deficit nation borrows from the International Monetary Fund, it purchases with its currency the foreign currency required to help finance the payments deficit.

37. The so-called General Arrangements to Borrow provide a permanent increase in the supply of international reserves.

38. Swap arrangements are bilateral agreements between central banks to allow countries to temporarily borrow funds to ease current-account deficits and discourage speculative capital flows.

39. IMF drawings, swap arrangements, buffer stock facility, and compensatory financing for exports are classified as owned reserves rather than borrowed reserves.

40. Concerning international lending risk, credit risk refers to the probability that part or all of the interest rate or principal of a loan will not be repaid.

41. Concerning international lending risk, country risk refers to the risk that part or all of the interest or principal of a loan will not be repaid.

42. Concerning international lending risk, currency risk is the risk of asset losses due to changing currency values.

43. A country with a high debt/export ratio and a high debt service/export ratio would likely be considered as an attractive place in which to invest by foreign residents.

44. A debt buyback is a debt-reduction technique in which a government of a debtor nation buys loans from commercial banks at a discount.

45. Under a debt-for-debt swap, a commercial bank sells its loans at a discount to a developing country government for local currency which it then uses to finance an equity investment in the debtor country.

46. A debt-equity swap results in a trade surplus nation forgiving the loans made to a trade-deficit nation.

47. Eurocurrencies are deposits, denominated and payable in dollars and other foreign currencies, in banks outside the United States, primarily in London, the market's center.

SHORT ANSWER

1. Why do countries hold international reserves?

2. How can a bank reduce its exposure to the debt of developing nations?

ESSAY

1. Describe the eurocurrency market.

2. Are international reserve needs different for different exchange rate regimes?

#ECO 305 Week 11 Quiz – Strayer

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ECO 302 Week 11 Quiz - Strayer

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Chapter 17 and 18

TRUE/FALSE

1. With an international sector real GNP is consumption plus gross investment plus government purchases plus net real asset income from abroad.

2. The balance of trade is net exports or imports less exports.

3. A higher current account deficit is caused by a declining domestic economy.

4. The real current account balance is real national saving less net domestic investment.

5. Tariffs and quotas lead to a higher real GDP growth rate in the country imposing them.

6. The law of one price says that there must be a unique price for a good in each location where it is sold.

7. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has a current-account deficit.

8. Foreign direct investment occurs when the home country acquires additional ownership of capital located in the rest of the world.

9. If the home country has negative trade balance, then its real GDP is less than real domestic expenditure.

10. The equilibrium business-cycle model predicts that the real current-account balance will be countercyclical.

MULTIPLE CHOICE

1. The law of one price:

a. prohibits price discrimination. c. is a tax on imports.

b. is that markets work to ensure that the same good has the same price in all locations. d. prohibits price increases unless firms can show their are unusual circumstances.

2. The difference between real GDP in a closed economy and real GNP in a open economy is:

a. net real asset income from abroad. c. net international investment position.

b. net imports. d. the trade balance.

3. Real GNP in an open economy is:

a. the closed economy real output less net real asset income from abroad. c. the closed economy real output less gross real asset income from abroad.

b. the closed economy real output plus gross real asset income from abroad. d. the closed economy real output plus net real asset income from abroad.

4. Net real asset income from abroad is:

a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.

b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

5. Net real foreign investment is:

a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.

b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

6. The trade balance is:

a. rt-1•Bft-1/P. c. (Bft - Bft-1)/P.

b. Yt - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

7. The balance on the current account:

a. rt-1•Bft-1/P. c. (rt-1•Bft-1/P) + ((Bft - Bft-1)/P).

b. Yt + (rt-1•Bft-1/P) - (Ct +It +Gt ). d. ((Bft - Bft-1)/P) - (rt-1•Bft-1/P).

8. The balance on the current account is:

a. real GNP less net foreign investment income. c. real GNP less the net international investment position.

b. real GNP less net foreign investment. d. real GNP less real domestic expenditure.

9. The real current-account balance is:

a. net real asset income from abroad less trade balance c. trade balance times the net real asset income from abroad.

b. trade balance plus the net real asset income from abroad. d. trade balance less the net real income from abroad.

10. The real current account balance equals:

a. net foreign investments. c. the trade balance plus net real asset income from abroad.

b. real GNP less real domestic expenditure. d. all of the above.

11. The real current account balance equals:

a. net foreign investments. c. the trade balance.

b. the net international investment position. d. all of the above.

12. The real current account balance equals:

a. the trade balance. c. the net international investment position.

b. real GNP less real domestic expenditure. d. all of the above.

13. The real current account balance equals

a. the net international investment position. c. the trade balance plus net real asset income from abroad.

b. the trade balance. d. all of the above.

14. The trade balance is:

a. the difference between exports and imports. c. the real current-account balance less net real asset income from abroad.

b. real GDP less real domestic expenditure. d. all of the above.

15. The trade balance is:

a. the difference between exports and imports. c. net foreign investment.

b. real asset income from abroad. d. all of the above.

16. The trade balance is:

a. the balance on the current account. c. net foreign investment.

b. real GDP less real domestic expenditure. d. all of the above.

17. The trade balance is:

a. net foreign investment. c. the real current-account balance less net real asset income from abroad.

b. the net international investment position. d. all of the above.

18. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:

a. an increase in the MPK. c. an increase in borrowing from foreigners.

b. an increase in home country gross domestic investment. d. all of the above.

19. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:

a. an increase in the MPK. c. an increase in lending to foreigners.

b. an decrease in home country gross domestic investment. d. all of the above.

20. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:

a. an decrease in the MPK. c. an increase in lending to foreigners.

b. an increase in home country gross domestic investment. d. all of the above.

21. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:

a. a decrease in the MPK. c. an increase in borrowing from foreigners.

b. a decrease in gross domestic investment. d. all of the above.

22. In the market clearing model with world markets for goods and credit, an increase in technology, A, in the home country causes:

a. a larger current account deficit. c. a lower MPK.

b. a smaller current account deficit. d. lower domestic gross investment.

23. In the market clearing model with world markets for goods and credit, a decrease in technology, A, in the home country causes:

a. a larger current account deficit. c. a higher MPK.

b. a smaller current account deficit. d. higher domestic gross investment.

24. The open economy equilibrium business-cycle model predicts that the real current account balance will be:

a. acyclical. c. countercyclical.

b. procyclical. d. exogenous.

25. The open economy equilibrium business-cycle model predicts that the real current account balance will be:

a. the same in expansions and recession. c. high in expansions and low in recessions.

b. low in expansions and high in recessions. d. invariant with the business cycle.

26. In US data the real current account balance is:

a. procyclical when the model predicts it will be countercyclical. c. countercyclical when the model predicts it will be procyclical.

b. procyclical as the model predicts. d. countercyclical as the model predicts.

27. In US data the real current account balance is:

a. procyclical. c. countercyclical.

b. weakly procyclical. d. weakly countercyclical.

28. While according to the model the current account balance will be countercyclical, the balance can also decline due to:

a. a temporary negative shock like a harvest failure. c. a temporary increase in government purchases as in war time.

b. a less developed country having a low capital stock. d. all of the above.

29. While according to the model the current account balance will be countercyclical, the balance can also decline due to:

a. a temporary negative shock like a harvest failure. c. a permanent decrease in government purchases.

b. a less developed country having poor institutions for growth. d. all of the above.

30. While according to the model the current account balance will be countercyclical, the balance can also decline due to:

a. a temporary positive shock like a good harvest. c. a permanent decrease in government purchases.

b. a less developed country having a low capital stock. d. all of the above.

31. While according to the model the current account balance will be countercyclical, the balance can also decline due to:

a. a temporary positive shock like a positive harvest c. a temporary increase in government purchases as in war time.

b. a less developed country having a high capital stock. d. all of the above.

32. In the Ricardian case, if the government budget deficit is increased, then the trade balance:

a. moves toward a deficit too. c. is unaffected.

b. moves toward a surplus. d. is exogenous.

33. The terms of trade are:

a. ($ per home good)/($ per foreign good). c. foreign good per home good.

b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

34. The terms of trade are:

a. ($ per home good)/($ per foreign good). c. home good per foreign good.

b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

35. The terms of trade are:

a. ($ per foreign good)/($ per home good). c. home good per foreign good.

b. the number of units of foreign goods that can be imported for each unit of home goods exported. d. all of the above.

36. The terms of trade are:

a. ($ per home foreign/($ per home good). c. foreign good per home good.

b. the number of units of home goods that can be exported for each unit of foreign goods imported. d. all of the above.

37. An increase in the terms of trade:

a. raises real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.

b. increases consumption. d. all of the above.

38. An increase in the terms of trade:

a. raises real GDP. c. lowers real national saving.

b. decreases consumption. d. all of the above.

39. An increase in the terms of trade:

a. reduces real GDP. c. lowers real national saving.

b. increases consumption. d. all of the above.

40. An increase in the terms of trade:

a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.

b. decreases consumption. d. all of the above.

41. A decrease in the terms of trade:

a. reduces real GDP. c. decreases real national saving if the change in terms of trade is less than fully permanent.

b. decreases consumption. d. all of the above.

42. A decrease in the terms of trade:

a. reduces real GDP. c. increases real national saving if the change in terms of trade is less than fully permanent.

b. increases consumption. d. all of the above.

43. If the government reduces tariffs or quotas on imports, then:

a. real GDP will increase. c. net domestic investment will rise.

b. the real current account balance falls. d. all of the above.

44. If the government reduces tariffs or quotas on imports, then:

a. real GDP will increase. c. net domestic investment will fall.

b. the real current account balance rises. d. all of the above.

45. If the government reduces tariffs or quotas on imports, then:

a. real GDP will decrease. c. net domestic investment will fall.

b. the real current account balance falls. d. all of the above.

46. If the government reduces tariffs or quotas on imports, then:

a. real GDP will decrease. c. net domestic investment will rise.

b. the real current account balance rises. d. all of the above.

47. If the government imposes or increases tariffs or quotas on imports, then:

a. real GDP will decrease. c. net domestic investment will fall.

b. the real current account balance rises. d. all of the above.

48. If the government imposes or increases tariffs or quotas on imports, then:

a. real GDP will decrease. c. net domestic investment will rise.

b. the real current account balance falls. d. all of the above.

49. If the government imposes or increases tariffs or quotas on imports, then:

a. real GDP will increase. c. net domestic investment will rise.

b. the real current account balance rises. d. all of the above.

50. If the government reduces tariffs or quotas on imports, then:

a. real GDP will increase. c. net domestic investment will fall.

b. the real current account balance falls. d. all of the above.

51. If we observe that the price of a good is higher in one location than in another location, this observation

a. violates the law of one price. c. violates the law of one GDP.

b. validates the law of one price. d. validates the law of one GDP.

52. Foreign direct investment is

a. the home country’s additional supply of labor to the rest of the world. c. the home country’s additional demand for labor from the rest of the world.

b. the home country’s additional ownership of capital in the rest of the world. d. the foreign country’s additional demand for labor in the home country.

53. When the home country acquires additional ownership of capital located in the rest of the world, it has is

a. reduced foreign indirect investment. c. acquired foreign direct investment.

b. acquired foreign divested investment. d. reduced foreign direct intervention.

54. Real gross national product in an open economy includes

a. real GDP. c. net real labor costs from abroad.

b. net real asset income from abroad. d. (a) and (b).

55. If the home country has a real GNP which is greater than real domestic expenditure, then the home country has

a. a current-account suplus. c. balance on the current account.

b. a current-account deficit. d. none of the above.

56. If the home country has a real GNP which is less than real domestic expenditure, then the home country has

a. a current-account suplus. c. balance on the current account.

b. a current-account deficit. d. none of the above.

57. If the home country has a real GNP which is equal to real domestic expenditure, then the home country has

a. a current-account suplus. c. balance on the current account.

b. a current-account deficit. d. none of the above.

58. If the home country has a real GNP which is greater than net foreign investment, then the home country has

a. a current-account suplus. c. balance on the current account.

b. a current-account deficit. d. none of the above.

59. If the home country has a real GDP which is greater than real domestic expenditure, then the home country has

a. a trade balance that is positive. c. a trade balance that is zero.

b. a trade balance that is negative. d. none of the above.

60. If the home country has a real GDP which is less than real domestic expenditure, then the home country has

a. a trade balance that is positive. c. a trade balance that is zero.

b. a trade balance that is negative. d. none of the above.

61. Historical data on the U.S. current account balance show

a. a deficit from the turn of the twentieth century through the mid-1970s. c. a surplus for the twentieth century through the mid-1970s.

b. a surplus in most of the past two decades. d. a zero current account balance for most of the twentieth century.

62. Historical data on the U.S. current account balance show that one of the largest ratios for the current-account balance relative to GDP occurred

a. as a surplus, in the early 1970s. c. as a surplus, in the early 2000s.

b. as a deficit, in the early 1990s. d. as a deficit, in the early 2000s.

63. Historical data on the ratio of U.S. nominal exports and imports to GDP show

a. a generally rising ratio since 1950. c. a generally positive but steady ratio since 1950.

b. a generally falling ratio since 1950. d. a ratio hovering around zero since 1950.

64. Historical data on the ratio of U.S. net international investment to GDP show

a. a steady increase in the ratio since 1980. c. a steady ratio since 1980.

b. a steady decline in the ratio since 1980. d. no discernable pattern in the ratio since 1980.

65. Historical data on the ratio of U.S. net factor income from abroad to GDP show

a. a steady increase in the ratio since 1980. c. a peak in the ratio around 1980, followed by a decline through 1987.

b. a steady decline in the ratio since 1960. d. no discernable pattern in the ratio since 1980.

66. A developing country with good prospects means that the country’s current-account balance would likely be

a. negative. c. zero.

b. positive. d. impossible to determine.

SHORT ANSWER

1. What is the real current account balance?

2. What are the effects of a permanent increase in technology in the open market clearing model?

3. What does the open market clearing model predict about the association of the real current account balance and real GDP growth and what do the data on the US show?

4. Does a government budget deficit lead to a real current-account deficit?

5. What are the effects of reducing tariffs and quotas in the open market clearing model?

Chapter 18

TRUE/FALSE

1. If the dollar per yen exchange rate rises, then so does the value of the dollar.

2. When absolute purchasing power parity holds, the real exchange rate is 1.

3. Relative purchasing power parity says that the country with the higher inflation rate will see its currency depreciate.

4. The interest rate differential between two countries is the real interest rate.

5. If a country fixes its exchange rate, it gives up control of its money supply.

6. The nominal exchange rate is measured by quantities of currencies exchanged, while the real exchange rate is measured by quantities of goods exchanged.

7. Fixed exchange rates are determined by market forces.

8. Flexible exchange rates are determined by market forces.

9. Poorer countries tend to have high real exchange rates because the prices for nontradable goods is low in these countries.

10. The combination of interest rate parity and relative purchasing power parity implies that expected real incomes are the same in the home country and the foreign country.

MULTIPLE CHOICE

1. The nominal exchange rate is:

a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.

b. the number of units of foreign currency per one unit of home currency divided by the ratio of the foreign price level to the home price level. d. all of the above.

2. The real exchange rate is:

a. foreign good per home good. c. the number of units of foreign currency per one unit of the home currency.

b. nominal exchange rate divided by the ratio of the foreign price level to the home price level. d. all of the above.

3. Flexible exchange rates are determined by:

a. the market. c. the UN.

b. the home country government. d. the International Monetary Fund.

4. Fixed exchange rates are determined by:

a. the market. c. the UN.

b. the governments of the two countries. d. the International Monetary Fund.

5. Purchasing power parity is the idea that:

a. the nominal exchange equals the ratio of the foreign price to the home price. c. the nominal exchange equals the home price less the foreign price.

b. the nominal exchange rate equals the foreign price time the home price. d. the nominal exchange equals the home price less the foreign price.

6. Purchasing power parity may not hold due to:

a. inflation. c. market clearing.

b. nontraded goods such as services. d. all of the above.

7. Purchasing power parity may not hold due to:

a. inflation. c. shifts in the terms of trade.

b. market clearing. d. all of the above.

8. Absolutely purchasing power parity means:

a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the home price.

b. buying and selling goods looks equally attractive in both countries. d. all of the above.

9. Absolute purchasing power parity means:

a. the quantity of goods that can be bought in the home country equals the quantity of good that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the home price to the world price.

b. buying and selling goods looks more attractive in the home country. d. all of the above.

10. Absolute purchasing power parity means:

a. the quantity of goods that can be bought in the home country is greater than the quantity of goods that can be bought in the foreign country. c. the nominal exchange rate is the ratio of the foreign price to the world price.

b. buying and selling goods looks equally attractive in both countries. d. all of the above.

11. Absolutely purchasing power parity means:

b. buying and selling goods looks more attractive in the home country. d. all of the above.

12. Non-traded goods include:

a. personal services like haircuts. c. consumer goods like shirts.

b. durable goods like tv sets. d. all of the above.

13. Non-traded goods include:

a. commodities like wheat. c. consumer goods like shirts.

b. real estate. d. all of the above.

14. Relative purchasing power parity says that:

a. the growth rate of the nominal exchange rate is the foreign inflation rate less the home inflation rate. c. the growth rate of the nominal exchange rate is the home inflation rate plus the foreign inflation rate.

b. the growth rate of the nominal exchange rate is the foreign inflation rate times the home inflation rate. d. the growth rate of the nominal exchange rate is the foreign inflation rate divided by the home inflation rate.

15. Relative purchasing power parity implies a country will see its currency fall in value, if

a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.

b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

16. Relative purchasing power parity implies a country will see its currency rise in value, if

a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is higher than the foreign inflation rate.

b. its price level is higher than the foreign price level. d. its price level is lower than the foreign price level.

17. Relative purchasing power parity implies a country will see its currency keep the same value, if

a. its inflation rate is lower than the foreign inflation rate. c. its inflation rate is equal to the foreign inflation rate.

b. its price level is higher than the foreign price level. d. its price level is equal to the foreign price level.

18. If the home inflation rate is 5% and the foreign inflation rate is 9%, then by relative purchasing power parity the home country would expect is exchange rate to:

a. rise in value by 5%. c. rise value by 4%.

b. fall in value by 5%. d. fall in value by 4%.

19. If the home inflation rate is 9% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:

a. rise in value by 5%. c. rise value by 4%.

b. fall in value by 5%. d. fall in value by 4%.

20. If the home inflation rate is 5% and the foreign inflation rate is 5%, then by relative purchasing power parity the home country would expect is exchange rate to:

a. rise in value by 5%. c. have no change in its value.

b. fall in value by 5%. d. fall in value by 10%.

21. Interest rate parity says that:

a. the interest rate differential is the growth rate of the nominal exchange rate. c. the interest rate differential is the growth rate of the real exchange rate.

b. the interest rate differential is ratio of the foreign price level to the home price level. d. the interest rate differential is ratio of the home price level to the foreign price level.

22. If the home interest rate is 5% and the foreign interest rate is 7%, then the expected growth of the nominal exchange rate is:

a. 2%. c. -2%.

b. 5%. d. -12%.

23. If the home interest rate is 5% and the foreign interest rate is 7%, then the difference in the expected inflation rates is:

a. 2%. c. -2%.

b. 5%. d. -12%.

24. If the home interest rate is 7% and the foreign interest rate is 5%, then the expected growth of the nominal exchange rate is:

a. 2%. c. -2%.

b. 7%. d. -12%.

25. If the home interest rate is 7% and the foreign interest rate is 5%, then the difference in the expected inflation rates is:

a. 2%. c. -2%.

b. 7%. d. -12%.

26. If absolute purchasing power parity holds, under fixed exchange rates:

a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.

b. the home inflation rate equals the foreign inflation rate. d. all of the above.

27. If absolute purchasing power parity holds, under fixed exchange rates:

a. the home interest rate equals the foreign interest rate. c. the growth rate of the nominal exchange rate is positive.

b. the home inflation is lower than the foreign inflation rate. d. all of the above.

28. If absolute purchasing power parity holds, under fixed exchange rates:

a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is negative.

b. the home inflation rate equals the foreign inflation rate. d. all of the above.

29. If absolute purchasing power parity holds, under fixed exchange rates:

a. the home interest rate is higher than the foreign interest rate. c. the growth rate of the nominal exchange rate is zero.

b. the home inflation rate is lower than the foreign inflation rate. d. all of the above.

30. If a country with a fixed exchange rate tries to raise its money stock it will:

a. see its central bank gain domestic government bonds. c. see its money stock fall back to its initial level.

b. see its central bank lose international reserves. d. all of the above.

31. If a country with a fixed exchange rate tries to raise its money stock it will:

a. see its central bank gain domestic government bonds. c. see its money stock continue to rise.

b. see its central bank gain international reserves. d. all of the above.

32. If a country with a fixed exchange rate tries to raise its money stock:

a. see its central bank lose domestic government bonds. c. see its money stock continue to rise.

b. see its central bank lose international reserves. d. all of the above.

33. If a country with a fixed exchange rate tries to raise its money stock:

a. see its central bank lose domestic government bonds. c. see its money stock fall back to its initial level.

b. see its central bank gain international reserves. d. all of the above.

34. A revaluation is when a country:

a. allows its currency’s value to float. c. lowers the fixed value of its currency.

b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

35. A devaluation is when a country:

a. allows its currency’s value to float. c. lowers the fixed value of its currency.

b. raises the fixed value of its currency. d. allows its currency value to be set by the market.

36. A depreciation is when the value of a country’s currency:

a. is fixed by the government. c. falls in value in the exchange market.

b. rises in value in the exchange market. d. is fixed in relationship to gold.

37. An appreciation is when the value of a country’s currency:

a. is fixed by the government. c. falls in value in the exchange market.

b. rises in value in the exchange market. d. is fixed in relationship to gold.

38. Under a fixed exchange rate regime, losses of international reserves imply that:

a. the pressure on a country that needs to devalue it currency is greater. c. countries are not under much pressure to change the value of their currency.

b. the pressure on a country that needs to revalue its currency is greater. d. countries can not change the value of their currencies.

39. Fixed exchange rates:

a. facilitate transactions between countries compared to floating exchange rates. c. constrain monetary policy officials.

b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

40. Fixed exchange rates:

a. facilitate transactions between countries compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.

b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

41. Fixed exchange rates:

a. make transactions between countries riskier compared to floating exchange rates. c. give domestic monetary policy officials more autonomy.

b. make monetary policy interdependent between the countries fixing their exchange rate. d. all of the above.

42. Fixed exchange rates:

a. make transactions between countries riskier compared to floating exchange rates. c. constrain monetary policy officials.

b. make monetary policy independent between the countries fixing their exchange rate. d. all of the above.

43. Floating exchange rates:

a. make transactions between countries more difficult. c. provide autonomy for monetary policy authorities.

b. make monetary policy independent. d. all of the above.

44. Floating exchange rates:

a. make transactions between countries more difficult. c. constrain monetary policy officials.

b. make monetary policy interdependent between the countries. d. all of the above.

45. Floating exchange rates:

a. make transactions between countries easier. c. constrain monetary policy officials.

b. make monetary policy independent. d. all of the above.

46. Floating exchange rates:

a. make transactions between countries easier. c. provide autonomy for monetary policy authorities.

b. make monetary policy interdependent between the countries. d. all of the above.

47. Under fixed exchange rates a country’s:

a. money supply is fixed. c. monetary policy makers are not independent.

b. inflation rate is fixed. d. all of the above.

48. Under fixed exchange rates a country’s:

a. money supply is fixed. c. monetary policy makers are independent.

b. inflation rate will rise. d. all of the above.

49. Under fixed exchange rates a country’s:

a. money supply is domestically controlled. c. monetary policy makers are independent.

b. inflation rate is fixed. d. all of the above.

50. Under fixed exchange rates a country’s:

a. money supply is domestically controlled. c. monetary policy makers are not independent.

b. inflation rate will rise. d. all of the above.

51. Suppose the exchange rate between the U.S. dollar and the Argentinian peso is 3 pesos per dollar today. It rises to 3.1 pesos per dollar the next day. This means the dollar has

a. appreciated and the peso has depreciated. c. appreciated, and the peso has appreciated.

b. depreciated and the peso has appreciated. d. depreciated, and the peso has depreciated.

52. In 1950, one U.S. dollar bought 361 Japanese yen, and in 2006, one U.S. dollar bought 117 yen. The U.S. dollar

a. gained over half of its value in terms of yen. c. appreciated relative to the yen.

b. lost over half of its value in terms of yen. d. appreciated relative to most of the world’s currencies.

53. If a country’s government intervenes often in the exchange rate market, then the country

a. is operating closer to a flexible exchange-rate model than a fixed exchange-rate model. c. is operating closer to a fixed exchange-rate model than a flexible exchange-rate model.

b. will experience repeated appreciations of its currency. d. is not a member of the International Monetary Fund (IMF).

54. At a simplified level, purchasing power parity makes sense because, if it did not, housefholds would

a. want to purchase all of their goods in one place, the more expensive country. c. not want to purchase any goods from either country.

b. want to purchase equal portions of their goods in each country. d. want to purchase all of their goods in one place, the cheaper country.

55. The real exchange rate is measured in units of

a. goods bought in the foreign country relative to goods bought in the home country. c. labor supply in the foreign country relative to labor supply in the home country.

b. prices in the foreign country relative to prices in the home country. d. none of the above.

56. If you can buy one pound of flour for $1.25 in the U.S. and one pound of flour for 0.75 £ (pounds) in the U.K., then purchasing power parity implies the

a. real exchange rate is 1.25 £ per $. c. nominal exchange rate is 1.67 £ per $.

b. nominal exchange rate is 0.6 £ per $. d. real exchange rate is 0.6 £ per $.

57. Purchasing power parity implies the

a. nominal exchange rate equals one. c. real exchange rate equals one.

b. nominal exchange is greater than one. d. real exchange rate is less than one.

58. The Balassa-Samuelson hypothesis identifies a pattern of poor countries having

a. low nominal exchange rates. c. low real exchange rates.

b. high nominal exchange rates. d. high real exchange rates.

59. The pattern of real exchange rates across countries that is identified by the Balassa-Samuelson hypothesis occurs because

a. low-income countries tend to have low prices for nontradable goods. c. low-income countries tend to have low prices for tradable goods.

b. low-income countries tend to have high prices for nontradable goods. d. low-income countries tend to have low real exchange rates.

60. The combination of interest-rate parity and relative purchasing power parity leads to the conclusion that the

a. foreign expected real interest rate is greater than the home expected real interest rate. c. foreign expected nominal interest rate equals the home expected real interest rate.

b. foreign expected real interest rate equals the home expected real interest rate. d. foreign expected nominal interest rate equals the home expected nominal interest rate.

61. The Bretton Woods System refers to

a. the flexible exchange-rate system that the International Monetary Fund (IMF) prefers. c. the fixed exchange-rate regime which linked other currencies to the dollar and the dollar to gold.

b. the flexible exchange-rate regime introduced just after World War II that gave France the major role in stabilizing currencies. d. the fixed exchange-rate regime which linked the U.S. and other currencies to silver.

62. Under the Bretton Woods System, the U.S. dollar

a. was allowed to vary around a wide band compared to other participating countries. c. was not fixed, but the U.S. nominal interest rate was fixed relative to other participating countries.

b. varied according to market conditions, but the other participating countries did not allow their currencies to vary. d. was the only participating currency linked directly to gold.

63. If the country of Colombia decides to fix its nominal exchange rate with the U.S. dollar, then in the long run, it will have

a. roughly the same inflation rate as the U.S. c. roughly the same real GDP as the U.S.

b. a higher inflation rate than the inflation rate for the U.S. d. a higher real GDP than the real GDP in the U.S.

64. One reason that a country with a record of high inflation might want to fix its nominal exchange rate with the U.S. dollar is that

a. the country will, in the long run, have about the same inflation rate as the U.S. c. the fixed exchange-rate will act as a monetary-policy rule which prevents the country from reneging on a pledge of low inflation.

b. the fixed exchange-rate will help the country gain credibility in fighting high inflation. d. all of the above.

65. In exchange rate policy, sterilization refers to

a. the market’s ability to clear excess quantities of currency supplied rapidly. c. anti-crime laws the U.S. passed to prevent “money laundering.”

b. the central bank’s attempt to offset an initial intervention in the exchange market. d. the process the International Monetary Fund (IMF) uses to lend to a country in need.

66. In a fixed exchange-rate regime, the money supply is

a. exogenous. c. endogenous.

b. interdependent. d. highly skewed.

SHORT ANSWER

1. What is a nominal exchange rate?

2. What is absolute purchasing power parity, what does it imply and why might it not hold?

3. What is relative purchasing power parity and when does it say the home country will see its currency lose value?

4. What is interest-rate parity and what does this imply about when the exchange rate will be stable?

5. What are the advantages of fixed and floating exchange rates?

#ECO 302 Week 11 Quiz - Strayer

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CIS 562 Week 11 Final Exam – Strayer New

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Chapters 7 Through 16

Chapter 7: Current Computer Forensics Tools

TRUE/FALSE

1. When you research for computer forensics tools, strive for versatile, flexible, and robust tools that provide technical support.

2. In software acquisition, there are three types of data-copying methods.

3. To help determine what computer forensics tool to purchase, a comparison table of functions, subfunctions, and vendor products is useful.

4. The Windows platforms have long been the primary command-line interface OSs.

5. After retrieving and examining evidence data with one tool, you should verify your results by performing the same tasks with other similar forensics tools.

MULTIPLE CHOICE

1. Computer forensics tools are divided into ____ major categories.

2. Software forensics tools are commonly used to copy data from a suspect’s disk drive to a(n) ____.

backup file

image file

firmware

recovery copy

3. To make a disk acquisition with En.exe requires only a PC running ____ with a 12-volt power connector and an IDE, a SATA, or a SCSI connector cable.

UNIX

Linux

MAC OS X

MS-DOS

4. Raw data is a direct copy of a disk drive. An example of a Raw image is output from the UNIX/Linux ____ command.

rawcp

d2dump

dhex

5. ____ of data involves sorting and searching through all investigation data.

Validation

Acquisition

Discrimination

Reconstruction

6. Many password recovery tools have a feature that allows generating potential lists for a ____attack.

brute-force

birthday

password dictionary

salting

7. The simplest method of duplicating a disk drive is using a tool that does a direct ____ copy from the original disk to the target disk.

partition-to-partition

disk-to-disk

image-to-partition

image-to-disk

8. To complete a forensic disk analysis and examination, you need to create a ____.

forensic disk copy

budget plan

risk assessment

report

9. The first tools that analyzed and extracted data from floppy disks and hard disks were MS-DOS tools for ____ PC file systems.

Apple

Commodore

Atari

IBM

10. In Windows 2000 and XP, the ____ command shows you the owner of a file if you have multiple users on the system or network.

Dir

Copy

owner

11. In general, forensics workstations can be divided into ____ categories.

12. A forensics workstation consisting of a laptop computer with a built-in LCD monitor and almost as many bays and peripherals as a stationary workstation is also known as a ____.

stationary workstation

lightweight workstation

field workstation

portable workstation

13. ____ is a simple drive-imaging station.

F.R.E.D.

FIRE IDE

SPARC

DiskSpy

14. ____ can be software or hardware and are used to protect evidence disks by preventing you from writing any data to the evidence disk.

Drive-imaging

Workstations

Disk editors

Write-blockers

15. Many vendors have developed write-blocking devices that connect to a computer through FireWire,____ 2.0,and SCSI controllers.

USB

LCD

IDE

PCMCIA

16. The ____ publishes articles, provides tools, and creates procedures for testing and validating computer forensics software.

CFTT

FS-TST

NIST

NSRL

17. The standards document, ____, demands accuracy for all aspects of the testing process, meaning that the results must be repeatable and reproducible.

ISO 3657

ISO 5725

ISO 5321

ISO 17025

18. The NIST project that has as a goal to collect all known hash values for commercial software applications and OS files is ____.

NSRL

FS-TST

CFTT

PARTAB

19. The primary hash algorithm used by the NSRL project is ____.

MD5

CRC-32

SHA-1

RC4

20. One way to compare your results and verify your new forensic tool is by using a ____, such as HexWorkshop, or WinHex.

disk imager

bit-stream copier

write-blocker

disk editor

21. Although a disk editor gives you the most flexibility in ____, it might not be capable of examining a ____ file’s contents.

testing, compressed

testing, pdf

scanning, text

testing, doc

COMPLETION

1. Software forensic tools are grouped into command-line applications and ____________________ applications.

2. The Windows application of EnCase requires a(n) ____________________ device, such as FastBloc, to prevent Windows from accessing and corrupting a suspect disk drive.

3. The ____________________ function is the most demanding of all tasks for computer investigators to master.

4. Because there are a number of different versions of UNIX and Linux, these platforms are referred to as ____________________ platforms.

5. Hardware manufacturers have designed most computer components to last about ____________________ months between failures.

MATCHING

Match each item with a statement below

JFIF

PDBlock

Lightweight workstation

Norton DiskEdit

Pagefile.sys

Stationary workstation

Salvaging

SafeBack

Raw data

1. letters embedded near the beginning of all JPEG files

2. European term for carving

3. a direct copy of a disk drive

4. usually a laptop computer built into a carrying case with a small selection of peripheral options

5. one of the first MS-DOS tools used for a computer investigation

6. software-enabled write-blocker

7. system file where passwords may have been written temporarily

8. a tower with several bays and many peripheral devices

9. command-line disk acquisition tool from New Technologies, Inc.

SHORT ANSWER

1. What are the five major function categories of any computer forensics tool?

2. Explain the validation of evidence data process.

3. What are some of the advantages of using command-line forensics tools?

4. Explain the advantages and disadvantages of GUI forensics tools.

5. Illustrate how to consider hardware needs when planning your lab budget.

6. Describe some of the problems you may encounter if you decide to build your own forensics workstation.

7. Illustrate the use of a write-blocker on a Windows environment.

8. Briefly explain the NIST general approach for testing computer forensics tools.

9. Explain the difference between repeatable results and reproducible results.

10. Briefly explain the purpose of the NIST NSRL project.

Chapter 8: Macintosh and Linux Boot Processes and File Systems

TRUE/FALSE

1. If a file contains information, it always occupies at least one allocation block.

2. Older Macintosh computers use the same type of BIOS firmware commonly found in PC-based systems.

3. GPL and BSD variations are examples of open-source software.

4. A UNIX or Linux computer has two boot blocks, which are located on the main hard disk.

5. Under ISO 9660 for DVDs, the Micro-UDF (M-UDF) function has been added to allow for long filenames.

MULTIPLE CHOICE

1. Macintosh OS X is built on a core called ____.

Phantom

Darwin

Panther

Tiger

�� 2. In older Mac OSs, a file consists of two parts: a data fork, where data is stored, and a ____ fork, where file metadata and application information are stored.

resource

blocks

node

inodes

3. The maximum number of allocation blocks per volume that File Manager can access on a Mac OS system is ____.

32,768

58,745

45,353

65,535

4. On older Macintosh OSs all information about the volume is stored in the ____.

Master Directory Block (MDB)

Extents Overflow File (EOF)

Volume Control Block (VCB)

Volume Bitmap (VB)

5. With Mac OSs, a system application called ____ tracks each block on a volume to determine which blocks are in use and which ones are available to receive data.

Extents overflow file

Master Directory Block

Volume Bitmap

Volume Control Block

6. On Mac OSs, File Manager uses the ____to store any information not in the MDB or Volume Control Block (VCB).

volume information block

catalog

extents overflow file

master directory block

7. Linux is probably the most consistent UNIX-like OS because the Linux kernel is regulated under the ____ agreement.

AIX

GPL

BSD

GRUB

8. The standard Linux file system is ____.

NTFS

HFS+

Ext3fs

Ext2fs

9. Ext2fs can support disks as large as ____ TB and files as large as 2 GB.

10. Linux is unique in that it uses ____, or information nodes, that contain descriptive information about each file or directory.

xnodes

infNodes

extnodes

inodes

11. To find deleted files during a forensic investigation on a Linux computer, you search for inodes that contain some data and have a link count of ____.

-1

0d.

12. ____ components define the file system on UNIX.

13. The final component in the UNIX and Linux file system is a(n) ____, which is where directories and files are stored on a disk drive.

superblock

boot block

data block

inode block

14. LILO uses a configuration file named ____ located in the /Etc directory.

Lilo.conf

Lilo.config

Boot.conf

Boot.config

15. Erich Boleyn created GRUB in ____ to deal with multiboot processes and a variety of OSs.

1989

1994

1991

1995

16. On a Linux computer, ____ is the path for the first partition on the primary master IDE disk drive.

/dev/sda1

/dev/hda1

/dev/hdb1

/dev/ide1

17. There are ____ tracks available for the program area on a CD.

100

18. The ____provides several software drivers that allow communication between the OS and the SCSI component.

International Organization of Standardization (ISO)

Advanced SCSI Programming Interface (ASPI)

CLV

EIDE

19. All Advanced Technology Attachment (ATA) drives from ATA-33 through ATA-133 IDE and EIDE disk drives use the standard ____ ribbon or shielded cable.

40-pin

80-pin

60-pin

120-pin

20. ATA-66,ATA-____, and ATA-133 can use the newer 40-pin/80-wire cable.

100

21. IDE ATA controller on an old 486 PC doesn’t recognize disk drives larger than 8.4 ____.

COMPLETION

1. Before OS X, Macintosh uses the ____________________, in which files are stored in directories, or folders, that can be nested in other folders.

2. The Macintosh file system has ____________________ descriptors for the end of file (EOF).

3. ____________________ is a journaling version of Ext2fs that reduces file recovery time after a crash.

4. When you turn on the power to a UNIX workstation, instruction code located in firmware on the system’s CPU loads into RAM. This firmware is called ____________________ code because it’s located in ROM.

5. CD players that are 12X or faster read discs by using a(n) _____________________ system.

MATCHING

Match each item with a statement below

File Manager

Volume

Inode blocks

ISO 9660

Catalog

LILO

Finder

Clumps

1. older Linux boot manager utility

2. Macintosh tool that works with the OS to keep track of files and maintain users’ desktops

3. any storage medium used to store files

4. the list command on Linux

5. maintains relationships between files and directories on a volume on a Mac OS

6. the first data after the superblock on a UNIX or Linux file system

7. ISO standard for CDs

8. Mac OS utility that handles reading, writing, and storing data to physical media

9. groups of contiguous allocation blocks

SHORT ANSWER

1. Explain the relation between allocation blocks and logical block on a Mac OS file system.

2. Explain the use of B*-trees on Mac OS 9 file system.

3. Explain the use of forensic tools for Macintosh systems.

4. What are the functions of the superblock on a UNIX or Linux file system?

5. What is a bad block inode on Linux?

6. What is a continuation inode?

7. Describe the CD creation process.

8. Write a brief history of SCSI.

9. Explain the problems you can encounter with pre-ATA-33 devices when connecting them to current PCs.

10. What problems can hidden partitions on IDE devices cause to forensic investigators?

Chapter 9: Computer Forensics Analysis and Validation

TRUE/FALSE

1. The defense request for full discovery of digital evidence applies only to criminal cases in the United States.

2. For target drives, use only recently wiped media that have been reformatted and inspected for computer viruses.

3. FTK cannot perform forensics analysis on FAT12 file systems.

4. FTK cannot analyze data from image files from other vendors.

5. A nonsteganographic graphics file has a different size than an identical steganographic graphics file.

MULTIPLE CHOICE

1. ____ increases the time and resources needed to extract,analyze,and present evidence.

Investigation plan

Litigation path

Scope creep

Court order for discovery

2. You begin any computer forensics case by creating a(n) ____.

investigation plan

evidence custody form

risk assessment report

investigation report

3. In civil and criminal cases, the scope is often defined by search warrants or ____, which specify what data you can recover.

risk assessment reports

scope creeps

investigation plans

subpoenas

4. There are ____ searching options for keywords which FTK offers.

5. ____ search can locate items such as text hidden in unallocated space that might not turn up in an indexed search.

Online

Active

Inline

Live

6. The ____ search feature allows you to look for words with extensions such as “ing,”“ed,” and so forth.

fuzzy

permutation

stemming

similar-sounding

7. In FTK ____ search mode, you can also look for files that were accessed or changed during a certain time period.

live

active

indexed

inline

8. FTK and other computer forensics programs use ____ to tag and document digital evidence.

tracers

bookmarks

hyperlinks

indents

9. Getting a hash value with a ____ is much faster and easier than with a(n) ____.

high-level language, assembler

HTML editor, hexadecimal editor

computer forensics tool, hexadecimal editor

hexadecimal editor, computer forensics tool

10. AccessData ____ compares known file hash values to files on your evidence drive or image files to see whether they contain suspicious data.

KFF

NTI

PKFT

NSRL

11. Data ____ involves changing or manipulating a file to conceal information.

recovery

integrity

creep

hiding

12. One way to hide partitions is to create a partition on a disk, and then use a disk editor such as ____ to manually delete any reference to it.

Norton DiskEdit

System Commander

PartitionMagic

LILO

13. Marking bad clusters data-hiding technique is more common with ____ file systems.

NTFS

HFS

FAT

Ext2fs

14. The term ____ comes from the Greek word for“hidden writing.”

creep

escrow

steganography

hashing

15. ____ is defined as the art and science of hiding messages in such a way that only the intended recipient knows the message is there.

Bit shifting

Marking bad clusters

Encryption

Steganography

16. Many commercial encryption programs use a technology called ____, which is designed to recover encrypted data if users forget their passphrases or if the user key is corrupted after a system data failure.

steganography

password backup

key escrow

key splitting

17. People who want to hide data can also use advanced encryption programs, such as PGP or ____.

NTI

FTK

BestCrypt

PRTK

18. ____ recovery is a fairly easy task in computer forensic analysis.

Data

Password

Partition

Image

19. ____ attacks use every possible letter, number, and character found on a keyboard when cracking a password.

Brute-force

Profile

Dictionary

Statistics

20. ____ are handy when you need to image the drive of a computer far away from your location or when you don’t want a suspect to be aware of an ongoing investigation.

Scope creeps

Password recovery tools

Remote acquisitions

Key escrow utilities

21. ____ is a remote access program for communication between two computers. The connection is established by using the DiskExplorer program (FAT or NTFS) corresponding to the suspect (remote) computer’s file system.

HDHOST

DiskEdit

DiskHost

HostEditor

COMPLETION

1. For most law-enforcement-related computing investigations, the investigator is limited to working with data defined in the search ____________________.

2. FTK provides two options for searching for keywords: indexed search and ____________________ search.

3. ____________________ search catalogs all words on the evidence disk so that FTK can find them quickly.

4. To generate reports with the FTK ReportWizard, first you need to ____________________ files during an examination.

5. The data-hiding technique ____________________ changes data from readable code to data that looks like binary executable code.

MATCHING

Match each item with a statement below

Court orders for discovery

PRTK

Investigation plan

Validating digital evidence

Digital Intelligence PDWipe

MD5

Live search

System Commander

Cabinet

1. defines the investigation’s goal and scope, the materials needed, and the tasks to perform

2. a hashing algorithm

3. one of the most critical aspects of computer forensics

4. a type of compressed file

5. an FTK searching option

6. a password recovery program available from AccessData

7. a disk-partitioning utility

8. program used to clean all data from the target drive you plan to use

9. limit a civil investigation

SHORT ANSWER

1. Describe the effects of scope creep on an investigation in the corporate environment.

2. Describe with examples why the approach you take for a forensics case depends largely on the specific type of case you’re investigating.

3. How should you approach a case in which an employee is suspected of industrial espionage?

4. What are the file systems supported by FTK for forensic analysis?

5. How does the Known File Filter program work?

6. How can you validate the integrity of raw format image files with ProDiscover?

7. How can you hide data by marking bad clusters?

8. Briefly describe how to use steganography for creating digital watermarks.

9. What are the basic guidelines to identify steganography files?

10. Briefly describe the differences between brute-force attacks and dictionary attacks to crack passwords.

Chapter 10: Recovering Graphics Files

TRUE/FALSE

1. Bitmap imagesare collections of dots, or pixels, that form an image.

PTS: 1 REF: 398

2. Operating systems do not have tools for recovering image files.

PTS: 1 REF: 405

3. If a graphics file is fragmented across areas on a disk, first you must recover all the fragments to re-create the file.

PTS: 1 REF: 405

4. With many computer forensics tools, you can open files with external viewers.

PTS: 1 REF: 425

5. Steganography cannot be used with file formats other than image files.

PTS: 1 REF: 428

MULTIPLE CHOICE

1. ____are based on mathematical instructions that define lines, curves, text, ovals, and other geometric shapes.

Bitmap images

Vector graphics

Metafile graphics

Line-art images

PTS: 1 REF: 398

2. You use ____ to create, modify, and save bitmap, vector, and metafile graphics files.

graphics viewers

image viewers

image readers

graphics editors

PTS: 1 REF: 398

3. ____ images store graphics information as grids of individual pixels.

Bitmap

Vector

Raster

Metafiles

PTS: 1 REF: 398

4. The process of converting raw picture data to another format is referred to as ____.

JEIDA

demosaicing

rastering

rendering

PTS: 1 REF: 401

5. The majority of digital cameras use the ____ format to store digital pictures.

EXIF

PNG

TIFF

GIF

PTS: 1 REF: 401

6. ____ compression compresses data by permanently discarding bits of information in the file.

Redundant

Huffman

Lossy

Lossless

PTS: 1 REF: 404

7. Recovering pieces of a file is called ____.

carving

saving

slacking

rebuilding

PTS: 1 REF: 405

8. A(n) ____ file has a hexadecimal header value of FF D8 FF E0 00 10.

EPS

GIF

BMP

JPEG

PTS: 1 REF: 408

9. If you can’t open an image file in an image viewer, the next step is to examine the file’s ____.

extension

header data

name

size

PTS: 1 REF: 414

10. The uppercase letter ____ has a hexadecimal value of 41.

“A”

“G”

“C”

“Z”

PTS: 1 REF: 417

11. The image format XIF is derived from the more common ____ file format.

GIF

BMP

JPEG

TIFF

PTS: 1 REF: 423

12. The simplest way to access a file header is to use a(n) ____ editor

hexadecimal

disk

image

text

PTS: 1 REF: 423

13. The ____ header starts with hexadecimal 49 49 2A and has an offset of four bytes of 5C01 0000 2065 5874 656E 6465 6420 03.

TIFF

JPEG

XIF

GIF

PTS: 1 REF: 425

14. ____ is the art of hiding information inside image files.

Steganography

Graphie

Steganalysis

Steganos

PTS: 1 REF: 425

15. ____ steganography places data from the secret file into the host file without displaying the secret data when you view the host file in its associated program.

Replacement

Substitution

Append

Insertion

PTS: 1 REF: 426

16. ____ steganography replaces bits of the host file with other bits of data.

Insertion

Substitution

Replacement

Append

PTS: 1 REF: 426

17. In the following list, ____ is the only steg tool.

EnCase

DriveSpy

iLook

Outguess

PTS: 1 REF: 429

18. ____ has also been used to protect copyrighted material by inserting digital watermarks into a file.

Encryption

Compression

Steganography

Archiving

PTS: 1 REF: 430

19. When working with image files, computer investigators also need to be aware of ____ laws to guard against copyright violations.

international

forensics

civil

PTS: 1 REF: 430

20. Under copyright laws, computer programs may be registered as ____.

literary works

architectural works

motion pictures

audiovisual works

PTS: 1 REF: 430

21. Under copyright laws, maps and architectural plans may be registered as ____.

pantomimes and choreographic works

literary works

artistic works

pictorial, graphic, and sculptural works

PTS: 1 REF: 430

COMPLETION

1. A graphics program creates and saves one of three types of image files: bitmap, vector, or ____________________.

2. ____________________ is the process of coding of data from a larger form to a smaller form.

3. The ____________________ is the best source for learning more about file formats and their associated extensions.

4. All ____________________ files start at position zero (offset 0 is the first byte of a file) with hexadecimal 49 49 2A.

5. The two major forms of steganography are ____________________ and substitution.

MATCHING

Match each item with a statement below

Pixels

Steganalysis tools

Hex Workshop

GIMP

Adobe Illustrator

XIF

Microsoft Office Picture Manager

Metafile graphics

JPEG

1. drawing program that creates vector files

2. Gnome graphics editor

3. image format derived from the TIFF file format

4. combinations of bitmap and vector images

5. short for “picture elements”

6. are also called steg tools

7. graphics file format that uses lossy compression

8. tool used to rebuild image file headers

9. Microsoft image viewer

SHORT ANSWER

1. Briefly describe the Exchangeable Image File (EXIF) format.

2. Explain how lossless compression relates to image file formats.

3. How does vector quantization (VQ) compress data?

4. Explain how someone can use a disk editor tool to mark clusters as “bad” clusters.

5. Identify and describe some image viewers.

6. Write a brief history of steganography.

7. Describe how to hide information on an 8-bit bitmap image file using substitution steganography.

8. Explain how steganalysis tools work.

9. Give a brief overview of copyright laws pertaining to graphics within and outside the U.S.

10. Present a list of categories covered under copyright laws in the U.S.

Chapter 11: Virtual Machines, Network Forensics, and Live Acquisitions

TRUE/FALSE

1. When intruders break into a network, they rarely leave a trail behind.

PTS: 1 REF: 442

2. Network forensics is a fast, easy process.

PTS: 1 REF: 447

3. PsList from PsTools allows you to list detailed information about processes.

PTS: 1 REF: 450

4. With the Knoppix STD tools on a portable CD, you can examine almost any network system.

PTS: 1 REF: 451

5. Ngrep cannot be used to examine e-mail headers or IRC chats.

PTS: 1 REF: 455

MULTIPLE CHOICE

1. ____ can help you determine whether a network is truly under attack or a user has inadvertently installed an untested patch or custom program.

Broadcast forensics

Computer forensics

Network forensics

Traffic forensics

PTS: 1 REF: 442

2. ____ hide the most valuable data at the innermost part of the network.

Layered network defense strategies

Protocols

Firewalls

NAT

PTS: 1 REF: 442

3. ____ forensics is the systematic tracking of incoming and outgoing traffic on your network.

Network

Criminal

Computer

Server

PTS: 1 REF: 442

4. ____ can be used to create a bootable forensic CD and perform a live acquisition.

Helix

Inquisitor

DTDD

Neon

PTS: 1 REF: 445

5. Helix operates in two modes:Windows Live (GUI or command line) and ____.

command Windows

command Linux

remote GUI

bootable Linux

PTS: 1 REF: 445

6. A common way of examining network traffic is by running the ____ program.

Netdump

Coredump

Slackdump

Tcpdump

PTS: 1 REF: 448

7. ____ is a suite of tools created by Sysinternals.

EnCase

R-Tools

PsTools

Knoppix

PTS: 1 REF: 450

8. ____ is a Sysinternals command that shows all Registry data in real time on a Windows computer.

PsReg

RegMon

RegExplorer

RegHandle

PTS: 1 REF: 450

9. The PSTools ____ kills processes by name or process ID.

PsExec

PsKill

PsList

PsShutdown

PTS: 1 REF: 450

10. ____ is a popular network intrusion detection system that performs packet capture and analysis in real time.

Ethereal

Tcpdump

Snort

john

PTS: 1 REF: 451

11. ____ is the U.S. DoD computer forensics lab’s version of the dd command that comes with Knoppix-STD.

chntpw

memfetch

john

dcfldd

PTS: 1 REF: 451

12. The Knoppix STD tool ____ enables you to reset passwords on a Windows computer, including the administrator password

chntpw

oinkmaster

john

memfetch

PTS: 1 REF: 451

13. ____are devices and/or software placed on a network to monitor traffic.

Packet sniffers

Hubs

Bridges

Honeypots

PTS: 1 REF: 454

14. Most packet sniffers operate on layer 2 or ____ of the OSI model.

PTS: 1 REF: 454

15. Most packet sniffer tools can read anything captured in ____ format.

SYN

PCAP

DOPI

AIATP

PTS: 1 REF: 455

16. In a(n) ____ attack, the attacker keeps asking your server to establish a connection.

SYN flood

brute-force attack

ACK flood

PCAP attack

PTS: 1 REF: 455

17. ____ is the text version of Ethereal, a packet sniffer tool.

Tcpdump

Etherape

Ethertext

Tethereal

PTS: 1 REF: 455

18. ____ is a good tool for extracting information from large Libpcap files.

Nmap

Pcap

Tcpslice

TCPcap

PTS: 1 REF: 455

19. The ____ Project was developed to make information widely available in an attempt to thwart Internet and network hackers.

Honeynet

Honeywall

Honeypot

Honeyweb

PTS: 1 REF: 458

20. Machines used on a DDoS are known as ____simply because they have unwittingly become part of the attack.

ISPs

zombies

soldiers

pawns

PTS: 1 REF: 458

21. A ____ is a computer set up to look like any other machine on your network, but it lures the attacker to it.

honeywall

honeynet

honeypot

honeyhost

PTS: 1 REF: 459

COMPLETION

1. ____________________ is a layered network defense strategy developed by the National Security Agency (NSA).

2. The term ____________________ means how long a piece of information lasts on a system.

3. ____________________ logs record traffic in and out of a network.

4. The PSTools ____________________ tool allows you to suspend processes.

ANS: PsSuspend

5. The U.K. Honeynet Project has created the ____________________. It contains the honeywall and honeypot on a bootable memory stick.

MATCHING

Match each item with a statement below

Cyberforensics

Trojan horse

Ethereal

Knoppix

Tripwire

PsShutdown

PsGetSid

oinkmaster

PsLoggedOn

1. displays who’s logged on locally

2. displays the security identifier (SID) of a computer or user

3. an audit control program that detects anomalies in traffic and sends an alert automatically

4. usually refers to network forensics

5. a bootable Linux CD intended for computer and network forensics

6. shuts down and optionally restarts a computer

7. helps manage snort rules so that you can specify what items to ignore as regular traffic and what items should raise alarms

8. a network analysis tool

9. type of malware

SHORT ANSWER

1. Why is testing networks as important as testing servers?

2. When are live acquisitions useful?

3. What is the general procedure for a live acquisition?

4. Detail a standard procedure for network forensics investigations.

5. How should you proceed if your network forensic investigation involves other companies?

6. Describe some of the Windows tools available at Sysinternals.

7. What are some of the tools included with the PSTools suite?

8. What is Knoppix-STD?

9. What are some of the tools included with Knoppix STD?

10. Explain The Auditor tool.

Chapter 12: E-mail Investigations

TRUE/FALSE

1. For computer investigators, tracking intranet e-mail is relatively easy because the accounts use standard names established by the network or e-mail administrator.

PTS: 1 REF: 470

2. You can always rely on the return path in an e-mail header to show the source account of an e-mail message.

PTS: 1 REF: 482

3. E-mail programs either save e-mail messages on the client computer or leave them on the server.

PTS: 1 REF: 483

4. All e-mail servers are databases that store multiple users’ e-mails.

PTS: 1 REF: 485

5. Like UNIX e-mail servers, Exchange maintains logs to track e-mail communication.

PTS: 1 REF: 489

MULTIPLE CHOICE

1. E-mail messages are distributed from one central server to many connected client computers, a configuration called ____.

client/server architecture

client architecture

central distribution architecture

peer-to-peer architecture

PTS: 1 REF: 469

2. In an e-mail address, everything after the ____ symbol represents the domain name.



PTS: 1 REF: 470

3. With many ____ e-mail programs, you can copy an e-mail message by dragging the message to a storage medium, such as a folder or disk.

command-line

prompt-based

shell-based

GUI

PTS: 1 REF: 472

4. When working on a Windows environment you can press ____ to copy the selected text to the clipboard.

Ctrl+A

Ctrl+V

Ctrl+C

Ctrl+Z

PTS: 1 REF: 473

5. To retrieve e-mail headers in Microsoft Outlook, right-click the e-mail message, and then click ____to open the Message Options dialog box. The Internet headers text box at the bottom of the dialog box contains the message header.

Options

Properties

Details

Message Source

PTS: 1 REF: 473

6. To retrieve an Outlook Express e-mail header right-click the message, and then click ____to open a dialog box showing general information about the message.

Properties

Details

Options

Message Source

PTS: 1 REF: 473

7. For older UNIX applications, such as mail or mailx, you can print the e-mail headers by using the ____ command.

prn

prnt

prt

PTS: 1 REF: 477

8. To view AOL e-mail headers click Action, ____ from the menu.

More options

Options

Message properties

View Message Source

PTS: 1 REF: 478

9. To view e-mail headers on Yahoo! click the ____ link in the Mail Options window, and then click Show all headers on incoming messages.

Advanced

Message Properties

General Preferences

More information

PTS: 1 REF: 480

10. In Microsoft Outlook, you can save sent, drafted, deleted, and received e-mails in a file with a file extension of ____.

.ost

.msg

.eml

.pst

PTS: 1 REF: 483

11. ____ is a comprehensive Web site that has options for searching for a suspect, including by e-mail address, phone numbers, and names.

www.freeality.com

www.whatis.com

www.google.com

www.juno.com

PTS: 1 REF: 484

12. ____ allocates space for a log file on the server, and then starts overwriting from the beginning when logging reaches the end of the time frame or the specified log size.

Continuous logging

Circular logging

Automatic logging

Server logging

PTS: 1 REF: 485

13. The files that provide helpful information to an e-mail investigation are log files and ____ files.

batch

scripts

configuration

.rts

PTS: 1 REF: 487

14. ____ contains configuration information for Sendmail, allowing the investigator to determine where the log files reside.

/etc/sendmail.cf

/etc/var/log/maillog

/etc/syslog.conf

/var/log/maillog

PTS: 1 REF: 487

15. Typically, UNIX installations are set to store logs such as maillog in the ____ directory.

/etc/Log

/etc/var/log

/log

/var/log

PTS: 1 REF: 488

16. Exchange logs information about changes to its data in a(n) ____ log.

checkpoint

transaction

communication

tracking

PTS: 1 REF: 489

17. In Exchange, to prevent loss of data from the last backup, a ____ file or marker is inserted in the transaction log to mark the last point at which the database was written to disk.

tracking

temporary

checkpoint

milestone

PTS: 1 REF: 489

18. The Novell e-mail server software is called ____.

Sendmail

Sawmill

GroupWise

Guardian

PTS: 1 REF: 491

19. GroupWise has ____ ways of organizing the mailboxes on the server.

PTS: 1 REF: 491

20. The GroupWise logs are maintained in a standard log format in the ____ folders.

MIME

QuickFinder

mbox

GroupWise

PTS: 1 REF: 491

21. Some e-mail systems store messages in flat plaintext files, known as a(n) ____ format.

POP3

MIME

mbox

SMTP

PTS: 1 REF: 500

COMPLETION

1. You can send and receive e-mail in two environments:via the ____________________ or an intranet (an internal network).

2. An e-mail address in the Return-Path line of an e-mail header is usually indicated as the ____________________ field in an e-mail message.

3. Administrators usually set e-mail servers to ____________________ logging mode.

4. In UNIX e-mail servers, the ____________________ file simply specifies where to save different types of e-mail log files.

5. Vendor-unique e-mail file systems, such as Microsoft .pst or .ost, typically use ____________________ formatting, which can be difficult to read with a text or hexadecimal editor.

MATCHING

Match each item with a statement below:

Contacts

Notepad

Pico

CISCO Pix

syslogd file

www.whatis.com

www.arin.net

Pine

PU020101.db

1. Web site to check file extensions and match the file to a program

2. command line e-mail program used with UNIX

3. text editor used with Windows

4. the first folder the GroupWise server shares

5. text editor used with UNIX

6. the electronic address book in Outlook

7. a network firewall device

8. a registry Web site

9. includes e-mail logging instructions

SHORT ANSWER

1. Describe how e-mail account names are created on an intranet environment.

2. Describe the process of examining e-mail messages when you have access to the victim’s computer and when this access is not possible.

3. What are the steps for retrieving e-mail headers on Pine?

4. What are the steps for viewing e-mail headers in Hotmail?

5. What kind of information can you find in an e-mail header?

6. Explain how to handle attachments during an e-mail investigation.

7. Why are network router logs important during an e-mail investigation?

8. What kind of information is normally included in e-mail logs?

9. Provide a brief description of Microsoft Exchange Server. Additionally, explain the differences between .edb and .stm files.

10. Briefly explain how to use AccessData FTK to recover e-mails.

Chapter 13: Cell Phone and Mobile Device Forensics

TRUE/FALSE

1. Many people store more information on their cell phones than they do on their computers.

PTS: 1 REF: 514

2. Investigating cell phones and mobile devices is a relatively easy task in digital forensics.

PTS: 1 REF: 514

3. TDMA can operate in the cell phone (800 to 1000 MHz) or PCS (1900 MHz) frequency.

PTS: 1 REF: 516

4. Typically, phones developed for use on a GSM network are compatible with phones designed for a CDMA network.

PTS: 1 REF: 516

5. Portability of information is what makes SIM cards so versatile.

PTS: 1 REF: 517

MULTIPLE CHOICE

1. Developed during WWII, this technology,____, was patented by Qualcomm after the war.

iDEN

GSM

CDMA

EDGE

PTS: 1 REF: 515

2. The ____ digital network divides a radio frequency into time slots.

TDMA

FDMA

CDMA

EDGE

PTS: 1 REF: 515

3. The ____ network is a digital version of the original analog standard for cell phones.

TDMA

CDMA

EDGE

D-AMPS

PTS: 1 REF: 515

4. The ____ digital network, a faster version of GSM, is designed to deliver data.

TDMA

EDGE

iDEN

D-AMPS

PTS: 1 REF: 515

5. TDMA refers to the ____ standard, which introduced sleep mode to enhance battery life.

IS-136

IS-236

IS-195

IS-361

PTS: 1 REF: 516

6. Typically, phones store system data in ____, which enables service providers to reprogram phones without having to physically access memory chips.

EROM

EEPROM

PROM

ROM

PTS: 1 REF: 517

7. ____ cards are found most commonly in GSM devices and consist of a microprocessor and from 16 KB to 4 MB of EEPROM.

SDD

MMC

SIM

PTS: 1 REF: 517

8. ____ can still be found as separate devices from mobile phones. Most users carry them instead of a laptop to keep track of appointments, deadlines, address books, and so forth.

SDHCs

CFs

PDAs

MMCs

PTS: 1 REF: 518

9. The file system for a SIM card is a ____ structure.

volatile

hierarchical

circular

linear

PTS: 1 REF: 520

10. The SIM file structure begins with the root of the system (____).

DCS

PTS: 1 REF: 520

11. Paraben Software is a leader in mobile forensics software and offers several tools, including ____, which can be used to acquire data from a variety of phone models.

BitPim

MOBILedit!

DataPilot

Device Seizure

PTS: 1 REF: 522

12. In a Windows environment, BitPim stores files in ____ by default.

My Documents\BitPim

My Documents\BitPim\Forensics Files

My Documents\Forensics Files\BitPim

My Documents\BitPim\Files

PTS: 1 REF: 522

13. ____ is a forensics software tool containing a built-in write blocker.

GSMCon

SIMedit

MOBILedit!

3GPim

PTS: 1 REF: 522

COMPLETION

1. So far, there have been three generations of mobile phones: analog, digital personal communications service (PCS), and ____________________.

2. Most Code Division Multiple Access (CDMA) networks conform to IS-95, created by the ______________________.

3. Global System for Mobile Communications (GSM) uses the ______________________ technique, so multiple phones take turns sharing a channel.

4. The 3G standard was developed by the ______________________ under the United Nations.

5. Mobile devices can range from simple phones to small computers, also called ______________________.

MATCHING

Match each item with a statement below:

CDMA

EDGE

iDEN

ROM

1. proprietary protocol developed by Motorola

2. nonvolatile memory

3. standard developed specifically for 3G

4. one of the most common digital networks, it uses the full radio frequency spectrum to define channels

SHORT ANSWER

1. What is some of the information that can be stored in a cell phone?

2. What is the bandwidth offered by 3G mobile phones?

3. What are the three main components used for cell phone communications?

4. Briefly describe cell phone hardware.

5. Identify several uses of SIM cards.

6. Identify and define three kinds of peripheral memory cards used with PDAs.

7. How can you isolate a mobile device from incoming signals?

8. What are the four categories of information that can be retrieved from a SIM card?

9. What is the general procedure to access the content on a mobile phone SIM card?

10. What are some of the features offered by SIMCon?

Chapter 14: Report Writing for High-Tech Investigations

TRUE/FALSE

1. Besides presenting facts, reports can communicate expert opinion.

PTS: 1 REF: 530

2. A verbal report is more structured than a written report.

PTS: 1 REF: 532

3. If you must write a preliminary report, use words such as “preliminary copy,”“draft copy,” or “working draft.”

PTS: 1 REF: 535

4. As with any research paper, write the report abstract last.

PTS: 1 REF: 536

5. When writing a report, use a formal, technical style.

PTS: 1 REF: 537

MULTIPLE CHOICE

1. Attorneys can now submit documents electronically in many courts; the standard format in federal courts is ____.

Microsoft Word (DOC)

Encapsulated Postscript (EPS)

Portable Document Format (PDF)

Postscript (PS)

PTS: 1 REF: 531

2. A(n) ____is a document that lets you know what questions to expect when you are testifying.

written report

examination plan

affidavit

subpoena

PTS: 1 REF: 532

3. You can use the ____ to help your attorney learn the terms and functions used in computer forensics.

verbal report

final report

preliminary report

examination plan

PTS: 1 REF: 532

4. A written report is frequently a(n) ____ or a declaration.

subpoena

deposition

affidavit

perjury

PTS: 1 REF: 532

5. If a report is long and complex, you should provide a(n) ____.

appendix

table of contents

glossary

abstract

PTS: 1 REF: 536

6. A(n) ____ is sworn to under oath (and penalty of perjury or comparable false swearing statute).

written report

examination plan

verbal report

cross-examination report

PTS: 1 REF: 532

7. In the past, the method for expressing an opinion has been to frame a ____ question based on available factual evidence.

hypothetical

challenging

nested

contradictory

PTS: 1 REF: 533

8. An expert’s opinion is governed by FRE, Rule ____, and the corresponding rule in many states.

705

805

755

855

PTS: 1 REF: 534

9. Remember that anything you write down as part of your examination for a report is subject to ____ from the opposing attorney.

subpoena

publishing

discovery

deposition

PTS: 1 REF: 535

10. A written preliminary report is considered a ____ document because opposing counsel can demand discovery on it.

low-risk

high-risk

middle-risk

no-risk

PTS: 1 REF: 535

11. The abstract should be one or two paragraphs totaling about 150 to ____ words.

200

300

250

350

PTS: 1 REF: 536

12. ____ provide additional resource material not included in the body of the report.

Conclusion

Discussion

References

Appendixes

PTS: 1 REF: 536

13. Typically, report writers use one of two numbering systems: decimal numbering or ____ numbering.

legal-sequential

arabic-sequential

roman-sequential

letter-sequential

PTS: 1 REF: 538

14. A report using the ____ numbering system divides material into sections and restarts numbering with each main section.

roman-sequential

legal-sequential

decimal

indent

PTS: 1 REF: 538

15. In the main section of your report, you typically cite references with the ____ enclosed in parentheses.

year of publication and author’s last name

author’s last name

author’s last name and year of publication

year of publication

PTS: 1 REF: 541

16. Save broader generalizations and summaries for the report’s ____.

appendixes

conclusion

introduction

discussion

PTS: 1 REF: 541

17. The report’s ____ should restate the objectives, aims, and key questions and summarize your findings with clear, concise statements.

abstract

introduction

conclusion

reference

PTS: 1 REF: 541

18. If necessary, you can include ____ containing material such as raw data, figures not used in the body of the report, and anticipated exhibits.

conclusions

references

discussions

appendixes

PTS: 1 REF: 542

19. Reports and logs generated by forensic tools are typically in plaintext format, a word processor format, or ____ format.

PDF

HTML

TXT

PTS: 1 REF: 543

20. Files with extensions .ods and ____ are created using OpenOffice Calc.

.sxc

.dcx

.xls

.qpr

PTS: 1 REF: 543

21. Files with extension ____ are created using Microsoft Outlook Express.

.sxc

.dbx

.doc

.ods

PTS: 1 REF: 543

COMPLETION

1. Lawyers use services called _________________________(libraries), which store examples of expert witnesses’ previous testimony.

2. The report body consists of the introduction and _________________________ sections.

3. When writing a report, _________________________ means the tone of language you use to address the reader.

4. _________________________ assist readers in scanning the text quickly by highlighting the main points and logical development of information.

5. The ______________________________ system is frequently used when writing pleadings.

MATCHING

Match each item with a statement below

Decimal numbering

Verbal report

Lay witness

Spoliation

FTK

Conclusion section

Examination plan

MD5

Signposts

1. draw reader’s attention to a point in your report.

2. a report layout system

3. used by an attorney to guide an expert witness in his or her testimony

4. computer forensics software tool

5. lawyers jargon for destroying or concealing evidence

6. stands for Message Digest 5

7. typically takes place in an attorney’s office where the attorney requests your consultant’s report

8. starts by referring to the report’s purpose, states the main points, draws conclusions, and possibly renders an opinion

9. a witness testifying to personally observed facts

SHORT ANSWER

1. What are the report requirements for civil cases as specified on Rule 26, FRCP?

2. Briefly explain how to limit your report to specifics.

3. What are the areas of investigation usually addressed by a verbal report?

4. Explain how hypothetical questions can be used to ensure that you as a witness are basing your opinion on facts expected to be supported by evidence.

5. What are the four conditions required for an expert witness to testify to an opinion or conclusion?

6. What is the basic structure of a report?

7. Provide some guidelines for writing an introduction section for a report.

8. What do you need to consider to produce clear, concise reports?

9. Explain how to use supportive material on a report.

10. How should you explain examination and data collection methods?

Chapter 15: Expert Testimony in High-Tech Investigations

TRUE/FALSE

1. As an expert witness, you have opinions about what you have found or observed.

PTS: 1 REF: 558

2. Create a formal checklist of your procedures that’s applied to all your cases or include such a checklist in your report.

PTS: 1 REF: 559

3. As a standard practice, collect evidence and record the tools you used in designated file folders or evidence containers.

PTS: 1 REF: 559

4. Like a job resume, your CV should be geared for a specific trial.

PTS: 1 REF: 561

5. Part of what you have to deliver to the jury is a person they can trust to help them figure out something that’s beyond their expertise.

PTS: 1 REF: 565

MULTIPLE CHOICE

1. When cases go to trial, you as a forensics examiner can play one of ____ roles.

PTS: 1 REF: 558

2. When you give ____ testimony, you present this evidence and explain what it is and how it was obtained.

technical/scientific

lay witness

expert

deposition

PTS: 1 REF: 558

3. Validate your tools and verify your evidence with ____ to ensure its integrity.

hashing algorithms

steganography

watermarks

digital certificates

PTS: 1 REF: 559

4. For forensics specialists, keeping the ____ updated and complete is crucial to supporting your role as an expert and showing that you’re constantly enhancing your skills through training, teaching, and experience.

testimony

examination plan

deposition

PTS: 1 REF: 561

5. If your CV is more than ____ months old, you probably need to update it to reflect new cases and additional training.

PTS: 1 REF: 561

6. ____ is a written list of objections to certain testimony or exhibits.

Defendant

Plaintiff

Empanelling the jury

Motion in limine

PTS: 1 REF: 562

7. Regarding a trial, the term ____ means rejecting potential jurors.

voir dire

strikes

rebuttal

venireman

PTS: 1 REF: 563

8. ____ from both plaintiff and defense is an optional phase of the trial. Generally, it’s allowed to cover an issue raised during cross-examination.

Rebuttal

Closing arguments

Plaintiff

Opening statements

PTS: 1 REF: 563

9. If a microphone is present during your testimony, place it ____ to eight inches from you.

PTS: 1 REF: 565

10. Jurors typically average just over ____ years of education and an eighth-grade reading level.

PTS: 1 REF: 565

11. ____ is an attempt by opposing attorneys to prevent you from serving on an important case.

Conflict of interest

Deposition

Warrant

Conflicting out

PTS: 1 REF: 568

12. ____ evidence is evidence that exonerates or diminishes the defendant’s liability.

Rebuttal

Inculpatory

Plaintiff

Exculpatory

PTS: 1 REF: 569

13. You provide ____ testimony when you answer questions from the attorney who hired you.

direct

examination

cross

rebuttal

PTS: 1 REF: 569

14. The ____ is the most important part of testimony at a trial.

cross-examination

rebuttal

direct examination

motions in limine

PTS: 1 REF: 569

15. Generally, the best approach your attorney can take in direct examination is to ask you ____ questions and let you give your testimony.

setup

compound

open-ended

rapid-fire

PTS: 1 REF: 569

16. Leading questions such as “Isn’t it true that forensics experts always destroy their handwritten notes?” are referred to as ____ questions.

hypothetical

setup

attorney

nested

PTS: 1 REF: 570

17. Sometimes opposing attorneys ask several questions inside one question; this practice is called ____ questions.

leading

compound

hypothetical

rapid-fire

PTS: 1 REF: 571

18. A ____differs from a trial testimony because there is no jury or judge.

rebuttal

civil case

plaintiff

deposition

PTS: 1 REF: 573

19. There are two types of depositions: ____ and testimony preservation.

examination

direct

discovery

rebuttal

PTS: 1 REF: 573

20. Discuss any potential problems with your attorney ____ a deposition.

before

during

after

during direct examination at

PTS: 1 REF: 574

21. A(n) ____ hearing generally addresses the administrative agency’s subject matter and seeks evidence in your testimony on a subject for which it’s contemplating making a rule.

administrative

legislative

judicial

direct

PTS: 1 REF: 575

COMPLETION

1. The ______________________ of evidence supports the integrity of your evidence.

2. Depending on your attorney’s needs, you might provide only your opinion and technical expertise to him or her instead of testifying in court; this role is called a(n) _______________________.

3. _____________________ is a pretrial motion to exclude certain evidence because it would prejudice the jury.

4. At a trial, _____________________ are statements that organize the evidence and state the applicable law.

5. The purpose of the _____________________ is for the opposing attorney to preview your testimony before trial.

MATCHING

Match each item with a statement below

Plaintiff

Motion in limine

Testimony preservation deposition

Voir dire of venireman

Voir dire

Opening statements

MD5

Discovery deposition

1. part of the discovery process for trial

2. presents the case during a trial

3. provide an overview of the case during a trial

4. questioning potential jurors to see whether they’re qualified

5. usually requested by your client to preserve your testimony in case of schedule conflicts or health problems

6. a hashing algorithm

7. lists your professional experience

8. an expert witness qualification phase

9. allows the judge to decide whether certain evidence should be admitted when the jury isn’t present

SHORT ANSWER

1. What are the differences between a technical or scientific witness and an expert witness?

2. What should you do when preparing for testimony?

3. What are some of the questions you should consider when preparing your testimony?

4. What are some of the technical definitions that you should prepare before your testimony?

5. What are some of the reasons to avoid contact with news media during a case?

6. What are the procedures followed during a trial?

7. What should you do when you find exculpatory evidence?

8. How can you deal with rapid-fire questions during a cross-examination?

9. Explain the differences between discovery deposition and testimony preservation deposition.

10. Briefly describe judicial hearings.

Chapter 16: Ethics for the Expert Witness

TRUE/FALSE

1. People need ethics to help maintain their balance, especially in difficult and contentious situations.

PTS: 1 REF: 596

2. In the United States, there’s no state or national licensing body for computer forensics examiners.

PTS: 1 REF: 597

3. Experts should be paid in full for all previous work and for the anticipated time required for testimony.

PTS: 1 REF: 600

4. Expert opinions cannot be presented without stating the underlying factual basis.

PTS: 1 REF: 601

5. The American Bar Association (ABA) is a licensing body.

PTS: 1 REF: 603

MULTIPLE CHOICE

1. The most important laws applying to attorneys and witnesses are the ____.

professional codes of conduct

rules of evidence

rules of ethics

professional ethics

PTS: 1 REF: 597

2. Computer forensics examiners have two roles: scientific/technical witness and ____ witness.

expert

discovery

direct

professional

PTS: 1 REF: 597

3. Attorneys search ____ for information on expert witnesses.

disqualification banks

examination banks

deposition banks

cross-examination banks

PTS: 1 REF: 598

4. ____ questions can give you the factual structure to support and defend your opinion.

Setup

Rapid-fire

Compound

Hypothetical

PTS: 1 REF: 601

5. FRE ____ describes whether the expert is qualified and whether the expert opinion can be helpful.

702

704

703

705

PTS: 1 REF: 601

6. FRE ____ describes whether basis for the testimony is adequate.

700

702

701

703

PTS: 1 REF: 601

7. The ABA’s ____ contains provisions limiting the fees experts can receive for their services.

Code 703

Rule 26

Model Code

Code 26-1.a

PTS: 1 REF: 603

8. The ____ has stated that, unlike attorneys, expert witnesses do not owe a duty of loyalty to their clients.

ISFCE

ABA

IACIS

HTCIA

PTS: 1 REF: 603

9. ____ are the experts who testify most often.

Civil engineers

Chemical engineers

Computer forensics experts

Medical professionals

PTS: 1 REF: 604

10. ____ offers the most comprehensive regulations of any professional organization and devote an entire section to forensics activities.

AMA’s law

APA’s Ethics Code

ABA’s Model Rule

ABA’s Model Codes

PTS: 1 REF: 605

11. The ____ Ethics Code cautions psychologists about the limitations of assessment tools.

ABA’s

AMA’s

APA’s

ADA’s

PTS: 1 REF: 605

COMPLETION

1. _____________________ are the rules you internalize and use to measure your performance.

2. _____________________ are standards that others apply to you or that you are compelled to adhere to by external forces, such as licensing bodies.

3. Some attorneys contact many experts as a ploy to disqualify them or prevent opposing counsel from hiring them; this practice is called “____________________.”

4. The ____________________ is the foundation of medical ethics.

5. For psychologists, the most broadly accepted set of guidelines governing their conduct as experts is the _____________________ (APA’s) Ethical Principles of Psychologists and Code of Conduct.

MATCHING

Match each item with a statement below:

Ethics

Disqualification

Federal Rules of Evidence (FRE)

IACIS

1. provides a well-defined, simple guide for expected behavior of computer forensics examiners

2. prescribe the methods by which experts appear at trial

3. one of the effects of violating court rules or laws

4. help you maintain your self-respect and the respect of your profession

SHORT ANSWER

1. Briefly describe the issues related to an attorney’s “opinion shopping.”

2. What are some of the factors courts have used in determining whether to disqualify an expert?

3. Describe some of the traps for unwary experts.

4. What are some of the most obvious ethical errors?

5. What are some of the guidelines included in the ISFCE code of ethics?

6. What are some of the requirements included in the HTCIA core values?

7. What are some of standards for IACIS members that apply to testifying?

8. What are the five recommendations set out by the AMA’s policy on expert witness testimony?

9. Why is it difficult to enforce any professional organization’s ethical guidelines?

10. What are the ethical responsibilities owed to you by your attorney?

#CIS 562 Week 11 Final Exam – Strayer New

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CIS 524 Week 11 Discussion Questions – Strayer

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Week 11 DQ 1

"Course Conclusion" Please respond to the following:

· You have just completed 10 weeks of a computer and interaction design course. Imagine you have been asked to create a one-day training course highlighting the important elements of what you have just learned in the past 10 weeks.

o Create a hierarchy of five (no more or no less) of the most important topics that you feel need to be addressed in this one-day course that best fits the course title of “Computer Interaction and Design: The Essentials Presented in One Day.” Give a detailed rationale for each of the five topics.

Week 11 DQ 2

"Course Importance" Please respond to the following:

· Using 140 characters or less (the length of a Tweet), summarize the importance of this class to someone unfamiliar with the concepts.

· Discuss how you can apply the learning outcomes of this course to your professional and personal life.

#CIS 524 Week 11 Discussion Questions – Strayer

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CIS 519 Midterm and Final Exam – Strayer NEW

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Chapter 1 Through 14

Chapter 1 Decision Support Systems and Business Intelligence

1) When faced with a turbulent business environment, organizations are best able to survive or even excel by minimizing changes until the environment stabilizes.

Diff: 2 Page Ref: 2

2) The management of Norfolk Southern, a large freight railroad company, invested in data warehousing technologies. Even though railroad transportation is a mature industry, Norfolk Southern gained a competitive advantage by using its data warehousing technologies to squeeze additional efficiency from its operations.

Diff: 2 Page Ref: 4

3) Globalization has significantly reduced the complexity of the business environment. For example, companies can find suppliers and customers in many countries where materials are cheaper, which reduces competition and complexity.

Diff: 3 Page Ref: 5

4) One of the major objectives of computerized decision support is to minimize the gap between the current performance of an organization and its desired performance.

Diff: 2 Page Ref: 6

5) One measure of productivity is the ratio of inputs to outputs.

Diff: 2 Page Ref: 7

6) Managers, especially those at high managerial levels, are primarily hands-on problem solvers.

Diff: 2 Page Ref: 7

7) Because managerial decision making is complex, it is more important to emphasize methodical, analytical decision making rather than interpersonal communication skills.

Diff: 3 Page Ref: 7

8) Government regulations, political instability, competition, and changing consumer demands cause uncertainty that makes it difficult to predict the consequences of a decision.

Diff: 2 Page Ref: 8

9) Computer applications have progressed from transaction processing and monitoring to problem analysis and solution applications, and much of the activity is supported by spreadsheet technologies.

Diff: 2 Page Ref: 9

10) Computerized systems enable people to overcome their cognitive limits by quickly accessing and processing vast amounts of stored information.

Diff: 2 Page Ref: 10

11) Accounts receivable and accounts payable processes are highly structured, which makes them easy to program.

Diff: 2 Page Ref: 11

12) Research and development (R & D) planning and social responsibility planning are unstructured decisions, which cannot be supported by computerized decision support systems.

Diff: 3 Page Ref: 11

13) The first phase in the decision-making process is design which involves inventing, developing, and analyzing possible alternative courses of action or solutions.

Diff: 2 Page Ref: 12

14) Automated decision systems (ADS) are rule-based systems that provide solutions to repetitive managerial problems, usually in one functional area (e.g., finance, manufacturing).

Diff: 3 Page Ref: 14

15) The term Decision Support Systems (DSS) can be used as an umbrella term to describe any computerized system that supports decision making in an organization.

Diff: 1 Page Ref: 16

16) The two major DSS types are the model-oriented DSS, in which quantitative models are used to generate a recommended solution to a problem, and data-oriented DSS, which support ad hoc reporting and queries.

Diff: 2 Page Ref: 17

17) A BI system has three major components: a data warehouse with source data; business performance management (BPM) for monitoring and analyzing performance; and a user interface such as a dashboard.

Diff: 2 Page Ref: 20

18) Most DSS are constructed to directly support specific decision making. In contrast, BI systems, in general typically provide accurate and timely information to support decision support indirectly. This difference is diminishing because decision support tools are being added to BI software packages.

Diff: 3 Page Ref: 24

19) Dashboards and information portals are data visualization tools.

Diff: 2 Page Ref: 26

20) The objective of computerized decision support, regardless of its name or nature, is to help managers solve problems and assess opportunities faster and better than would be possible without computers.

Diff: 2 Page Ref: 27

21) Norfolk Southern Railroad built a ________ application that pulls data from the data warehouse and then graphically depicts actual performance against planned performance.

A) dashboard

B) graphical interface

C) transaction processing

D) forecasting

Diff: 2 Page Ref: 3

22) Norfolk Southern Railroad invested in a Teradata ________, which is a central repository of historical data that is organized for easy access and manipulation to support decision making.

A) database

B) data warehouse

C) data repository

D) data disk

Diff: 2 Page Ref: 3

23) Numerous types of business ________ result from today's business climate.

A) decisions

B) responses

C) support

D) pressures

Diff: 1 Page Ref: 5

24) Companies are facing each of the following impacts of globalization except:

A) Easier to find suppliers and customers in many countries

B) Less complex business environment

C) Cheaper materials

D) More and stronger competitors

Diff: 2 Page Ref: 5

25) Which of the following is an organizational response to a business environmental factor?

A) customer demand

B) government regulations

C) new business models

D) globalization

Diff: 3 Page Ref: 5

26) Business environment factors that create pressures on organizations include all of the following except:

A) workforce that is younger and shrinking

B) need for real-time, on-demand transactions

C) booming electronic markets on the Internet

D) innovative marketing methods

Diff: 1 Page Ref: 6

27) One of the major objectives of ________ is to facilitate closing the gap between the current performance of an organization and its desired performance, as expressed in its mission, objectives, and goals.

A) business alliances

B) customer relationships

C) business models

D) computerized decision support

Diff: 3 Page Ref: 6

28) Management is a process by which organizational goals are achieved by using resources. The resources are considered ________, and attainment of goals is viewed as the ________ of the process.

A) expenses; profits

B) inputs; output

C) pressures; opportunities

D) scarce; success

Diff: 2 Page Ref: 7

29) Mintzberg's (1980) classic study of top managers suggests that managers perform ten major roles that can be classified into three major categories. Each of the following is one of those major categories except:

A) relational

B) interpersonal

C) decisional

D) informational

Diff: 2 Page Ref: 7

30) For years in the past, managers considered decision making a(n) ________, that is, a talent acquired over a long period through experience and by using intuition.

A) science

B) strategy

C) art

D) methodology

Diff: 2 Page Ref: 7

31) According to Mintzberg's ten managerial roles, a ________ is responsible for the motivation and activation of subordinates.

A) leader

B) figurehead

C) liason

D) spokesperson

Diff: 2 Page Ref: 7

32) According to Mintzberg's ten managerial roles, a ________ is symbolic head; or someone who is obliged to perform a number of routine duties.

A) leader

B) figurehead

C) liason

D) spokesperson

Diff: 2 Page Ref: 7

33) Today's computerized systems possess capabilities that can facilitate decision support in a number of ways, including each of the following except:

A) Increased productivity of group members

B) Improved communication and collaboration

C) Agility support

D) Reduced environmental pressures

Diff: 2 Page Ref: 9

34) Decision-making processes fall along a continuum that ranges from ________ to ________.

A) highly structured; highly unstructured

B) semistructured; unstructured

C) managerial; strategic

D) ad hoc; nonprogrammed

Diff: 2 Page Ref: 11

35) Phases in the decision-making process include each of the following except:

A) intelligence

B) analysis

C) design

D) choice

Diff: 2 Page Ref: 12

36) Solving semistructured problems may involve a combination of both standard solution procedures and human judgment. Management science can provide models for the portion of the decision-making problem that is ________.

A) controlled

B) semistructured

C) unstructured

D) structured

Diff: 2 Page Ref: 13

37) A(n) ________ is a rule-based system that provides a solution, usually in one functional area, such as finance or manufacturing, to a specific repetitive managerial problem.

A) decision support systems (DSS)

B) transaction processing system (TPS)

C) online analytical processing (OLAP) system

D) automated decision system (ADS)

Diff: 2 Page Ref: 14

38) Which of the following is one of the two major types of Decision Support Systems?

A) Number-oriented

B) Text-oriented

C) Model-oriented

D) Application-oriented

Diff: 2 Page Ref: 17

39) Which of the following is not a component of DSS architecture?

A) Data

B) Model

C) Knowledge

D) Web

Diff: 2 Page Ref: 17

40) The major benefit of ________ to the company is the ability to provide accurate information when needed.

A) data warehouse

B) analytical models

C) management information systems

D) business intelligence

41) Management is a process by which organizational goals are achieved using ________.

42) Making a decision means selecting the best alternative from two or more ________ solutions.

43) The level of organization's ________, or the success of management, depends on the performance of managerial functions, such as planning, organizing, directing, and controlling.

44) ________ indicates that an individual's problem-solving capability is limited when a wide range of diverse information and knowledge is required.

45) ________ defines long-range goals and policies for resource allocation.

46) ________ is the efficient and effective execution of specific tasks.

47) Gorry and Scott-Morton suggested, for example, that for semistructured decisions and unstructured decisions, conventional ________ and management science (MS) tools are insufficient.

48) ________ involves transforming the real-world problem into an appropriate prototype structure.

49) Structured problems, which are encountered repeatedly, have a high level of ________.

50) ________ is the application of scientific approach and mathematical models to the analysis and solution of managerial decision situations.

51) Automated Decision Systems (ADS) is a business ________ system that uses intelligence to recommend solution to repetitive decisions (such as pricing).

52) Decision support systems are computer-based support systems for management decision makers who deal with ________ problems.

53) ________ is the first component of the DSS architecture.

54) The process of business intelligence is based on the ________ of data to information, then to decisions, and finally to actions.

55) Business intelligence's major objective is to enable ________ access to data, enable manipulation of these data, and to provide business managers and analysts the ability to conduct appropriate analysis.

56) ________ is a process of searching for unknown relationships or information in large databases or data warehouses, using intelligent tools such as neural computing, predictive analytics techniques, or advanced statistical methods.

57) ________ which is also referred to as corporate performance management (CPM), is an emerging portfolio of applications and methodology that contains evolving BI architecture and tools in its core.

58) ________ are a type of user interface that provides a comprehensive visual view of corporate performance measures, trends, and exceptions.

59) A ________ is a system in which human participants and/or machines perform a business process, using information, technology, and other resources, to produce products and/or services for internal or external customers.

60) List four major business environmental factors in today's business environment.

61) List and define the three interpersonal roles of a manager as described by Mintzberg.

62) List and define the three informational roles of a manager as described by Mintzberg.

63) List and define the four decisional roles of a manager as described by Mintzberg.

64) Describe the four phases in the decision-making process.

65) Distinguish between structured and unstructured problems.

66) Describe the three categories that comprise Anthony's taxonomy of management.

67) List the steps involved in the management science (MS) approach to problem solving.

68) List the components of the architecture of business intelligence.

69) Describe the nine elements of a work system.

Chapter 2 Decision Making, Systems, Modeling, and Support

1) When trying to solve a problem, developers at the manufacturer HP consider the three phases in developing a

model. Their first phase is problem analytics.

Diff: 2 Page Ref: 39

2) If a problem arises due to misalignment of incentives or unclear lines of authority or plans, then no model can help solve that root problem.

Diff: 2 Page Ref: 39

3) When developers design and develop tools, the first guideline is to develop a prototype to test the designs and get early feedback from the end users to see what works for them and what needs to be changed.

Diff: 2 Page Ref: 39

4) It is important to remove unneeded complexity from a model before handoff because as a tool becomes more complex it requires more automation.

Diff: 3 Page Ref: 39

5) Groupthink among decision makers can help lead to the best decisions.

Diff: 3 Page Ref: 41

6) Experimentation with a real system is possible only for one set of conditions at a time and can be disastrous.

Diff: 2 Page Ref: 41

7) Collecting information and analyzing a problem are the fastest and least expensive parts of decision-making.

Diff: 2 Page Ref: 41

8) Fast decision-making requirements tend to reduce decision quality.

Diff: 1 Page Ref: 41

9) According to Simon, managerial decision making is synonymous with managers using decision support systems.

Diff: 1 Page Ref: 42

10) Most Web-based DSS are focused on improving decision efficiency.

Diff: 1 Page Ref: 42

11) Personality temperament tests are often used to determine decision styles.

Diff: 2 Page Ref: 43

12) Problem identification is the conceptualization of a problem in an attempt to place it in a definable category, possibly leading to a standard solution approach.

Diff: 3 Page Ref: 48

13) One approach to solving a complex problem is to divide it into simpler subproblems and then solve those subproblems.

Diff: 2 Page Ref: 49

14) A problem exists in an organization only if someone or some group takes on the responsibility of attacking it and if the organization has the ability to solve it.

Diff: 2 Page Ref: 50

15) The process of modeling involves determining the (usually mathematical, sometimes symbolic) relationships among the variables.

Diff: 1 Page Ref: 51

16) "Humans are economic beings whose objective is to maximize the attainment of goals" is one of the assumptions of rational decision makers.

Diff: 2 Page Ref: 52

17) The idea of "thinking with your gut" is a heuristic approach to decision making.

Diff: 1 Page Ref: 52

18) Rationality is bounded only by limitations on human processing capacities but not by individual differences.

Diff: 2 Page Ref: 55

19) In general, people have a tendency to measure uncertainty and risk badly; for example, people tend to be overconfident and have an illusion of control in decision making.

Diff: 2 Page Ref: 56

20) Web-based systems have clearly influenced how decision making is supported.

Diff: 2 Page Ref: 63

21) Groupthink tends to ________ the quality of decisions.

A) be detrimental to

B) improve

C) prolong

D) complicate

Diff: 2 Page Ref: 41

22) Decision making that involves too much information may lead to a condition known as _______.

A) groupthink

B) information overload

C) experimentation

D) over assumption

Diff: 1 Page Ref: 41

23) Decisions are often made by ________, especially at lower managerial levels and in small organizations.

A) groups

B) management teams

C) individuals

D) computerized systems

Diff: 2 Page Ref: 42

24) Different decision styles require different types of support. A major factor that determines the type of required support is whether the decision maker is ________.

A) autocratic

B) consultative

C) an individual or a group

D) democratic

Diff: 2 Page Ref: 43

25) Which of the following is a physical replica of a system, usually on a different scale from the original?

A) Complex model

B) Iconic model

C) Duplicated model

D) Composite model

Diff: 2 Page Ref: 44

26) Which of the following model behaves like the real system but does not look like it?

A) Composite model

B) Analog model

C) Dense model

D) Iconic model

Diff: 2 Page Ref: 44

27) There is a continuous flow of activity from one phase to the next phase in a decision making process, but at any phase there may be a return to a previous phase. ________ is an essential part of this process.

A) Testing

B) Trial-and-error

C) Experimenting

D) Modeling

Diff: 2 Page Ref: 46

28) The identification of organizational goals and objectives related to an issue of concern and determination of whether they are being met is the beginning of the ________ of decision making.

A) initial phase

B) intelligence phase

C) brainstorming phase

D) generation phase

Diff: 2 Page Ref: 46

29) Which of the following involves finding or developing and analyzing possible courses of action in a decision making phase?

A) Consultation phase

B) Communication phase

C) Intelligence phase

D) Design phase

Diff: 2 Page Ref: 46

30) A(n) ________ is a criterion that describes the acceptability of a solution approach. In a model, it is a result variable.

A) principle of choice

B) optimization variable

C) trade-off

D) worst-case criterion

Diff: 3 Page Ref: 51

31) Which of the following describes normative models?

A) These models are based on anomalies in rational decision making.

B) They are models in which the chosen alternative is demonstrably the best of all possible alternatives.

C) They are models based on the phenomenon of preference reversal.

D) They lead to an approach known as suboptimization.

Diff: 3 Page Ref: 51

32) Which of the following, by definition, requires a decision maker to consider the impact of each alternative course of action on the entire organization because a decision made in one area may have significant effects in other areas?

A) Satisfaction

B) Worst-case

C) Feasibility

D) Optimization

Diff: 1 Page Ref: 51

33) "Thinking with your gut" is a heuristic approach to decision making that would work best for ________.

A) amateur chefs

B) payroll processors and accountants

C) experienced firefighters and military personnel on the battlefield

D) structured decision situations

Diff: 3 Page Ref: 52

34) With ________, the performance of the system is checked for a given set of alternatives, rather than for all alternatives. Therefore, there is no guarantee that an alternative selected is optimal.

A) analytical analysis

B) descriptive analysis

C) optimization analysis

D) quantitative analysis

Diff: 3 Page Ref: 54

35) The usual reasons for ________ are time pressures and recognition that the marginal benefit of a better solution is not worth the marginal cost to obtain it

A) satisficing

B) settling

C) compromising

D) rationalizing

Diff: 3 Page Ref: 55

36) A ________ describes the decision and uncontrollable variables and parameters for a specific modeling situation.

A) statement

B) model

C) program

D) scenario

Diff: 2 Page Ref: 57

37) Which of the following is a study of the effect of a change in one or more input variables on a proposed solution?

A) Sensitivity analysis

B) Boundary analysis

C) Fish bone analysis

D) Input-output analysis

Diff: 2 Page Ref: 58

38) A ________ can help a decision maker sketch out the important qualitative factors and their causal relationships in a messy decision-making situation.

A) mathematical map

B) cognitive map

C) qualitative map

D) narrative map

Diff: 2 Page Ref: 62

39) The ________ of a proposed solution to a problem is the initiation of a new order of things or the introduction of change.

A) method

B) implementation

C) approach

D) style

Diff: 2 Page Ref: 62

40) The Museum of Natural History in Aarhus, Denmark uses ________ to collect detailed information about visitors' use of the exhibits to help determine visitors' behavior to identify high-demand exhibits.

A) group decision systems

B) algorithms

C) RFID

D) expert systems

Diff: 2 Page Ref: 71

41) ________ is synonymous with the whole process of management.

42) A ________ is a simplified representation or abstraction of reality.

43) ________ are the descriptive representations of decision-making situations that we form in our heads and think about.

44) The ________ phase in decision making involves scanning the environment and collecting information.

45) Problem ________ is the conceptualization of a problem in an attempt to place it in a definable category, possibly leading to a standard solution approach.

46) The process of modeling is a combination of art and science. As an art, a level of creativity and finesse is required when determining what simplifying ________ are appropriate and helpful.

47) A ________ describes the alternatives a manager must choose among, e.g., like how many cars to deliver to a specific rental agency or how to advertise at specific times.

48) A ________ is a model that prescribes how a system should operate.

49) ________ may also involve simply bounding the search for an optimum by considering fewer criteria or alternatives or by eliminating large portions of the problem from evaluation.

50) A ________ is extremely useful in DSS for investigating the consequences of various alternative courses of action under different configurations of inputs and processes.

51) ________ is the imitation of reality and has been applied to many areas of decision making.

52) Another descriptive decision-making model is the use of ________ to describe a decision-making situation. It is extremely effective when a group is making a decision and can lead to a more common frame.

53) ________ is a willingness to settle for a satisfactory solution that is, in effect, suboptimizing.

54) Aside from estimating the potential utility or value of a particular decision's outcome, the best decision makers are capable of accurately estimating the ________ associated with the resultant outcomes resulting from making each decision.

55) A ________ asks a computer what the effect of changing some of the input data or parameters would be.

56) The model is the critical component in the decision-making process, but one may make a number of errors in its development and use. ________ the model before it is used is critical.

57) A(n) ________ is a step-by-step search in which improvement is made at every step until the best solution is found.

58) ________ is the critical act of decision making when the actual decision and commitment to follow a certain course of action are made.

59) A data warehouse can support the intelligence phase by continuously monitoring both internal and

external information, looking for early signs of problems and opportunities through a Web-based enterprise information portal called a(n) ________.

60) Much of the information used in seeking new opportunities is ________, or soft.

61) Discuss the importance of decision style.

62) Describe the three classifications of models.

63) List five benefits of using models.

64) Briefly describe Simon's four phases of decision making.

65) Briefly describe the four steps in the intelligence phase of decision making.

66) Briefly describe problem decomposition and its benefits.

67) Describe the three assumptions of rational decision makers used in Normative decision theory.

68) Compare the normative and descriptive approaches to decision making.

69) Discuss why scenarios play an important role in management support systems.

70) Describe 3 findings about decision making in the Digital Age.

Chapter 3 Decision Support Systems Concepts, Methodologies, and Technologies: An Overview

1) Decision makers at the Avantas Company selected Planners Lab for data analysis because Planners Lab offered an easy-to-use alternative to Excel to create "what-if" scenarios.

Diff: 3 Page Ref: 71

2) A key component of DSS is the ability to visualize the results. For example, it is important for executives to visualize the results of modifying assumptions.

Diff: 2 Page Ref: 74

3) Business intelligence (BI) is typically built to support the solution of a certain problem or to evaluate an opportunity.

Diff: 2 Page Ref: 78

4) All DSSs have common components that enable them to provide the same capabilities and support to users.

Diff: 1 Page Ref: 77

5) Business analytics (BA) implies the use of models and data to improve an organization's performance or competitive posture

Diff: 2 Page Ref: 78

6) Knowledge Management Systems (KMS) that are developed around communities that practice collaborative work are a type of document-driven DSS.

Diff: 2 Page Ref: 80

7) The most common end-user tool for DSS development is Microsoft Access, which includes statistical packages, a linear programming package, and financial and management science models.

Diff: 2 Page Ref: 80

8) A DSS can be custom-made by assembling the system from a variety of tools including databases, Web servers and clients, and analytical engines, often from several vendors.

Diff: 1 Page Ref: 84

9) A DSS database can include multimedia objects, e.g., pictures, maps, and sounds.

Diff: 1 Page Ref: 91

10) XML (eXtensible Markup Language) is becoming more important in DSS due to the growth of mobile commerce applications, on handheld devices, e.g., PDAs and cell phones.

Diff: 3 Page Ref: 91

11) To create or load a DSS database or a data warehouse, it is often necessary to capture data from several sources, which is a simple (trivial) process.

Diff: 3 Page Ref: 92

12) An effective database and its management can support many managerial activities; however, the real power of a DSS occurs when data are integrated with its models.

Diff: 2 Page Ref: 92

13) A key issue in data management is that of data quality. Poor quality data, which leads to poor quality information leads directly to waste.

Diff: 1 Page Ref: 93

14) Data integration issues generally become critical when implementing an enterprise information system like a supply management system.

Diff: 1 Page Ref: 94

15) Planned models are used mainly by middle management to assist in allocating and controlling the organization's resources.

Diff: 3 Page Ref: 97

16) 3Because DSS deal with semistructured or unstructured problems, it is often necessary to customize models, using programming tools and languages.

Diff: 1 Page Ref: 98

17) Database directory is a catalog of all the models and other software in the model base.

Diff: 2 Page Ref: 99

18) User interface of a DSS includes not only the hardware and software but also factors that deal with ease of use, accessibility, and human-machine interactions.

Diff: 2 Page Ref: 100

19) A difficult user interface is one of the major reasons why managers do not use computers and quantitative analyses as much as they could, given the availability of these technologies.

Diff: 1 Page Ref: 100

20) If the main user of a DSS is replaced by another, less knowledgeable user (in terms of the decision-making problem and environment), the DSS will generally be less effective.

Diff: 1 Page Ref: 107

21) A DSS is an approach for supporting decision making. It uses an interactive, flexible, adaptable computer-based information system (CBIS) developed to support the solution to a specific, ________ management problem.

A) easy

B) problematic

C) nonstructured

D) hard

Diff: 2 Page Ref: 75

22) ________ implies the use of models and data to improve an organization's performance or competitive posture.

A) Business applications

B) Business analytics

C) Business intelligence

D) Business rules

Diff: 2 Page Ref: 78

23) ________ systems have models embedded in them, but they are still not well understood in practice.

A) Web analytics

B) Data mining and OLAP

C) XML

D) Data dictionary

Diff: 3 Page Ref: 78

24) By definition, a DSS must include ________.

A) business intelligence

B) an expert system

C) an animation system

D) a user interface

Diff: 2 Page Ref: 86

25) Which of the following subsystem can support any of the other subsystems or act as an independent component? It also provides intelligence to augment the decision maker's own?

A) Knowledge-base management subsystem

B) Intelligence-base subsystem

C) User interface subsystem

D) Expertise-base subsystem

Diff: 2 Page Ref: 86

26) A(n) ________ is a collection of interrelated data, organized to meet the needs and structure of an organization that can be used by more than one person for more than one application.

A) business intelligence

B) expert system

C) database

D) data repository

Diff: 1 Page Ref: 90

27) The operation of capturing data from several sources and loading it to a data warehouse is called:

A) extraction.

B) loading.

C) mining.

D) storing.

Diff: 1 Page Ref: 92

28) A database is created, accessed, and updated by a(n) ________.

A) expert system

B) animation system

C) knowledge system

D) database management system

Diff: 2 Page Ref: 92

29) Data directory is a catalog of all the data in the database. It contains ________, and its main function is to answer questions about the availability of data items, their source, and their exact meaning.

A) data foundations

B) data definitions

C) data names

D) data sources

Diff: 2 Page Ref: 93

30) The ________ is especially appropriate for supporting the intelligence phase of the decision-making process by helping to scan data and identify problem areas or opportunities.

A) intelligence facility

B) query facility

C) data directory

D) knowledge facility

Diff: 1 Page Ref: 93

31) A(n) ________ contains routine and special statistical, financial, forecasting, management science, and other quantitative models that provide the analysis capabilities in a DSS.

A) model base

B) application base

C) analytical base

D) query base

Diff: 3 Page Ref: 96

32) Which of the following is used mainly by middle management to assist in allocating and controlling the organization's resources?

A) Tactical model

B) Planned model

C) Managerial model

D) Middle-management model

Diff: 2 Page Ref: 97

33) When voice input with accompanying ________ software is used, verbal instructions with accompanied actions and outputs can be invoked.

A) language recognition

B) accent recognition

C) voice recognition

D) speech recognition

Diff: 2 Page Ref: 102

34) Most data mining applications include intelligent systems, such as artificial neural networks (ANN) and rule induction methods for expert systems (ES), to search for potentially profitable ________ in data.

A) samples

B) patterns

C) sections

D) trends

Diff: 2 Page Ref: 106

35) ________ control and coordinate the use of software to support group work.

A) Expert tool users

B) Facilitators

C) Analyst

D) Managers

Diff: 2 Page Ref: 107

36) The choice of hardware can be made ________ the design of the MSS software, but it is often determined by what is already available in the organization.

A) before

B) during

C) after

D) all of the above

Diff: 2 Page Ref: 107

37) The de facto DSS hardware standard is a(n) ________ through which the DBMS provides data.

A) Web server

B) data center

C) mainframe

D) local area network

Diff: 3 Page Ref: 108

38) Optimization, simulation, statistics systems, and ES currently run in ________. These developments simplify access to data, models, and knowledge, and simplify their integration.

A) ASPs

B) user interfaces

C) Java

D) .NET

Diff: 3 Page Ref: 108

39) ________ is a robust DSS modeling language.

A) Ruby on Rails

B) Planners Lab

C) Sybase

D) OLAP

Diff: 2 Page Ref: 108

40) All of the following are characteristics of Planners Lab except:

A) Planners Lab makes it possible for the decision makers to play with assumptions to reflect alternative views of the future.

B) It lets decision makers describe their plans in their own words and with their own assumptions.

C) It facilitates a conversation with the decision maker in the process of describing business assumptions.

D) All assumptions are described in English equations only.

Diff: 2 Page Ref: 110

41) ________ describes the business analytics method of forecasting problems and opportunities rather than simply reporting them as they occur.

42) ________ are generally utilized to analyze decision-making situations and make a DSS different from most MIS.

43) A database-oriented DSS features strong ________ capabilities.

44) ________ deal with specific problems that are usually neither anticipated nor recurring.

45) ________ is the physical data repository organized to provide enterprise wide, cleaned data in a standardized format.

46) A(n) ________ subsystem includes a database that contains relevant data for the situation and is managed by software called the database management system.

47) Users of DSS communicate with and command the DSS through the ________ subsystem.

48) In building and using DSS, it is often necessary to access, manipulate, and query data. The ________ performs these tasks.

Answer: query facility

Diff: 2 Page Ref: 93

49) Selection and ________ are two important functions of a DSS query system.

50) As the size of the data to be stored and accessed increases, processing times and storage space also grow, sometimes dramatically. Large databases present major ________ problems.

51) One key issue that DBMS must handle is data security. Data can be ________ so that even in the case of unauthorized access, the viewed data is scrambled and unintelligible.

52) ________ models are used to support the day-to-day working activities of the organization. Typical decisions involve e-commerce transaction acceptance, approval of personal loans by a bank, production scheduling, inventory control, maintenance planning and scheduling, and quality control.

53) ________ are Web-based business analytics tools to assist in decision making.

54) Operational models mainly support first-line managers' decision making with a daily to ________ time horizon.

55) The models in the model base can also be classified by functional areas or by ________.

56) ________ are preprogrammed software elements that can be used to build computerized models. One example is the random-number generator that can be employed in the construction of a simulation model.

57) Advanced DSS are equipped with a component called a(n) ________ subsystem. This component can supply the required expertise for solving some aspects of the problem and provide knowledge that can enhance the operation of other DSS components.

58) An ________ allows the manager to benefit from the decision support system without actually having to use the keyboard.

59) Distributed DSS runs on various types of networks, including the Internet, intranets, and extranets. Access may be provided for mobile devices, e.g., notebook PCs and mobile telephones. This ________ has become critical for deploying decision-making capability in the field, especially for salespersons and technicians.

60) Planners Lab is a DSS ________ language.

61) Identify the key characteristics and capabilities of a DSS.

62) List the capabilities of institutional DSS and ad hoc DSS.

63) List the five major components of a DSS.

64) List and describe the four components of the data management subsystem.

65) Describe five of Larry English's Top Ten essential ingredients of data quality management.

66) List the five elements of the model management subsystem.

67) Explain the differences in strategic, tactical, operational, and analytical models.

68) List the four main functions of MBMS (model base management system) software

69) Explain the role, components, and importance of the user interface (dialog) subsystem.

70) Discuss the advantages of developing a models for a DSS with Planners Lab instead of traditional programming languages or spreadsheets?

Chapter 4 Modeling and Analysis

1) The use of an optimization model in the auction bidding process to award school meal contracts in Chile has significantly decreased costs.

Diff: 1 Page Ref: 138

2) In developing countries, small changes in state-run social programs using management science support can lead to enormous savings.

Diff: 2 Page Ref: 138

3) All companies, except for those under financial stress, should invest in simulation models to increase their efficiency.

Diff: 2 Page Ref: 139

4) A DSS can be composed of several models, some standard and some custom built, used collectively to support strategic decisions in the company.

Diff: 1 Page Ref: 139

5) Modeling involves data analysis with trend lines and establishing relationships with statistical methods.

Diff: 1 Page Ref: 141

6) Predictive analytics is essential for construction and manipulation of models because when a decision is implemented, the results usually occur in the future.

Diff: 2 Page Ref: 142

7) Models, like data, must be managed to maintain their applicability, and thus their integrity.

Diff: 3 Page Ref: 143

8) DSS uses mostly qualitative models, whereas expert systems use quantitative models in their applications.

Diff: 2 Page Ref: 143

9) To use models and solution techniques effectively, one needs to have gained experience through developing and solving simple ones.

Diff: 2 Page Ref: 144

10) One recent trend in modeling involves the development of model libraries and solution technique libraries.

Diff: 1 Page Ref: 144

11) There is a trend toward developing and using Web tools and software to access and run software to perform modeling, optimization, and simulation, even though this has complicated the application of many models to real-world problems.

Diff: 3 Page Ref: 144

12) An influence diagram is a graphical representation of a model; that is, it is a model of a model.

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13) In decision making under uncertainty, the decision maker considers situations in which several outcomes are possible for each course of action. In this case, the decision maker can estimate the probability of occurrence of the possible outcomes.

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14) One of the assumptions of the linear programming allocation model is that not all data are known with certainty.

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15) The pessimistic approach assumes that the best possible outcome of each alternative will occur and then selects the best of the best.

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16) Today's management systems are designed to help managers attain simultaneous, but at times, conflicting goals.

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17) The AHP manipulates quantitative and qualitative decision-making criteria in a fairly structured manner, allowing a decision maker to make trade-offs quickly and expertly.

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18) Heuristics techniques are used mainly for solving structured problems, usually of a tactical or operational nature, in areas such as resource allocation or inventory management.

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19) Blind search techniques are arbitrary search approaches that are not guided.

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20) Continuous distributions are situations with unlimited numbers of possible events that follow density functions, such as the normal distribution.

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21) Which of the following is a key element in most DSS and a necessity in a model-based DSS?

A) Database

B) Analytical model

C) Modeling

D) Business intelligence

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22) ________ diagrams are graphical models of mathematical models, which can facilitate the process of identifying the model's variables.

A) Decision

B) Tree

C) Fish bone

D) Influence

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23) E-commerce has created an immense need for ________ and an abundance of available information for performing it.

A) nonlinear programming

B) forecasting

C) auction models

D) queuing

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24) Which of the following models takes a single snapshot of a situation where everything occurs in a singleinterval?

A) Sliced model

B) Snapshot model

C) Stationary model

D) Static model

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25) Which of the following techniques is used to solve optimization problems that have few alternatives?

A) Trial-and-error

B) Binary search

C) Expert systems

D) Decision trees

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26) ________ is a type of model that is used to find a good enough solution, or the best solution among alternatives, using experimentation.

A) Simulation

B) Heuristics

C) Predictive

D) Deterministic

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27) Which of the following are factors that affect the result variables, but are not under the control of the decision maker?

A) Parameters

B) Decision variables

C) Independent variables

D) Output variables

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28) The four components in a decision support mathematical model are linked together by the ________ relationships, such as equations.

A) mathematical

B) cause-and-effect

C) analytical

D) data integration

Diff: 2 Page Ref: 147

29) Decision situations are often classified on the basis of what the decision maker knows about the forecasted results. Which of the following is one of the categories?

A) Indecision

B) Firmness

C) Ambiguity

D) Certainty

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30) Which of the following is not a characteristic of a linear programming model?

A) A limited quantity of economic resources is available for allocation.

B) The resources are used in the production of products or services.

C) The maximum number of constraints is four.

D) There are two or more ways in which the resources can be used.

Diff: 3 Page Ref: 154

31) A model builder makes predictions and assumptions regarding the input data, many of which deal with the assessment of uncertain futures. Which of the following attempts to assess the impact of a change in the input data or parameters on the proposed solution?

A) Mathematical relationships

B) Decision analysis

C) Goal programming

D) Sensitivity analysis

Diff: 3 Page Ref: 158

32) Which of the following calculates the values of the inputs necessary to achieve a desired level of an output?

A) Goal seeking analysis

B) Decision analysis

C) Trial-and-error

D) Sensitivity analysis

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33) Decision situations that involve a finite and usually not-too-large number of alternatives are modeled by an approach called ________.

A) exhaustive search

B) decision map

C) decision analysis

D) trial-and-error

Diff: 2 Page Ref: 162

34) Which of the following is a step-by-step search process for obtaining an optimal solution?

A) Analytic technique

B) Algorithm

C) Heuristic

D) Linear programming

Diff: 2 Page Ref: 169

35) Which of the following are the informal, judgmental knowledge of an application area that constitute the "rules of good judgment" in the field?

A) Binary search

B) Algorithm

C) Heuristic

D) Rule of thumb

Diff: 2 Page Ref: 170

36) Typically there is some randomness in decision-making situations. Because DSS deals with semistructured or unstructured situations, reality is complex, which may not be easily represented by optimization or other models but can often be handled by ________.

A) simulation

B) linear programming

C) statistical analysis

D) forecasting

Diff: 2 Page Ref: 171

37) Which of the following is one of the disadvantages of simulation?

A) The model is built from the manager's perspective.

B) Simulation automatically produces many important performance measures.

C) Simulation is often the only DSS modeling method that can readily handle relatively unstructured problems.

D) An optimal solution cannot be guaranteed, but relatively good ones are generally found.

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38) Monte Carlo simulation is a type of ________ simulation.

A) deterministic

B) probabilistic

C) exact

D) analytical

Diff: 2 Page Ref: 174

39) ________ uses animated computer graphic displays to present the impact of different managerial decisions. It differs from regular graphics in that the user can adjust the decision making process and see the results of the intervention.

A) Visual interactive simulation

B) Quantitative software

C) OLAP

D) Object-oriented model base

Diff: 2 Page Ref: 178

40) Which of the following packages are preprogrammed (sometimes called ready-made) models and optimization systems that sometimes serve as building blocks for other quantitative models?

A) Quantitative software

B) Qualitative software

C) Development tool

D) Application

Diff: 2 Page Ref: 179

41) ________ conducts a search for and an analysis of information in external databases and flows of information.

42) Customer relationship management systems and revenue management systems rely heavily on forecasting techniques, which are typically described as ________.

43) ________ models are time dependent; and are valuable because they represent trends and patterns over time.

44) ________ is a variable that expresses the result of a decision (e.g., one concerning profit), usually one of the goals of a decision-making problem.

45) ________ are variables that contain the values of intermediate outcomes in mathematical models.

46) In decision making under ________, the decision maker considers situations in which several outcomes are possible for each course of action. The decision maker does not know, or cannot estimate, the probability of occurrence of the possible outcomes.

47) ________ is a decision-making method that analyzes the risk associated with different alternatives.

48) ________ is a family of tools designed to help solve managerial problems in which the decision maker must allocate scarce resources among competing activities to optimize a measurable goal.

49) The allocation of resources in a linear programming problem is usually restricted by limitations and requirements called ________.

50) ________ investigates what the effect of changing some of the input data or parameters would be.

51) ________ analysis calculates the values of the inputs necessary to achieve a desired level of an output.

52) ________ conveniently organize information and knowledge in a systematic, tabular manner to prepare it for analysis.

53) A(n) ________ is a step-by-step search process for obtaining an optimal solution

54) ________ is a measure of how difficult a problem is in terms of its formulation for optimization, its required optimization effort, or its stochastic nature.

55) ________ distributions involve a situation with a limited number of events or variables that can take on only a finite number of values.

56) ________ distributions are situations with unlimited numbers of possible events that follow density functions, such as the normal distribution.

57) If the simulation results do not match the intuition or judgment of the decision maker, a ________ gap in the results can occur.

58) ________ is a simulation approach used in the decision-making process that shows graphical animation in which systems and processes are presented dynamically to the decision maker. It enables visualization of the results of different potential actions.

59) A(n) ________ is a model based management system constructed in an object-oriented environment.

60) ________ is the relational approach to the design and development of a model base management system.

61) Distinguish between a static model and a dynamic model.

62) Briefly describe three of the seven categories of models.

63) What is an influence diagram? Name a benefit of influence diagrams.

64) Distinguish between decision making under certainty, risk, and uncertainty.

65) List the characteristics of a linear program allocation problem.

66) List and briefly discuss the three major components of linear programming.

67) List five most common optimization models.

68) List the type of relationships sensitivity analysis study can test.

69) List the steps involved in the simulation process.

70) Explain the value of visual interactive simulation (VIS).

Chapter 5 Data Mining for Business Intelligence

1) Data mining is a way for companies to develop business intelligence from their data to gain a better understanding of their customers and operations and to solve complex organizational problems.

2) Data mining is a prime candidate for better management of companies that are data-rich, but knowledge-poor.

3) Business analytics cannot be conducted in real time because it includes components such as metrics and reengineering tools.

Diff: 1 Page Ref: 195

4) Technically speaking, data mining is a process that uses statistical, mathematical, and artificial intelligence techniques to extract and identify useful information and subsequent knowledge from large sets of data.

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5) The data mining environment is usually a client-server architecture or a Web-based information systems architecture.

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6) Data mining offers organizations a decision-enhancing environment to exploit opportunities by transforming data into a strategic weapon.

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7) At the highest level of abstraction, all data can be divided into interval data and ratio data.

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8) Two types of categorical data are nominal data and ordinal data.

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9) The variable marital status can be categorized using the codes (1) single, (2) married, and (3) divorced. These codes are examples of ordinal data.

Diff: 2 Page Ref: 198

10) A common example of interval scale measurement is temperature on the Celsius scale.

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11) Mass, length, time, plane angle, energy, and electric charge are examples of physical measures whose data are represented in interval scales.

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12) Data types such as date/time, unstructured text, image, and audio need to be converted into some form of categorical or numeric representation before they can be processed by data mining algorithms.

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13) Associations are a type of pattern that discovers time-ordered events, such as predicting that an existing banking customer who already has a checking account will open a savings account followed by an investment account within a year.

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14) Predictions tells the nature of future occurrences of certain events based on what has happened in the past, such as predicting the winner of the Super Bowl or forecasting the absolute temperature of a particular day.

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15) Clustering partitions a collection of things, such as objects and events presented in a structured dataset into segments whose members share similar characteristics.

Diff: 2 Page Ref: 202

16) Cross-Industry Standard Process for Data Mining, or CRISP-DM, is one of the most popular

nonproprietary standard methodologies for data mining.

Diff: 2 Page Ref: 207

17) The first step in the data mining process is to understand the relevant data from the available databases.

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18) Compared to the other steps in CRISP-DM, data preprocessing consumes the most time and effort; most believe that this step accounts for roughly 80 percent of the total time spent on a data mining project

Diff: 2 Page Ref: 209

19) In order to be applied successfully, a data mining study must be viewed as a set of automated software tools and techniques.

Diff: 2 Page Ref: 214

20) Data mining requires a separate, dedicated database.

Diff: 1 Page Ref: 233

21) In an article in Harvard Business Review, Thomas Davenport (2006) argued that the latest strategic weapon for companies is ________.

A) customer relationship management

B) e-commerce

C) online auctions

D) analytical decision making

Diff: 2 Page Ref: 194

22) The term data mining was originally used to ________.

A) include most forms of data analysis in order to increase sales

B) describe the analysis of huge datasets stored in data warehouses

C) describe the process through which previously unknown patterns in data were discovered

D) All of the above

Diff: 2 Page Ref: 194

23) Why has data mining gained the attention of the business world?

A) More intense competition at the global scale driven by customers' ever-changing needs and wants in an increasingly saturated marketplace.

B) Consolidation and integration of database records, which enables a single view of customers and vendors.

C) Significant reduction in the cost of hardware and software for data storage and processing.

D) All of the above

Diff: 2 Page Ref: 194

24) On the commercial side, the most common use of data mining has been in ________ sectors.

A) manufacturing and heath care

B) finance, retail, and health care

C) online retail and government

D) R&D and scientific

Diff: 3 Page Ref: 194

25) Business analytics and data mining provided 1-800-Flowers with all of the following benefits except:

A) More efficient marketing campaigns.

B) Increased mailings and response rates.

C) Better customer experience and retention.

D) Increased repeat sales.

Diff: 2 Page Ref: 195

26) Data mining is tightly positioned at the intersection of many disciplines. Those disciplines include all of the following except:

A) management science

B) statistics

C) information systems and databases

D) logistics

Diff: 2 Page Ref: 196

27) What is a major characteristic of data mining?

A) Data mining tools are readily combined with spreadsheets and other software development

tools.

B) Because of the large amounts of data and massive search efforts, it is sometimes necessary to use serial processing for data mining.

C) Data are often buried within numerous small large databases, which sometimes contain data from several years.

D) The miner needs sophisticated programming skill.

Diff: 3 Page Ref: 196

28) A query that can be run by an end users and is not programmed in advance is considered a(n) ________ query.

A) tailored

B) casual

C) informal

D) ad hoc

Diff: 1 Page Ref: 196

29) At the highest level of abstraction, data can be classified as ________ and ________.

A) alpha; numeric

B) categorical; numerical

C) nominal; ratio

D) interval; ration

Diff: 2 Page Ref: 197

30) Data that has a meaningful, or nonarbitrary, zero point is ________ data.

A) categorical

B) nominal

C) interval

D) ratio

Diff: 2 Page Ref: 198

31) Numeric data represent the numeric values of specific variables, which are ________ variables that can take on an infinite number of fractional values.

A) discrete

B) continuous

C) interval

D) ratio

Diff: 2 Page Ref: 198

32) Data mining seeks to identify patterns in the data. All of the following are major types of patterns except:

A) associations

B) regression

C) predictions

D) clusters

Diff: 1 Page Ref: 200

33) Predictive analysis uses sophisticated algorithms that can be designed to sift through data and identify ________.

A) patterns of behavior

B) outlier

C) average statistics

D) minimum and maximum statistics

Diff: 2 Page Ref: 200

34) ________, or supervised induction, is perhaps the most common of all data mining tasks. Its objective is to analyze the historical data stored in a database and automatically generate a model that can predict future behavior.

A) Association

B) Clustering

C) Prediction

D) Classification

Diff: 2 Page Ref: 201

35) ________ are essentially a hierarchy of if-then statements. They are most appropriate for categorical and interval data.

A) Neural nets

B) Clusters

C) Decision trees

D) Time-series

Diff: 3 Page Ref: 202

36) ________ data miningbegins with a proposition by the user, who then seeks to validate the truthfulness of the proposition. For example, a marketing manager may begin with the following proposition: "Are BluRay player sales related to sales of HDTV sets?"

A) Hypothesis-driven

B) Theory-driven

C) Discovery-driven

D) Data-driven

Diff: 2 Page Ref: 204

37) Because the data mining is driven by experience and experimentation, depending on the problem situation and the analyst's knowledge, the whole process can be ________ and ________, i.e., one should expect to go back and forth through the steps quite a few times.

A) simple; iterative

B) expensive; hypothetical

C) time consuming; iterative

D) time-consuming; hypothetical

Diff: 2 Page Ref: 207

38) Because the latter steps in the data mining process are built on the outcome of the former ones, one

should:

A) start with an understanding of the relevant data.

B) work quickly through the early steps and work in-depth on the latter steps.

C) start by cleaning the relevant data and storing it in a single data warehouse.

D) pay extra attention to the earlier steps in order not to put the whole study on an incorrect path from the onset.

Diff: 3 Page Ref: 208

39) The simple split methodology splits the data into two mutually exclusive subsets called a ________ set and a ________ set.

A) training; test

B) positive; negative

C) holdout; training

D) matrix; test

Diff: 2 Page Ref: 217

40) A good question to ask with respect to the patterns/relationships that association rule mining can discover is "Are all association rules interesting and useful?" In order to answer such a question, association rule mining uses two common metrics ________ and ________.

A) mean; median

B) support; confidence

C) standard deviation; confidence interval

D) regression; distance measure

Diff: 3 Page Ref: 226

41) ________ means that discovered patterns in a dataset hold true on new data with a sufficient degree of certainty.

42) Mass, length, time, energy, and electric charge are examples of ________ data because their scales have a nonarbitrary zero value.

43) ________ data contains codes assigned to objects or events as labels that also represent the rank order among them; for example, credit score.

44) ________ data contains measurements of simple codes assigned to objects as labels, such as marital status, but those labels are not measurements.

45) ________data represent the labels of multiple classes used to divide a variable into specific groups.

46) Using existing and relevant data, data mining builds models to identify ________ among the attributes presented in the dataset.

47) ________tells the nature of future occurrences of certain events based on what has happened in the past, such as predicting the winner of the Super Bowl or forecasting the absolute temperature of a particular day.

48) Generally speaking, data mining tasks can be classified into three main categories: ________, association, and clustering.

49) ________ partitions a collection of things, such as objects and events stored in a dataset, into segments whose members share similar characteristics.

50) With ________ forecasting, the data are a series of values of the same variable that is captured and stored over time. These data are then used to develop models to extrapolate the future values of the same phenomenon.

51) ________ data mining begins with a proposition by the user, who then seeks to validate the truthfulness of the proposition

52) ________ data miningfinds patterns, associations, and other relationships hidden within datasets. It can uncover facts that an organization had not previously known or contemplated.

53) ________ data, also known as categorical data, contains both nominal and ordinal data.

54) ________ data can be readily represented by some sort of probability distribution.

55) The model's ability to make reasonably accurate predictions, given noisy data or data with missing and erroneous values, is called ________.

56) With ________, a fixed number of instances from the original data is sampled (with replacement) for training and the rest of the dataset is used for testing. This process is repeated as many times as desired.

57) The ________ indexhas been used in economics to measure the diversity of a population. The same concept can be used to determine the purity of a specific class as a result of a decision to branch along a particular attribute or variable.

58) ________ measures the extent of uncertainty or randomness in a dataset.

59) The most commonly used measure to calculate the closeness between pairs of items in cluster analysis is the ________.

60) The ________algorithm is the most commonly used algorithm to discover association rules.

61) List three of the major characteristics and objectives of data mining.

62) Sketch a simple taxonomy of data in data mining.

63) Identify and describe the two types of categorical data. Give an example of each.

64) Identify and describe the two types of numerical data. Give an example of each.

65) List and briefly describe three of the major types of patterns that data mining attempts to identify.

66) List the six steps in the CRISP-DM Data Mining Process.

67) List the four data preprocessing steps.

68) List and briefly explain four of the factors to be considered when assessing a model to be used for classification.

69) Explain the simple split methodology for classification. Explain the advantages of the k-fold cross-validation methodology over the simple split methodology.

70) List five of the data mining mistakes often made in practice.

Chapter 6 Artificial Neural Networks for Data Mining

1) Neural network models are designed as exact replicas of how the human brain actually functions.

Diff: 1 Page Ref: 245

2) Neural networks have been used in finance, marketing, manufacturing, operations, and information systems and in many business applications for pattern recognition, forecasting, prediction, and classification.

Diff: 2 Page Ref: 245

3) The information processing in neural networks makes it attractive for solving complex problems.

Diff: 1 Page Ref: 245

4) The human brain is composed of special cells called neurons. Neural networks are composed of interconnected processing elements called artificial neurons.

Diff: 1 Page Ref: 245

5) Typically, the input-output transformation process at the individual neuron level is performed in a linear fashion.

Diff: 2 Page Ref: 248

6) Minotaur was implemented to prevent fraud. In the first 3 months following installation of Minotaur, the average fraud loss per case was reduced by 40 percent.

Diff: 2 Page Ref: 248

7) The processing elements (PE) of an ANN are artificial neurons, which receive inputs, process them, and deliver outputs.

Diff: 1 Page Ref: 249

8) Each ANN is composed of a collection of neurons that are grouped into three types of layers: input, intermediate (or hidden), and output.

Diff: 1 Page Ref: 249

9) Parallel processing resembles the way the brain and conventional computing works.

Diff: 2 Page Ref: 249

10) In network information processing, each input corresponds to one or two attributes.

Diff: 2 Page Ref: 249

11) Several types of data, such as text, pictures, and voice, can be used as inputs in network information processing.

Diff: 1 Page Ref: 249

12) The output of a network contains the solution to a problem.

Diff: 1 Page Ref: 250

13) Weights are crucial in network information processing because they store learned patterns of information; and it is through repeated adjustments of these weights that a network learns.

Diff: 2 Page Ref: 250

14) A threshold value is a hurdle value for the output of a neuron to trigger the next level of neurons. If an output value is larger than the threshold value, it will not be passed to the next level of neurons.

Diff: 3 Page Ref: 251

15) Supervised learning uses a set of inputs for which the desired outputs are known. For example, a dataset of loan applications with the success or failure of borrowers to repay their loans has a set of input parameters and known outputs.

Diff: 2 Page Ref: 254

16) In neural network, larger data sets increase processing time during training but improve the accuracy of the training and often lead to faster convergence to a good set of weights.

Diff: 3 Page Ref: 261

17) Training of artificial neural networks is an iterative process and the iteration continues until the error sum is converged to below a preset acceptable level.

Diff: 1 Page Ref: 261

18) Implementation of an ANN often requires interfaces with other computer-based information systems and user training.

Diff: 1 Page Ref: 264

19) A general Hopfield network is a single large layer of neurons with total interconnectivity.

Diff: 2 Page Ref: 272

20) In general, ANN are suitable for problems whose inputs are both categorical and numeric, and where the relationships between inputs and outputs are linear or the input data are normally distributed.

Diff: 2 Page Ref: 276

21) Which of the following is the reason why neural networks have been applied in business classification problems?

A) Able to learn the data

B) Able to learn the models' nonparametric nature

C) Its ability to generalize

D) All of the above

Diff: 2 Page Ref: 245

22) An artificial neural network is composed of many interconnected ________.

A) artificial units

B) artificial cells

C) artificial neurons

D) artificial atoms

Diff: 1 Page Ref: 245

23) Which of the following is a trait of an artificial neural network?

A) Fault tolerance

B) Duplicate cell

C) Self-repaired

D) Memory less

Diff: 2 Page Ref: 245

24) Pioneers McCulloch and Pitts built their neural network model using a large number of interconnected ________ artificial neurons.

A) dual

B) binary

C) singular

D) serial

Diff: 1 Page Ref: 245

25) There are about 50 to 150 billion neurons in the human brain and these neurons are partitioned into groups called ________.

A) teams

B) sects

C) groups

D) networks

Diff: 2 Page Ref: 246

26) ANN can also be used as simple biological models to test ________ about biological neuronal information processing.

A) hypotheses

B) assumptions

C) theory

D) proposition

Diff: 3 Page Ref: 247

27) ________ is the most commonly used network paradigm.

A) Parallel processing

B) Processing element

C) Minotaur

D) Backpropagation

Diff: 2 Page Ref: 248

28) The way that information is processed by the neural network is a function of its ________.

A) composition

B) formation

C) structure

D) makeup

Diff: 2 Page Ref: 249

29) The output of neurons can be the final result or it can be ________ to other neurons.

A) sources

B) contributions

C) keys

D) inputs

Diff: 1 Page Ref: 249

30) In single, hidden-layer structured neural network, this hidden layer converts inputs into a ________ combination.

A) continuous

B) linear

C) nonlinear

D) nonstop

Diff: 3 Page Ref: 249

31) The ways neurons are organized are referred to as ________.

A) topologies

B) contour

C) formation

D) configuration

Diff: 2 Page Ref: 249

32) The connection weights express the ________ of the input data.

A) significance

B) value

C) mathematical value

D) worth

Diff: 2 Page Ref: 250

33) The summation function computes the ________ sums of all the input elements entering each processing element.

A) weighted

B) averaged

C) total

D) aggregated

Diff: 2 Page Ref: 250

34) Sigmoidfunction is an S-shaped transfer function in the range of 0 to 1 and is also a useful ________ transfer function.

A) integer

B) binary

C) linear

D) nonlinear

Diff: 3 Page Ref: 251

35) Learning algorithms specify the ________ by which a neural network learns the underlying relationship between input and outputs.

A) process

B) method

C) route

D) direction

Diff: 2 Page Ref: 252

36) The backpropagation learning algorithm is an iterative ________ technique designed to minimize an error function between the actual output of the network and its desired output, as specified in the training set of data.

A) differential equation

B) binary search

C) gradient-descent

D) exact search

Diff: 2 Page Ref: 255

37) Most implementations of the learning process in neural network include a counterbalancing parameter called ________ to provide a balance to the learning rate.

A) power

B) energy

C) force

D) momentum

Diff: 2 Page Ref: 257

38) Which of the following is not a consideration in selecting a neural network structure?

A) Selection of a topology

B) Determination of input nodes

C) Determination of output nodes

D) Determination of weighting functions

Diff: 2 Page Ref: 261

39) Which of the following procedure is used to break datasets into different pairs of training and testing sets?

A) resampling

B) sampling

C) trial and error

D) random

Diff: 2 Page Ref: 267

40) Because of their ability to capture and represent highly complex relationships, a new and prosperous area of application for neural networks is in the field of ________.

A) health care and medicine

B) transportation and distribution

C) security

D) financial planning

Diff: 2 Page Ref: 275

41) A(n) ________ network represents a brain metaphor of information processing.

42) ________ refers to a pattern recognition methodology for machine learning.

43) Each biological neuron possesses axons and ________, finger-like projections that enable the neuron to communicate with its neighboring neurons by transmitting and receiving electrical and chemical signals.

44) ANN stands for ________.

45) The early neural network model is called ________.

46) ________ is the central processing portion of the biological neuron.

47) A ________ is able to increase or decrease the strength of the connection from neuron to neuron.

48) There are several neural network paradigms, and one of the easiest ways to differentiate between the various models is on the basis of how these models structurally ________ the human brain.

49) One popular approach, known as the feedforward-backpropagation paradigm, in organizing neurons, does not allow any ________ linkage.

50) A neural network is composed of processing elements organized in different ways to form the network's ________.

51) The artificial neurons receive the information from external input stimuli, perform a ________ on the inputs, and then pass on external outputs.

52) In a neural network, the knowledge is stored in the ________ associated with each connection between two neurons.

53) A ________ is a layer of neurons that takes input from the previous layer and converts those inputs into outputs for further processing.

54) When information is processed, many of the processing elements of neural network perform their computations at the same time, which is called ________ processing.

55) The purpose of the neural network is to compute the ________ of the output.

56) In neural network, it is through repeated adjustments of ________ that the network learns.

57) ________ value is a hurdle value for the output of a neuron to trigger the next level of neurons.

58) The ________ is the training procedure used by an artificial neural network.

59) In ________, the network is self-organizing; that is, it organizes itself internally so that each hidden processing element responds strategically to a different set of input stimuli.

60) ________ testing is used to comparing test results to historical results.

61) List the relationships between biological and artificial networks.

62) Sketch or describe the typical structure of an ANN.

63) Describe the five major concepts / components of neural network information processing.

64) Explain threshold value and its role in the network.

65) Explain supervised and unsupervised learning modes of neural networks.

66) List the usual process of general learning in neural network.

67) Describe or sketch the supervised learning process of an ANN

68) Briefly describe backpropagation.

69) List the procedures of the learning algorithm.

70) List the development process for an ANN application.

Chapter 7 Text and Web Mining

1) DARPA and MITRE teamed up to develop capabilities to automatically filter text-based information sources to generate actionable information in a timely manner.

Diff: 2 Page Ref: 288

2) A vast majority of all business data are captured and stored in structured text documents.

Diff: 2 Page Ref: 289

3) Text mining is important to competitive advantage because knowledge is power, and knowledge is derived from text data sources.

Diff: 2 Page Ref: 289

4) The purpose and processes of text mining are different from those of data mining because with text mining the input to the process are data files such as Word documents, PDF files, text excerpts, and XML files.

Diff: 3 Page Ref: 289

5) The benefits of text mining are greatest in areas where very large amounts of textual data are being generated, such as law, academic research, finance, and medicine.

Diff: 2 Page Ref: 289

6) Unstructured data has a predetermined format. It is usually organized into records as categorical, ordinal, and continuous variables and stored in databases.

Diff: 3 Page Ref: 290

7) Stemming is the process of reducing inflected words to their base or root form.

Diff: 1 Page Ref: 290

8) Stop words, such as a, am,the, and was, are words that are filtered out prior to or after processing of natural language data.

Diff: 2 Page Ref: 290

9) The goal of natural language processing (NLP) is syntax-driven text manipulation.

Diff: 2 Page Ref: 292

10) Two advantages associated with the implementation of NLP are word sense disambiguation and syntactic ambiguity.

Diff: 2 Page Ref: 293

11) By applying a learning algorithm to parsed text, researchers from Stanford University's NLP lab have

developed methods that can automatically identify the concepts and relationships between those concepts in the text.

Diff: 2 Page Ref: 293

12) Text mining can be used to increase cross-selling and up-selling by analyzing the unstructured data generated by call centers.

Diff: 1 Page Ref: 296

13) Compared to polygraphs for deception-detection, text-based deception detection has the advantages of being nonintrusive and widely applicable to textual data and transcriptions of voice recordings.

Diff: 2 Page Ref: 297

14) The corpus for the text mining process consists of organized ACII text files and structured data.

Diff: 2 Page Ref: 303

15) The main categories of knowledge extraction methods are recall, search, and signaling.

Diff: 2 Page Ref: 307

16) Web pages consisting of unstructured textual data coded in HTML or XML, hyperlink information, and logs of visitors' interactions provide rich data for effective and efficient knowledge discovery:

Diff: 3 Page Ref: 313

17) Web crawlers are Web content mining tools that are used to read through the content of a Web site automatically.

Diff: 1 Page Ref: 314

18) Amazon.com leverages Web usage history usage dynamically and recognizes the user by reading a cookie written by a Web site on the visitor's computer.

Diff: 1 Page Ref: 317

19) The quality of search results is impossible to measure accurately using strictly quantitative measures such as click-through rate, abandonment, and search frequency. Additional quantitative and qualitative measures are required.

Diff: 2 Page Ref: 318

20) Customer experience management applications gather and report direct feedback from site visitors by benchmarking against other sites and offline channels, and by supporting predictive modeling of future visitor behavior.

Diff: 3 Page Ref: 320

21) A vast majority of business data are stored in text documents that are ________.

A) mostly quantitative

B) virtually unstructured

C) semi-structured

D) highly structured

Diff: 1 Page Ref: 289

22) Text miningis the semi-automated process of extracting ________ from large amounts of unstructured data sources.

A) patterns

B) useful information

C) knowledge

D) all of the above

Diff: 2 Page Ref: 289

23) All of the following are popular application areas of text mining except:

A) information extraction

B) document summarization

C) question answering

D) data structuring

Diff: 2 Page Ref: 289

24) Which of the following correctly defines a text mining term?

A) Tagging is the number of times a word is found in a specific document.

B) A token is an uncategorized block of text in a sentence.

C) Rooting is the process of reducing inflected words to their base form.

D) A term is a single word or multiword phrase extracted directly from the corpus by means of NLP methods.

Diff: 3 Page Ref: 290

25) ________ is a branch of the field of linguistics and a part of natural language processing that studies the internal structure of words.

A) Morphology

B) Corpus

C) Stemming

D) Polysemes

Diff: 2 Page Ref: 290

26) Using ________ as a rich source of knowledge and a strategic weapon, Kodak not only survives but excels in its market segment defined by innovation and constant change.

A) visualization

B) deception detection

C) patent analysis

D) semantic cues

Diff: 2 Page Ref: 291

27) It has been shown that the bag-of-word method may not produce good enough information content for text mining tasks. More advanced techniques such as ________ are needed.

A) classification

B) natural language processing

C) evidence-based processing

D) symbolic processing

Diff: 2 Page Ref: 292

28) Why will computers probably not be able to understand natural language the same way and with the same accuracy that humans do?

A) A true understanding of meaning requires extensive knowledge of a topic beyond what is in the words, sentences, and paragraphs.

B) The natural human language is too specific.

C) The part of speech depends only on the definition and not on the context within which it is used.

D) All of the above.

Diff: 3 Page Ref: 293

29) At a very high level, the text mining process consists of each of the following tasks except:

A) Create log frequencies.

B) Establish the corpus.

C) Create the term-document matrix.

D) Extract the knowledge.

Diff: 2 Page Ref: 304

30) In ________, the problem is to group an unlabelled collection of objects, such as documents, customer comments, and Web pages into meaningful groups without any prior knowledge.

A) search recall

B) classification

C) clustering

D) grouping

Diff: 2 Page Ref: 307

31) The two main approaches to text classification are ________ and ________.

A) knowledge engineering; machine learning

B) categorization; clustering

C) association; trend analysis

D) knowledge extraction;

Diff: 2 Page Ref: 307

32) Commercial software tools include all of the following except:

A) GATE

B) IBM Intelligent Miner Data Mining Suite

C) SAS Text Miner

D) SPSS Text Mining

Diff: 2 Page Ref: 312

33) Why does the Web pose great challenges for effective and efficient knowledge discovery?

A) The Web search engines are indexed-based.

B) The Web is too dynamic.

C) The Web is too specific to a domain.

D) The Web infrastructure contains hyperlink information.

Diff: 2 Page Ref: 313

34) A simple keyword-based search engine suffers from several deficiencies, which include all of the following except:

A) A topic of any breath can easily contain hundreds or thousands of documents.

B) Many documents that are highly relevant to a topic may not contain the exact keywords defining them.

C) Web mining can identify authoritative Web pages.

D) Many of the search results are marginally or not relevant to the topic.

Diff: 3 Page Ref: 313

35) Which of the following is not one of the three main areas of Web mining?

A) Web search mining

B) Web content mining

C) Web structure mining

D) Web usage mining

Diff: 2 Page Ref: 314

36) Which of the following refers to developing useful information from the links included in the Web documents?

A) Web content mining

B) Web subject mining

C) Web structure mining

D) Web matter mining

Diff: 2 Page Ref: 315

37) A ________ is one or more Web pages that provide a collection of links to authoritative pages, reference sites, or a resource list on a specific topic.

A) hub

B) hyperlink-induced topic search

C) spoke

D) community

Diff: 2 Page Ref: 315

38) All of the following are types of data generated through Web page visits except:

A) data stored in server access logs, referrer logs, agent logs, and client-side cookies

B) user profiles

C) hyperlink analysis

D) metadata, such as page attributes, content attributes, and usage data

Diff: 2 Page Ref: 316

39) When registered users revisit Amazon.com, they are greeted by name. This task involves recognizing the user by ________.

A) pattern discovery

B) association

C) text mining

D) reading a cookie

Diff: 1 Page Ref: 317

40) Forward-thinking companies like Ask.com, Scholastic, and St. John Health System are actively using Web mining systems to answer important questions of "Who?" "Why?" and "How?" The benefits of integrating these systems:

A) are measured qualitatively in terms of customer satisfaction, but not measured using financial or other quantitative measure.

B) can be significant in terms of incremental financial growth and increasing customer loyalty and satisfaction.

C) have not yet outweighed the costs of the Web mining systems and analysis.

D) can be infinitely measurable.

Diff: 3 Page Ref: 319

41) ________ is the semi-automated process of extracting patterns from large amounts of unstructured data sources.

42) ________ is the process of identifying valid, novel, potentially useful, and ultimately understandable patterns in data stored in structured databases, where the data are organized in records structured by categorical, ordinal, or continuous variables.

43) ________ is the grouping of similar documents without having a predefined set of categories.

44) In linguistics, a(n) ________ is a large and structured set of texts prepared for the purpose of conducting knowledge discovery.

45) ________ is the process of reducing inflected words to their base or root form.

46) ________ words or noise words are words that are filtered out prior to or after processing of natural language data.

47) The term "stop-words" are used by text mining to ________ commonly used words.

48) ________ is an important component of text mining and is a subfield of artificial intelligence and computational linguistics. It studies the problem of understanding the natural human language.

49) ________ is a technique used to detect favorable and unfavorable opinions toward specific products and services using textual data sources, such as customer feedback in Web postings and the detection of unfavorable rumors.

50) At a very high level, the first of three consecutive tasks in the text mining process is to establish the ________, which is a list of organized documents.

51) In the text mining process, the output of task two is a flat file called a ________ where the cells are populated with the term frequencies.

52) One of the main approaches to text classification is ________ in which an expert's knowledge is encoded into the system either declaratively or in the form of procedural classification rules.

53) ________ is the discovery and analysis of interesting and useful information from the Web, about the Web, and usually though Web-based tools.

54) A(n) ________ is one or more Web pages that provide a collection of links to authoritative pages.

55) ________ mining is the process of extracting useful information from the links embedded in Web documents.

56) ________ mining is the extraction of useful information from data generated through Web page visits and transactions.

57) Analysis of the information collected by Web servers can help better understand user behavior. Analysis of this data is called ________ analysis.

58) ________ applications focus on "who and how" questions by gathering and reporting direct feedback from site visitors, by benchmarking against other sites and offline channels, and by supporting predictive modeling of future visitor behavior.

59) Web analytics, CEM, and VOC applications form the foundation of the Web site ________ ecosystem that supports the online business's ability to positively influence desired outcomes

60) The ________ model, which is one where multiple sources of data describing the same population are integrated to increase the depth and richness of the resulting analysis, forms the framework of the Web site optimization ecosystem

61) Compare and contrast text mining and data mining.

62) Why will computers probably not be able to understand natural language the same way and with the same accuracy that humans do?

63) NLP has successfully been applied to a variety of tasks via computer programs to automatically process natural human language that previously could only be done by humans. List three of the most popular of these tasks.

64) Describe a marketing application of text mining.

65) What is the primary purpose of text mining within the context of knowledge discovery?

66) Diagram and explain the three-step text mining process.

67) List two options for managing or reducing the dimensionality (size) of the term-document matrix (TDM).

68) What are three of the challenges for effective and efficient knowledge discovery posed by the Web?

69) Define the three main areas of Web mining and each area's source of information.

70) List three business applications of Web mining.

Chapter 8 Data Warehousing

1) A real-time data warehouse together with a decision support strategy that leverages the integrated data can provide significant financial benefits for an organization.

Diff: 1 Page Ref: 329

2) A data warehouse differs from an operational database in that most data warehouses have a product orientation and are designed to handle transactions that update the database.

Diff: 1 Page Ref: 329

3) A data warehouse maintains historical data that do not necessarily provide current status, except in real-time systems.

Diff: 2 Page Ref: 329

4) Once the data are entered into the data warehouse, users cannot change or update the data.

Diff: 2 Page Ref: 329

5) There are three main types of data warehouses, which are data marts, operational data stores, and enterprise data warehouses.

Diff: 2 Page Ref: 330

6) An independent data mart is a small warehouse designed for a strategic business unit (SBU) or a department whose source is an EDW.

Diff: 2 Page Ref: 330

7) Operational data store is used for the medium- and long-term decisions associated with the enterprise data warehouse (EDW).

Diff: 3 Page Ref: 330

8) An operational data store (ODS) provides a fairly recent form of a customer information file (CIF), which is often used as an interim staging area for a data warehouse.

Diff: 2 Page Ref: 330

9) The design, creation, and use of metadata and its accompanying standards may involve ethical issues, including privacy and intellectual property issues.

Diff: 1 Page Ref: 333

10) There are five levels of metadata management maturity that can be used to describe where an organization is in terms of how and how well it utilizes its metadata.

Diff: 2 Page Ref: 333

11) Data warehouses contain vast amounts of internal data but are limited because they do not contain external data.

Diff: 2 Page Ref: 334

12) There are many middleware tools that business users can use to access data stored in the data repositories, including data mining, reporting tools, and data visualization.

Diff: 1 Page Ref: 334

13) In a three-tier architecture, operational systems contain the data and the software for data acquisition in the first tier, the data warehouse is a second tier, and the third tier includes the DSS/BI/BA engine.

Diff: 2 Page Ref: 335

14) An advantage of the hub-and-spoke data warehouse architecture is that they are easy to build.

Diff: 3 Page Ref: 338

15) The centralized data warehouse helps to simplify data management and administration.

Diff: 2 Page Ref: 339

16) Because of performance and data quality issues, most experts agree that federated approaches work well to replace data warehouses.

Diff: 1 Page Ref: 339

17) According to conventional wisdom, independent data marts are a poor architectural solution.

Diff: 2 Page Ref: 341

18) ETL tools transport data between sources and targets, document how data elements change as they move between source and target, exchange metadata with other applications, and administer all runtime processes and operations.

Diff: 2 Page Ref: 344

19) A hosted data warehouse has less functionality than an onsite data warehouse, but it does not consume computer resources on client premises for computer upgrades, software licenses, in-house development, and in-house support and maintenance.

Diff: 2 Page Ref: 352

20) A data warehouse needs to support scalability, which pertains to the amount of data in the warehouse, how quickly the warehouse is expected to grow, the number of concurrent users, and the complexity of user queries.

Diff: 3 Page Ref: 358

21) When DirectTV decided to implement an active data warehouse solution, the goal of the new system was to send fresh data to the call center at least daily. Once the capabilities of the solutions became apparent, that goal:

A) dropped to fresh data of less than 15 minutes to improve responsiveness.

B) dropped to fresh data every 12 hours to improve responsiveness.

C) increased to every 2 days to reduce maintenance costs.

D) increased to every 5 days to reduce maintenance costs.

Diff: 2 Page Ref: 327

22) Data warehouse is a(n) ________, integrated, time-variant, nonvolatile collection of data in support of management's decision making process.

A) analysis-oriented

B) object-oriented

C) subject-oriented

D) model-oriented

Diff: 2 Page Ref: 329

23) Once data are entered into the warehouse, users cannot change or update the data. Obsolete data are discarded, and changes are recorded as new data. This ________ characteristic is one of the characteristics of data warehousing.

A) changeable

B) nonvolatile

C) nonperishable

D) static

Diff: 2 Page Ref: 329

24) A data warehouse contains ________ about how data are organized and how to use them effectively.

A) a data directory

B) a data index

C) data fields

D) metadata

Diff: 2 Page Ref: 330

25) The high cost of data warehouses limits their use to large companies. As an alternative, many firms use a lower-cost, scaled-down version of a data warehouse referred to as (an) ________.

A) data mart

B) operational data store

C) dependent data mart

D) independent data mart

Diff: 2 Page Ref: 330

26) Which of the following are created when operational data need to be analyzed multidimensionally?

A) Oper marts

B) Customer information file

C) Dependent data marts

D) Independent data marts

Diff: 2 Page Ref: 330

27) Which of the following is one of the components of data warehousing process that enables users to access the data warehouse?

A) Middleware tools

B) Users interface

C) Query tools

D) OLAP

Diff: 2 Page Ref: 334

28) Which of the following is not a data source to a data warehouse?

A) ERP

B) legacy

C) POS

D) ETL

Diff: 2 Page Ref: 334

29) The advantage of three-tier architecture for data warehousing is its separation of the functions of the data warehouse, which eliminates resource constraints and makes it possible to easily create data ________.

A) banks

B) cubes

C) bases

D) marts

Diff: 1 Page Ref: 335

30) The ________ have inconsistent data definitions and different dimensions and measures, making it difficult to analyze data across those marts.

A) enterprise data marts

B) operational data marts

C) dependent data marts

D) independent data marts

Diff: 2 Page Ref: 338

31) Users demanding access via PDAs and through speech recognition and synthesis is becoming more commonplace, further complicating ________ issues.

A) data extraction

B) data load

C) data integration

D) OLAP

Diff: 1 Page Ref: 342

32) Which of the following is an evolving tool space that promises real-time data integration from a variety of sources, such as relational databases, Web services, and multidimensional databases?

A) Information integration

B) Data management integration

C) SQL data integration

D) Enterprise information integration (EII)

Diff: 2 Page Ref: 344

33) ETL process consists of extract, transform, and load. Transformation occurs by using ________ or lookup tables or by combining the data with other data.

A) rules

B) policies

C) strategies

D) procedures

Diff: 2 Page Ref: 345

34) Karacsony indicates that there is a direct correlation between the extent of ________ data and the amount of ETL processes. When data are managed correctly as an enterprise asset, ETL efforts are significantly reduced.

A) enormous

B) bad

C) redundant

D) wrong

Diff: 3 Page Ref: 346

35) Which of the following is not a direct benefit of a data warehouse?

A) End users can perform extensive analysis in numerous ways

B) A consolidated view of the data provides a single version of the truth

C) Simplified data access

D) Improved customer service and satisfaction

Diff: 2 Page Ref: 346

36) Guidelines that need to be considered when developing a vendor list include all of the following except:

A) financial strength

B) trade shows

C) ERP linkages

D) market share

Diff: 2 Page Ref: 348

37) A star schema contains a central ________ surrounded by several dimension tables.

A) database

B) fact table

C) data tree

D) data table

Diff: 2 Page Ref: 351

38) Which of the following is not one of the failure factors in data warehousing as identified by Turban et al.?

A) Cultural issues are ignored.

B) inappropriate architecture

C) unrealistic expectations

D) high levels of data summarization

Diff: 3 Page Ref: 355

39) ________ is a critical aspect of data warehousing that includes reconciling conflicting data definitions and formats organization-wide.

A) Data modification

B) Fact refinement

C) Data purification

D) Data cleansing

Diff: 2 Page Ref: 356

40) Which of the following is needed to determine how data are to be retrieved from a data warehouse, and will assist in the physical definition of the warehouse by helping to define which data require indexing?

A) Indexing modeling

B) Retrieval modeling

C) Access modeling

D) Tactic modeling

Diff: 2 Page Ref: 357

41) Data often are fragmented in distinct operational systems, so managers often make decisions with partial information at best. ________ cuts through this obstacle by accessing, integrating, and organizing key operational data in a form that is consistent, reliable, timely, and readily available where needed.

42) ________ is a subset that is created directly from the data warehouse. It has the advantages of using a consistent data model and providing quality data.

43) An ________ is a large-scale data warehouse that is utilized across the enterprise for decision support.

44) ________ provides a fairly recent form of customer information files (CIF). It is a type of database often used as an interim staging area for a data warehouse.

45) ________ is a small data warehouse designed for a strategic business unit (SBU)or a department.

46) In three-tier architecture for data warehouse, ________ contain the data and the software for data acquisition in one tier, the data warehouse is another tier, and the third tier includes the decision support and the client.

47) The ________ is a concession to the natural forces that undermine the best plans for developing a perfect system. It uses all possible means to integrate analytical resources from multiple sources to meet changing needs or business conditions.

48) ________ comprises three major processes that, when correctly implemented, permits data to be accessed and made accessible to an array of ETL and analysis tools and data warehousing environment.

49) EII (enterprise information integration) tools use predefined metadata to populate views that make integrated data appear relational to end-users. ________ may be the most important aspect of EII, because it allows data to be tagged either at the time of creation or later.

50) One of the benefits of a well-designed data warehouse is that business rules can be stored in a ________ repository and applied to the data warehouse centrally.

51) A data warehouse contains numerous ________ that define such things as how the data will be used, summarization rules, standardization of encoded attributes, and calculation rules.

52) The ________ is a scaled-down version of the data warehouse that centers on the requests of a specific department, such as marketing or sales.

53) The data warehouse design is based upon the concept of ________ modeling, which is a retrieval-based model that supports high-volume query access.

54) A(n) ________ contains the attributes needed to perform decision analysis, descriptive attributes used for query reporting, and foreign keys to link to dimension tables.

55) A(n) ________ data warehouse has nearly the same, if not more, functionality as an on-site data warehouse, but it does not consume computer resources on client premises.

56) It is important to identify the right level of ________ that will be needed during the scoping of a data warehouse project. A low level of that will result in more data being stored in the warehouse.

57) During data modeling, expertise is required to determine what data are needed, define business rules associated with the data, and decide what ________ and other calculations may be necessary.

58) The main issues pertaining to ________ are the amount of data in the warehouse, how quickly the warehouse is expected to grow, the number of concurrent users, and the complexity of user queries.

59) ________ is the process of loading and provides data via the data warehouse as they become available.

60) ________ is the person responsible for the administration and management of a data warehouse.

61) List four characteristics of a data warehouse.

62) Describe the data warehousing process.

63) What are the issues to consider when deciding which architecture for data warehousing to use?

64) Describe two of the alternative architectures to the basic architectural design types in data warehousing.

65) List 5 factors that potentially affect the architecture selection decision.

66) Describe various integration technologies that enable data and metadata integration.

67) Describe various issues that affect whether an organization will purchase data transformation tools or build the transformation process itself.

68) Describe a star schema.

69) List five benefits of a hosted data warehouse.

70) Identify at least five data warehouse best practices.

Chapter 9 Business Performance Management

1) Business performance management (BPM) is an outgrowth of decision support systems (DSS), enterprise information systems (EIS), and business intelligence (BI).

Diff: 1 Page Ref: 374

2) The term business performance management (BPM) refers to the business processes, methodologies, metrics, and technologies used by enterprises to measure, monitor, and manage business performance.

Diff: 1 Page Ref: 378

3) During the strategic planning process, the time horizon is determined by the company's market share; rate of technological innovation; and capital intensity of the industry.

Diff: 2 Page Ref: 380

4) For a low-cost provider such as Wal-Mart, distribution capabilities are a critical success factor.

Diff: 1 Page Ref: 380

5) The Palladium Group found that 75 percent of organizations tied their budgets to their strategic plans.

Diff: 1 Page Ref: 382

6) An operational plantranslates an organization's strategic objectives and goals into a set of well-defined tactics and initiatives, resource requirements, and expected results for some future time period, usually, but not always, a month.

Diff: 1 Page Ref: 382

7) In a budget-centric operational plan, tactics are established to meet the objectives and targets established in the strategic plan.

Diff: 1 Page Ref: 382

8) An organization's strategic objectives and key metrics should serve as top-down drivers for the allocation of an organization's tangible and intangible assets.

Diff: 2 Page Ref: 383

9) A comprehensive framework for monitoring performance should address two key issues: what to monitor and how to monitor.

Diff: 2 Page Ref: 383

10) The average knowledge worker spent less than 20 percent of his or her time focused on higher-value analytical and decision support tasks, according to the Saxon Group's findings.

Diff: 2 Page Ref: 389

11) An effective performance measurement system should not change measurements even when the underlying processes and strategies change.

Diff: 1 Page Ref: 395

12) Both balanced Scorecards and Six Sigma are performance management tools and methodologies.

Diff: 1 Page Ref: 395

13) Six Sigma is a performance management methodology aimed at reducing the number of defects in a business process to as close to zero DPMO (defects per million opportunities) as possible.

Diff: 2 Page Ref: 399

14) Unlike BPM, DMAIC is an open-loop business improvement model that encompasses the steps of defining, measuring, analyzing, improving, and controlling a process.

Diff: 2 Page Ref: 399

15) Lean manufacturing focuses on the elimination of waste or non-value-added activities, whereas Six Sigma focuses on reducing the variation or improving the consistency of a process.

Diff: 2 Page Ref: 400

16) Six Sigma is drastically different from other business initiatives.

Diff: 1 Page Ref: 401

17) To dramatically increase the success of Six Sigma, the Six Sigma results should "pay as you go" and be confirmed by objective parties.

Diff: 2 Page Ref: 402

18) Operational dashboards are used by managers and analysts to track, on weekly basis, raw data generated from departmental processes and projects.

Diff: 2 Page Ref: 409

19) The primary challenge of dashboard design is to display all the required information to be displayed clearly and without distraction on a single screen in a manner that can be assimilated quickly.

Diff: 1 Page Ref: 409

20) With comparative measures, it is important to point out whether a particular number is good or bad and whether it is trending in the right direction. Without these designations, it can be time-consuming to determine the status of a particular number or result.

Diff: 2 Page Ref: 410

21) What was the most important service provided by Harrah's Total Rewards program?

A) It provided Harrah's with a vast collection of high volume, real-time transaction data about its customers and their behaviors.

B) The program served to reward customers with cash for their gaming.

C) The program served to reward customers with comps for their gaming.

D) Opulent accommodations and surroundings for loyal customers.

Diff: 2 Page Ref: 375

22) The term business performance management (BPM) encompasses three key components, which include all of the following except:

A) A set of integrated, closed-loop management and analytic processes, supported by technology, that address financial as well as operational activities

B) An enterprise-wide strategy that helps to optimize local business performance

C) Tools for businesses to define strategic goals and then measure and manage performance against those goals

D) A core set of processes, including financial and operational planning, modeling, analysis, and monitoring of key performance indicators (KPIs), linked to organizational strategy

Diff: 3 Page Ref: 378

23) BPM is an enterprise-wide strategy that seeks to prevent organizations from optimizing ________ business at the expense of overall corporate performance.

A) corporate wise

B) global

C) regional

D) local

Diff: 2 Page Ref: 378

24) BPM helps organizations translate a unified set of objectives into plans, monitor execution, and deliver critical insight to improve financial and ________ performance.

A) strategic

B) tactical

C) operational

D) daily

Diff: 1 Page Ref: 380

25) Which of the following identifies and prioritizes the key customer, market, competitor, government, demographic, or actually impacting the company?

A) SWOT

B) SWAT

C) ROA

D) CSF

Diff: 1 Page Ref: 380

26) A(n) ________ plan translates an organization's strategic objectives and goals into a set of well-defined tactics and initiatives, resources requirements, and expected results for some future time period.

A) business

B) operational

C) tactical

D) strategic

Diff: 1 Page Ref: 381

27) Fundamentally, an operational plan is like a project plan that is designed to ensure that an organization's ________ is realized.

A) business policy

B) plan

C) strategy

D) business rules

Diff: 1 Page Ref: 382

28) Best practice organizations tend to utilize ________ operational planning, which begins the operational planning process by defining the alternative tactics and initiatives that can be used to reach a particular target.

A) tactic-centric

B) budget-centric

C) cost-centric

D) revenue-centric

Diff: 1 Page Ref: 382

29) An organization's strategic objectives and key metrics should serve as ________ drivers for the allocation of an organization's tangible and intangible assets.

A) bottom-up

B) top-down

C) company wide

D) revenues

Diff: 1 Page Ref: 383

30) Which of the following is not a part of a cybernetic system?

A) Inputs

B) Standard

C) Feedback channel

D) Diagnostic mechanism

Diff: 3 Page Ref: 384

31) An effective diagnostic control system encourages ________.

A) management by exception

B) strict rules

C) democratic rules

D) elite rules

Diff: 2 Page Ref: 384

32) The effectiveness of a campaign is measured by ________.

A) net cost and productivity

B) relative profitability and net value

C) gross revenue and net income

D) cost and quality

Diff: 2 Page Ref: 388

33) Saxon Group's benchmarking results indicate that best practice organizations:

A) focus on competition instead of on cause-and-effect relationships between tactics and objectives.

B) develop better predictions or plans.

C) are far better equipped to quickly identify changes or problems, diagnose the root causes, and take corrective action.

D) are historic and internally focused.

Diff: 2 Page Ref: 389

34) Which of the following is not what an effective performance measurement system should do?

A) Align top-level strategic objectives and bottom-level initiatives.

B) Identify opportunities in a timely fashion.

C) Determine priorities and allocate resources based on those priorities.

D) Maintain measurement when the underlying processes and strategies change.

Diff: 2 Page Ref: 395

35) Which of the following is the best-known and most widely used performance management system?

A) Dashboard

B) Performance reengineering

C) Balanced scorecard (BSC)

D) Total quality management

Diff: 1 Page Ref: 395

36) BSC translates an organization's vision and strategy into a set of interrelated financial and nonfinancial objectives. All of the following are nonfinancial objectives except:

A) Business rules

B) Customers

C) Internal business process

D) Learning and growth

Diff: 1 Page Ref: 396

37) A ________ delineates the process of value creation through a series of cause-and-effect relationships among the key organizational objectives for all four BSC perspectives--financial, customer, process, and learning and growth.

A) balanced scorecard

B) strategic theme

C) strategy map

D) KPI

Diff: 2 Page Ref: 397

38) Sigma, σ, is a Greek alphabet letter used by statisticians to measure the ________ in a process.

A) variance

B) mean

C) inconsistency

D) variability

Diff: 2 Page Ref: 399

39) Which of the following about Six Sigma is not true?

A) Six Sigma focuses on the elimination of waste activities, whereas lean focuses on reducing the variation or improving the consistency of a process.

B) Most companies use Six Sigma as a process improvement methodology that enables them to

scrutinize their processes, pinpoint problems, and apply remedies.

C) Six Sigma is a performance management methodology aimed at reducing the number of defects in a business process to as close to zero DPMO as possible.

D) Six Sigma uses DMAIC, a closed-loop business improvement model that involves the steps of defining, measuring, analyzing, improving, and controlling a process.

Diff: 3 Page Ref: 399

40) Logically speaking, a BPM system consists of three basic parts, or layers. Which of the following is not one of those parts or layers?

A) BPM applications

B) Dashboards and scorecards

C) Information hub

D) Source systems

Diff: 2 Page Ref: 404

41) ________ is a framework for organizing, automating, and analyzing business methodologies, metrics, processes, and systems to drive the overall performance of the enterprise.

42) ________ outline those things that an organization must excel at to be successful in their market space.

43) A(n) ________ is a standard strengths, weaknesses, opportunities, and threats (SWOT) assessment of the company.

44) ________ is used to identify and prioritize the internal strengths and weaknesses in an organization's processes, structures, and its technologies and applications.

45) A ________ is the quantification of an objective for a designated period of time. For example, if an organization has an objective of increasing profitability, that objective is turned into quantified targets

46) In a ________ plan, tactics are established to meet the objectives and targets established in the strategic plan.

47) Most companies use ________ to monitor organizational performance and correct deviations from present performance standards.

48) KPIs stand for ________, which are strategically aligned metrics.

49) Targets are measured against a baseline or ________.

50) A ________ delineates the relationships among the key organizational objectives for all BSC perspectives.

51) A ________ is a set of activities that transform a set of inputs that include suppliers, assets, resources, and information into a set of outputs for another person or process.

52) Six Sigma is a performance management methodology aimed at reducing the number of defects in a business process to as close to ________ as possible.

53) DMAIC is a ________ business improvement model.

54) To achieve a Six Sigma level of performance, the company would have to reduce the number of defects to no more than ________ DPMO.

55) Six Sigma and Lean Production both deal with ________.

56) ________ focuses on the elimination of waste or non-value–added activities.

57) ________ focuses on reducing the variation or improving the consistency of a process.

58) In recent years, there has been a focus on combining the Six Sigma methodology with the ________.

59) ________ refers to both the logical and physical design of a system.

60) Dashboards and ________ both provide visual displays of important information that is consolidated and arranged on a single screen so that information can be digested at a single glance and easily explored.

61) What are the three key components of business performance management (BPM)?

62) Describe or sketch the BPM cycle.

63) Describe the common tasks in strategic planning process.

64) A number of surveys have highlighted the gap that routinely exists in organizations between their strategic plans and the execution of those plans. What are the reasons for this strategy gap?

65) Describe the conditions under which an information system can be used as diagnostic control system.

66) Describe the series of three steps in the discovery-driven planning (DDP).

67) Explain three of the drawbacks or limitations of using financial data as the core of a performance measurement system.

68) List the basic ingredients of good performance measures.

69) Describe the steps in DMAIC performance model.

70) What are the characteristics of well-designed dashboards and scorecards?

Chapter 10 Collaborative Computer-Supported Technologies and

Group Support Systems

1) Most of the complex decisions in organizations are made by groups whose members work together in the same location and at the same time.

Diff: 1 Page Ref: 420

2) One of the greatest benefits of using computer-supported collaboration tools is anonymity when there is tension or sensitive topics within groups.

Diff: 2 Page Ref: 422

3) One of the characteristics of groupwork is that a group can be at one managerial level or can span across several levels.

Diff: 1 Page Ref: 423

4) There is never a tendency for poor quality compromised solutions in groupwork.

Diff: 1 Page Ref: 425

5) A group may produce synergy during problem solving, which means that the time to reach a high quality decision is greater for group decision making than for independent individuals.

Diff: 2 Page Ref: 425

6) Nominal group technique (NGT) uses questionnaires for technological forecasting and for forecasting of sensitive issues.

Diff: 2 Page Ref: 426

7) A large part of our communication is conveyed via nonverbal cues.

Diff: 1 Page Ref: 430

8) The advancement of Web-based systems such as webex.com and gotomeetings.com opens the door for improved electronically supported virtual meetings.

Diff: 1 Page Ref: 430

9) Groupware products are either stand-alone products that support only one task, such as videoconferencing, or are integrated kits consisting of several tools.

Diff: 1 Page Ref: 431

10) Instant messaging, audio conferencing, and polling are asynchronous groupware tools.

Diff: 1 Page Ref: 432

11) Collaborators can work together on the same document, spreadsheet, or graphics using the screen sharing software.

Diff: 1 Page Ref: 435

12) Intraspect from Vignette Corp. allows employees to create Web sites, invite co-workers to join discussions and post documents.

Diff: 1 Page Ref: 436

13) The Windows Meeting Space client is included in the Windows operating system.

Diff: 1 Page Ref: 437

14) WebEx delivers active and interactive presentations, allows real-time collaboration, enhances demonstration of products and services, and assists in document management.

Diff: 2 Page Ref: 438

15) Successful enterprise-wide collaboration systems such as Lotus Notes/Domino can be

inexpensive to develop and operate because no support staff is required.

Diff: 2 Page Ref: 440

16) A major characteristic of GDSSs is that they contain built-in mechanisms that discourage development of negative group behaviors, such as destructive conflict miscommunication and groupthink.

Diff: 2 Page Ref: 441

17) Voice over IP (VoIP) are communication systems that transmit voice calls over circuit-based networks.

Diff: 1 Page Ref: 453

18) In contrast with commercial portals such as Yahoo! and MSN, which are gateways to general information on the Internet, corporate portals provide a single point of access to information and applications available on the Internet, intranets, and extranets of a specific organization.

Diff: 2 Page Ref: 456

19) The idea of CPFR is achieve fewer out-of-stock situations and resultant lost sales by increasing inventory levels in the supply chain.

Diff: 2 Page Ref: 457

20) Personality-related creativity traits include inventiveness, independence, individuality, enthusiasm, and flexibility, and these traits have been assessed through the widely used Torrance Tests of Creative Thinking.

Diff: 2 Page Ref: 462

21) Which of the following activities and processes is not a characteristic of meetings?

A) Differences in opinions are settled by the ranking person present and not through negotiation or arbitration.

B) A meeting is a joint activity engaged in by a group of people typically of equal or nearly equal status.

C) The outcome of a meeting depends partly on the knowledge, opinions, and judgments of its participants and the support they give to the outcome.

D) The process of group decision making can create benefits as well as dysfunctions.

Diff: 2 Page Ref: 424

22) Which of the following refers to a group process wherein people begin thinking alike and not being tolerant of new ideas?

A) Group brainwash

B) Group politics

C) Group gain

D) Groupthink

Diff: 1 Page Ref: 425

23) Managers spend about ________ percent of their time in formal meetings of five people or more; and up to ________ percent of their time communicating.

A) 10; 50

B) 20; 85

C) 50; 25

D) 50; 50

Diff: 2 Page Ref: 425

24) Which of the following is a simple brainstorming process for nonelectronic meetings?

A) NGT

B) NBT

C) NAT

D) NCT

Diff: 1 Page Ref: 426

25) Communication occurs when the receiver gets the information at a different time than it was sent is called ________ communication.

A) deferred

B) delayed

C) time lagging

D) asynchronous

Diff: 1 Page Ref: 429

26) With ________, group members can work on the same document which is shown on the PC screen of each participant.

A) data conferencing

B) whiteboards

C) instant messaging

D) screen sharing

Diff: 1 Page Ref: 435

27) The spread of instant messaging and Internet telephony has led to the idea of linking people via both voice and audio, which is called ________.

A) audio-video conference

B) instant audio

C) instant video

D) conference

Diff: 1 Page Ref: 435

28) Lotus Notes provides online ________ capabilities through Web conferencing on demand.

A) collaboration

B) cooperation

C) partnership

D) teamwork

Diff: 1 Page Ref: 437

29) Groove Workspace, used with Groove enterprise servers and ________, enables spontaneous, online-offline collaboration that reduces project costs and speeds time-to-market for products and services.

A) blackboards services

B) whiteboards services

C) server services

D) hosted services

Diff: 1 Page Ref: 437

30) The collaborative experience in Live Meeting is enhanced through added features like ________.

A) mood indicators

B) opinion sharing

C) user participation

D) instant messaging

Diff: 2 Page Ref: 439

31) GDSS supports group decision making by providing the automation of ________ using information technology tools.

A) participations

B) tasks

C) processes

D) subprocesses

Diff: 2 Page Ref: 441

32) Which of the following is not an option for deploying GDSS/GSS technology?

A) Multiple users functions

B) Decision room

C) Multiple-use facility

D) Internet based or intranet-based groupware

Diff: 2 Page Ref: 445

33) The term, wiki, refers to the collaborative software that facilitates the operation of a wiki Web site;.and means ________ in the Hawaiian language.

A) slow

B) quick

C) integration

D) collaboration

Diff: 1 Page Ref: 455

34) A wikilogs is an extension of a(n) ________, which is created by an individual or a small group and may have a discussion board.

A) im

B) wiki

C) log

D) blog

Diff: 1 Page Ref: 455

35) Which of the following is used for the members of a supply chain to help improve effectiveness between manufacturing companies?

A) Supply chain hub

B) Collaboration hub

C) Member hub

D) Supplier hub

Diff: 2 Page Ref: 455

36) Which of the following is a gateway to a corporate Web site that enables communication, collaboration, and access to company information?

A) Corporate port

B) Web portal

C) Corporate gateway

D) Enterprise portal

Diff: 1 Page Ref: 456

37) CPFR is an industry-wide project in which suppliers and retailers collaborate in ________ and demand forecasting.

A) planning

B) scheduling

C) purchasing

D) transportation

Diff: 2 Page Ref: 456

38) Retailers make their suppliers responsible for determining when to order and how much to order by adopting ________.

A) VMM

B) SMM

C) SMI

D) VMI

Diff: 2 Page Ref: 458

39) In order for collective intelligence (CI) to happen, four features are needed. Which of the following is not one of those features?

A) acting locally

B) openness

C) peering

D) sharing

Diff: 2 Page Ref: 460

40) Which of the following is a key feature of idea-generating GDSS software?

A) The software does all of the thinking.

B) Bombarding the user with many ideas.

C) Information overload.

D) All of the above.

Diff: 2 Page Ref: 463

41) ________ is a team whose members are in different places while in a meeting.

42) ________ are methods used to increase some of the benefits of meetings and eliminate or reduce some of the losses.

43) ________ that is a qualitative forecasting methodology using anonymous questionnaires.

44) ________ are computerized tools have been developed to provide group support.

45) ________ tools support synchronous communication of graphical and text-based information. These tools are also being used in distance learning, virtual classroom, personnel training, product demonstrations, customer support, e-commerce, and sales applications.

46) In collaborative work, team members are frequently in different locations. By using ________ software, group members can work on the same document, which is shown on the PC screen of each participant.

47) ________, associated with asynchronous mode, allows users to collaborate on projects but work at different times.

48) The advancement of Web-based systems allows ________ where members are in different locations and even in different countries.

49) ________ is the use of electronic communication that allows two or more people at different locations to have a simultaneous conference.

50) The Groove Outliner tool is an open-ended ________ tool that allows shared space members to build structured hierarchical lists of videos and concepts.

51) WebEx Meeting Center integrates data, voice, and video within a standard ________ for real-time meetings over the Internet from any desktop, laptop, or wireless handheld device.

52) A ________ is an interactive computer-based system that facilitates the solution of semistructured and unstructured problems by a group of decision makers.

53) An ________ is a form of GSS that supports anytime/anyplace meetings.

54) A ________ is any combination of hardware and software that enhances groupwork support in decision making, directly or in indirectly.

55) ________ refers to the ability of participants in a group to work simultaneously on a task.

56) ________ is the first major step in the GSS process. This exploratory step looks at the problem and attempts to develop creative ideas about its important features or alternative solutions in a problem-solving session.

57) The success of a GSS depends mostly on its ________.

58) ________ refers to communication systems that transmit voice calls over Internet Protocol—based networks.

59) A ________ is a piece of server software available in a Web site that allows users to freely create and edit Web page content.

60) ________ is an industry-wide project in which suppliers and retailers collaborate in planning and demand forecasting in order to ensure that members of the supply chain will have the right amount of raw materials and finished goods when they need them.

61) Describe the benefits of working in groups.

62) Describe the four cells frameworks of time and space in communications.

63) List and describe the three categories in Groupware products.

64) Describe the major characteristics of a GDSS.

65) List the activities supported by GDSS.

66) Describe the major steps in a standard GSS.

67) Describe the steps that managers must do in creating a work environment that supports collaboration.

68) List the benefits of VoIP for business users.

69) List the benefits of VoIP for individual users.

70) Describe the steps in the process model for implementing a CPFR project.

Chapter 11 Knowledge Management

1) The goal of knowledge management is to identify, capture, store, maintain, and deliver useful knowledge in a meaningful form to anyone who needs it, anyplace and anytime, within an organization.

Diff: 2 Page Ref: 471

2) Knowledge management is about building personal repositories of information at the department and organization levels.

Diff: 2 Page Ref: 471

3) Since knowledge management (KM) first appeared in the mid-1990s, almost all organizations have invested in KM systems and reaped significant benefits.

Diff: 2 Page Ref: 472

4) MITRE implemented KM systems because its knowledge was not structured in a way that encouraged knowledge sharing, and the sharing that was done took place in an unsystematic, informal way.

Diff: 2 Page Ref: 474

5) KM systems are used to leverage a company's intellectual assets, or intellectual capital—the valuable knowledge of its employees.

Diff: 1 Page Ref: 474

6) Knowledge is an important asset, but large companies have difficulties sharing it.

Diff: 1 Page Ref: 474

7) Both the idea of knowledge management and the application of information technology to facilitate the creation, storage, transfer, and application of previously uncodifiable organizational knowledge is a new and major initiative in organizations.

Diff: 3 Page Ref: 474

8) Knowledge management is the systematic and active managing of ideas, information, and knowledge that reside in an organization's external environment.

Diff: 1 Page Ref: 474

9) An up-to-the-minute traffic bulletin along the freeway that indicates a traffic slowdown due to construction several miles ahead is an example of knowledge.

Diff: 1 Page Ref: 475

10) Knowledge has strong experiential and reflective elements that distinguish it from information in a given context.

Diff: 1 Page Ref: 475

11) Today's knowledge may become tomorrow's ignorance if an organization fails to update knowledge as environmental conditions change.

Diff: 1 Page Ref: 476

12) Explicit knowledge deals with objective, rational, and technical knowledge.

Diff: 2 Page Ref: 478

13) Tacit knowledge is usually in the domain of subjective, cognitive, and experiential learning; it is highly personal and difficult to formalize.

Diff: 2 Page Ref: 478

14) The purpose of building a knowledge management system (KMS) is to maintain a well-informed, productive workforce and to help large organizations provide a consistent level of customer service.

Diff: 2 Page Ref: 480

15) A learning organization is one that performs these four main activities well: systematic problem solving, creative experimentation, learning from the best practices of others, and transferring knowledge quickly and efficiently throughout the organization.

Diff: 2 Page Ref: 481

16) Organizational learning and memory depend more on technology than on the people issues.

Diff: 2 Page Ref: 482

17) Use of strong hierarchy, position-based status, and formal power contribute to people wanting to share knowledge.

Diff: 2 Page Ref: 483

18) In contrast to the process approach, the practice approach to knowledge management assumes that a great deal of organizational knowledge is tacit in nature and that formal controls, processes, and technologies are not suitable for transmitting this type of understanding.

Diff: 1 Page Ref: 488

19) eXtensible Markup Language (XML) enables standardized representations of data structures so that data can be processed by different systems without additional programming.

Diff: 1 Page Ref: 497

20) The situation at Mrs. Fields illustrates that while organizations can achieve significant short-term gains through KMS, they must not neglect the creative process of new knowledge creation or they may find themselves applying yesterday's solutions to tomorrow's problems.

Diff: 3 Page Ref: 520

21) What is an organization's valuable knowledge of its employees?

A) Effective and efficient problem solving

B) corporate information

C) intellectual capital

D) active management

Diff: 2 Page Ref: 474

22) Which of the following is true about knowledge management?

A) Successful managers have always been performing knowledge management.

B) KM focuses on identifying and explicating knowledge so that it can be shared in a formal manner.

C) The benefits are always clear at the start of the effort.

D) All of the above.

Diff: 2 Page Ref: 475

23) Knowledge is:

A) dynamic.

B) contextual.

C) information in action.

D) all of the above.

Diff: 1 Page Ref: 475

24) Which of the following is a characteristic of knowledge?

A) Knowledge is subject to diminishing returns

B) Knowledge branches and fragments

C) It is easy to estimate the impact of investments in knowledge

D) All of the above

Diff: 2 Page Ref: 476

25) Tacit knowledge is:

A) easy to explain.

B) easy to apply.

C) easy to document.

D) none of the above.

Diff: 2 Page Ref: 478

26) Explicit knowledge is:

A) easy to explain.

B) easy to apply.

C) easy to document.

D) easy to explain, document and apply.

Diff: 2 Page Ref: 478

27) Firms adopt knowledge management systems:

A) to help deal with employee turnover.

B) to increase productivity.

C) to improve customer service.

D) all of the above.

Diff: 2 Page Ref: 480

28) Which of the following is not a learning skill?

A) Openness to new perspectives

B) Awareness of personal biases

C) Exposure to unfiltered data

D) A sense of urgency

Diff: 2 Page Ref: 482

29) Organizational learning and memory depend ________ on technology and ________ on people issues.

A) less; more

B) mostly; not

C) first; secondly

D) primarily; less

Diff: 2 Page Ref: 482

30) All of the following describe the practice approach to knowledge management except:

A) It deals mostly with tacit knowledge.

B) It provides an environment to generate and transfer high-value tacit knowledge.

C) It uses formal controls and procedures with an emphasis on technology to transfer and disseminate knowledge.

D) It relies on informal social groups.

Diff: 2 Page Ref: 487

31) A knowledge management portal (KMP) consists of each of the following except:

A) knowledge portal

B) corporate culture

C) knowledge repository

D) information data sources

Diff: 1 Page Ref: 492

32) Artificial intelligence (AI) supports knowledge management in each of the following ways except:

A) By enhancing knowledge searches

B) By helping to determine the relative importance of the knowledge

C) By manipulating current results

D) By identifying patterns in data

Diff: 2 Page Ref: 496

33) Which of the following is true about a chief knowledge officer?

A) A CKO need not have extensive experience in KMS.

B) A CKO should be technically savvy.

C) A CKO does not have to be actually involved in promoting knowledge sharing.

Diff: 2 Page Ref: 504

34) What is the importance of communities of practice (COP)?

A) They consist of chief officers of the organization.

B) They are a supportive culture needed for a KMS to succeed.

C) They provide necessary technology training.

D) All of the above.

Diff: 2 Page Ref: 506

35) Each of the following is a way to encourage vibrant COP (communities of practice) in an organization except:

A) manage strictly

B) focus on value

C) combine familiarity and excitement

D) invite different levels of participation

Diff: 2 Page Ref: 508

36) Which of the following is not one of the key knowledge performance dimensions that drives competitive advantage?

A) creating a corporate knowledge-driven culture

B) fostering innovation

C) providing customer service

D) facilitating organizational learning

Diff: 2 Page Ref: 510

37) There are several essential "preconditions" for effective knowledge management to succeed. Which of the following is a precondition?

A) a knowledge infrastructure consisting of technology, structure, and culture

B) a knowledge process architecture of acquisition, conversion, application, and protection

C) economies of scale in obtaining information from external providers

D) A and B

Diff: 3 Page Ref: 510

38) Lessons learned from the British Broadcasting Corporation's (BBC) knowledge management system includes all of the following except:

A) High-tech and large budgets are necessary to attain knowledge management success.

B) The BBC runs on knowledge.

C) Design the system to match the way the company functions, e.g., as a social network.

D) Blogs and wikis have helped break down silos and spread knowledge.

Diff: 3 Page Ref: 511

39) ________ are interactive computerized systems that help employees find and connect with colleagues who have the expertise required for specific problems in order to solve specific, critical business problems in seconds.

A) Expert location systems

B) Tacit knowledge systems

C) Knowledge sharing systems

D) Social networks

Diff: 2 Page Ref: 512

40) Which of the following factors is not among the most important for KM success?

A) Quantity the expected and realized ROI of the KM before and after deployment.

B) Build the right team for knowledge capture and creation.

C) If the deployment appears to be falling behind schedule, it is better to focus on finishing it on schedule rather than narrowing the scope of the knowledge base.

D) Maintain a flexible approach to information access to improve user adoption.

Diff: 2 Page Ref: 513

41) ________ is the systematic and active managing of ideas, information, and knowledge residing in an organization's employees.

42) A learning organization must have an organizational memory and a means to save, represent, and ________ its organizational knowledge.

43) Knowledge evolves over time with ________, which puts connections among new situations and events in context.

44) ________ are information technologies that together make knowledge management available throughout an organization.

45) ________ refers to an organization's capability of learning from its past experience.

46) The ability of an organization to learn, develop memory, and share knowledge is dependent on its ________, which is a pattern of shared basic assumptions.

47) The process approach attempts to ________ organizational knowledge through formalized controls, processes, and technologies.

48) The practice approach to knowledge management assumes that a great deal of organizational knowledge is ________ in nature.

49) ________ are the activities and methods that the most effective organizations use to operate and manage various functions.

50) ________ are software systems that learn how users work and provide assistance in their daily tasks.

51) ________ enables standardized representations of data structures so that data can be processed appropriately by heterogeneous systems without case-by-case programming.

52) Collaboration tools, or ________, were the first tools used to enhance tacit knowledge transfer within an organization.

53) ________ are the doorways into many knowledge management systems. They have evolved from the concepts underlying EIS, GSS, Web browsers, and DBMS.

54) ________ systems allow users to access needed documents, generally via a Web browser over a corporate intranet.

55) A(n) ________ is a group of people in an organization with a common professional interest.

56) ________ are interactive computerized systems that help employees find and connect with colleagues with expertise required for specific problems.

57) In order to measure the financial impact of knowledge management, experts recommend focusing knowledge management projects on specific business problems that can be easily ________.

58) The first step for companies in increasing the probability of success of knowledge management projects is to access whether there is a ________ need for knowledge management.

59) Knowledge management requires a major transformation in organizational ________ to create a desire to share knowledge.

60) Nontrivial ________ methods, such as rewards and recognition, to encourage users to contribute and use knowledge.

61) Define tacit knowledge.

62) Define explicit knowledge.

63) Identify and list reasons why people do not want to share knowledge.

64) Distinguish between a process approach and a practice approach to knowledge management.

65) Describe the knowledge management system cycle steps.

66) Identify ways in which Artificial Intelligence helps knowledge management.

67) Describe electronic document management.

68) Describe the role of the CKO.

69) What is a community of practice?

70) Describe the Seven Principles for designing successful communities of practice.

Chapter 12 Artificial Intelligence and Expert Systems

1) Using the knowledge of many wine experts, MenuVino was able to develop an expert system that mimics the advising that a person would receive from a wine guru.

Diff: 1 Page Ref: 531

2) Most technologies used to support decision situations where expertise is required use qualitative and/or mathematical models to provide the needed support.

Diff: 2 Page Ref: 532

3) Artificial intelligence (AI) has many different definitions and is an area in management science.

Diff: 1 Page Ref: 532

4) Deep Blue is the first computer that demonstrated its intelligence in an area that requires human intelligence.

Diff: 1 Page Ref: 533

5) Artificial intelligent systems have the learning capabilities as humans have.

Diff: 1 Page Ref: 535

6) It is easier to duplicate and disseminate natural intelligence than artificial intelligence.

Diff: 1 Page Ref: 537

7) The basic objective of computer vision is to generate pictures.

Diff: 2 Page Ref: 540

8) The purpose of an intelligent computer-aided instruction (ICAI) is to learn.

Diff: 2 Page Ref: 540

9) Inexact knowledge and imprecise reasoning are important aspects of expertise in applying commonsense to decision-making situations.

Diff: 2 Page Ref: 541

10) Expertise is often acquired from training, reading, and experience in practice, and the level of expertise determines the performance of a decision.

Diff: 1 Page Ref: 543

11) Expert systems (ES) must have the ability to examine their own reasoning and provide proper explanations as to why a particular conclusion was reached.

Diff: 1 Page Ref: 544

12) Expert systems allow knowledge to be transferred more easily at a lower cost.

Diff: 2 Page Ref: 545

13) Acquiring knowledge from experts is often a bottleneck in expert system construction.

Diff: 2 Page Ref: 551

14) The knowledge base of an expert system and the knowledge base of an organization are the same.

Diff: 2 Page Ref: 551

15) The blackboard of an expert system is used for recording intermediate hypotheses and decisions.

Diff: 2 Page Ref: 551

16) The explanation subsystem of an expert system cannot trace responsibility for conclusions to their sources and cannot explain the expert system behavior interactively.

Diff: 2 Page Ref: 552

17) Inference rules, or procedural rules, offer advice on how to solve a problem, given that certain facts are known.

Diff: 2 Page Ref: 557

18) In IF-THEN rules, the IF part indicates the condition for the rule to be activated, and the THEN part shows the action or the conclusion if all IF conditions are satisfied.

Diff: 2 Page Ref: 558

19) The first step in developing an ES is to identify the nature of the problem and to define who is the proper expert responsible for the solving the problem

Diff: 2 Page Ref: 566

20) By implementing ES and other intelligent systems as knowledge servers, it becomes economically feasible and profitable to publish expertise on the Web.

Diff: 2 Page Ref: 572

21) One does not have to rethink completely what to do every time a similar problem is encountered, when using ________.

A) symbolic database

B) knowledge base

C) algorithms

D) rules of thumb

Diff: 2 Page Ref: 535

22) Which of the following technology allows computer users the ability to communicate with a computer in their native language?

A) NAP

B) NLP

C) NBP

D) XML

Diff: 1 Page Ref: 537

23) Which of the following is an electromechanical device that can be programmed to perform manual tasks?

A) Robot

B) Sensory systems

C) Tactile systems

D) Signal processing systems

Diff: 1 Page Ref: 539

24) In the traditional Boolean logic, a person's credit score is either good or bad. In ________, the credit record may be assessed as both good and bad, but with different degrees.

A) genetic algorithms

B) artificial intelligence

C) language translation

D) fuzzy logic

Diff: 2 Page Ref: 541

25) The solution of genetic algorithms is represented as a ________ for a specific problem.

A) cell

B) gene

C) DNA

D) chromosome

Diff: 2 Page Ref: 541

26) The basic rationale of artificial intelligence is to use ________ rather than mathematical calculation.

A) mathematical calculation

B) symbolic reasoning

C) genetic algorithms

D) fuzzy logic

Diff: 2 Page Ref: 543

27) A rule-based expert system contains rules in its knowledge base and the rules are used to generate ________ for the user.

A) questions

B) solutions

C) questions and solutions

D) none of the above

Diff: 2 Page Ref: 545

28) Which of the following is the major objective of an expert system?

A) To learn

B) To teach

C) To provide advice

D) To function as a knowledge repository

Diff: 2 Page Ref: 550

29) Which of the following is used by a nonexpert to obtain expert knowledge and advice?

A) Query environment

B) Development environment

C) consultation environment

D) Blackboard

Diff: 3 Page Ref: 550

30) Which of the following components appear in virtually every expert system?

A) User interface

B) Database management system

C) Statistical analysis module

D) Numeric data representation

Diff: 2 Page Ref: 550

31) Which of the following is usually included in an expert system that interacts with users?

A) Blackboard

B) Justifier

C) Knowledge acquisition subsystem

D) All of the above

Diff: 2 Page Ref: 550

32) The knowledge base in expert system is composed of:

A) facts

B) heuristics and meta-rules

C) facts, heuristics, and meta-rules

D) facts, data, and knowledge rules

Diff: 2 Page Ref: 551

33) Which of the following is the brain of an expert system?

A) Knowledge base

B) Inference engine

C) User interface

D) Blackboard

Diff: 2 Page Ref: 551

34) Which of the following is not a typical type of problems recorded on blackboard?

A) Plan

B) Agenda

C) Solution

D) Key

Diff: 2 Page Ref: 552

35) A knowledge engineer helps the expert structure the problem area by doing all of the following tasks except:

A) decoding the heuristics

B) interpreting and integrating human answers to questions

C) drawing analogies

D) posing counterexamples

Diff: 2 Page Ref: 551

36) A major goal of ________ is to help experts articulate how they do what they do and to document this knowledge in a reusable form.

A) heuristics

B) knowledge engineering

C) knowledge refinement

D) rule interpreting

Diff: 2 Page Ref: 553

37) Which of the following is not an advantage of using multiple experts in the development of an ES?

A) groupthink

B) fewer mistakes

C) enhanced quality

D) wider domain

Diff: 2 Page Ref: 556

38) "If the stop light is red AND you have stopped, THEN a right turn is okay" is an example of:

A) a heuristic

B) a knowledge base

C) an inference rule

D) a production rule

Diff: 2 Page Ref: 557

39) The standard statistical methods are based on the assumption that an uncertainty is the ________ that an event is true or false, whereas certainty theory is based on the ________ that an event is true or false.

A) estimated probability; calculated probability

B) probability; degrees of belief

C) calculated probability; estimated probability

D) degrees of belief; probability

Diff: 2 Page Ref: 561

40) All of the following are benefits of ES except:

A) Reduced downtime

B) Capture of scarce expertise

C) Work well within wide domains of knowledge.

D) Elimination of the need for expensive equipment

41) ________ is a test designed to measure the intelligence of a computer.

42) ________ are intuitive knowledge, or rules of thumb, learned from experience.

43) An ________ is a system that uses human knowledge captured in a computer to solve problems that ordinarily require human expertise.

44) ________ is the recognition and understanding of spoken language by a computer.

45) Sensory systems, such as vision systems, tactile systems, and signal-processing systems, when combined with AI, define a broad category of systems generally called ________.

46) ________ systems bring the power of a computer to bear on the educational process.

47) A(n) ________ network is a set of mathematical models that simulate the way a human brain functions.

48) ________ is a technique for processing linguistic terms, which extends the notions of logic beyond simple true/false statements.

49) ________ are small programs that reside on computers to conduct certain tasks automatically and it runs in the background, monitors the environment, and reacts to certain trigger conditions.

50) A(n) ________ is a person who has the special knowledge, judgment, experience, and methods, and the ability to apply these talents to give advice and solve problems.

51) The ________ is the foundation of an expert system, which includes the relevant knowledge necessary for understanding, formulating, and solving problems.

52) The process of eliciting knowledge is called ________.

53) The ________ of an expert system is the rule interpreter.

54) ________ is a goal-driven approach in which you start from an expectation of what is going to happen and then seek evidence that supports or contradicts your expectation.

55) ________ is a data-driven approach that starts from available information or from a basic idea, which is used to try to draw conclusions.

56) ________ express belief in an event, fact, or hypothesis based on the expert's assessment and can be represented by values ranging from 0 to 100.

57) ________ is the process that ensures the resulting knowledge base contains the knowledge exactly the same as that acquired from the expert.

58) In ________ expert systems, knowledge in the knowledge base is represented in IF-THEN rules that combine the condition and the conclusion for handling a specific situation.

59) An ________ is an expert system without the knowledge in the knowledge base.

60) The Web can greatly support the spread of multimedia-based ES. Such systems are called ________ systems.

61) Describe abilities that are signs of intelligence.

62) Describe the characteristics of artificial intelligence.

63) Describe heuristics and give an example. Why do many AI methods use heuristics?

64) Identify the advantages of artificial intelligence over natural intelligence.

65) Identify the advantages of natural intelligence over artificial intelligence.

66) List major applications and disciplines of AI.

67) Describe fuzzy logic. Contrast fuzzy logic with Boolean logic.

68) Describe the capabilities of human experts.

69) Describe the characteristics of expertise.

70) List and describe the generic categories of expert systems.

Chapter 13 Advanced Intelligent Systems

1) Machine-learning techniques enable computers to acquire knowledge (i.e., learn) from data that reflects the historical happenings.

Diff: 1 Page Ref: 582

2) Machines learning overcomes deficiencies of manual knowledge acquisition techniques by automating the learning process.

Diff: 1 Page Ref: 582

3) Unsupervised learning is a process of inducing knowledge from a set of observations.

Diff: 2 Page Ref: 584

4) Inductive learning allows the computer to use historical cases to solve new problems.

Diff: 2 Page Ref: 585

5) Case-based reasoning (CBR) is analogical reasoning that adapts solutions that had been used to solve old problems to solve new problems.

Diff: 2 Page Ref: 585

6) The foundation of case-based reasoning (CBR) is a repository or library of cases called a case base that contains a number of previous cases for decision making.

Diff: 2 Page Ref: 585

7) Genetic algorithms (GA) are a part of global search techniques that are used to find or produce the best solution to a specific problem.

Diff: 2 Page Ref: 593

8) The knapsack problem is a conceptually simple optimization problem that can be solved directly using analytical methods, but it is ideal for illustrating a genetic algorithm approach.

Diff: 2 Page Ref: 597

9) Genetic algorithms can be used to solve business problems such as assembly-line balancing, facility layout, machine and job shop scheduling, creditworthiness determination, and aircraft design.

Diff: 2 Page Ref: 599

10) The thinking behind fuzzy logic is that decision making is not always a matter of crisp logic, e.g., black or white or true or false. It often involves tones of gray and varying degrees of truth.

Diff: 2 Page Ref: 602

11) Fuzzy logic systems can be used in conducting property appraisals since it is necessary to use judgment, experience, and intuition to generate estimates.

Diff: 2 Page Ref: 604

12) STRATASSIST is a fuzzy ES that helps small- to medium-sized firms plan strategically by asking questions in five strategic, competitive areas.

Diff: 2 Page Ref: 605

13) Support vector machines (SVM) have a solid mathematical foundation in statistical learning theory, but are too complex for use in real-world applications.

Diff: 3 Page Ref: 606

14) A hyperplane is a geometric concept commonly used to describe the separation surface between different classes of things within a multidimensional space.

Diff: 2 Page Ref: 606

15) In SVM, kernel trick allows us to construct a decision surface that is 3D in the feature space while it is inherently nonlinear in the original input space.

Diff: 3 Page Ref: 608

16) In the SVM model development process, the main advantage of normalizing or scaling the data is to avoid attributes in greater numeric ranges dominating those in smaller numeric ranges.

Diff: 3 Page Ref: 609

17) An advantage of SVM models is that they tend to take less time to develop compared to other predictive models.

Diff: 3 Page Ref: 613

18) A personal daemon must be able to make decisions on its own and alter its course of behavior when it meets an obstacle and find ways around the impediment.

Diff: 2 Page Ref: 616

19) Interactivity is the most important characteristic of intelligent agents, making them capable of acting on their own or of being empowered.

Diff: 2 Page Ref: 616

20) Development of a fuzzy inference system is a four-step process: fuzzification, inferencing, summation, and defuzzification.

Diff: 2 Page Ref: 623

21) Neural networks identify ________ in the data from which they generate recommended courses of action.

A) patterns

B) outliers

C) movements

D) associations

Diff: 1 Page Ref: 583

22) Machine learning is a family of artificial intelligence technologies that is primarily concerned with:

A) the use of use neural networks to support simple and repetitive decision making.

B) the design and development of algorithms that allow computers to learn based on historical data.

C) identifying outliers and patterns in data sets.

D) simulating creativity to generate courses of action.

Diff: 2 Page Ref: 583

23) Which of the following is not a relevant observation on how learning relates to intelligent systems?

A) Automated learning systems are anchored in a formal bedrock; thus, their implications are well understood.

B) Automated learning systems demonstrate intriguing learning behaviors.

C) Although AI sometimes matches human-level learning capabilities, it is not able to learn as well as humans or in the same way that humans do.

D) A common thread running through most AI approaches to learning is the manipulation of symbols rather than numeric information.

Diff: 3 Page Ref: 583

24) Human learning is a combination of many complicated cognitive processes. Which of the following is not included in human's cognitive processes?

A) Induction

B) Simulation

C) Deduction

D) Analogy

Diff: 2 Page Ref: 583

25) Machine learning is considered a(n) ________ method.

A) trial-and-error

B) optimization

C) simulation

D) artificial intelligence

Diff: 1 Page Ref: 583

26) In supervised learning:

A) only input stimuli are fed into the network.

B) both the inputs and the desired outputs are known.

C) the desired output and the algorithms are known.

D) the network is controlled by the user.

Diff: 2 Page Ref: 584

27) In unsupervised learning:

A) only input stimuli are fed into the network.

B) both the inputs and the desired outputs are known.

C) the desired output and the algorithms are known.

D) the network is controlled by the user.

Diff: 2 Page Ref: 584

28) Which of the following is not a method of machine learning?

A) Genetic algorithms

B) Generic algorithms

C) Neural computing

D) Case-based reasoning

Diff: 1 Page Ref: 584

29) According to the Simplified Taxonomy of Machine Learning, all of the following are types of learning except:

A) Supervised learning

B) Reinforcement learning

C) Unreiforced learning

D) Unsupervised learning

Diff: 2 Page Ref: 584

30) ________ allows the computer to examine historical cases and generate rules that can be used to solve new problems or that can be deployed for automating a decision support process that repeatedly deals with a specific class of problems (e.g., evaluating loan applications).

A) Exploration learning

B) Case-based reasoning

C) Explanation-based learning

D) Inductive learning

Diff: 2 Page Ref: 585

31) The foundation of case-based reasoning is a library of cases called ________.

A) case base

B) data base

C) legacy system

D) reasoning base

Diff: 2 Page Ref: 585

32) Which of the following is not a step in case-based reasoning process?

A) Retrieve

B) Reuse

C) Retain

D) Reserve

Diff: 2 Page Ref: 586

33) Which of the following are special cases that contain rich contents and special features of deep implications?

A) Descriptive cases

B) Foundation cases

C) Special cases

D) Stories cases

Diff: 2 Page Ref: 586

34) Survival of the fittest (natural selection) is used in ________.

A) genetic algorithms

B) fuzzy logic

C) case-based reasoning

D) fuzzy neural networks

Diff: 1 Page Ref: 593

35) A chromosome in a genetic algorithm refers to ________.

A) crossover

B) summation

C) mutation

D) candidate solution

Diff: 2 Page Ref: 593

36) Crossover means choosing a random position in the string and exchanging the segments ________ of this point with another string.

A) to the right

B) to the left

C) to both left and right

D) to either left or right

Diff: 2 Page Ref: 593

37) Which of the following is a limitation of GA?

A) Difficult to determine good variables for a particular problem

B) The results of GA may vary

C) It might reach local optimum

D) All of the above

Diff: 2 Page Ref: 595

38) Which of the following is not an advantage of fuzzy logic?

A) Greater flexibility

B) Faster calculations

C) More options

D) All of the above are advantages

Diff: 1 Page Ref: 602

39) Fuzzy logic in consumer products is sometimes called ________.

A) inferencing

B) defuzzification

C) continuous logic

D) crisp logic

Diff: 1 Page Ref: 604

40) Autonomy implies that an intelligent agent takes initiative and exercises control over its own actions by having each of the following characteristics except:

A) An agent should accept high-level requests indicating what a human wants, and it should be responsible for deciding how and where to satisfy the requests.

B) An agent should be able to dynamically choose which actions to invoke, and in what sequence, in response to the state of its external environment.

C) The agent should obey commands and not be able to modify requests.

D) An agent should sense changes in its environment and decide when to act.

41) Human learning is a combination of many complicated ________ processes.

42) ________ is a process of inducing knowledge from a set of observations whose outcomes are known.

43) ________ is used to discover knowledge from a set of data whose outcomes are unknown.

44) ________ segmentation is one of the unsupervised machine learning methods wherein data is put into several groups based on their similarity.

45) The basic principle of machine learning is that there are data that preserve previous decision experience, and these experience-based records are called ________.

46) ________ allows computers to examine historical cases and generate rules that can be chained to solve new problems.

47) Genetic algorithms are sets of computational procedures that conceptually follow steps inspired by the biological processes of ________.

48) Genetic algorithms demonstrate self-organization and ________ in much the same way that the fittest biological organisms survive and reproduce.

49) Genetic algorithms ________ by producing offspring that are better and better measured by a fitness-to-survive function.

50) A genetic algorithm represents its candidate solutions as strings of genes called ________ and measures their viability with a fitness function.

51) ________ deals with the kind of uncertainty and partial information that is inherently human in nature.

52) Fuzzy sets use a spectrum of possible values called ________.

53) The process in which the input and output are processed by fuzzy logic before entering neural network in fuzzy neural networks is called ________.

54) A(n) ________ is a geometric concept commonly used to describe the separation surface between different classes of things within a multidimensional space.

55) ________ are one of the most popular machine-learning techniques. They belong to the family of generalized linear models and are closely associated with feedforward-type artificial neural networks.

56) In machine learning, the ________ is a method for using a linear classifier algorithm to solve a nonlinear problem

57) An ________ is an autonomous computer program that observes and acts upon an environment and directs its activity toward achieving specific goals.

58) ________is one of the unintended by-products of the information age characterized by huge volumes of information that cross the desks of mangers and decision makers.

59) ________is the degree of autonomy and authority vested in an agent and can be measured by the nature of the interaction between the agent and other entities in the system.

60) ________is the degree to which agents themselves travel through a network. Some agents may be static, either residing on the client machine or initiated at the server.

61) Describe case-based reasoning. What type of leaning is it?

62) Compare rule-based reasoning and case-based reasoning (CBR).

63) Define these three categories of cases--ossified cases, paradigmatic cases, and stories--based on their different characteristics and the different ways of handling them.

64) What are the advantages of using case-based reasoning?

65) Describe the major steps in case-based reasoning process.

66) List and describe the success factors for a case-based reasoning system.

67) What are genetic algorithms?

68) Describe the genetic operators of Genetic Algorithm in reproduction.

69) What is fuzzy logic?

70) Explain or draw the three-step process description for SVM model development.

Chapter 14 Management Support Systems: Emerging Trends and Impacts

1) RFID technology allows Coca-Cola to test and track new drink flavors and local preferences.

Diff: 1 Page Ref: 635

2) Fundamentally, RFID is one example of automatic identification technologies, unlike scanner-based barcodes and magnetic strips.

Diff: 1 Page Ref: 636

3) Active RFID tags have their own power source and can initiate the data transmission process on their own, but need a reader to energize them.

Diff: 2 Page Ref: 636

4) One of the applications of the massive amounts of data that are generated by RFID is in supply-chain management.

Diff: 2 Page Ref: 637

5) RFID technology generates massive amounts of data that can be analyzed to achieve great insights into a company's environment, a major purpose for the very existence of BI and decision support.

Diff: 2 Page Ref: 641

6) Just as RFID generates major data streams for further analysis through BI technologies that can assist in decision making, another massive data source and technologies to make sense of the data are emerging. This type of data mining is called reality mining.

Diff: 2 Page Ref: 641

7) By applying algorithms that reduce the volume of personally identifiable information, reality mining can characterize places according to the activity and movement between them.

Diff: 3 Page Ref: 643

8) Virtual worldsare defined as artificial worlds created by computer systems in which the user has the impression of being immersed.

Diff: 1 Page Ref: 644

9) Advantages of Second Life are that it operates around the clock and a day in Second Life is four hours long.

Diff: 2 Page Ref: 645

10) Virtual worlds are well-developed, interesting tools for businesses and consumers and have gained widespread acceptance.

Diff: 2 Page Ref: 646

11) Web 2.0 is not only changing what is on the Web, but also how it works.

Diff: 1 Page Ref: 649

12) Wikia is an example of a new business model that has emerged from Web 2.0. It s the accumulation of the "power of the crowd," but the potential of such a business model remains limited because of competition.

Diff: 2 Page Ref: 650

13) Virtual communitiestakes place over a computer network and parallel typical physical communities,

such as neighborhoods, clubs, or associations.

Diff: 2 Page Ref: 650

14) Social network analysis (SNA) software is used to identify, represent, analyze, visualize, or simulate network nodes and edges from various types of input data.

Diff: 2 Page Ref: 653

15) Mobile social networkingrefers to social networking where members converse and connect with one another using cell phones or other mobile devices. It is much more popular in Japan, South Korea, and China than it is in the West.

Diff: 1 Page Ref: 653

16) Advertising and sales are the major EC activities in public social networks.

Diff: 1 Page Ref: 655

17) Cloud computing is an important initiative for a BI professional to watch even though concerns have been raised about cloud computing, including loss of control and privacy, legal liabilities, cross-border political issues, and so on.

Diff: 2 Page Ref: 659

18) Management support systems (MSS) are important factors in the information, Web, and knowledge revolution. This revolution is a cultural transformation like the Industrial Revolution, both of which took place slowly and affected every facet of our lives.

Diff: 2 Page Ref: 659

19) Although many jobs may be substantially enriched by MSS, other jobs may become more routine and less satisfying.

Diff: 1 Page Ref: 664

20) Because the government is acquiring personal data to detect suspicious patterns of activity, there is the prospect of improper or illegal use of the data. Many see such gathering of data as a violation of citizens' freedoms and rights.

Diff: 2 Page Ref: 669

21) What is the difference between active and passive RFID tags?

A) Active tags have a battery as their own power source and do not need a reader to energize them like passive tags do.

B) Active tags receive energy from the electromagnetic field created by the reader; and passive tags receive energy from a battery.

C) Active tags are faster and less expensive than passive tags.

D) Passive tags are most frequently found in defense or military systems, and active tags are used more frequently in retail.

Diff: 2 Page Ref: 636

22) The most commonly used data representation for RFID technology is the:

A) Common Product Code (CPC)

B) Universal Product Code (UPC)

C) Electronic Product Code (EPC)

D) Standard Product Code (SPC)

Diff: 2 Page Ref: 637

23) RFID tag data for products consist of the following information except:

A) manufacturer

B) carrier

C) product

D) serial number

Diff: 2 Page Ref: 637

24) Gillette has used RFID to determine whether stores have stocked their shelves with particular items for a particular promotion. They found that in those stores that used RFID to move a product from the backroom to the shelf before a promotion started, sales were ________ than those that did not move the product in a timely manner.

A) 8 percent higher

B) 18 percent higher

C) 28 percent higher

D) 48 percent higher

Diff: 2 Page Ref: 639

25) The success of today's highly volatile perishables supply chains depends on the level and the timeliness of ________.

A) product visibility

B) product data

C) supply chain management

D) RFID

Diff: 2 Page Ref: 640

26) RFID generates major data streams ready for analysis through BI technologies. Another massive data source is emerging, along with the data mining technologies to make sense of the data, which is referred to as ________.

A) triangulation

B) location-enabled services

C) reality mining

D) sensor mining

Diff: 2 Page Ref: 647

27) By analyzing and learning from these large-scale patterns of movement, Sense Networks is now adapting this general technology to help consumers find people with similar interests. This application is called ________.

A) Citysense

B) Macrosense

C) AppleSense

D) Second Life

Diff: 2 Page Ref: 642

28) The intention of ________ is to achieve a feeling of telepresence and participation from a distance.

A) active environments

B) Wikia

C) social networks

D) virtual worlds

Diff: 2 Page Ref: 644

29) Which is not a major advantage of using Second Life for decision support?

A) easy access and low cost

B) pranksters and spam are filtered out

C) experienced and dedicated designer/builders

D) encourages active participation and experiential learning

Diff: 2 Page Ref: 645

30) Although virtual worlds are becoming interesting tools for businesses and consumers, several factors have kept them from gaining widespread acceptance. Which of the following is one of those factors? :

A) Requires downloading of a plug-in

B) Users get addicted

C) Costs are too high

D) Lack of technical staff

Diff: 2 Page Ref: 646

31) One of the most significant differences between Web 2.0 and the traditional Web is the ________ of Web 2.0:

A) enhanced privacy and security protection

B) opportunity to offer decision support capabilities in a novel way

C) greater collaboration among Internet users and other users, content providers, and enterprises

D) All of the above.

Diff: 2 Page Ref: 649

32) A ________ is a social network organized around a common interest, idea, task, or goal; members interact across time, geographic location, and organizational boundaries to develop personal relationships.

A) virtual community

B) Web 2.0

C) wiki

D) trade fair

Diff: 2 Page Ref: 650

33) Categories of interaction in a virtual community include each of the following except:

A) communication

B) information

C) EC element, such as advertisements

D) private community

Diff: 2 Page Ref: 651

34) MySpace and Facebook, Wikipedia and YouTube are examples of ________.

A) Web logs

B) online social networks

C) social network analysis software

D) Live Spaces

Diff: 1 Page Ref: 653

35) A primary reason why Facebook has expanded so rapidly is the ________, which refers to the principle that more users means more value.

A) network effect

B) mobile effect

C) mobile media

D) connection effect

Diff: 2 Page Ref: 654

36) The term cloud computing originates from a reference to the ________ as a cloud and represents an evolution of all of previous shared/centralized computing trends.

A) server

B) client

C) Internet

D) network

Diff: 1 Page Ref: 658

37) MSS can have ________ implications.

A) micro

B) macro

C) both micro and macro

D) none of the above

Diff: 1 Page Ref: 659

38) Which of the following is not an impact of management support systems (MSS) technologies?

A) organizational

B) governmental

C) individual

D) societal

Diff: 2 Page Ref: 659

39) Which of the following is not an impact of automated decision systems (ADS)?

A) Reduction of upper management

B) Empowerment of customers

C) Improved customer service

D) increased productivity

Diff: 2 Page Ref: 661

40) Privacy has long been a(n) ________ issue.

A) legal

B) ethical

C) social

D) all of the above

41) Placing ________ chips on each flavor cartridge and using readers allows Coca-Cola to test new drink flavors and concepts, observe what flavors and combinations customers are choosing, identify regional preferences, and keep track of the amounts they are drinking.

42) On the positive side for RFID, ________ have a longer read range, better accuracy, more complex rewritable information storage, and richer processing capabilities

43) RFID tag data, in its purest form, is a series of ________.

44) RFID-enabled environmental ________ provide insight into the changing environmental conditions experienced by the product and provide the data necessary to determine to what extent those changes affect the quality or safety of the product.

45) By analyzing and learning from these large-scale patterns of movement, it is possible to identify distinct classes of behaviors in specific contexts, called ________.

46) ________ provide new immersive experiences for decision support and replicate many of the features

of physical gatherings.

47) ________ content is a major characteristic of Web 2.0, as is the emergence of social networking.

48) A major objective of Web 2.0 is to enhance creativity, information sharing, and ________.

49) Wikia is working on community-developed Web searches. If they can create a successful one, ________ will have a challenger.

50) A(n) ________ is a group of people with common interests who interact with one another.

51) ________ softwareis used to identify, represent, analyze, visualize, or simulate network nodes and edges from various types of input data, including mathematical models of social networks.

52) Mobile social networking is much ________ popular in Japan, South Korea, and China than it is in the West.

53) ________, which was launched in 2004 by former Harvard student Mark Zuckerberg, is the second-largest social network service in the world.

54) Business-oriented ________, such as LinkedIn and Xing, concentrate on business issues both in one country and around the world; e.g., recruiting, finding business partners).

55) ________ computing offers the possibility of using software, hardware, platform, and infrastructure, all on a service-subscription basis.

56) Automated decision support (ADS) applications can empower ________-level frontline employees, giving them more autonomy.

57) In one view, intelligent systems and other MSS will cause massive ________ because of automating jobs, increased productivity, lower required skill levels, and impacts on all sectors of the economy.

58) Privacy is the right to be left alone and the right to be free from ________ personal intrusions.

59) Serious legal issues may develop with the introduction of intelligent systems; liability and ________ are the dominant problem areas.

60) Many people recognize that MSS tools are effective and efficient means to increase ________ even though the privacy of many innocent people is compromised.

61) Define the components of RFID and how active and passive tags works.

62) How are real-world institutions, such as businesses and government agencies, incorporating virtual worlds into their strategic marketing initiatives?

63) What are four major advantages of using Second Life for decision support?

64) List four major disadvantages of using Second Life for decision support.

65) Describe three representative characteristics of the Web 2.0 environment.

66) Describe social network analysis (SNA) software.

67) What is Twitter and how can it add business value to marketers?

68) Computer technology has already changed our world, and much more change is anticipated. What are some of the major areas of social impact?

69) What are some of the potential positive and negative impacts of MSS on managers' jobs?

70) What is privacy? Why is it difficult to enforce privacy regulations?

#CIS 519 Midterm and Final Exam – Strayer NEW

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