Chapter 17

3. Award: 10.00 points Problems? Adjust credit for all students. Which of the following is not a governmental structural policy that supply-side economists believe would promote long-term growth in an economy? A redistributive tax system Explanation: When wealth is redistributed through the government’s tax policy, economic inefficiency is created. Tax policies should promote economic growth as much as possible. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 17: Macroeconomic and Industry Analysis > Chapter 17 Problems - Algorithmic & Static References

6. Award: 10.00 points Problems? Adjust credit for all students. Required: For each pair of firms, choose the one that you think would be more sensitive to the business cycle. More Sensitive a. General Autos b. Friendly Airlines Explanation: a. General Autos. Pharmaceuticals are less of a discretionary purchase than automobiles. b. Friendly Airlines. Travel expenditure is more sensitive to the business cycle than movie consumption. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 17: Macroeconomic and Industry Analysis > Chapter 17 Problems - Algorithmic & Static References

9. Award: 10.00 points Problems? Adjust credit for all students. Institutional Advisors for All Incorporated, or IAAI, is a consulting firm that advises foundations, endowments, pension plans, and insurance companies. The research department predicts an upward trend in job creation and consumer confidence, which it expects to continue for the next few years. Other domestic leading indicators that the research department considers are industrial production, average weekly hours in manufacturing, the S&P 500 stock index, the money supply, and the index of consumer expectations. In light of the predictions for job creation and consumer confidence, the investment advisers at IAAI want to make recommendations for their clients. Their primary concern is to forecast how the trends in job creation and consumer confidence should affect bond prices and how those trends should affect stock prices. The research department also notes that stocks have been trending up in the past year, and this information is factored into their forecasts of the overall economy. The researchers consider an upward-trending stock market a positive economic indicator in itself; however, they disagree as to the reason this should be the case. IAAI uses primarily historical data in its calculations and forecasts. Which of the following regarding the actions of IAAI is most accurate? Select the most accurate actions of IAAI. IAAI should use a moving average of recent stock returns when times are bad because it will result in a high expected equity risk premium. Explanation: If historical returns are used, the arithmetic and geometric means of returns are available. The geometric mean is preferred for multi-period horizons to observe long-term trends. An alternative to the equity risk premium is to use a moving average of recent historical market returns. This will reveal a low expected equity risk premium when times have been bad, which is contrary to investor expectations. When using historical data, there is a trade-off between long and short time spans. Short time spans are helpful to reduce the impact of regime changes. Long time spans provide better statistical data that are less sensitive. Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 17: Macroeconomic and Industry Analysis > Chapter 17 Problems - Algorithmic & Static References

12. Award: 10.00 points Problems? Adjust credit for all students. Mary Smith, a CFA candidate, was recently hired for an analyst position at a large bank in London. Her first assignment is to examine the competitive strategies employed by various French wineries. Smith's report identifies four wineries that are the major players in the French wine industry. Key characteristics of each are cited in table below. In the body of Smith’s report, she notes that over the past five years, the French wine industry has not responded to changing consumer tastes. Profit margins have declined steadily, and the number of firms representing the industry has decreased from 10 to 4. It appears that participants in the French wine industry must consolidate in order to survive. Characteristics of Four Major French Wineries South Winery North Winery East Winery West Winery Founding date 1750 1903 1812 1947 Generic competitive strategy ? Cost leadership Cost leadership Cost leadership Major customer market (more than 80% concentration) France France England U.S. Production site France France France France Smith's report notes that French consumers have strong bargaining power over the industry. She supports this conclusion with the following key points: Many consumers are drinking more beer than wine with meals and at social occasions. Increasing sales over the Internet have allowed consumers to better research the wines, read opinions from other customers, and identify which producers have the best prices. The French wine industry is consolidating and consists of only 4 wineries today compared to 10 wineries five years ago. More than 65% of the business for the French wine industry consists of purchases from restaurants. Restaurants typically make purchases in bulk, buying four to five cases of wine at a time. Land where the soil is fertile enough to grow grapes necessary for the wine production process is scarce in France. Smith takes her report to her boss, Sandra VanDriesen, to review and tells her, “In my report I have classified the South Winery as a stuck-in-the-middle firm. It tries to be a consumer cost leader by selling its wine at a price that is slightly below the other firms, but it also tries to differentiate itself from its competitors by producing wine in bottles with curved necks, which increases its cost structure. The end result is that the South Winery’s profit margin gets squeezed from both sides.” VanDriesen replies, I believe that the South Winery could succeed at following both a cost leadership and a differentiation strategy if its operations were separated into distinct operating units, with each unit pursuing a different competitive strategy.” Smith makes a note to do more research on generic competitive strategies to verify VanDriesen’s assertions before publishing the final draft of her report. Smith makes three observations about the North Winery and its strategic planning process: which of these observation(s) least support(s) the conclusion that the North Winery's strategic planning process is guided and informed by its generic competitive strategy? Note: Select all that apply. You may select more than one answer. Single click the box with the question mark to produce a check mark for a correct answer and double click the box with the question mark to empty the box for a wrong answer. North Winery places each of its business units into one of three categories: build, hold, or harvest [i.e., divest]. North Winery uses market share as the key measure of its competitive position. North Winery's price and cost forecasts account for its forecasted changes in the structure of the French wine industry. Explanation: A firm with a strategic planning process not guided by its generic competitive strategy usually makes one or more of the following mistakes: 1. The strategic plan is a list of unrelated action items that do not lead to a sustainable competitive advantage. 2. Price and cost forecasts are based on current market conditions and fail to consider how industry structure will influence future long-term industry profitability. 3. Business units are placed into categories such as build, hold, and harvest; with businesses failing to realize that these are not business strategies, but rather the means to achieve the strategy. 4. The firm focuses on market share as a measure of competitive position, failing to realize that market share is the result and not the cause of a sustainable competitive position. Smith’s observations North Winery places each of its business units into one of three categories: build, hold, or harvest [i.e., divest] and North Winery uses market share as the key measure of its competitive position. describe two of these mistakes and therefore do not support the conclusion that the North Winery’s strategic planning process is guided and informed by their generic competitive strategy. Check all that apply Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 17: Macroeconomic and Industry Analysis > Chapter 17 Problems - Algorithmic & Static References

15. Award: 10.00 points Problems? Adjust credit for all students. Two firms, A and B, both produce brushes. The price of brushes is $1.65 each. Firm A has total fixed costs of $459,000 and variable costs of 48 cents per brush. Firm B has total fixed costs of $260,000 and variable costs of 72 cents per brush. The corporate tax rate is 30%. If the economy is strong, each firm will sell 1,500,000 brushes. If the economy enters a recession, each firm will sell 984,500 brushes. If the economy enters a recession, what will be the after-tax profit of Firm A? Note: Round your answer to 2 decimal places. $ After-tax profit 485,005.50 Explanation: Firm A if Economy is in Recession Revenue $ 1,624,425 p × Q Fixed cost 459,000 Given Variable cost 472,560 v × Q Taxable income $ 692,865 Revenue − Fixed cost − Variable cost Tax 207,859.50 0.35 × Taxable income After-tax profit $ 485,005.50 Taxable income − Tax Worksheet Difficulty: 2 Intermediate Source: Investments (Bodie, 13e, ISBN 1266836322) > Chapter 17: Macroeconomic and Industry Analysis > Chapter 17 Additional Algorithmic Problems References

1. Award: 10.00 points 2. Award: 10.00 points 3. Award: 10.00 points 4. Award: 10.00 points A top-down analysis of a firm starts with: the relative value of the firm. the absolute value of the firm. the domestic economy. the global economy. the industry outlook. A top down analysis of a firm starts with the global economy. References Multiple Choice Difficulty: 1 Basic An example of a highly cyclical industry is: the automobile industry. the tobacco industry. the food industry. the automobile industry and the tobacco industry. the tobacco industry and the food industry. Consumer durables, such as automobiles, are highly cyclical as purchases can be delayed until good times. Necessities, low-ticket items, and addictive products are purchased in good times and bad. References Multiple Choice Difficulty: 1 Basic Demand-side economics is concerned with: government spending and tax levels, only. monetary policy, only. fiscal policy, only. government spending, tax levels, and monetary policy. All of the options are correct. Demand-side economics is concerned with monetary and fiscal policy (government spending and taxing). References Multiple Choice Difficulty: 1 Basic The most widely used monetary tool is/are: altering the discount rate. altering the reserve requirements. open-market operations. altering marginal tax rates. None of the options are correct. The Federal Reserve's open market operations are the most widely used and most effective monetary tool for influencing interest rates. References Multiple Choice Difficulty: 1 Basic                        

13. Award: 10.00 points 14. Award: 10.00 points 15. Award: 10.00 points 16. Award: 10.00 points If the economy is shrinking, firms with low operating leverage will experience: larger decreases in profits than firms with high operating leverage. similar decreases in profits as firms with high operating leverage. smaller decreases in profits than firms with high operating leverage. no change in profits. None of the options are correct. As sales decrease, firms with high operating leverage spread these fixed costs over fewer units and thus decrease profits. References Multiple Choice Difficulty: 1 Basic Industrial production 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. None of the options are correct. Industrial production is a measure of the productive output of the manufacturing sector of the economy. References Multiple Choice Difficulty: 1 Basic 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. None of the options are correct. GDP is a measure of the productive output of the country, both in terms of goods and services. References Multiple Choice Difficulty: 1 Basic A rapidly growing GDP indicates a(n) __________ economy with __________ opportunity for a firm to increase sales. stagnant; little stagnant; ample expanding; little expanding; ample stable; no GDP is a measure of the productive output of the country and indicates the opportunities firms have to expand sales. References Multiple Choice Difficulty: 1 Basic                        

17. Award: 10.00 points 18. Award: 10.00 points 19. Award: 10.00 points 20. Award: 10.00 points A declining GDP indicates a(n) __________ economy with __________ opportunity for a firm to increase sales. stagnant; little stagnant; ample expanding; little expanding; ample stable; no GDP is a measure of the productive output of the country and indicates the opportunities firms have to expand sales. References Multiple Choice Difficulty: 1 Basic The average duration of unemployment and changes in the consumer price index for services are: leading economic indicators. coincidental economic indicators. lagging economic indicators. composite economic indicators. countercyclical indicator. These indicators lag the general economy and are indicators that the economy is about to change directions. References Multiple Choice Difficulty: 2 Intermediate A firm in an industry that is very sensitive to the business cycle will likely have a stock beta: greater than 1.0. equal to 1.0. less than 1.0 but greater than 0.0. equal to or less than 0.0. There is no relationship between beta and sensitivity to the business cycle. Cyclical stocks are more volatile than the market in general and thus have betas greater than 1.0. References Multiple Choice Difficulty: 2 Intermediate If the economy were going into a recession, an attractive industry to invest in would be the: automobile industry, only. medical services industry, only. construction industry, only. automobile and construction industries. medical services and construction industries. Medical services are necessities and thus perform about the same regardless of the business cycle. Automobile and construction industries are cyclical and perform poorly during recessions. References Multiple Choice Difficulty: 1 Basic                        

21. Award: 10.00 points 22. Award: 10.00 points 23. Award: 10.00 points 24. Award: 10.00 points The stock price index and new orders for nondefense capital goods are: leading economic indicators. coincidental economic indicators. lagging economic indicators. not useful as economic indicators. None of the options are correct. Contracts and orders for plant and equipment are indicative of future economic times and thus are leading economic indicators. The stock price index is one of the best leading economic indicators, a reflection of market efficiency. References Multiple Choice Difficulty: 2 Intermediate A firm in the early stages of the industry life cycle will likely have: high market penetration. high risk. rapid growth. high market penetration and rapid growth. high risk and rapid growth. In the early stages of the industry life cycle, the firm is likely to be high in risk. References Multiple Choice Difficulty: 1 Basic Assume the U.S. government was to decide to increase the budget deficit. Holding all else constant, this will cause __________ to decrease. interest rates government borrowing unemployment interest rates and government borrowing None of the options are correct. Increasing the deficit raises government borrowing, increases the demand for funds, and thus increases the interest rates. Deficit spending is also used to stimulate the economy by encouraging increasing the output of the economy. References Multiple Choice Difficulty: 1 Basic Assume the U.S. government was to decide to decrease the budget deficit. Holding all else constant, this will cause __________ to decrease. interest rates government borrowing unemployment interest rates and government borrowing None of the options are correct. Decreasing the deficit lowers government borrowing, decreases the demand for funds, and thus decreases the interest rates. References Multiple Choice Difficulty: 1 Basic                        

25. Award: 10.00 points 26. Award: 10.00 points 27. Award: 10.00 points 28. Award: 10.00 points Assume that the Federal Reserve decreases the money supply. This action will cause __________ to decrease. interest rates the unemployment rate investment in the economy trade balance inflation. Decreasing the money supply is an economic contraction strategy, resulting in a decreased output of the economy. References Multiple Choice Difficulty: 1 Basic If the currency of your country is depreciating, the result should be to __________ exports and to __________ imports. increase; increase increase; decrease decrease; increase decrease; decrease not affect; not affect Depreciating currency means that country's goods and services are cheaper and thus that country's exports are stimulated. Likewise, goods and services of other countries are now more expensive, and thus importing is discouraged. References Multiple Choice Difficulty: 2 Intermediate If the currency of your country is appreciating, the result should be to __________ exports and to __________ imports. increase; increase increase; decrease decrease; increase decrease; decrease not affect; not affect An appreciating currency means that country's goods and services are more expensive to foreigners and thus that country's exports are discouraged. Likewise, goods and services of other countries are now less expensive, and thus imports are stimulated. References Multiple Choice Difficulty: 2 Intermediate Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and cause prices to __________ in the long run. increase; increase increase; decrease decrease; increase decrease; hold steady be unaffected; be unaffected An increase in the money supply results in increased demand for goods and services, which ultimately is reflected in higher prices for these goods and services. References Multiple Choice Difficulty: 2 Intermediate                        

29. Award: 10.00 points 30. Award: 10.00 points 31. Award: 10.00 points 32. Award: 10.00 points The North American Industry Classification System (NAICS) codes are for firms that operate in the NAFTA region, only. group firms by industry, only. are a perfect classification system for firms, only. are for firms that operate in the NAFTA region and group firms by industry. are for firms that operate in the NAFTA region and are a perfect classification system for firms. The NAICS is a grouping of NAFTA firms by industry. However, the classification system is not perfect as firms with dissimilar clients may be classified in one category. References Multiple Choice Difficulty: 1 Basic 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 be unaffected; be unaffected If interest rates increase, business investment expenditures are likely to decrease and consumer durable expenditures are likely to decrease. References Multiple Choice Difficulty: 2 Intermediate Fiscal policy generally has a __________ direct impact than monetary policy on the economy, and the formulation and implementation of fiscal policy is __________ than that of monetary policy. more; quicker more; slower less; quicker less; slower Cannot tell from the information given Fiscal policy has a more direct impact on the economy than does monetary policy. However, the formulation and implementation of fiscal policy is much slower than monetary policy. Monetary policy is determined by the Federal Reserve System. Fiscal policy must be deliberated, passed, and implemented by both the executive and legislative branches of the federal government. References Multiple Choice Difficulty: 2 Intermediate Fiscal policy is difficult to implement quickly because: it requires political negotiations, only. much of government spending is nondiscretionary and cannot be changed, only. increases in tax rates affect consumer spending gradually, only. it requires political negotiations, and much of government spending is nondiscretionary and cannot be changed. it requires political negotiations and increases in tax rates affect consumer spending gradually. Fiscal policy must be negotiated and can change only discretionary items within the budget, making it more difficult to implement. However, fiscal policy changes affect consumer spending almost immediately. References Multiple Choice Difficulty: 1 Basic                        

33. Award: 10.00 points 34. Award: 10.00 points 35. Award: 10.00 points Inflation: is the rate at which the general level of prices is increasing. rates are high when the economy is considered to be "overheated." is unrelated to unemployment rates. is the rate at which the general level of prices is increasing, and rates are high when the economy is considered to be "overheated." is the rate at which the general level of prices is increasing and is unrelated to unemployment rates. is the rate at which the general level of prices is increasing and rates are high when the economy is considered to be "overheated are true. The government attempts to walk the fine line of the trade-offs between unemployment and inflation. References Multiple Choice Difficulty: 1 Basic Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy enters a recession, the after-tax profit of Firm A will be: $0. $6,000. $30,000. $60,000. None of the options are correct. Profit After-tax = (Revenue − Fixed Costs − Variable Costs) × (1 − t c ) = ($1,100,000 − $500,000 − $0.50 × 1,100,000) × 0.60 = $30,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy enters a recession, the after-tax profit of Firm B will be: $0. $6,000. $36,000. $60,000. None of the options are correct. Profit After-tax = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,100,000 − $240,000 − $0.75 × 1,100,000) × 0.60 = $21,000 References Multiple Choice Difficulty: 2 Intermediate                  

36. Award: 10.00 points 37. Award: 10.00 points 38. Award: 10.00 points Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy is strong, the after-tax profit of Firm A will be: $0. $6,000. $36,000. $60,000. None of the options are correct. Profit After-tax = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,200,000 − $500,000 − $0.50 × 1,200,000) × 0.60 = $60,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. If the economy is strong, the after-tax profit of Firm B will be: $0. $6,000. $36,000. $60,000. None of the options are correct. Profit After-tax = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,200,000 − $240,000 − $0.75 × 1,200,000) × 0.60 = $36,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. Calculate firm A's degree of operating leverage. 11.0 2.86 9.09 1.00 None of the options are correct. Profit Expansion = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,200,000 − $500,000 − $0.50 × 1,200,000) × 0.60 = $60,000 Profit Recession = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,100,000 − $500,000 − $0.50 × 1,100,000) × 0.60 = $30,000 DOL = % Δ Profit ÷ % Δ Sales = (($60,000 − $30,000) ÷ $30,000) ÷ (($1,200,000 − $1,100,000) ÷ $1,100,000) = 11 References Multiple Choice Difficulty: 3 Challenge                  

39. Award: 10.00 points 40. Award: 10.00 points 41. Award: 10.00 points 42. Award: 10.00 points Two firms, A and B, both produce widgets. The price of widgets is $1 each. Firm A has total fixed costs of $500,000 and variable costs of 50¢ per widget. Firm B has total fixed costs of $240,000 and variable costs of 75¢ per widget. The corporate tax rate is 40%. If the economy is strong, each firm will sell 1,200,000 widgets. If the economy enters a recession, each firm will sell 1,100,000 widgets. Calculate firm B's degree of operating leverage. 0.714 9.09 7.86 7.14 None of the options are correct. Profit Expansion = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,200,000 − $240,000 − $0.75 × 1,200,000) × 0.60 = $36,000 Profit Recession = (Revenue − Fixed Costs − Variable Costs) × (1− t c ) = ($1,100,000 − $240,000 − $0.75 × 1,100,000) × 0.60 = $21,000 DOL = % Δ Profit ÷ % Δ Sales = (($36,000 − $21,000) ÷ $21,000) ÷ (($1,200,000 − $1,100,000) ÷ $1,100,000) = 7.86 References Multiple Choice Difficulty: 3 Challenge Classifying firms into groups, such as __________, provides an alternative to the industry life cycle. slow-growers, only stalwarts, only countercyclicals, only slow-growers and stalwarts slow-growers and countercyclicals The groups in this classification are slow-growers, stalwarts, fast-growers, cyclicals, turnarounds, and asset plays. References Multiple Choice Difficulty: 1 Basic Supply-side economists wishing to stimulate the economy are most likely to recommend: a decrease in the money supply. a decrease in production output. an increase in the real interest rate. a decrease in the tax rate. an increase in mortgage rates. Supply-siders argue that lowering tax rates stimulates investment. References Multiple Choice Difficulty: 2 Intermediate Which of the following are not examples of defensive industries? Food producers, only Durable goods producers, only Pharmaceutical firms, only Public utilities, only All of are defensive industries. Durable good producers represent a cyclical industry, while the others are examples of defensive industries. References Multiple Choice Difficulty: 1 Basic                        

43. Award: 10.00 points 44. Award: 10.00 points 45. Award: 10.00 points 46. Award: 10.00 points Which of the following are examples of defensive industries? Food producers Durable goods producers Pharmaceutical firms Public utilities Food producers, pharmaceutical firms, and public utilities Durable goods producers represent a cyclical industry, while the others are examples of defensive industries. References Multiple Choice Difficulty: 1 Basic __________ is a proposition that a strong proponent of supply-side economics would most likely stress. Higher marginal tax rates will lead to a reduction in the size of the budget deficit and lower interest rates as they depend on government revenues Higher marginal tax rates promote economic inefficiency and thereby drag aggregate output as they encourage investors to undertake low productivity projects with substantial tax shelter benefits Income redistribution payments will exert little impact on real aggregate supply as they do not consume resources directly A tax reduction will increase the disposable income of households, and thus, the primary impact of a tax reduction on aggregate supply will stem from the influence of the tax change on the size of the budget deficit or surplus None of the options is a likely statement for a supply-side proponent. Supply-side economists focus on incentives and marginal tax rates. References Multiple Choice Difficulty: 2 Intermediate The industry life cycle is described by which of the following stage(s)? Start-up Consolidation Absolute decline Start-up and consolidation All of the options are correct. The four stages of the industry life cycle are: start-up, consolidation, maturity, and relative decline. References Multiple Choice Difficulty: 1 Basic In the start-up stage of the industry life cycle,: it is easy to predict which firms will succeed and which firms will fail. industry growth is very slow. firms pay a high level of dividends. it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid. industry growth is very rapid, and firms pay a high level of dividends. In the start-up stage, it is very difficult to predict which firms will succeed and which firms will fail, as no historical data are available. In this stage, industry growth is very rapid (if the industry is successful) and firms pay little or no dividends. References Multiple Choice Difficulty: 1 Basic                        

47. Award: 10.00 points 48. Award: 10.00 points 49. Award: 10.00 points 50. Award: 10.00 points In the consolidation stage of the industry life cycle, it is difficult to predict which firms will succeed and which firms will fail. industry growth is very rapid. the performance of firms will more closely track the performance of the overall industry. it is difficult to predict which firms will succeed and which firms will fail, and industry growth is very rapid. industry growth is very rapid, and the performance of firms will more closely track the performance of the overall industry. In the consolidation stage of the industry life cycle, the performance of firms will more closely track the performance of the overall industry. References Multiple Choice Difficulty: 1 Basic In the maturity stage of the industry life cycle, the product has reached full potential. profit margins are narrower. producers are forced to compete on price to a greater extent. All of the options are correct. None of the options are correct. In the maturity stage of the industry life cycle, the product has reached full potential, profit margins are narrower, and producers are forced to compete on price to a greater extent. References Multiple Choice Difficulty: 1 Basic In the decline stage of the industry life cycle, the product may have reached obsolescence, only. the industry will grow at a rate less than the overall economy, only. the industry may experience negative growth, only. the product may have reached obsolescence, and the industry will grow at a rate less than the overall economy. the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth. In the decline stage of the industry life cycle, the product may have reached obsolescence, the industry will grow at a rate less than the overall economy, and the industry may experience negative growth. References Multiple Choice Difficulty: 1 Basic A variety of factors relating to industry structure affect the performance of the firm, including: threat of entry, only. rivalry between existing competitors, only. the state of the economy, only. threat of entry and the state of the economy. threat of entry and rivalry between existing competitors. A variety of factors relating to industry structure affect the performance of the firm, including threat of entry and rivalry between existing competitors. References Multiple Choice Difficulty: 1 Basic                        

51. Award: 10.00 points 52. Award: 10.00 points 53. Award: 10.00 points 54. Award: 10.00 points The process of estimating the dividends and earnings that can be expected from the firm based on determinants of value is called: business-cycle forecasting. macroeconomic forecasting. technical analysis. fundamental analysis. None of the options are correct. Fundamental analysis is the analysis of the determinants of value such as earnings prospects. It includes both macroeconomic analysis and industry analysis. References Multiple Choice Difficulty: 1 Basic The stock market exhibiting the highest return in 2021 was: Use Table 17.1 . Russia. Singapore. Greece. South Korea. China. See Table 17.1 . References Multiple Choice Difficulty: 2 Intermediate The life cycle stage in which industry leaders are likely to emerge is the: start-up stage. maturity stage. consolidation stage. relative decline stage. All of the options are correct. Industry leaders are most likely to emerge during the consolidation stage after products become established. References Multiple Choice Difficulty: 1 Basic Investment manager Peter Lynch refers to firms that are in bankruptcy or soon might be as: slow growers. stalwarts. cyclicals. asset plays. turnarounds. Lynch classifies firms into six categories. Turnarounds may offer tremendous investment potential if they can recover. References Multiple Choice Difficulty: 1 Basic                        

55. Award: 10.00 points 56. Award: 10.00 points 57. Award: 10.00 points 58. Award: 10.00 points A top-down analysis of a firm's prospects starts with: an examination of the firm's industry. an evaluation of the firm's position within its industry. a forecast of interest-rate movements. an assessment of the broad economic environment. the application of the CAPM to find the firm's theoretical return. A top-down analysis first looks at the broad economy, then the industry, then the firm's position within the industry. References Multiple Choice Difficulty: 1 Basic In 2009, the P/E multiples of the S&P 500 companies was approximately: Use Figure 17.2 . 8 12 19 25 35 Figure 17.2 shows that 2009 was another year in which the P/E multiple was much higher than even 25 times earnings. This reflects the fact that earnings in that year, at the height of the deep recession, were dramatically below trend projections. References Multiple Choice Difficulty: 1 Basic The industry with the highest ROE in 2020 was: Use Figure 17.5 . beverage (soft). trucking. business software. computer systems. integrated oil and gas. See Figure 17.5 . References Multiple Choice Difficulty: 1 Basic The industry with the lowest ROE in 2020 was: Use Figure 17.5 . money center banks. chemical products. business software. biotech. air transport. See Figure 17.5 . References Multiple Choice Difficulty: 1 Basic                        

59. Award: 10.00 points 60. Award: 10.00 points 61. Award: 10.00 points 62. Award: 10.00 points The industry with the lowest return in 2020 was: Use Figure 17.6 . coal. telecom services. health care. business software. money center banks. See Figure 17.6 . References Multiple Choice Difficulty: 1 Basic The industry with the highest return in 2020 was: Use Figure 17.6 . trucking. retail. health plans. asset management. money center banks. See Figure 17.6 . References Multiple Choice Difficulty: 1 Basic Investors can __________ invest in an industry with the highest expected return by purchasing __________. most easily; industry-specific iShares not; industry-specific iShares most easily; industry-specific ADRs not; individual stocks None of the options are correct. Investors can most easily invest in an industry with the highest expected return by purchasing industry-specific iShares. References Multiple Choice Difficulty: 1 Basic Which of the following are key economic statistics that are used to describe the state of the macroeconomy? 1. Gross domestic product 2. The unemployment rate 3. Inflation 4. Consumer sentiment 5. The budget deficit 1, 2, and 5 1, 3, and 5 1, 2, and 3 1, 2, 3, and 5 1, 2, 3, 4, and 5 All of the factors are key economic statistics. References Multiple Choice Difficulty: 1 Basic                        

63. Award: 10.00 points 64. Award: 10.00 points 65. Award: 10.00 points 66. Award: 10.00 points An example of a positive demand shock is: a decrease in the money supply. a decrease in government spending. a decrease in foreign export demand. a decrease in the price of imported oil. a decrease in tax rates. Increases in the items mentioned in the money supply, government spending, and foreign export demand would be unfavorable demand shocks. Imported oil price changes are supply shocks. A decrease in tax rates is the only favorable demand shock mentioned. References Multiple Choice Difficulty: 1 Basic An example of a negative demand shock is: a decrease in the money supply, only. a decrease in government spending, only. an increase in foreign export demand, only. a decrease in the price of imported oil, only. a decrease in the money supply and a decrease in government spending. Decreases in the items mentioned in answers a decrease in the money supply and a decrease in government spending would be unfavorable demand shocks. Imported oil price changes are supply shocks. An increase in foreign export demand would be a favorable demand shock. References Multiple Choice Difficulty: 1 Basic During which stage of the industry life cycle would a firm experience stable growth in sales? Consolidation Relative decline Maturity Start-up Stabilization One of the features of the consolidation phase is stable growth. There is no "stabilization" stage. During start-up there is rapid growth, during the maturity phase there is slowing growth, and during the relative decline phase there is minimal or negative growth. References Multiple Choice Difficulty: 1 Basic The stock market exhibiting the highest local currency return in 2018 was: Use Table 17.1 . Russia. China. Singapore. Mexico. Brazil. See Table 17.1 . References Multiple Choice Difficulty: 2 Intermediate                        

67. Award: 10.00 points 68. Award: 10.00 points 69. Award: 10.00 points 70. Award: 10.00 points Sector rotation: should always be carried out. is never worthwhile. is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future. can be implemented without cost. is easy to predict accurately. Sector rotation is shifting the portfolio more heavily toward an industry or sector that is expected to perform well in the future. References Multiple Choice Difficulty: 1 Basic According to Michael Porter, there are five determinants of competition. An example of __________ is the threat new competitors pose to existing competitors in an industry. threat of entry rivalry between existing competitors pressure from substitute products bargaining power of buyers bargaining power of suppliers According to Michael Porter, there are five determinants of competition. An example of threat of entry is when new entrants to an industry put pressure on prices and profits. References Multiple Choice Difficulty: 1 Basic According to Michael Porter, there are five determinants of competition. An example of __________ is when competitors seek to expand their share of the market. threat of entry rivalry between existing competitors pressure from substitute products bargaining power of buyers bargaining power of suppliers According to Michael Porter, there are five determinants of competition. An example of rivalry between existing competitors is when competitors seek to expand their share of the market. References Multiple Choice Difficulty: 1 Basic According to Michael Porter, there are five determinants of competition. An example of _____ is when the availability limits the prices that can be charged to customers. threat of entry rivalry between existing competitors pressure from substitute products bargaining power of buyers bargaining power of suppliers According to Michael Porter, there are five determinants of competition. An example of pressure from substitute products is when the availability limits the prices that can be charged to customers. References Multiple Choice Difficulty: 1 Basic                        

71. Award: 10.00 points 72. Award: 10.00 points 73. Award: 10.00 points 74. Award: 10.00 points According to Michael Porter, there are five determinants of competition. An example of __________ is when a buyer purchases a large fraction of an industry's output and can demand price concessions. threat of entry rivalry between existing competitors pressure from substitute products bargaining power of buyers bargaining power of suppliers According to Michael Porter, there are five determinants of competition. An example of bargaining power of buyers is when a buyer purchases a large fraction of an industry's output and can demand price concessions. References Multiple Choice Difficulty: 1 Basic Assume the U.S. government was to decide to increase the budget field. Holding all else constant, this will cause __________ to increase. interest rates, only government borrowing, only unemployment, only interest rates and government borrowing None of the options are correct. Decreasing the deficit lowers government borrowing, decreases the demand for funds, and thus decreases the interest rates. Increasing the deficit does the opposite. References Multiple Choice Difficulty: 1 Basic If interest rates decrease, business investment expenditures are likely to __________, and consumer durable expenditures are likely to __________. increase; increase increase; decrease decrease; increase decrease; decrease be unaffected; be unaffected If interest rates decrease, business investment expenditures are likely to increase and consumer durable expenditures are likely to increase. References Multiple Choice Difficulty: 2 Intermediate An example of a defensive industry is the automobile industry, only. the tobacco industry, only. the food industry, only. the automobile industry and the tobacco industry. the tobacco industry and the food industry. Consumer durables, such as automobiles, are highly cyclical as purchases can be delayed until good times. Necessities, low-ticket items, and addictive products are purchased in good times and bad. References Multiple Choice Difficulty: 1 Basic                        

75. Award: 10.00 points 76. Award: 10.00 points 77. Award: 10.00 points Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the total revenue of firm C will be: $1,680,000. $1,400,000. $2,000,000. $0. None of the options are correct. $1.20 × 1,400,000 = $1,680,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the total cost of firm C will be: $1,680,000. $1,170,000. $750,000. $420,000. None of the options are correct. Fixed Costs + Variable Costs = $750,000 + $0.30 × 1,400,000 = $1,170,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the before-tax profit of firm C will be: $1,680,000. $1,170,000. $510,000. $204,000. None of the options are correct. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 1,400,000 − ($750,000 + $0.30 × 1,400,000) = $1,680,000 − $1,170,000 = $510,000 References Multiple Choice Difficulty: 2 Intermediate                  

78. Award: 10.00 points 79. Award: 10.00 points 80. Award: 10.00 points Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the tax of firm C will be: $1,680,000. $750,000. $510,000. $204,000. None of the options are correct. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 1,400,000 − ($750,000 + $0.30 × 1,400,000) = $1,680,000 − $1,170,000 = $510,000 Taxes = Profit Pretax × t c = $510,000 × 0.40 = $204,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy enters a recession, the after-tax profit of firm C will be: $1,680,000. $750,000. $510,000. $204,000. $306,000. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 1,400,000 − ($750,000 + $0.30 × 1,400,000) = $1,680,000 − $1,170,000 = $510,000 Taxes = Profit Pretax × t c = $510,000 × 0.40 = $204,000 Profit After-tax = Profit Pretax − Taxes = $510,000 − $204,000 = $306,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the total revenue of firm C will be: $1,680,000. $1,400,000. $2,000,000. $2,400,000. None of the options are correct. Revenue = $1.20 × 2,000,000 = $2,400,000 References Multiple Choice Difficulty: 2 Intermediate                  

81. Award: 10.00 points 82. Award: 10.00 points 83. Award: 10.00 points Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the total cost of firm C will be: $1,680,000. $1,170,000. $1,350,000. $420,000. None of the options are correct. Fixed Costs + Variable Costs = $750,000 + $0.30 × 2,000,000 = $1,350,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the before-tax profit of firm C will be: $1,680,000. $1,050,000. $510,000. $204,000. None of the options are correct. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 2,000,000 − ($750,000 + $0.30 × 2,000,000) = $2,400,000 − $1,350,000 = $1,050,000 References Multiple Choice Difficulty: 2 Intermediate Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the tax of firm C will be: $420,000. $750,000. $510,000. $204,000. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 2,000,000 − ($750,000 + $0.30 × 2,000,000) = $2,400,000 − $1,350,000 = $1,050,000 Taxes = Profit Pretax × t c = $1,050,000 × 0.40 = $420,000. References Multiple Choice Difficulty: 2 Intermediate                 

84. Award: 10.00 points 85. Award: 10.00 points 86. Award: 10.00 points 87. Award: 10.00 points Two firms, C and D, both produce coat hangers. The price of coat hangers is $1.20 each. Firm C has total fixed costs of $750,000 and variable costs of 30¢ per coat hanger. Firm D has total fixed costs of $400,000 and variable costs of 50¢ per coat hanger. The corporate tax rate is 40%. If the economy is strong, each firm will sell 2,000,000 coat hangers. If the economy enters a recession, each firm will sell 1,400,000 coat hangers. If the economy is strong, the after-tax profit of firm C will be: $0. $6,000. $36,000. $60,000. $630,000. Profit Pre-tax = Revenue − (Fixed Costs + Variable Costs) = $1.20 × 2,000,000 − ($750,000 + $0.30 × 2,000,000) = $2,400,000 − $1,350,000 = $1,050,000 Taxes = Profit Pre-tax × t c = $1,050,000 × 0.40 = $420,000 Profit After-tax = Profit Pretax − Taxes = $1,050,000 − $420,000 = $630,000 References Multiple Choice Difficulty: 2 Intermediate If a firm's sales decrease by 15%, and profits decrease by 20% during a recession, the firm's operating leverage is: 1.33. 0.75. 5. − 5. None of the options are correct. DOL = % Δ Profit ÷ % Δ Sales = − 20% ÷ − 15% = 1.33 References Multiple Choice Difficulty: 2 Intermediate Markets reacted positively to the United States Mexico Canada Agreement (USMCA) as a replacement for NAFTA. If the agreement failed to be ratified by congress, the resulting negative economic impact would be an example of __________. political risk interest rate risk volatility currency risk None of the options are correct. Markets react to news, be it good or bad, when an event occurs. References Multiple Choice Difficulty: 2 Intermediate Profits made by Canadian investors in Russia, become negative when repatriated to Canada. This is an example of __________. political risk interest rate risk volatility currency risk None of the options are correct. The change in the value of a currency can improve or negate the actual returns earned in a non-domestic currency. References Multiple Choice Difficulty: 2 Intermediate                        

88. Award: 10.00 points 89. Award: 10.00 points 90. Award: 10.00 points Japan announces a tariff on rice imported from China. In doing so, the resulting impact on consumers is similar to that of __________. budget deficits unemployment deflation tax increases None of the options are correct. Tariffs act to increase the cost of goods for consumers. Since it is imposed by government and generates revenue to the government from domestic consumers, it resembles the mechanics of a tax. References Multiple Choice Difficulty: 2 Intermediate Unemployment declines dramatically. This is a __________. leading economic indicators coincidental economic indicators lagging economic indicators not useful as economic indicators None of the options are correct. See Table 17.2 References Multiple Choice Difficulty: 2 Intermediate Industrial production increases. This is a __________. leading economic indicators coincidental economic indicators lagging economic indicators not useful as economic indicators None of the options are correct. See Table 17.2 References Multiple Choice Difficulty: 2 Intermediate                  