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MGT 510 Midterm and Final Exam – Strayer NEW

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Chapters 1 Through 15

Chapter 1 Multinational Management in a Changing World

MULTIPLE CHOICE

1. Businesses of all sizes are increasingly looking for global opportunities because

Trade barriers are falling.

Money is flowing more freely across countries.

The world is becoming one interconnected economy.

All of the above.

AACSB Analytic, Strategy

PTS: 1

2. Globalization is

The trend of businesses expanding beyond their domestic boundaries.

Increasing average temperature over the globe.

The increased use of global satellite communication systems.

A strategy of developing unique products for each nation in the world.

AACSB Reflective thinking, Environmental influence

PTS: 1

3. Which of the following would not be considered a basic source of globalization?

Similar customer needs

Falling of trade barriers

Advances in communication technology

Differentiation among countries

AACSB Reflective Thinking, Environmental influence

PTS: 1

4. Multinational management is

A strategy of developing similar strategies for different countries.

The trend of business expanding beyond local boundaries.

The formulation and design of management systems to successfully take advantage of international opportunities and respond to international threats.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

5. According to the text, the multinational company

Is required to be a public corporation.

Is any company that engages in any business function across borders.

Must sell overseas to be a true multinational.

Must be large.

AACSB Reflective thinking, Strategy

PTS: 1

6. Which of the following is not a classification of economic systems noted in the text?

Domestic economies

Transition economies

LDCs

Emerging markets

AACSB Reflective thinking, Environmental influence

PTS: 1

7. Transition economies are

Mature economies with substantial per capita GDP and international trade.

Led by Hong Kong, Singapore, South Korea, and Taiwan.

Countries changing from government-controlled or communistic economies to a more free market capitalism.

None of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

8. Emerging markets include

OECD countries.

Brazil, China, Russia, India.

Korea, Japan and USA.

Hungary, Poland, Slovakia.

AACSB Reflective thinking, Environmental influence

PTS: 1

9. Developing economies are

Mature economies with substantial per capita GDP and international trade.

Hong Kong, Singapore, and Taiwan.

Countries in the process of changing their economies from government-controlled to a more free market capitalism.

None of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

10. Emerging markets are defined as those that are:

Growing rapidly.

Transitioning from a communist-controlled economy to capitalism.

Seen to have impact only sporadically.

Enjoying a mature economy.

AACSB Reflective thinking, Environmental influence

PTS: 1

11. Major regional trade agreements include all of the following EXCEPT

EU.

NAFTA.

APEC.

PROTEC.

AACSB Reflective thinking, Legal responsibilities

PTS: 1

12. The economic agreement that links the US, Canada, and Mexico in an economic bloc that allows freer exchange of goods and services is known as the

EU.

OPEC.

APEC.

None of the above

AACSB Reflective thinking, Legal responsibilities

PTS: 1

13. The World Trade Organization:

Is a major trading company.

Succeeded the GATT agreements.

Collects duties for member countries.

Is a consulting group for companies who wish to engage in international trade.

AACSB Reflective thinking, Legal responsibilities

PTS: 1

14. Examples of developed economies would include:

The U.S. and Japan.

Hungary and Poland.

Argentina and Brazil.

Hong Kong and Singapore.

AACSB Reflective thinking, Creation of value

PTS: 1

15. According to your text, FDI means

Foreign development initiatives.

Various investment policies of the U.S. government.

A foreign company has an ownership position in a company in another country.

A type of international negotiation strategy.

AACSB Reflective thinking, Legal responsibilities

PTS: 1

16. The two forms of risk discussed in the text include

Exchange rate risk and corruption risk.

Business risk and social risk.

Sales risk and employment risk.

Economic and political risk.

AACSB Reflective thinking, Environmental influence

PTS: 1

17. Economic risks discussed in the text include

Anything a government might do or not do that might adversely affect a company.

The likelihood of losing money if one invests in stocks.

Exchange and interest rates.

Expropriating of foreign firms by the local government without any compensation.

AACSB Reflective thinking, Environmental influence

PTS: 1

18. Anything that a government might do to affect a multinational adversely is known as

Exchange rate risk.

Business risk.

Sales risk.

Political risk.

AACSB Reflective thinking, Leadership

PTS: 1

19.. A global product or service is

Adapted for each country's unique needs.

A similar product or service for all customers throughout the world.

A product or service that requires bilingual customers.

Products developed for use outside the country.

AACSB Reflective thinking, Creation of value

PTS: 1

20. Which of the following statements about the Internet and Information Technology is true?

The Internet is benefiting companies worldwide.

Electronic communications does not allow companies to communicate with locations around the world.

Information technology is not encouraging a borderless financial market.

Information technology does not allow the sharing of information around the world.

AACSB Technology, Information technology

PTS: 1

21. The free market reforms in emerging countries are creating a potential group of

new competitors.

old competitors.

subsidized firms.

government companies.

AACSB Analytic, Environmental influence

PTS: 1

22. Which of the following statements is true about privatization?

Developing nations have the highest rate of privatization.

The leading privatizers in the world do not face competition.

Privatization is the sale of private business to government investors.

Privatization is absent in transition economies.

AACSB Analytic, Legal responsibilities

PTS: 1

23. Global customers:

Search for government-controlled enterprises.

Provide reduced government trade protection.

Search the world for their supplies without regard to national boundaries.

Encourage large firms to sell to them.

AACSB Reflective thinking, Strategy

PTS: 1

24. Global trade has this important effect on developing new competitors.

It facilitates the transfer of technology, allowing former assemblers to become creators.

It facilitates the transfer of knowledge, allowing former builders to become assemblers.

It reduces competition.

It reduces rivalry.

AACSB Reflective thinking, Creation of value

PTS: 1

25. Global standards for products

Are virtually impossible in technical industries.

Refer to having one product standard for all countries.

Puts companies at a strategic disadvantage.

All of the above

AACSB Reflective thinking, Creation of value

PTS: 1

26. According to the experts cited in your text, the next generation of global managers will need all of the following, EXCEPT:

Emotional intelligence

The ability to work with people from different cultural backgrounds

Poor negotiation skills

A local mindset

AACSB Reflective thinking, Leadership

PTS: 1

27. A global mindset requires managers to think globally but

act locally.

have emotional intelligence.

understand national cultures.

need accomplished negotiation skills.

AACSB Reflective thinking, Leadership

PTS: 1

28. The strategic approach to multinational management

Involves the development of one strategy for all countries.

Focuses on the skills and aptitudes that the next generation of global managers will need.

Is concerned with developing strategies that deal with operating in more than one country and culture.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

29. Which of the following statements about globalization is false?

Globalization is a simple evolutionary process.

Not all economies of the world are benefiting equally from globalization.

Terrorism, wars and SARS has limited and even reversed the effects of globalization.

All of the above statements are false.

AACSB Reflective thinking, Environmental influence

PTS: 1

30. Aggressive multinational companies from emerging markets are

expanding beyond their own borders.

staying within their own national borders.

help transition from a communist to a capitalist system.

unable to compete with western companies.

AACSB Reflective thinking, Strategy

PTS: 1

31. The set of technical standards developed by the International Organization for Standardization are known as

ISO 92.

ISO 14000.

ISO 9001: 2000.

None of the above

AACSB Reflective thinking, Legal responsibilities

PTS: 1

32. One of the major reasons why global companies seek to develop standard products is because

A standard product allows the company to save money because the same product can be sold anywhere.

A company can be more responsive to local cultural conditions.

It allows the company to invest more in research and development.

All of the above

AACSB Reflective thinking, Creation of value

PTS: 1

33. Emerging markets are

Located mostly in Africa and South America.

Similar to developed economies.

Those countries between developed and developing countries that present tremendous opportunities.

have free trade areas.

AACSB Reflective thinking, Environmental influence

PTS: 1

34. Which of the following statements regarding the European Union is true?

The European Union no longer exists.

The European Union includes Venezuela.

The European Union has a common currency.

All of the above are true.

AACSB Reflective thinking, Environmental influence

PTS: 1

35. Future trends indicate that _____ matters more than size of the company.

location

price

flexibility

a high standard

AACSB Reflective thinking, Strategy

PTS: 1

36. According to the text, all of the following includes factors that will shape the future business environment EXCEPT

Blurring of industry barriers.

Finding your niche.

Ability to find cheap labor.

Emphasis on innovation and the learning organization.

AACSB Reflective thinking, Strategy

PTS: 1

37. The best definition of multinational management includes which of these factors:

The formulation of strategies and management systems.

Designed to take advantage of international opportunities.

And to respond to international threats.

All of the above.

AACSB Reflective thinking, Strategy

PTS: 1

38. Multinational companies are defined by all of these factors EXCEPT:

Engaging in business beyond its domestic borders.

They may be of any size.

They may be corporations.

They must be public corporations.

AACSB Reflective thinking, Strategy

PTS: 1

39. The largest company in the world is:

Wal-Mart Stores.

BP.

Royal Dutch Shell.

Chevron.

AACSB Reflective thinking, Strategy

PTS: 1

40. The European Union consists of:

25 member nations, with the 26th scheduled to become a member in 2013.

26 member nations, with the 27th scheduled to become a member in 2013.

27 member nations, with the 28th scheduled to become a member in 2013.

25 member nations, with no others scheduled to become a member in 2013.

AACSB Reflective thinking, Strategy

PTS: 1

ESSAY

1. Discuss how any company can become a multinational company. What are some of the options available to companies that allow them to use international markets and locations competitively?

2. Discuss some reasons why reductions in world trade barriers are driving the world toward a global economy.

3. Discuss at least two major forces that are driving the world toward a global economy.

4. How is the Internet and Information technology helping companies deal with a global economy? How is the Internet and Information technology helping small companies and even companies from poorer nations?

5. What is corporate social responsibility? Why are firms trying to become socially responsible?

6. Discuss the differences between foreign trade and foreign direct investment.

7. What are some of the reasons why globalization and free trade are being criticized? Do you think that free trade is helping all countries? Why or why not?

8. Look at the information on the world’s leading exporters discussed in the text. Do you think these trends will continue in the future? Why?

9. Discuss the characteristics of a next generation of multinational managers. How can you develop those characteristics through education and experience?

10. Why should multinational management be studied? What are some of the elements of a strategic approach to multinational management?

Chapter 2 Culture and Multinational Management

MULTIPLE CHOICE

1. All the following is true about culture EXCEPT

Culture is the shared belief, norms, and values that guide everyday life of a group.

Culture is passed from generation to generation through norms, values, and beliefs.

Culture is always directly observable.

Culture is very pervasive in societies.

AACSB Reflective thinking, Individual dynamics

PTS: 1

2. The correct definitions of the levels of culture include all of these EXCEPT:

The national culture, dominant within the political boundaries of a nation-state.

The business culture, unique to each business.

The organizational culture, shared by members of an organization.

The occupational culture, shared by those in the same occupation.

AACSB Analytic, Individual dynamics

PTS: 1

3. Cultural values:

Represent our understandings about what is true.

Prescribe and proscribe behavior.

Tell us what is good and beautiful and what are legitimate goals in life.

Provide solutions to problems of adaptation to the environment.

AACSB Analytic, Individual dynamics

PTS: 1

4. All of the following are dimensions of Hofstede’s Model of National Culture EXCEPT:

Power avoidance.

Uncertainty avoidance.

Masculinity.

Long-term orientation.

AACSB Analytic, Individual dynamics

PTS: 1

5. International management may be influenced by which of the following levels of culture?

National

Business

Organization

All of the above

AACSB Analytic, Individual dynamics

PTS: 1

6. Aspects of the business culture in China include all of these EXCEPT:

Business moves more slowly.

One should respect Chinese business etiquette.

It is important to praise individuals who excelled.

The Chinese value harmony and order.

AACSB Analytic, Individual dynamics

PTS: 1

7. Organizational culture refers to the

Set of important understandings that members of an organization share.

Expected ways of behaving for people in the same occupational group.

Values and beliefs pertaining to doing business with a specific company.

None of the above

AACSB Reflective thinking, Individual dynamics

PTS: 1

8. Occupational cultures

Are the norms, values, beliefs, and expected ways of behaving for people in the same occupational group.

Are the set of important understandings that members of an organization share.

Are norms, values, and beliefs that pertain to all aspects of doing business in a country.

Are the dominant cultures within a country.

AACSB Reflective thinking, Individual dynamics

PTS: 1

9. Some people believe that the norms, values, and beliefs of their own culture represent the only correct ways of dealing with the world. This is called

High power distance.

Stereotyping.

Androgyny.

Ethnocentrism.

AACSB Reflective thinking, Individual dynamics

PTS: 1

10. Cultural relativism represents

The belief that all cultures are valid and ethical responses to the problems of living.

The belief that some cultures are relatively better than others.

The belief that your own culture is the best.

The degree of similarity between business and national cultures.

AACSB Reflective thinking, Individual dynamics

PTS: 1

11. A new expatriate manager located in India reports to you that all of her subordinate local managers lack initiative and will only do what she tells them to do. You realize that most Indian managers expect superiors to tell them what to do. You advise her of this, but also caution the new manager to avoid:

Rationalization.

Stereotyping.

Uncertainty avoidance.

Ethnocentrism.

AACSB Reflective thinking, Individual dynamics

PTS: 1

12. On which of Hofstede's value dimensions does the U.S. rank highest?

Masculinity

Individualism

Patriotism

Power distance

AACSB Reflective thinking, Individual dynamics

PTS: 1

13. High power distance countries have norms, values, and beliefs such as

It is best to exercise power privately.

Everyone has a place, some are high and some are low.

A leader should develop his or her subordinates.

Leaders are made and not born.

AACSB Reflective thinking, Leadership principles

PTS: 1

14. Countries high on uncertainty avoidance have norms, values, and beliefs such as

Debates help you find the truth.

Deviant people should be tolerated.

Lack of rules in the workplace is good.

Experts and authorities are usually correct.

AACSB Reflective thinking, Individual dynamics

PTS: 1

15. Which of the following best describes U.S. culture with regard to individualism?

Lower than many European nations

Highest observed so far

About the same as Japan

Slightly above average

AACSB Reflective thinking, Individual dynamics

PTS: 1

16. An emphasis on leadership styles that appeal to duty and commitment to group goals are found primarily in countries with

Low masculinity.

Low uncertainty avoidance.

Short term orientations.

High collectivisim (low individualism).

AACSB Reflective thinking, Leadership principles

PTS: 1

17. Training for conformity and obedience, with valuations based on compliance and trustworthiness characterize countries with

Low power distance.

High power distance.

High individualism.

Short term orientations.

AACSB Reflective thinking, Individual dynamics

PTS: 1

18. Cultures with high power distance values probably have

Participative leadership.

Decentralized decision making.

Large wage differences between management and workers.

Managers selected by educational achievement.

AACSB Analytic, Individual dynamics

PTS: 1

19. Seniority tends to dominate evaluation and promotion in

Short term oriented cultures.

Cultures high on uncertainty avoidance and low on individualism.

Ethnocentric cultures.

Doing rather than being cultures.

AACSB Reflective thinking, Individual dynamics

PTS: 1

20. People from ________ countries would probably feel most comfortable with an autocratic (theory X) task- directed style of leadership.

High masculinity

High power distance

High uncertainty avoidance

All of the above

AACSB Reflective thinking, Individual dynamics

PTS: 1

21. A culture which has dominant values of success, money, and material things is probably

Low on power distance.

Low on individualism.

High on masculinity.

High on long term orientation.

AACSB Analytic, Individual dynamics

PTS: 1

22. In countries that rank high on Hofstede's masculinity index

People prefer a short working day to get home to their families.

People feel more comfortable in small organizations.

Theory X management is rejected strongly.

Work is central to life and job recognition is very important.

AACSB Reflective thinking, Individual dynamics

PTS: 1

23. In a universalistic culture, the right way to treat people is based on

Personal relationships.

Principles of harmony within the group.

Abstract principles such as rules of law and religion.

Accepting the use of emotions.

AACSB Reflective thinking, Individual dynamics

PTS: 1

24. Which of the 7d cultural dimensions represents the extent to which an individual's personal life is involved in his/her work relationships?

Neutral versus affective

Achievement versus ascription

Time orientation

Specific versus diffuse

AACSB Analytic, Individual dynamics

PTS: 1

25. The achievement versus ascription dimension addresses

The extent to which an individual's life is involved with work.

The manner by which a society gives status.

The way a culture deals with the past, present, and future.

The belief people have in controlling their fate.

AACSB Reflective thinking, Individual dynamics

PTS: 1

26. Expressions of anger, laughter, gesturing, and emotional outbursts are considered acceptable in

Specific cultures.

Diffuse cultures.

Neutral cultures.

Affective cultures.

AACSB Analytic, Individual dynamics

PTS: 1

27. Which of the following statements is true regarding a future oriented society?

Managers and workers do not necessarily believe that hard work can lead to future success.

People believe they can control nature.

Organizational change is considered necessary and beneficial.

Individuals cannot influence the future.

AACSB Analytic, Individual dynamics

PTS: 1

28. In countries where it is believed that nature dominates people,

Managers are less likely to be fatalistic.

Managers emphasize planning and scheduling.

Managers actively try to change situations.

Managers believe that they must accept situations rather than changing them.

AACSB Analytic, Individual dynamics

PTS: 1

29. The ability to interact effectively in multiple cultures is known as

Trustworthiness.

Cultural intelligence.

Cultural relativism.

None of the above

AACSB Reflective thinking, Individual dynamics

PTS: 1

30. Discussing cultural paradoxes, the text indicates that although the US scores very high on individualism, it also has the highest percentage of

unmotivated population.

uncaring seniors.

homeless people.

charity giving in the world.

AACSB Analytic, Individual dynamics

PTS: 1

31. A cultural paradox is defined as:

Group situations define cultural prescriptions.

Individual situations define cultural prescriptions.

Group situations contradict cultural prescriptions.

Individual situations contradict cultural prescriptions.

AACSB Reflective thinking, Individual dynamics

PTS: 1

32. When hiring for managerial jobs in high power distance countries, preference is generally given to individuals

having a high social class or a degree from an elite university.

from all social classes.

based on their qualifications and skills.

All of the above

AACSB Analytic, Individual dynamics

PTS: 1

33. The range of feelings outwardly expressed in society refers to the cultural dimension of ________.

Uncertainty avoidance

Universalism vs. particularism

Neutral vs. affective

Diffuse vs. specific

AACSB Reflective thinking, Individual dynamics

PTS: 1

34. Preference for involvement in multiple areas of personal and work life simultaneously are more likely in

Specific cultures.

Diffuse cultures.

Neutral cultures.

Affective cultures.

AACSB Analytic, Individual dynamics

PTS: 1

35. Which of the following cultural dimensions is NOT included in Hofstede's model of national culture?

Power distance

Individualism

Masculinity

Neutrality

AACSB Reflective thinking, Individual dynamics

PTS: 1

36. US firms often outsource customer service to workers in a foreign country. To minimize difficulties, such workers receive cross-cultural training which may include:

Training workers to reduce or eliminate an accent.

Educating workers regarding US culture.

Requiring workers to speak only English while on duty.

All of the above

AACSB Reflective thinking, Individual dynamics

PTS: 1

37. Which of the following cultural dimension represents the extent to which individuals are expected to be fair, altruistic, caring and generous?

Performance orientation

Individualism

Humane orientation

Power distance

AACSB Reflective thinking, Individual dynamics

PTS: 1

38. According to the text, which of the following two dimensions are not considered by Hofstede and is unique to the GLOBE cultural dimensions framework?

Power distance and humane orientation

Long-term orientation and uncertainty avoidance

Masculinity and Individualism

Humane orientation and performance orientation

AACSB Reflective thinking, Individual dynamics

PTS: 1

39. Cultural paradoxes represent

Cases where situations in reality seem to contradict cultural prescriptions.

The assumption that all people within a culture behave, feel and act the same.

The belief that a person’s culture is superior.

The belief that one’s culture is inferior.

AACSB Reflective thinking, Individual dynamics

PTS: 1

40. According to research discussed in the text, which of the following may help managers become more culturally intelligent?

Exposure to new cultural experiences in other countries

Learning to trust each people from individualistic cultures

Having a short term orientation

All of the above are true

AACSB Reflective thinking, Individual dynamics

PTS: 1

ESSAY

1. Define national culture, business culture, occupational, and organizational culture.

2. Describe three management implications of high individualism versus collectivism (low individualism).

3. What are country clusters? Explain with an example.

4. What are cultural paradoxes? Give one example.

5. Describe some characteristics of cultures high on power distance. Compare the management implications with cultures low on power distance.

6. Describe some characteristics of cultures high on collectivism. Compare the management implications with cultures low on collectivism.

7. Describe some characteristics of cultures high on masculinity. Compare the management implications with cultures low on masculinity.

8. Discuss four of the 7d cultural dimensions. What are some implications of these dimensions for international management?

9. Why do the rankings on some cultural dimensions such as individualism differ between the 7d and Hofstede models?

10. Discuss the GLOBE cultural framework. How is this cultural framework different from Hofstede’s framework?

Chapter 3 The Institutional Context of Multinational Management

MULTIPLE CHOICE

1. The national context of a society is made up of

The national and business cultures of that society.

The social institutions of that society.

The national cultures and social institutions of that society.

The national cultures of that society.

AACSB Reflective thinking, Environmental influence

PTS: 1

2. A complex of positions, roles, norms, and values organizing relatively stable patterns of human resources to sustain viable social structures refers to which of the following?

Entrepreneurship

Social institutions

Comparative advantage

Strategy of the multinational company

AACSB Reflective thinking, Environmental influence

PTS: 1

3. According to the model discussed in the text, the national context does which of the following?

Creates a resource pool

Influences the business environment and helps create induced factor conditions

Does not influence the business environment

Does not help create induced factor conditions

AACSB Reflective thinking, Environmental influence

PTS: 1

4. An economic system where production activities are decentralized to private owners who carry out these activities to make a profit is known as a

Capitalist economy.

Command economy.

Socialist economy.

Mixed economy.

AACSB Reflective thinking, Environmental influence

PTS: 1

5. Which of the following statements is NOT TRUE regarding the experiences countries go through as they undertake market transitions from socialism to a more market based economy?

Drastic measures have to be taken to turn around formerly inefficient companies.

Managers' thinking have to be changed so that they can understand management functions.

Financial systems have to be left unregulated to accurately reflect market prices.

More workers have to be hired as companies find that they are understaffed.

AACSB Reflective thinking, Environmental influence

PTS: 1

6. A society that is characterized by dominance of the manufacturing or secondary sectors is a/an

Industrial society.

Pre-industrial society.

Post-industrial society.

Market society.

AACSB Reflective thinking, Environmental influence

PTS: 1

7. Which of the following statements is TRUE regarding post-industrial societies?

Post-industrial societies are characterized by the dominance of manufacturing sectors.

Post-industrial societies tend to favor economic achievement.

Post-industrial societies tend to emphasize quality of life over economic achievement.

All of the above are true.

AACSB Reflective thinking, Environmental influence

PTS: 1

8. Which of the following are key social institutions that are the most likely to influence the business environment of a country?

Economic system

Level of industrialization

Religion

All of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

9. Which of the following systems encourage the pursuit of collective goals such as social equality and solidarity?

Economic system

Market economy

Command economy

Capitalist economy

AACSB Reflective thinking, Environmental influence

PTS: 1

10. According to the text, which of the following statements regarding workers in formerly socialist economies is NOT TRUE?

Workers in formerly socialist economies are very trusting of each other

Workers in formerly socialist economies are generally reluctant to cooperate and work with each other

Workers in formerly socialist economies tend to favor personal relationships as key to success as opposed to their work performance

All of the above are true

AACSB Reflective thinking, Environmental influence

PTS: 1

11. Which of the following societies tend to determine occupations based on ascription (family background) and social status?

Industrial societies

Postindustrial societies

Socialist societies

Pre industrial societies

AACSB Reflective thinking, Environmental influence

PTS: 1

12. Which of the following four religions are practiced by 71% of the world's population?

Jainism, Hinduism, Islam and Christianity

Hinduism, Christianity, Islam, and Sikhism

Christianity, Hinduism, Islam and Buddhism

Judaism, Christianity, Buddhism, and Islam

AACSB Reflective thinking, Environmental influence

PTS: 1

13. Which of the following religions is most practiced around the world?

Christianity

Buddhism

Hinduism

Islam

AACSB Reflective thinking, Environmental influence

PTS: 1

14. Which of the following religions has strict gender roles and also prohibits multinationals from paying or receiving interest on transactions?

Islam

Buddhism

Christianity

Jainism

AACSB Reflective thinking, Environmental influence

PTS: 1

15. Which religion is considered to be timeless and eternal as it not based on a single founder or event?

Jainism

Christianity

Hinduism

None of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

16. Which of the following religions is based on the idea that craving and desires produce suffering but that it also possible to reach a stage where there is no longer any suffering?

Christianity

Judaism

Hinduism

Buddhism

AACSB Reflective thinking, Environmental influence

PTS: 1

17. The cultural and economic changes that occur because of how production is organized and distributed in society refers to which concept?

religion

education

industrialization

dominant economic type

AACSB Reflective thinking, Environmental influence

PTS: 1

18. In industrial societies, occupational placement is based on universalistic criteria such as

Age.

Religion.

Ascription.

Achievement.

AACSB Reflective thinking, Environmental influence

PTS: 1

19. A multinational manager carefully considers the list of festivals that are celebrated in a country in order to allow for holidays for his/her employees. Which social institution is most likely being considered here?

Industrialization

Market transition

Education

Religion

AACSB Analytic, Environmental influence

PTS: 1

20. Pre industrial societies tend to have

Poor infrastructure and support.

Adequate infrastructure.

Favorable business conditions.

Government support.

AACSB Reflective thinking, Environmental influence

PTS: 1

21. An increased emphasis on quality of life over achievement oriented norms is typical of

Pre-industrial societies.

Industrial societies.

Post-industrial societies.

None of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

22. A multinational Human Resource Manager's decision to promote an individual results in wide discontent in the foreign subsidiary. The manager finds that although the promoted individual's performance is exemplary, most employees feel that the promotion should have gone to another individual who comes from an important family. The foreign subsidiary is most likely located in a/an

Industrial society.

Pre-industrial society.

Capitalist society.

Post-industrial society.

AACSB Reflective thinking, Environmental influence

PTS: 1

23. In which of the following societies would people most likely prefer non-monetary incentives?

Industrial society

Pre-industrial society

Post-industrial society

None of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

24. High rankings on the materialist index of some countries (e.g., Hungary, India, Brazil) suggest that individuals in these countries are

Favor non material incentives.

Achievement oriented.

Motivated by non-monetary rewards.

Hinduism.

AACSB Reflective thinking, Environmental influence

PTS: 1

25. When industrialization is inwardly oriented, local industries are promoted to satisfy the

Need to export.

Local population.

Requirements of multinational companies.

Domestic market and preserve foreign exchange.

AACSB Analytic, Environmental influence

PTS: 1

26. When industrialization is outward oriented, foreign exchange is

Encouraged and exporting is promoted.

Discouraged and exporting is not favored.

Not welcomed.

Used to fund governments in power.

AACSB Reflective thinking, Environmental influence

PTS: 1

27. The famous German Sociologist, Max Weber, argued that the Protestant work ethic

Led to the emergence of capitalism in Western Europe.

Led to the decline of capitalism in Western Europe.

Led to an acute distaste for the accumulation of wealth.

Led to the rise of socialism in Eastern Europe.

AACSB Analytic, Environmental influence

PTS: 1

28. One important issue relevant to multinationals, is the extent to which educational systems encourage students to

Be innovative and creative.

To expect a more ethical atmosphere.

Passively accept what is taught.

None of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

29. When multinationals pay low wages or use child labor, they often receive

Support and praise.

Imprisonment.

Negative publicity.

Social responsibility.

AACSB Reflective thinking, Environmental influence

PTS: 1

30. According to the text, all of the following statements regarding education and educational systems around the world are TRUE except

Universal education enrolment is a goal of most countries.

Educational levels give an indication of the skill and productivity in any society.

The focus of educational systems around the world are fairly similar in terms of whether these systems emphasize academic or vocational aspects.

All of the above statements are true.

AACSB Analytic, Environmental influence

PTS: 1

31. The educational attainment scores

Are fairly similar for most countries.

Give an idea of the abundance of engineers for research and development purposes.

Reflect the mean years of schooling of people in any society.

All of the above are true of educational attainment scores.

AACSB Reflective thinking, Environmental influence

PTS: 1

32. Which of the following is not an implication of educational systems as they apply to multinationals?

Educational level gives an indication of the skill and productivity of workers in any society.

Educational systems have implications for how labor force issues are approached and policies implemented.

Educational levels can be gauged to give an idea of what multinationals can expect.

All of the above are true

AACSB Analytic, Environmental influence

PTS: 1

33. In societies with high social inequality, resources are controlled by

A majority of people.

Very few people.

The Government.

Religious institutions.

AACSB Reflective thinking, Environmental influence

PTS: 1

34. When a society expects that while men should work outside, and women ideally stay at home, this exhibits which of the following features?

Need for domestic products

Open societies

Growing levels of industrialization and economic development

Strict division of society by gender

AACSB Reflective thinking, Environmental influence

PTS: 1

35. Postindustrial societies are typically characterized by the dominance of

Service and manufacturing sectors.

Service sectors.

Manufacturing sectors.

Agricultural sectors.

AACSB Reflective thinking, Environmental influence

PTS: 1

36. The degree to which people have privileged access to resources and positions within societies is

An indication of social inequality.

The same around the world.

Has no implications for multinationals.

All of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

37. Which of the following statements about the GINI index is FALSE?

The GINI index represents the extent of inequality in people’s income within a society

Ranges from 0 to 100

Is scaled so that 0 represents no inequality while 100 represents perfect inequality

Is scaled so that 100 represents no inequality while 0 represents perfect inequality

AACSB Reflective thinking, Environmental influence

PTS: 1

38. The movement from a socialist economy to a free market economy is also known as which of the following?

Market transition

Dominant economic type

Rapid industrialization

Government regulation

AACSB Analytic, Environmental influence

PTS: 1

39. The index of economic freedom may be used by multinationals to understand the nature of

market transitions

national culture

national context

governmental intervention

AACSB Reflective thinking, Environmental influence

PTS: 1

40. Which of the following has important implications for multinationals?

Religion

Education and economic systems

Industrialization and inequality

All of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

ESSAY

1. Define social institutions. How do social institutions affect individuals and organizations?

2. Define national context. Explain how national context influences organizations.

3. What are the three major types of economic systems? What are the effects of economic systems on how organizations are structured in societies?

4. What are some implications of the market transitions that many formerly communist societies are experiencing? What are some major challenges facing multinationals as they try to motivate workers in these transition economies?

5. Compare and contrast pre-industrial, industrial and post-industrial societies. Discuss the implications for multinationals of any one of these three types of economies.

6. What are some major philosophies of each of the world's major religions? Pick two religions and discuss how they affect the business environment.

7. How does the educational system influence the business environment in any country?

8. What is social inequality? What implications does social inequality have for multinationals?

Chapter 4

Managing Ethical and Social Responsibility Challenges in Multinational Companies

MULTIPLE CHOICE

1. International business ethics

Present problems similar to domestic business ethics.

Pertain to the rules and values that determine actions that companies should follow when dealing with other companies.

Pertain to those unique ethical problems faced by managers conducting business across countries.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

2. Which of the following statements is NOT TRUE regarding social responsibility?

Social responsibility is not linked with business ethics.

Refers to the idea that businesses have certain responsibilities to society beyond making profits.

Means that a company has to take into consideration various stakeholders when making decisions.

Is concerned with the ethical consequences of policies and procedures of the company as an organization.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

3. The ethical philosophies that consider actions as good or bad regardless of their outcomes are

The teleological ethical theories.

Utilitarianism.

Deontological theories of ethics.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

4. Utilitarianism, as a form of ethical philosophy,

Argues that what is good or moral comes from acts that produce the greatest good for the greatest number of people.

Argues that actions by themselves have a good or bad morality regardless of their consequences.

Is one form of deontological ethical theory.

Is a moral language proposed by Donaldson.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

5. Which of the following statements are true about teleological ethical theories?

The morality of an act comes from its consequences.

Utilitarianism is one of the most popular teleological theory.

Actions by themselves have a good or bad morality regardless of their consequences.

All of the above are true.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

6. Stealing a loaf of bread to feed a hungry family can be justified by which ethical theory?

Social responsibility ethical theory

Deontological ethical theory

Moral languages

Utilitarianism

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

7. Moral languages

Are a form of deontological ethical theory.

Focus on the consequences of actions rather than their worth.

Describe the ways people think about general issues.

Are used to explain ethical choices.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

8. Moral languages include all of the following EXCEPT

Virtue and vice.

Self-control.

Avoiding harm.

Being ethical.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

9. Multinationals that provide fair wages to their local employees are following which type of moral language?

Avoiding harm

Ethical behavior

Rights and duties

Social contract

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

10. According to the text, the United Nations Declaration of Human Rights is an example of which of the following?

Convenient imperialism

Transnational ethics

European codes

Moral language

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

11. Written ethical codes may include which of the following?

Contracts

International laws

Laws of a country

All of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

12. Which of the following statements about bribes or questionable payments are true?

Bribes to expedite government actions or to gain business advantages are common in international business.

Most countries have formal laws forbidding bribes or questionable payments.

Enforceability of ethics varies in different countries.

All of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

13. The reason to know provisions of the FCPA is that it

Is the easiest to enforce and observe.

Probably encourages foreign bribery.

Is a tricky component for US companies.

Emphasizes the reasonable person concept.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

14. According to the FCPA, U.S. managers are criminally liable

Only for bribes that they pay directly to a foreign official.

Only for bribes paid in the U.S. and not in other countries where it is common practice in business dealings.

For all bribes by employees or agents of the U.S. company even if the U.S. managers do not know about them.

For bribes paid by foreign agents, if managers know about them.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

15. Which of the following payments would the Foreign Corrupt Practices Act allow?

Payments made under duress to avoid injury or violence

Small payments to encourage officials to do their legitimate and routine jobs

Payments that are considered lawful in the country

All of the above are allowed

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

16. Ethical dilemmas are usually

Easy to resolve.

Clear and unambiguous.

Unclear and ambiguous.

Removed with a formal code of ethics.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

17. Proscriptive rules in codes of conduct:

Tell multinational companies or managers what they should do.

Are forms of moral language.

Tell multinational companies or managers what they cannot do.

All of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

18. Ethical convergence

Is similar to ethical relativism.

Refers to basic universal moral principles.

Is a form of ethical universalism.

Refers to the growing pressures for multinational companies to follow the same rules in managing ethical behavior and social responsibility.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

19. Pressures for ethical convergence include all of the following EXCEPT

The growth of international trade and trading blocs.

Increased interaction between foreign trading partners.

The need to have unique norms and values to manage their employees differently.

All of the above are true

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

20. Prescriptive rules in codes of conduct

Tell multinational companies or managers what they should do.

Are forms of moral language.

Tell multinational companies or managers what they cannot do.

All of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

21. Ethical relativism

Argues that one should impose the home country's ethical system everywhere.

Implies that ethics are relative to the type of philosophy used.

Means that each society's view of ethics must be considered legitimate.

Means that the same ethical principles are universal.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

22. The argument that there are basic moral principles that transcend cultural and national boundaries is supported by

Ethical relativism.

Moral languages.

Ethical universalism.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

23. When companies use the logic of ethical relativism to behave any way they please, this is known as

Prescriptive ethical management.

Proscriptive ethical management.

Convenient relativism.

Universal ethics applications.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

24. When companies use the logic of moral universalism and impose their views on the rest of the world, ________________ occurs.

Ethical divergence

Ethical convenience

Cultural imperialism

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

25. The form of analysis where the prime interest is what is the best decision for a company's profit is

Legal analysis.

Ethical analysis.

Social responsibility analysis.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

26. In an economic analysis

The manager considers the best decision for a company's profits.

The manager focuses on meeting the laws of a country.

The manager goes beyond profits and analyzes the ethical consequences of decisions.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

27. When facing an ethical question, the manager who uses legal analysis criteria

Is primarily interested in the decision that is best for the company's profits.

Focuses on only meeting the laws of the country in which the company is operating.

Focuses on meeting the needs of other constituents beyond stakeholders.

Focuses on doing the right things.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

28. In an ethical analysis of a problem, a manager must

Focus on meeting the laws of the country in which the company is operating.

Focus on what is the best decision for a company's profits.

Focus on the decisions with the best consequences.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

29. The first duty of a multinational manager faced with a decision is

To consider whether the decision makes business sense.

To consider whether the decision meets the legal standard in the country.

To consider whether the decision is ethical.

To refer to the written codes of ethics.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

30. Ethical decision making of multinational managers preferably should

Be based solely on home country ethical principles.

Go beyond legal constraints and respect the local cultural norms.

Be primarily profitable for the multinational.

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

31. A multinational manager decides that it would be unethical to close a foreign plant as employees in that plant are not being treated with dignity. Which ethical theory is the manager using to reach that conclusion?

Teleological ethical theory

Utilitarian ethical theory

Deontological ethical theory

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

32. A multinational manager decides to allow hiring of children for a foreign plant as such practices are accepted in the country. Which ethical principle is she basing her decision on?

Ethical universalism

Convenient ethical universalism

Ethical relativism

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

33. A multinational manager is considering closing a plant in China as wages have increased considerably in China. The manager considers the implications of laying off people and closing the plant on the profits of the company. Which form of analysis is the manager doing?

Legal analysis

Profit making analysis

Ethical analysis

None of the above

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

34. Which act was proposed by the Securities Exchange Commission in reaction to the accounting scandals at companies like Enron and Worldcom?

Sarbanes-Oxley

WTO

Corruption Perception Index

The Ethisphere Institute

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

35. Which of the following statements regarding the Foreign Corrupt Practices Act (FCPA) is NOT TRUE?

Bribes or payments made under duress to avoid injury or violence are acceptable.

Small payments to encourage officials to do their legitimate and routine jobs are acceptable.

Payments or gifts to foreign government officials for the sake of gaining or retaining business are acceptable.

In an unstable political environment, payments made to local officials to avoid harassment of employees are acceptable.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

36. Which of the following statements is TRUE regarding cultural relativism as an approach in international business ethics?

What is right or wrong depends on the culture.

A guide for what is legal and appropriate is the local culture.

Companies should follow the moral norms of the local culture.

All of the above statements are true.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

37. Deontological ethical theories

Argue that the morality of an act comes from this consequences.

Would provide justification for closing a plant and laying off workers to reduce costs.

Is most typically represented by cost and benefit analyses.

Argue that actions by themselves have a good or bad morality irrespective of the consequences.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

38. According to the text, which of the following is NOT a consequence of corruption?

Companies typically make up the bribe by increasing the contract price.

Companies use poorer quality materials to make up for the bribe.

Companies devote some of the bribe to socially responsible causes.

Corruption can also result in collusions among firms.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

39. The world seems to be moving towards transnational ethics because:

Globalization dramatically increases contact among people from different ethical and cultural systems.

This contact creates pressure for the development of new transnational agreements regarding business practices.

International trade and trading blocs such as the EU and NAFTA are growing.

All of these reasons.

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

40. Which of the following ethical dilemmas is addressed by the Sarbanes Oxley Act?

Competition

Auditor responsibility and independence

Sourcing of cheap labor

Company strategy

AACSB Ethics, Ethical responsibilities in organizations and societies

PTS: 1

ESSAY

1. Discuss some of the issues that make international business ethics more complex than domestic business ethics.

2. Do laws always reflect a community’s ethics? Give an example to explain your answer.

3. Discuss the difference between teleological and deontological theories of ethics. Give examples of how an international manager might appeal to either type of theory when faced with the opportunity to offer a bribe.

4. How do social institutions and culture affect the practice of business ethics in different countries?

5. Compare and contrast ethical relativism and ethical universalism. What are some of the dangers of adopting either ethical relativism or ethical universalism when making decisions?

6. Describe the U.S. FCPA, what makes it challenging for U.S. firms, and how they deal with that challenge.

7. What are moral languages? How can moral languages help multinational become more ethical?

8. Discuss some of the pressures for ethical convergence. What are some implications for multinational management?

9. Compare and contrast prescriptive codes of ethics with proscriptive codes.

Chapter 5

Strategic Management in the Multinational Company: Content and Formulation

MULTIPLE CHOICE

1. Generic strategies

Occur when a company can outmatch its rivals in attracting and maintaining its customers.

Represent basic ways that domestic and multinational companies keep and achieve competitive advantage.

Are all based on finding ways to provide superior value to the customer.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

2. Which of the following is a primary generic strategy?

Cross country subsidizing

Low Cost

Competitive pricing

Critical success factors

AACSB Reflective thinking, Strategy

PTS: 1

3. Differentiation leads to higher profits by

Charging a higher price than competitors.

Offering the customer better value.

Offering a product with more features and quality.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

4. A low cost strategy leads to higher profits by

Charging a higher price than competitors.

Offering the customer products with more features.

The cost savings that firms achieve.

Adding unique features to products.

AACSB Reflective thinking, Strategy

PTS: 1

5. __________ strategies achieve higher profits by charging higher prices.

Low cost

Differentiation

Competitive advantage

Generic

AACSB Reflective thinking, Strategy

PTS: 1

6. The value chain

Represents a generic strategy.

Represents all the activities that a firm uses to market and deliver its products.

Represents all the activities that a firm uses to design, produce, market, deliver, and support its products.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

7. Upstream activities in the value chain are concerned, in part, with

The primary activities.

The support activities.

Input logistics.

After market service.

AACSB Reflective thinking, Strategy

PTS: 1

8. Support activities include

Research and development.

Service repair.

Output logistics.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

9. Sales and dealing with distribution channels refer to _________ activities in the value chain.

Upstream

Support

Secondary

Downstream

AACSB Reflective thinking, Strategy

PTS: 1

10. Capabilities that lead to competitive advantage must be

Valuable, rare, and easy to copy.

Fairly substitutable.

Valuable, rare, and hard to copy.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

11. Competitive strategies

Are examples of basic generic strategies.

Are moves multinationals and other companies use to defeat competitors.

Can be low cost or differentiation.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

12. Offensive strategies

Are examples of basic generic strategies.

Are direct targeting/attacking of rivals.

Are attempts to reduce the risk of being attacked.

Are used to convince other firms to seek other targets.

AACSB Reflective thinking, Strategy

PTS: 1

13. Defensive strategies include

Direct attacks, end-run offensive, and acquisitions.

The generic strategies.

Counter-parries.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

14. Strategies used to attempt to reduce the risk of being attacked are

Defensive competitive strategies.

Offensive competitive strategies.

Generic strategies.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

15. Counter-parry

Is an example of an offensive strategy.

Is an example of a generic strategy.

Is fending off a competitor's attack in one country by attacking the competitor in another country.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

16. Corporate level strategies

Are similar to the generic strategies.

Pertain to the operation of corporate divisions.

Are concerned with how single business companies choose strategies.

Are concerned with how companies choose their mixtures of different businesses.

AACSB Reflective thinking, Strategy

PTS: 1

17. Business level strategies

Include only the generic strategies.

Pertain to the operation of multiple businesses.

Are concerned with how single business companies choose strategies.

Are concerned with how companies choose their mixtures of different businesses.

AACSB Reflective thinking, Strategy

PTS: 1

18. In related diversification

Companies acquire businesses in any country.

Companies acquire businesses in any industry.

Companies acquire businesses that are similar in some way to their core business.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

19. Acquisition of mixtures of businesses in any industry is

Low cost strategy.

Unrelated diversification.

Related diversification.

A business level strategy.

AACSB Reflective thinking, Strategy

PTS: 1

20. This is considered to be a popular and controversial way to address internal cost inefficiencies.

Insourcing

Outsourcing

Related diversification

Unrelated diversification

AACSB Reflective thinking, Strategy

PTS: 1

21. Market size, ease of entry and exit, and economies of scale are all examples of

Defensive strategies.

Key success factors.

Dominant economic characteristics.

Differentiation.

AACSB Reflective thinking, Strategy

PTS: 1

22. Key success factors are

Examples of defensive strategies.

Important characteristics of a company or its product that lead to success in an industry.

Similar to generic strategies.

The economic characteristics of countries that lead to success.

AACSB Reflective thinking, Strategy

PTS: 1

23. The acronym SWOT stands for

Strategies with organizational timelines.

Selection, withdrawal, opportunities, and timeliness.

Strengths, weakness, opportunities, and threats.

Strategies, winning, organizations, and tender offers.

AACSB Reflective thinking, Strategy

PTS: 1

24. A strength is

A favorable condition in a company's environment.

Distinctive capability, resource, skill, or other advantage that a company has vis-à-vis its competitors.

Represented by changes in the economic conditions in an industry.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

25. Weaknesses are

Lack of distinctive capabilities, resource, and skills that leads to competitive disadvantage compared to competitors.

Unfavorable conditions in a firm's environment.

Relevant to both the internal and external environment of companies.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

26. BMW and Mercedes view their Japanese rivals moves into the upscale car market as a/an

Strength.

Weakness.

Opportunity.

Threat.

AACSB Reflective thinking, Strategy

PTS: 1

27. Matrix analyses

Help assess business portfolios.

Divide businesses into successes and failures.

Are less complicated for the multinational company.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

28. In the BCG Matrix, cash cows are

Businesses in a slow-growth industry where the company has a strong market share position.

Businesses in a fast growing industry where the company has a strong market share position.

Businesses in a slow-growth industry where the company has a weak market share position.

Businesses in a fast growing industry where the company has a weak market share position.

AACSB Reflective thinking, Strategy

PTS: 1

29. In the BCG matrix, the appropriate strategy for dogs should be

Invest and Expand.

Defend and Harvest.

Divest.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

30. In the BCG Matrix, Defend and Harvest are the most popular strategies for

Stars.

Dogs.

Cash cows.

Problem children.

AACSB Reflective thinking, Strategy

PTS: 1

31. Competitive advantage

Represent the basic ways that companies can provide superior value to customers.

Is one of the basic strategies.

Occurs when a company can outmatch its rivals in attracting and maintaining its customers.

Is best achieved using a low cost strategy.

AACSB Reflective thinking, Strategy

PTS: 1

32. The GE Portfolio matrix

Is the same as the Boston Consulting Group matrix.

Contains four cells based on industry and business strength.

Can be used to assess business level strategies.

Contains nine cells based on industry strength and business competitive position.

AACSB Reflective thinking, Strategy

PTS: 1

33. Capabilities

Are the inputs into a company's production or service processes.

Are early activities in the value chain such as R&D and dealing with suppliers.

Are similar to distinctive competencies.

Represent the ability of companies to assemble and coordinate their resources in ways that lead to lower costs of differentiated outputs.

AACSB Reflective thinking, Strategy

PTS: 1

34. Favorable conditions in a firm's external environment are known as

Strengths.

Capabilities.

Opportunities.

Distinctive competencies.

AACSB Reflective thinking, Strategy

PTS: 1

35. Which of the following more likely represents a threat to a multinational company like Toyota?

Higher prices charged by Toyota's competitors.

Lower interest rates around the world that makes cars more affordable.

Toyota's bad image among teenagers.

Kia and Hyundai's entry in markets traditionally dominated by Toyota.

AACSB Reflective thinking, Strategy

PTS: 1

36. A company that has a limited product range, and sells to certain buyers in some geographical areas is said to have which of the following?

Broad competitive scope

Narrow competitive scope

Lack of competition

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

37. Porter’s five forces help a multinational manager understand

The key success factors in an industry.

How to assess the attractiveness of the industries a company is involved in.

How to assess its unrelated diversification efforts.

The trends in its industry.

AACSB Reflective thinking, Strategy

PTS: 1

38. Which of the following forces is NOT one of the forces considered in Porter’s five forces analysis?

Degree of competition among existing competitors

Degree of governmental regulation in the industry

Threat of new entrants in the industry

Bargaining power of buyers in the industry

AACSB Reflective thinking, Strategy

PTS: 1

39. The degree to which competitors are confronted with alternatives for their products is referred to as which force in Porter’s five forces?

Threat of new entrants

Bargaining power of buyers

Degree of competition

None of the above

AACSB Analytic, Strategy

PTS: 1

40. The national context affects strategy through which of the following processes?

Encourage or discourage certain forms of businesses and strategies in each country

Factor conditions play a role in shaping each country’s unique resource base

Determine which resources are used, how they are used and which are developed

All of the above

AACSB Reflective thinking, Environmental influence

PTS: 1

ESSAY

1. Describe the low cost strategy as compared to the differentiation strategy.

2. Regarding low cost and differentiation strategies, when is each strategy appropriate?

3. Compare and contrast defensive and offensive strategies. Discuss when a multinational can use offensive strategies in one country and defensive strategies in another.

4. What is the value chain? How can an understanding of the value chain help a company be more successful in its generic strategy?

5. What is related diversification? When would you expect related diversification to be more profitable than unrelated diversification?

6. What is sustainable competitive advantage? What are some essential characteristics of company capabilities that can lead to sustainable competitive advantage?

7. Describe the SWOT analysis. Why is a SWOT analysis more complex for a multinational than for a domestic company?

8. Discuss some of the major issues a multinational manager needs to take into consideration when conducting an industry analysis.

9. What are key success factors? Discuss some KSFs that are most likely to vary by national context.

10. Discuss each of Porter’s five forces model. What information can a multinational obtain from Porter’s five forces industry analysis?

Chapter 6 Multinational and Entry-Mode Strategies: Content and Formulation

MULTIPLE CHOICE

1. According to the text, a fundamental dilemma faced by all multinationals is

The form of competitive strategy they should use.

How much they emphasize responding to differences in all the markets they operate.

How to fight their rivals.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

2. Responding to differences in the markets in all the countries in which a company operates is

The global-local dilemma.

The best strategy for success for a multinational.

The local-responsiveness solution.

The global solution.

AACSB Reflective thinking, Strategy

PTS: 1

3. The global solution to the global-local dilemma refers to

Conducting business similarly around the world.

Responding to differences in the global markets in which a company operates.

Customization of products to regional but not country differences.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

4. Conducting business similarly throughout the world, and locating company units wherever there is high quality and low cost is

The global-local dilemma.

The global integration solution.

The local responsiveness solution.

The multidomestic solution.

AACSB Reflective thinking, Strategy

PTS: 1

5. A multidomestic company gives strategic priority to

Providing a low cost product to local customers.

Adapting a product or service to local needs.

Having multiple locations for sources its raw materials.

Controlling the strategic options of local companies.

AACSB Reflective thinking, Strategy

PTS: 1

6. Which strategy attempts to balance advantages from three other multinational strategies?

Regional

Multidomestic

Transnational

International

AACSB Reflective thinking, Strategy

PTS: 1

7. Dispersing value-chain activities anywhere in the world where the company can do them best or cheapest refers to seeking

The global-local dilemma.

Comparative advantage of nations.

Competitive advantage of firms.

Locations advantages.

AACSB Reflective thinking, Strategy

PTS: 1

8. Comparative advantage is

Similar to competitive advantage.

A local responsiveness solution.

Where the company can produce the cheapest.

Advantages of nations over other nations.

AACSB Reflective thinking, Strategy

PTS: 1

9. Comparative advantages are

Cost or quality advantages particular to a nation.

Similar to competitive advantages.

Emphasized through multidomestic strategies.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

10. Selling global products and using similar marketing techniques worldwide is an example of a

Transnational strategy.

International strategy.

Multidomestic strategy.

Regional strategy.

AACSB Reflective thinking, Strategy

PTS: 1

11. A regional strategy refers to

Managing raw-material sourcing, production, marketing, and support activities within a particular region.

Selling global products and using similar marketing techniques worldwide.

Dispersing value-chain activities anywhere in the world where the company can do them best or cheapest.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

12. Global companies usually seek to

Provide unique products for all countries of the world.

Take advantage of different factor costs among countries.

Manufacture their products in every country.

Focus only on downstream activities in the value chain.

AACSB Reflective thinking, Strategy

PTS: 1

13. Common customer needs, global sources of raw material, and favorable trade policies all lead to

An increased focus on local markets.

More use of the multidomestic strategy.

More use of the local solution to the global-local dilemma.

A greater likelihood that companies select global strategies.

AACSB Reflective thinking, Strategy

PTS: 1

14. Having one set of products for North American countries and another set of products for Europe illustrates which strategy?

Multidomestic

Regional

Transnational

Global

AACSB Reflective thinking, Strategy

PTS: 1

15. Globalization drivers

Fall into four categories: market, costs, governments, and competition.

Are conditions in an industry that favor transnational or international strategies over multidomestic or regional strategies.

Indicate the degree of globalization of an industry.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

16. Asking diagnostic questions such as are there economies of scale, are there cheaper sources of raw materials, are there global sources of low-cost raw materials provide information regarding which globalization driver?

Global markets

Costs

Competition

Governments

AACSB Reflective thinking, Strategy

PTS: 1

17. Entry-mode strategies

Include multidomestic and transnational strategies.

Are options multinationals have to enter foreign markets and countries.

Are only processes by which firms fill overseas orders like domestic orders.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

18. Using intermediaries or go-between firms to provide the knowledge and contacts necessary to sell overseas is usually associated with

Direct exporting.

Franchising.

Indirect exporting.

Licensing.

AACSB Reflective thinking, Strategy

PTS: 1

19. A company that treats and fills overseas orders like domestic orders is an example of a

Indirect exporter.

Export management company.

Aggressive exporter.

Passive exporter.

AACSB Reflective thinking, Strategy

PTS: 1

20. International franchising

Is a comprehensive licensing agreement where the franchisor grants to the franchisee the use of a whole business operation.

When multinationals make a project fully operational and train local managers and workers before the owner takes control.

The use of intermediaries or go-between firms to provide the knowledge and contacts necessary to sell overseas is.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

21. When multinationals make a project fully operational and train local managers and workers before the owner takes control, they are using which entry-mode strategy?

Licensing

Franchising

Turnkey

Direct export

AACSB Reflective thinking, Strategy

PTS: 1

22. When a firm from another country has an equity (or ownership) position in a separate company, it is engaging in

An international cooperative alliance.

A turnkey operation.

A contract manufacturer.

FDI.

AACSB Reflective thinking, Strategy

PTS: 1

23. Foreign direct investment

Is an entry-mode strategy.

Means that a multinational owns, in part or in whole, an operation in another country.

Symbolizes the highest rate of internationalization.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

24. Major drawbacks of licensing include

The risk of losing the capital investment.

The risk of the local government changing international trade policies.

The loss of control and the possibility of creating a new competitor.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

25. Companies should license if

They want to control all aspects of operation.

Their product is older or a soon-to-be replaced technology.

They have the necessary resources to export or invest directly.

There are no tariffs or quotas.

AACSB Reflective thinking, Strategy

PTS: 1

26. If a company seeks a strategic alliance with another firm, it is a

Low cost strategy.

Franchising agreement.

Competitive agreement.

Cooperative agreement.

AACSB Reflective thinking, Strategy

PTS: 1

27. Advantages of foreign direct investment include

Increased capital investment.

Greater control of product and marketing strategy.

Greater exposure to financial risks.

The lower costs of using expatriates managers.

AACSB Reflective thinking, Strategy

PTS: 1

28. If management believes that it must control foreign sales, customer credit, and the eventual sale of the product, then the company should choose which of the following entry-mode strategies?

Indirect exporting

Licensing

Direct exporting

Franchising

AACSB Reflective thinking, Strategy

PTS: 1

29. When deciding on an entry-mode strategy, cultural distance is

The physical distance between two countries.

Not the distance between an organization's culture and the local national culture.

Similar to the geographic distance.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

30. As entry-mode strategies, direct and indirect exporting have

High levels of control and low levels of risk.

Similar levels of risk and control as FDI.

Low levels of risk and control.

Are among the most risky.

AACSB Reflective thinking, Strategy

PTS: 1

31. Which of the following strategies gives top priority to seeking location advantages and to gaining operation efficiencies from worldwide operation?

Multidomestic strategy

Regional strategy

Transnational strategy

International strategy

AACSB Reflective thinking, Strategy

PTS: 1

32. If strategists in a firm believe that centralizing key activities such as R&D is necessary to reduce coordination costs and to achieve economies of scale, they are more likely to choose

An international strategy.

A transnational strategy.

A local strategy.

None of the above

AACSB Analytic, Strategy

PTS: 1

33. What dictates the choice of a multinational entry-mode strategy?

Strategic competition

Strategic reason to be in the market

Companies want to share risks and costs of developing technology

Companies want to achieve economies of scale

AACSB Reflective thinking, Strategy

PTS: 1

34. If a company believes that it needs to control foreign sales, customer credit, and sale of product to the customer, it is more likely to choose

Indirect exporting.

Rely on foreign intermediaries for export purposes.

Direct exporting.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

35. To deal with political risk, various private and government agencies offer

Insurance.

Assurance.

Investment.

All of the above are true.

AACSB Reflective thinking, Strategy

PTS: 1

36. A company pursuing a regional strategy

Has worldwide products and a worldwide value chain.

Sells the same product using only minor modification in marketing and product offerings.

Is similar to a company pursuing an international strategy.

Attempt to gain location advantages of more global transnational combined with some of the local-adaptation advantages of the multidomestic company.

AACSB Reflective thinking, Strategy

PTS: 1

37. Which of the following statements regarding exporting is FALSE?

Exporting is the easiest of entry-mode strategies.

Export can be of the passive form where overseas orders are treated like domestic orders.

Export can be indirect where companies rely on intermediaries to sell overseas.

Because it is the easiest form of going international, exports are not as important to the US economy.

AACSB Reflective thinking, Strategy

PTS: 1

38. Foreign direct investment

Exists when two or more firms have an ownership position in a separate company.

Requires at least three separate companies to combine resources.

Exists when two or more companies agree to cooperate in any value-chain activity.

The above statements are all true for equity international joint ventures.

AACSB Reflective thinking, Strategy

PTS: 1

39. Which of the following refers to the negative impact of political decisions or events on a multinational’s profitability?

Economic risk

Local government risk

Political risk

Control risk

AACSB Reflective thinking, Strategy

PTS: 1

40. Which of the following is NOT a factor considered when assessing political risk?

The durability of the political system

The role of the government, unions and the media in political stability

The profitability

The reliability of the rule of law

AACSB Reflective thinking, Strategy

PTS: 1

ESSAY

1. Describe the global-local dilemma. When is each solution most appropriate?

2. What are globalization drivers?

3. Discuss the conditions when a transnational or international firm is likely to outcompete a multidomestic or regional strategist. Contrast this with the opposite situation where the multidomestic is most likely to be successful.

4. Contrast the transnational and international strategies in their approach to location advantages.

5. You work for a small company that has an innovative low-cost production method for laser disks. A Japanese firm approaches your CEO to license the technology. The CEO asks you to write a report detailing the risks and potential benefits of this deal. What will you include in the report and why?

6. You work for a small company that has an innovative low-cost production method for laser disks that allow it to produce at very low cost. A Belgian firm approaches your CEO and offers to export your disks to Belgium for a commission. The CEO asks you to write a report detailing the risks and potential benefits of this deal. What will you include in your report and why

7. Under what conditions would a regional strategy be best for a multinational? Explain.

8. Discuss some key issues to consider when choosing an entry-mode strategy.

9. Discuss some general strategic considerations regarding multinational strategy when choosing a entry-mode strategy.

10. What is political risk? Discuss some of the aspects of political risk assessment. How can multinationals use political risk assessment?

Chapter 7 Small Businesses and International Entrepreneurship:

Overcoming Barriers and Finding Opportunities

MULTIPLE CHOICE

1. Small businesses differ from large businesses when going international primarily in

The available participation strategies.

The strategies they can use to go international.

Their founder's or entrepreneur's influence.

The available multinational strategies.

AACSB Reflective thinking, Creation of value

PTS: 1

2. Definitions of small businesses discussed in the text include the following EXCEPT

Number of employees.

Sales revenue.

Industry.

Type of product or service.

AACSB Reflective thinking, Creation of value

PTS: 1

3. An entrepreneur

Creates new ventures that seek profit and growth.

Is seldom the primary force behind a company's decision to go international.

Can accurately predict the risks and uncertainties of his/her ventures.

Faces less uncertainty than a multinational.

AACSB Reflective thinking, Creation of value

PTS: 1

4. When a company sets up a sales branch in a foreign country, it is at what stage of the internationalization of the small entrepreneurial business?

Stage 1

Stage 2

Stage 3

Stage 4

AACSB Reflective thinking, Creation of value

PTS: 1

5. During the second stage (Export Management) of the small business model of internationalization, the company

Fills international orders only.

Specifically seeks export sales.

Seeks increased sales from licensing.

Sets up a local sales office in another country.

AACSB Reflective thinking, Creation of value

PTS: 1

6. A global start-up is

A company that goes global from day one of its life.

A company that starts a global strategy after exporting.

A company that skips the first stage of the Small Business Model of Internationalization.

None of the above

AACSB Reflective thinking, Creation of value

PTS: 1

7. One of the major advantages of being involved in Stage 5 (Production Abroad) of the stages of internationalization for small businesses is that it

Allows the company to cut the costs of direct investment.

Allows the company to avoid developing a globally integrated network.

Allows the company to gain local advantages such as product adaptation or production effectiveness.

Almost insures that the company will survive and prosper.

AACSB Reflective thinking, Creation of value

PTS: 1

8. Global start-ups occur when

Companies have consistent licensing agreements.

Companies start exporting as soon as they receive their first order.

Companies begin as multinationals.

Companies move rapidly through the stages of internationalization.

AACSB Reflective thinking, Creation of value

PTS: 1

9. Which of the following has helped to level the playing field for small businesses wanting to go international?

Technology and e-commerce

Sources of venture capital

Having a headquarters located near a major customer

The existence of trade shows

AACSB Reflective thinking, Creation of value

PTS: 1

10. The liabilities of size for small businesses imply that

Small businesses can grow as a result of going international.

Being small often means it may be more difficult to obtain necessary resources.

Small size creates only limited liability.

Small and new businesses can only succeed by exporting.

AACSB Reflective thinking, Creation of value

PTS: 1

11. Small business barriers to internationalization include all of the following EXCEPT

Small size means limited financial and personnel resources for international operations.

Top managers with limited international experience.

Positive attitudes of top managers about becoming multinationals.

Lack of sufficient scale to produce goods or services as efficiently as large companies.

AACSB Reflective thinking, Creation of value

PTS: 1

12. Although large businesses have more resources, small businesses have the advantage of:

size.

time.

speed.

a global culture.

AACSB Reflective thinking, Creation of value

PTS: 1

13. A small business global culture occurs when

Small businesses face global competition.

Key decision makers view competition as more domestic than global.

Organizations have managerial and worker values that view strategic opportunities as global and not just domestic.

Managers give priority to the relevance of national boundaries when conducting international business.

AACSB Reflective thinking, Creation of value

PTS: 1

14. The development of a global culture is affected by all of the following characteristics of the key decision makers EXCEPT

Ability to perform well at the domestic level.

International experience.

Perceived psychological distance to foreign markets.

Overall attitudes toward international strategies.

AACSB Reflective thinking, Creation of value

PTS: 1

15. All of the following are true about small business CEOs EXCEPT

Opening new markets is often the personal responsibility of the CEO.

They want to take a break from the daily management of their businesses by going overseas.

New international ventures may threaten their family life.

Their attitudes towards internationalization is a major factor in international success.

AACSB Reflective thinking, Creation of value

PTS: 1

16. Small businesses can potentially have more advantages than larger businesses in the global economy because

Small companies can change quickly to take advantage of opportunities in new markets.

Larger companies have more slack resources to absorb risk.

Small companies require a lot of travel from their CEOs.

Small companies have more access to resources.

AACSB Reflective thinking, Creation of value

PTS: 1

17. The small business advantage refers to

The energy and creativity entrepreneurs can put in their multinational operations.

The ease by which small companies can become global start-ups.

The speed by which entrepreneurs can react to changing conditions and capture significant sales before larger companies can react.

The number of venture capitalists willing to invest in successful small businesses.

AACSB Reflective thinking, Creation of value

PTS: 1

18. It is now easier to overcome the barriers to small business internationalization because of all of the following reasons EXCEPT

There are more government programs that support small business exporting and sales.

Trade agreements (such as NAFTA) are making international trade less complex.

Larger organizations are increasingly more willing to share their global expertise with smaller ones.

There is a wealth of information regarding international opportunities such as those available on the World Wide Web.

AACSB Reflective thinking, Creation of value

PTS: 1

19. Which of the following is not one of the questions to consider when a small business decides to go international?

Do we have a global product or service?

Do we have partners with which to go international?

Do we have the managerial, organizational, and financial resources to go international?

Is there a profitable market for our products or service?

AACSB Reflective thinking, Creation of value

PTS: 1

20. A strategic competitive advantage for breaking into the established pattern of commercial activity is a/an

Low cost strategy.

Differentiation Strategy.

Entry wedge.

Participation strategy.

AACSB Reflective thinking, Creation of value

PTS: 1

21. According to the text, which of the following participation strategies do small businesses emphasize?

Importing

Licensing

Foreign direct investment

Exporting

AACSB Reflective thinking, Creation of value

PTS: 1

22. The more common techniques of making international contacts used by small businesses include all of the following EXCEPT

Trade shows.

Seeking advice from foreign companies.

Government sponsored trade missions.

Catalogue expositions.

AACSB Reflective thinking, Creation of value

PTS: 1

23. An entry wedge is

A strategic competitive advantage for breaking into the established pattern of commercial activity.

A competitive opening in an industry.

A strategy used by only new companies.

None of the above

AACSB Reflective thinking, Creation of value

PTS: 1

24. First mover advantages occur when

A company can begin business as a global start-up.

A company adopts global strategies faster than competitors.

Company moves quickly into a new venture and establishes the business before other firms can react.

A company changes production technology.

AACSB Reflective thinking, Creation of value

PTS: 1

25. Technological leadership, as a source of first mover advantage refers to

A company beginning business as a global start-up.

A company that adopts global strategies faster than competitors.

A company that moves quickly into a new venture.

A company that is the first to use a new technology.

AACSB Reflective thinking, Creation of value

PTS: 1

26. First mover advantage includes all of the following EXCEPT

Technological leadership.

First access to natural and other resources.

Better ability to forecast market conditions.

Switching costs.

AACSB Reflective thinking, Creation of value

PTS: 1

27. Copycat businesses

Follow the “me too” strategy.

Adapt existing products or services to attract customers.

Find a niche or slight innovation to gain market share from existing businesses.

All of the above

AACSB Reflective thinking, Creation of value

PTS: 1

28. Successful strategies for copy cats include all of the following EXCEPT

Being the first to change to a new standard.

Transferring the location.

Seeking abandoned or ignored market.

Selling products at a global level.

AACSB Reflective thinking, Creation of value

PTS: 1

29. Future Tech International sells high tech products in Latin America, a market traditionally ignored by many high tech companies. What successful copycat strategy does this move represent?

Acquiring existing businesses

Becoming a dedicated distributor

Seeking abandoned or ignored markets

Being the first to change to a new standard

AACSB Reflective thinking, Creation of value

PTS: 1

30. Switching costs are

Expenses involved when a customer switches to a competitor's product.

Forms of copycat strategies.

The costs incurred by a company when adopting a global standard.

None of the above

AACSB Reflective thinking, Creation of value

PTS: 1

31. The United Nations and Organization for Economic Cooperation and Development

Defines a small business as those having less than 500 employees.

Defines a small business as those with less than 100 employees.

Defines a small business based on industry and sales revenue.

All of the above

AACSB Reflective thinking, Creation of value

PTS: 1

32. When a small business uses significant resources to seek increased sales from exporting, it is what stage of internationalization?

Stage 1 - Passive exporting

Stage 2 - Export management

Stage 3 - Export department

Stage 4 - Sales branch

AACSB Reflective thinking, Creation of value

PTS: 1

33. International sales intensity represents

A significant size barrier to internationalization.

The amount of international sales as a proportion of total sales.

The amount of local sales as a proportion of international sales.

Is more relevant for larger businesses.

AACSB Reflective thinking, Creation of value

PTS: 1

34. All of the following are first mover advantages EXCEPT

First mover advantages gives the company first access to natural resources.

First mover advantages gives the company first access to social resources.

First mover advantages reduce switching costs.

All of the above are first mover advantages.

AACSB Reflective thinking, Creation of value

PTS: 1

35. The discovery, evaluation and exploitation of market opportunities refers to which of the following?

Entrepreneurship

International entrepreneurship

Small business

International opportunities

AACSB Reflective thinking, Creation of value

PTS: 1

36. Which of the following statements about small businesses in the US is FALSE?

Small businesses represent about 99.7% of all employing firms.

Small businesses generate about 15% of all new jobs annually.

Small businesses employ almost 41% of all high tech workers.

Small businesses represent almost 97% of identified exporters.

AACSB Reflective thinking, Creation of value

PTS: 1

37. When demand for a small business is so high in a foreign country that it justifies setting up a local branch, which of the following stages of internationalization is the small business at?

Export management

Passive exporting

Production abroad

None of the above

AACSB Reflective thinking, Creation of value

PTS: 1

38. A multinational manager is studying the data on total entrepreneurial activity ratings by country. She is most likely doing this in order to

Assess the level of entrepreneurship in a country.

Understand available industries.

Assess small business failure.

Understand opportunities for new ventures.

AACSB Analytic, Creation of value

PTS: 1

39. Many multinationals rely on the support and assistance provided by which of the following when entering a new country?

Customers

Entrepreneurs and small businesses

World Bank

Trade Shows

AACSB Reflective thinking, Creation of value

PTS: 1

40. Which of the following is NOT a common customer contact technique used by small firms to get find customers?

Trade shows

Industry advisory boards

Government sponsored trade missions

Catalog expositions

AACSB Reflective thinking, Creation of value

PTS: 1

ESSAY

1. Why are small businesses important for most economies?

2. What are the advantages of a small business going international through incremental stages rather than as a global start-up?

3. Describe the Small Business Stage Model.

4. Discuss some of the advantages that the Internet can offer small businesses when going international.

5. Identify two or three small business barriers to internationalization. If you were a recently hired manager of a small business facing great opportunities in a foreign market, how would you go about overcoming these barriers.

6. Imagine a small business manager asks you, a recent business college graduate, to help her decide whether she should enter the export market. What questions would you ask her and why?

7. How do small businesses and entrepreneurs affect national economic growth and development? Explain why multinationals consider entrepreneurship levels in the country when making their location choices.

8. Discuss ways that a small business manager can make the contacts necessary to implement an exporting strategy.

9. Consider three of the suggested strategic moves for copycat businesses. Which of these strategies might be most successful when expanding into the international market as opposed to the domestic market?

10. What is the first mover advantage? What are the most common sources of first mover advantages? How can a small business benefit from first mover advantage?

Chapter 8 Organizational Design for Multinational Companies

MULTIPLE CHOICE

1. The manner in which organizations structure subunits and use coordination and control mechanisms to achieve their strategic goals is the

Organizational structure.

Organizational culture.

Degree of formalization.

Organizational design.

AACSB Reflective thinking, Strategy

PTS: 1

2. The functional structure is considered most efficient when

An organization gets too large.

When customers need special functions.

When the organization is in the mature phase of the life cycle.

When organizations have few products.

AACSB Reflective thinking, Strategy

PTS: 1

3. All of the following statements are true about the functional structure EXCEPT

In the functional structure, departments perform separate business functions such as marketing or manufacturing.

The functional structure is the simplest of organizations.

In small organizations, the functional structure is the least efficient of all structures.

Because functional subunits are separated from each other, coordination among the units can be difficult.

AACSB Reflective thinking, Strategy

PTS: 1

4. One of the major reasons why companies choose a functional structure is because

It allows adapting products to country tastes.

It enables responding to the needs of different types of customers.

It helps balance the strategy with the organization design.

It helps achieve efficiency.

AACSB Reflective thinking, Strategy

PTS: 1

5. All of the following statements are true about product structures EXCEPT

The product structure is the most efficient of all structures.

Product organizations must still perform some functional tasks of a business.

The structure builds a department or subunit around a product .

Managers choose product structures when they believe that a product or a group of products is sufficiently unique to require focused efforts on one type of product or service.

AACSB Reflective thinking, Strategy

PTS: 1

6. The least efficient of the following structural options is

Product structure.

Functional structure.

Vertical structure.

Graphic structure.

AACSB Reflective thinking, Strategy

PTS: 1

7. Organizations that are designed with mixtures of structures that are the best to implement their strategies are

Product structures.

Geographic structures.

Hybrid structures.

Functional structures.

AACSB Reflective thinking, Strategy

PTS: 1

8. When exports become a significant percentage of company sales and a company wishes greater control over its export operations, managers often create a separate

Export department.

Functional department.

Product department.

Liaison office.

AACSB Reflective thinking, Strategy

PTS: 1

9. The structure adopted by companies in the early stage of internationalization is usually

Replica.

Network.

Export department.

Transnational subsidiary.

AACSB Reflective thinking, Strategy

PTS: 1

10. The type of subsidiary that supports a multinational firm strategy based on location advantages is a/an

Export department.

Minireplica subsidiary.

Transnational subsidiary.

International division.

AACSB Reflective thinking, Strategy

PTS: 1

11. The minireplica subsidiary

Copies the structure and strategy of companies located in the same country.

Mostly copies the structure and strategy of the parent company.

Replicates only minor parts of the parent’s production technology.

Copies the structure of small foreign firms.

AACSB Reflective thinking, Strategy

PTS: 1

12. Transnational subsidiaries

Look pretty much like a domestic division of the parent company.

Often have different structures and functions in each location.

Exist near the border to facilitate exporting.

Serve mostly to coordinate international currency exchange.

AACSB Reflective thinking, Strategy

PTS: 1

13. The international division differs from the export department in that

The international division is usually larger and has greater responsibilities.

The international division has more extensive staff with international expertise.

Top management expects the staff of the international division to perform functions such as negotiating licensing and joint venture agreements, translating promotional material, or providing expertise on different national cultures and social institutions.

All of the above are true.

AACSB Reflective thinking, Strategy

PTS: 1

14. Which of the following are considered to be the structural building blocks for running a multinational?

International division

Metanational

Mini replica

Foreign subsidiaries

AACSB Reflective thinking, Strategy

PTS: 1

15. Adopting strategies that include both concerns for local adaptation needs and concern for the economic and product development benefits of globalization is possible with the

Worldwide product structure.

Worldwide geographic structure.

Hybrid structure.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

16. The worldwide geographic structure is usually considered best to implement a _____ strategy.

Multidomestic or regional

Transnational

International

Indirect exporting

AACSB Reflective thinking, Strategy

PTS: 1

17. The worldwide product structure is usually considered best to implement a/an _____ strategy.

Multidomestic or regional

Transnational

International

Indirect exporting

AACSB Reflective thinking, Strategy

PTS: 1

18. The most balanced structural solution to the national responsiveness versus global efficiency dilemma is

The transnational network structure.

The worldwide product structure.

Worldwide geographic structure.

The matrix structure.

AACSB Reflective thinking, Strategy

PTS: 1

19. All of the following statements are true about the worldwide matrix structure EXCEPT

To balance the benefits produced by geographic and product structures and to coordinate a mixture of product and geographic subunits, some multinationals create a worldwide matrix structure.

Unlike most hybrid organizations, the worldwide matrix structure is a symmetrical organization.

It has unequal lines of authority for product groups and for geographic divisions.

The matrix structure works well only when there are near equal demands from the environment for local adaptation and for product standardization with its associated economies of scale.

AACSB Reflective thinking, Strategy

PTS: 1

20. Which of the following structures best support strategies that emphasize global products and rationalization?

The functional structure

The matrix structure

The geographic structure

The product structure

AACSB Reflective thinking, Strategy

PTS: 1

21. A __________ helps link the organization horizontally.

Control system

Coordination system

Cultural system

Centralized operations

AACSB Reflective thinking, Strategy

PTS: 1

22. The type of vertical control mechanism most often associated with a profit center is

Bureaucratic.

Output.

Cultural.

Decision making.

AACSB Reflective thinking, Strategy

PTS: 1

23. The type of control system favored by the transnational is

Bureaucratic.

Output.

Cultural.

Decision making.

AACSB Reflective thinking, Strategy

PTS: 1

24. _________ mean/means that management locates subsidiaries anywhere in the world where they can benefit the company.

Dispersed subunits

Specialized operations

Interdependent relationships

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

25. __________help link the organization vertically, up and down the organizational hierarchy.

Coordination systems

Dispersed subunits

Control systems

Subunits

AACSB Reflective thinking, Strategy

PTS: 1

26. Output control systems

Focus on managing behaviors, not outcomes, within the organization.

Represent the level in the organizational hierarchy where managers have the authority to make decisions.

Assess the performance of a unit based on results, not on the processes used to achieve those results.

Use the organizational culture to control the output and attitudes of employees.

AACSB Reflective thinking, Strategy

PTS: 1

27. Which of the following types of control system uses budgets, statistical reports, standard operating procedures, and centralized decision making to manage organizational processes?

Profit center

Bureaucratic control system

Decision-making control

Cultural control system

AACSB Reflective thinking, Strategy

PTS: 1

28. A permanent unit of the organization designed to focus the efforts of different subunits on particular problems is a

Task force.

Full-time integrator.

Liaison.

Team.

AACSB Reflective thinking, Strategy

PTS: 1

29. Temporary groups created to solve a particular organizational problem such as entering a new market are

Teams.

Liaisons.

Taskforces.

Full time integrators.

AACSB Reflective thinking, Strategy

PTS: 1

30. Which of the following is NOT true regarding the use of control options by most multinationals?

Most multinationals use several types of coordination mechanisms.

Multinationals with export departments have very high need for coordination.

Matrix and transnational structures have very high needs for coordination.

For transnational networks, teams are increasingly virtual with members seldom meeting face-to-face.

AACSB Reflective thinking, Strategy

PTS: 1

31. All of the following are TRUE about product structures EXCEPT

Product structure organizations must still perform functional tasks of a business.

In product structures, functional areas are concentrated in separate subunits.

Product structures are required when products or service are sufficiently unique to require different functional support.

All of the above are true.

AACSB Reflective thinking, Strategy

PTS: 1

32. Subunits of a multinational company located in other countries than the parent company's headquarters is known as

Functional divisions.

Foreign functional divisions.

Foreign subsidiaries.

International minireplica.

AACSB Reflective thinking, Strategy

PTS: 1

33. The basic issue (s) that need to be considered for organizational design are

Division of work.

Coordination.

Control.

All of the above

AACSB Reflective thinking, Strategy

PTS: 1

34. A large, entrepreneurial multinational that is able to tap into hidden pockets of innovation, technology, and market know-how scattered around the world, especially in emerging markets is known as

A transnational.

A minireplica subsidiary.

A metanational.

A foreign subsidiary.

AACSB Reflective thinking, Strategy

PTS: 1

35. Which of the following control systems uses the organizational culture to control behaviors and attitudes of employees?

Cultural control systems

Decision-making control systems

Bureaucratic control systems

Output control systems

AACSB Reflective thinking, Strategy

PTS: 1

36. Which of the following is NOT one of the questions asked when designing an organization?

How should work be divided among the organization’s subunits?

How should the work be coordinated among the various subunits?

How should the work of the various subunits be controlled?

How many subunits should the multinational have?

AACSB Reflective thinking, Strategy

PTS: 1

37. Which of the following control systems focuses on managing behaviors of employees rather than outcomes?

Bureaucratic control systems

Budgets and standard operating procedures

Cultural control systems

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

38. Which of the following represents the strongest coordination mechanism?

Task forces

Teams

Liaison roles

Direct contact

AACSB Reflective thinking, Strategy

PTS: 1

39. Knowledge that usually resides within employees and is dependent on the organization’s culture and context is

Explicit knowledge.

Knowledge management.

Tacit knowledge.

None of the above

AACSB Reflective thinking, Strategy

PTS: 1

40. Which of the following statements regarding explicit knowledge is FALSE?

Explicit knowledge can be easily codified.

Explicit knowledge can be found in records and other information repositories.

Explicit knowledge can be easily transferred from employee to employee.

Explicit knowledge usually resides within employees and is dependent on the organization’s context and culture.

AACSB Reflective thinking, Strategy

PTS: 1

ESSAY

1. Discuss some of the advantages of a functional structure over the product or geographic structure. When is it necessary to adopt a geographic or product structure?

2. What are some advantages of a worldwide product structure over a worldwide geographic structure? What type of company would most likely choose each type?

3. What are hybrid structures? What are the costs and benefits of having a hybrid structure?

4. Describe the use of export management as a design structure to go international. When does it become necessary to use an international division? What are some of the problems associated with international divisions?

5. What is a minireplica subsidiary? How is a minireplica subsidiary different from a transnational subsidiary?

6. Compare and contrast bureaucratic control with output control.

7. What is cultural control? Why is it the favored control mechanism for transnational-network structures?

8. Describe some functions of coordination mechanisms. Pick two coordination systems and describe how they work.

9. What are control systems? Pick two control systems and describe how they work.

10. What is the transnational-network structure? Discuss some costs and benefits of having a transnational network structure. Under what situation would a transnational-network be appropriate?

11. What is knowledge management? Distinguish between the types of knowledge.

Chapter 9 International Strategic Alliances: Management and Design

MULTIPLE CHOICE

1. There are several issues to consider in picking a partner for a strategic alliance. One of these is

Go for the biggest partner possible because they have the most assets.

Seek strategic complementarity.

Make sure your partner will be dependent on you and not vice versa.

All of the above

AACSB Reflective thinking, Group dynamics

PTS: 1

2. According to the text, all of the following are true about strategic alliances EXCEPT

They are inherently unstable and provide significant management challenges.

Estimates of failure rates range from 30 to 60 percent.

They are among the most popular choice to go international.

They are used mostly as a means to share technology.

AACSB Reflective thinking, Group dynamics

PTS: 1

3. The most important decision in setting up a strategic alliance is usually about

Working out the proportions of ownership.

Decision on the proper management structure.

Developing a detailed contract.

Selecting the right partner.

AACSB Reflective thinking, Group dynamics

PTS: 1

4. In operations alliances, multinational companies

Use research and development to merge different technical skills.

Share the risk of developing new or costly technology.

Gain access to new markets.

Combine manufacturing to reach a profitable volume of activity.

AACSB Reflective thinking, Group dynamics

PTS: 1

5. The anchor partner in a strategic alliance refers to

A partner that is very stable and anchors the relationship.

The strongest partner in the relationship.

The partner who initiates the relationship.

A partner that fails to deliver their share of funding.

AACSB Reflective thinking, Group dynamics

PTS: 1

6. The best level of dependency recommended for a strategic alliance is

Balanced.

Home country dominated.

Host country dominated.

It does not matter if there are more than two companies.

AACSB Reflective thinking, Group dynamics

PTS: 1

7. The elephant-and-the-ant complex refers to

Difficulties that come with two different size organizations in a strategic alliance.

Problems that arise when one side feels inferior to the other.

Strategic alliances between developed and developing countries.

An unbalanced management structure.

AACSB Reflective thinking, Group dynamics

PTS: 1

8. An agreement not legally binding between companies to cooperate on any value-chain activity is a (an)

Formal international cooperative alliance.

International joint venture.

Informal international joint venture.

International cooperative alliance.

AACSB Reflective thinking, Group dynamics

PTS: 1

9. When a large number of companies form a joint venture, the international joint venture is a

Multi-partner joint venture.

Consortium.

Informal cooperative alliance.

Equity joint venture.

AACSB Reflective thinking, Group dynamics

PTS: 1

10. All of the following are typically part of a negotiated joint venture agreement EXCEPT

Management loyalty.

Equity contributions.

Provisions for dissolving the IJV.

Contracts for the IJV.

AACSB Reflective thinking, Group dynamics

PTS: 1

11. In the split control management structure

Companies share all decision making.

Managers of the strategic alliance split from and act independently from their parent companies.

Partners divide decision making control by functional areas.

Each company takes a turn providing the operational managers.

AACSB Reflective thinking, Group dynamics

PTS: 1

12. In the independent control management structure

Strategic alliance managers have nearly complete autonomy for operational decisions.

Partners act independently of each other except when necessary.

Partners focus only on their special areas of expertise.

None of the above

AACSB Reflective thinking, Group dynamics

PTS: 1

13. When partners share strategic decision making but make decisions independently at the functional level (e.g., marketing, production), they are using which of the following management structures?

Dominant partner

Independent management structure

Rotating management

Split-control management structure

AACSB Reflective thinking, Group dynamics

PTS: 1

14. If partners have similar technologies or know-how and they contribute this knowledge equally to the alliance, they prefer

A shared management structure.

A split management structure.

A dominant management structure.

A rotating management structure.

AACSB Reflective thinking, Group dynamics

PTS: 1

15. Strategic alliance partners prefer a dominant management structure

If partners have similar technologies or know-how and they contribute this knowledge equally to the alliance.

If partners have different technologies or know-how and they contribute this knowledge equally to the alliance.

If partners have different technologies or know-how and they contribute this knowledge differently to the alliance.

If the alliance has more strategic importance to one partner.

AACSB Reflective thinking, Group dynamics

PTS: 1

16. Which management structure is popular in developing countries?

Dominant

Shared

Split

Rotating

AACSB Reflective thinking, Group dynamics

PTS: 1

17. As their management team gains more expertise, mature joint ventures move to what type of structure?

Independent

Interdependent

Local partner dominance

Shared

AACSB Reflective thinking, Group dynamics

PTS: 1

18. Equity in a strategic alliance implies

Labor skills.

Ownership.

Domination.

None of the above

AACSB Analytic, Group dynamics

PTS: 1

19. Suggested ways to build and sustain commitment in strategic alliances include

Go slowly.

Be the dominant partner.

Keep your goals secret so your partner does not get nervous about your intentions.

Use extensive written documentation.

AACSB Reflective thinking, Group dynamics

PTS: 1

20. When applied to a strategic alliance relationship, the concept of trust includes

Confidence that the partner will deliver.

Confidence that the partner will behave with good will.

Confidence that the partner will engage in fair exchange.

All of the above

AACSB Reflective thinking, Group dynamics

PTS: 1

21. The confidence that the partner will behave with goodwill and trust is

Commitment.

Credibility trust.

Benevolent trust.

Calculative commitment.

AACSB Reflective thinking, Group dynamics

PTS: 1

22. Trust in strategic alliance relationships

Usually builds in cycles.

Either exists at the beginning of the relationship or will never be there.

Can really only evolve with partners from similar cultures.

Can never exist in high technology relationships since the risk of losing the technology is too great.

AACSB Reflective thinking, Group dynamics

PTS: 1

23. In strategic alliance relationships, high levels of trust often

Retard organizational functioning due to excessive emotional reactions.

Cause excessive loyalty to the strategic alliance.

Are irrelevant if the strategic alliance is projected to have a high financial return.

Facilitate the exchange of tacit knowledge.

AACSB Reflective thinking, Group dynamics

PTS: 1

24. The best method of assessing strategic alliance performance is

Total sales revenue.

ROI.

ROA.

There is no one best method.

AACSB Reflective thinking, Group dynamics

PTS: 1

25. Indirect strategic benefits for entering a strategic alliance include

Immediate improved performance on profit ratios.

Learning a new market.

Developing management loyalty.

None of the above

AACSB Reflective thinking, Group dynamics

PTS: 1

26. __________ means that companies rely on each other to contribute to the relationship.

Shared management

Balanced management

The norm of reciprocity

Mutual dependency

AACSB Reflective thinking, Group dynamics

PTS: 1

27. Contracts for strategic alliances may include _____________ if the relationship dissolves before the negotiated time.

Penalties for early termination of the contract by each side

Restrictions on future business growth

A promise to try future joint ventures

All of the above

AACSB Reflective thinking, Group dynamics

PTS: 1

28. In dealing with cross-cultural communication in a strategic alliance, managers should expect

Communication difficulties to disappear when operational managers are fluent in each other's language.

Slower communication and more errors.

No communication problems if all managers were educated in the US.

No communication difficulties if all parties agree on a common language of the strategic alliance.

AACSB Analytic, Group dynamics

PTS: 1

29. Understanding a new market and developing a new technology may be used as performance criteria for which of the following?

Organizational learning

Management processes

Competitive advantage

Commitment

AACSB Reflective thinking, Group dynamics

PTS: 1

30. Strategic complementarity in a strategic alliance means that

Both sides must have similar strategic objectives for the strategic alliance to succeed.

Objectives can be different if they are not in conflict.

Cultural differences must be dealt with first.

Parent companies must leave the strategic alliance management to develop their own strategic goals.

AACSB Reflective thinking, Group dynamics

PTS: 1

31. Which of the following type of strategic alliances allows the multinational to combine manufacturing or assembly activities to achieve a profitable volume of activity?

Operations alliances

Output alliances

Upstream-downstream alliances

Marketing alliances

AACSB Reflective thinking, Group dynamics

PTS: 1

32. All of the following are true about international joint venture (IJV) EXCEPT

An IJV is a separate legal entity owned by parent companies from different countries.

IJVs can have more than two partners.

IJVs require that companies have equal ownership to form the venture.

IJVs require legal contracts that bind partners.

AACSB Reflective thinking, Group dynamics

PTS: 1

33. If strategic alliance partners have different technologies or know-how and they contribute this knowledge equally, they often prefer

Shared management structure.

Dominant management structure.

Split management structure.

Rotating management structure.

AACSB Reflective thinking, Group dynamics

PTS: 1

34. The psychological identification with a relationship in a strategic alliance and the pride of association with the partner and the alliance is known as

Calculative commitment.

Credibility trust.

Benevolent trust.

Attitudinal commitment.

AACSB Reflective thinking, Group dynamics

PTS: 1

35. The confidence that a strategic alliance partner has the intent and ability to meet their obligations and make their promised contribution to a strategic alliance is known as

Credibility trust.

Benevolent trust.

Calculative trust.

Attitudinal trust.

AACSB Reflective thinking, Group dynamics

PTS: 1

36. According to the text, which of the following is NOT a key criterion used in picking an alliance partner?

Pick a partner who provides strategic complementarity.

Pick a partner who provides financial security.

Pick a partner who has complementary skills.

Pick a partner who provides the right level of mutual dependency.

AACSB Reflective thinking, Group dynamics

PTS: 1

37. According to the text, which of the following DOES NOT represent a form of strategic alliance?

Informal cooperative alliances

Formal cooperative alliances

International joint ventures

Informal partnerships

AACSB Reflective thinking, Group dynamics

PTS: 1

38. Which of the following statements regarding international joint ventures is FALSE?

International joint ventures usually have two or more partners.

International joint ventures are usually not legally binding.

International joint ventures with a large number of partners are known as consortiums.

Companies do not need equal ownership to form an international joint venture.

AACSB Reflective thinking, Group dynamics

PTS: 1

39. The confidence that a partner has the intent and ability to meet its obligations and make its promised contribution to the strategic alliance is known as

Calculative trust.

Calculative commitment.

Credibility trust.

Benevolent trust.

AACSB Reflective thinking, Group dynamics

PTS: 1

40. Which of the following describes the situation where companies stay in a strategic alliance despite strong evidence that the alliance won’t work?

Calculative commitment

Credibility commitment

Attitudinal commitment

Escalation of commitment

AACSB Reflective thinking, Group dynamics

PTS: 1

ESSAY

1. What are the characteristics of a good partner in a strategic alliance? Why do these partner traits help make a strategic alliance successful?

2. What are some of the common value chain links companies use to gain strategic benefits from alliances? Pick two of these links and describe some of the benefits partners gain from pursuing these links.

3. Under what conditions should a firm choose one of the various management structures available for a strategic alliance?

4. What are the different kinds of commitment needed in a strategic alliance? Explain.

5. What are some of the difficulties of assessing IJV or ICA performance? How do these differ for companies with different strategic goals?

6. What are the different management structures possible for strategic alliances? Pick two of these management structures and discuss when they are most appropriate.

7. Compare and contrast the three main types of strategic alliances.

8. Discuss some of the things multinational managers can do to build and sustain trust and commitment.

9. If an alliance fails to meet strategic goals, what two options do top managers have to choose from to resolve the situation? How can an alliance be improved?

Chapter 10 Multinational e-Commerce: Strategies and Structures

MULTIPLE CHOICE

1. Ebay is a prime example of which form of e-commerce?

Business to business transactions (B2B)

Business to consumer transactions (B2C)

Consumer to business transactions (C2B)

Consumer to consumer transactions (C2C)

AACSB Technology, Information technologies

PTS: 1

2. An Internet host that allows users to send encrypted data so that those outside the connection cannot see the information is a

A secure server.

An internet host.

A computer that has its own Internet Protocol address.

A computer that has its own World Wide Web address.

AACSB Technology, Information technologies

PTS: 1

3. Secure servers and internet hosts are two indicators of the

Internet infrastructure.

Web influence.

global presence of e-commerce.

Internet security.

AACSB Technology, Information technologies

PTS: 1

4. Traditional internet metrics do not quantify the use of new internet devices and features, including:

Smart phones.

Cloud-computing.

Social networking.

All of the above.

AACSB Technology, Information technologies

PTS: 1

5. Companies such as manufacturers that sell directly to consumers (Dell), and companies that provide online shipping services (FedEx, UPS) are all examples of which of the following?

Web customers

B2B

C2B

B2C

AACSB Technology, Information technologies

PTS: 1

6. Which of the following is NOT one of the necessary steps to ensure a successful E-Commerce strategy?

Building on current business models and experimenting with new e-commerce models

Allocating resources to the e-commerce business

Making sure that the entire firm is prepared to embrace the e-commerce model

Training all upper level management in computer programming

AACSB Technology, Information technologies

PTS: 1

7. The brick and mortar part of the company refers to

The degree of interaction between traditional business operations and the company's e-commerce system.

The company's traditional business operations.

The company's management information systems.

The extent of computer use in the company.

AACSB Technology, Information technologies

PTS: 1

8. Independent operations between the brick and mortar part of a company and its e-commerce system offer which of the following benefits?

The independent operation can move faster and be more entrepreneurial when freed from corporate bureaucracy and it can seek funding from deep pockets of venture capitalists.

The independent operation can benefit from cross-promotion of shared products, shared customer information, increased large-quantity purchase leverage, and economies of scale by using the same distribution channels.

The brick and mortar part of the company can transfer learning to the e-commerce system of the company.

Independent operations can facilitate synergy between the brick and mortar part and the e-commerce system.

AACSB Technology, Information technologies

PTS: 1

9. According to the text, which of the following is NOT one of the management challenges companies will face as they develop their e-commerce businesses?

Attracting, retaining, and developing employees in the e-commerce unit

Deciding which e-commerce functions to outsource

Finding funds to develop the e-commerce business

Finding ways to provide individuals with growth opportunities and job fulfillment to encourage employee retention in the e-commerce business

AACSB Technology, Information technologies

PTS: 1

10. Which of the following strategies is a pure e-business least likely to be concerned with when facing e-commerce challenges?

Developing information and management systems to respond to rapid growth

Attracting and retaining e-commerce-capable talent

Altering HR programs to suit the different skill requirements of e-commerce employees

Maintaining rapid decision making, creativity, innovation, and flexibility

AACSB Technology, Information technologies

PTS: 1

11. Which of the following statements regarding globalizing through the Internet is not true?

A company that globalizes through the Internet does not have to be concerned with the global-local dilemma.

A company that globalizes through the Internet still faces the same challenges that a brick and mortar company faces.

A company that globalizes through the internet must still address the traditional problems of multinational business (i.e., currencies, local laws, infrastructure for delivery).

A company that globalizes through the Internet must still decide whether to go global or to require localization to national or regional levels.

AACSB Technology, Information technologies

PTS: 1

12. According to the text, which of the following areas is not one of the areas that e-commerce companies work in?

Moving bits or computerized information

Moving money in payment flows

Providing Internet services

Moving physical products

AACSB Technology, Information technologies

PTS: 1

13. Which of the following businesses poses the highest degree of difficulty in e-commerce?

Portals and infomediaries

Businesses such as Travelocity, and those that sell digital music, and software

Businesses that rely on a physical infrastructure

Brick and mortar companies

AACSB Technology, Information technologies

PTS: 1

14. According to the text, the degree of difficulty in conducting global e-commerce businesses is primarily dependent on

The financial requirements.

The availability of management talent.

The infrastructure requirements.

The telecommunications infrastructure requirements.

AACSB Technology, Information technologies

PTS: 1

15. Which of the following types of companies are more likely to face challenges when they decide to enter the international market through the Internet?

Large multinational firms that already have an existing global presence.

Large multinationals firms that already have existing international operations.

Smaller firms and firms new to international commerce.

Small firms that already have an existing global presence.

AACSB Technology, Information technologies

PTS: 1

16. The major opportunities of e-commerce globalization include all of the following EXCEPT

Cost reduction.

Efficiencies.

Speed of access and convenience.

Access to new sources of financing.

AACSB Technology, Information technologies

PTS: 1

17. Which of the following is NOT one of the major threats to e-commerce globalization?

Cost of site construction, maintenance and upgrades

Cost of training in top managers in computer programming

Easily copied e-commerce models

Traditional cross-border transaction and other cross-cultural complexities

AACSB Technology, Information technologies

PTS: 1

18. According to the text, which of the following is NOT one of the factors to take in consideration when picking a country to start an e-business?

Internet population of at least 5%

Countries with market inefficiencies, such as formerly state-controlled markets

Countries that participates in at least one free trade agreement

Countries that have remarkable education systems

AACSB Technology, Information technologies

PTS: 1

19. According to the text, where is the greatest potential for e-commerce businesses?

North America

The European Union

South America

Asia

AACSB Technology, Information technologies

PTS: 1

20. Which of the following statements does not accurately describe the most likely form of organizing a multinational e-business?

A multinational e-business is three-tiered mixing global and local functions.

Corporate headquarters of the business provides the vision, strategy and leadership that drive the marketing of products worldwide.

Local subsidiaries of the business take charge of the functions better done locally in each country.

Corporate headquarters of the business provides the vision, strategy and leadership and also takes charge of the local strategies in each country.

AACSB Technology, Information technologies

PTS: 1

21. Which of the following is not one of the necessary electronic capabilities required for successful online presence?

Software to process pricing in multiple currencies

Ability to provide support in English in the various service centers

Systems that check regulatory compliance with local and international laws

Fraud protection

AACSB Technology, Information technologies

PTS: 1

22. E-commerce enablers are

Software that provide electronic payment models in addition to credit cards.

Systems that calculate and show purchase information on international shipping, duties, and local taxes such as VAT.

Companies that provide services and software that translate Web sites, calculate shipping, value-added taxes, duties, and other charges unique to each country.

Equity partners in multinational businesses.

AACSB Technology, Information technologies

PTS: 1

23. Multinational e-commerce enablers exist because

Many companies including very large ones, do not have the internal resources or abilities to conduct all e-commerce functions.

There is a shortage of employees with e-commerce skills.

It is extremely difficult for a brick and mortar company to develop an e-commerce strategy.

It is more beneficial to have a strategic partner when conducting multinational e-commerce.

AACSB Technology, Information technologies

PTS: 1

24. MNC’s face rising pressures to maintain the __________ of their customers.

Data

Privacy

Support

Repeat business

AACSB Technology, Information technologies

PTS: 1

25. Cost reduction, technology and efficiencies are considered to be the ________ of e-commerce.

Attractions

Challenges

Deterrents

Keys

AACSB Technology, Information technologies

PTS: 1

26. Which of the following is not true regarding e-commerce?

Refers to the selling of goods and services over the Internet

Includes products that are delivered offline such as UPS shipping a book purchased through Amazon.com

Does not include goods and services delivered online, such as downloaded computer software

Includes goods and services delivered online, such as downloaded computer software

AACSB Technology, Information technologies

PTS: 1

27. Which of the following statements is NOT true regarding Business-to-Business transactions (B2B)?

B2B is not as important as business-to-consumer (B2C) e-commerce businesses.

B2B allows instant information sharing between business customers and suppliers.

B2B allows suppliers to know what their customers want and allows businesses to know price, availability and product characteristics immediately.

B2B transactions make up more than 70 % of all current e-commerce business.

AACSB Technology, Information technologies

PTS: 1

28. Channel conflicts, cost of site construction and maintenance are considered to be _____ of e-commerce.

Attractions

Challenges or deterrents

Linking services

Supporting software

AACSB Technology, Information technologies

PTS: 1

29. Which of the following services is not provided by e-commerce enablers?

Services and software that translate Websites

Software that calculate shipping, value-added, and duties

Receiving customers purchased goods and storing, packaging, and shipping to the customer

Training programs to understand the local culture

AACSB Technology, Information technologies

PTS: 1

30. E-commerce potential is substantial in South America because

Of the Mercosur trade group.

Of trade with the U.S.

Because of the demographic characteristics.

Of the ASEAN trade group.

AACSB Technology, Information technologies

PTS: 1

31. Price comparison websites which searches online stores around the world to provide price comparisons and shipping and delivery information represents which form of e-commerce?

B2B (business-to-business)

B2C (business-to-consumer)

C2C (consumer-to-consumer)

C2B (consumer-to-business)

AACSB Technology, Information technologies

PTS: 1

32. Which of the following is NOT one of the ways to modify a website to make it global?

All company websites should first show the corporate website in the home country.

Provide a prominent list of languages used by the company's web site

Provide the firm's privacy statements in all local languages

Provide a culturally-sensitive website

AACSB Technology, Information technologies

PTS: 1

33. Which of the following is NOT a benefit of integrated brick-and-mortar and internet businesses?

The integrated operation can benefit from shared customer information.

The integrated operation can move faster and be more entrepreneurial.

The integrated operation can benefit from cross-promotion of shared products.

The integrated operation can benefit from economies of scale by using the small distribution channels.

AACSB Technology, Information technologies

PTS: 1

34. Which of the following does NOT represent a necessary component of the ideal multinational e-business?

Corporate headquarters which represents the global core in charge of providing a common vision and strategy

Managers at headquarters having worldwide responsibility for their shared functional areas responsibility

Local subsidiaries which actually deliver the goods and also taking charge of functions best done locally

All of the above are necessary aspects of the multinational e-business

AACSB Technology, Information technologies

PTS: 1

35. The internet has enabled the emergence of a new form of multinational, known as

Internet Service Providers.

Virtual enablers.

Internet businesses.

Born-globals.

AACSB Technology, Information technologies

PTS: 1

36. The retail sale of toys from the Wal-Mart website represents which form of transaction?

B2C

B2B

C2C

C2B

AACSB Technology, Information technologies

PTS: 1

37. Having systems in place to ensure that collected information is accurate and reliable represents which form of information security?

Confidentiality

Availability

Integrity

Authentication

AACSB Technology, Information technologies

PTS: 1

38. Confidentiality

Is ensuring that collected information is available to authorized users.

Is ensuring that collected private information is protected and safeguarded.

Is ensuring the privacy of online shoppers.

Is ensuring that systems are in place to ensure that only legitimate individuals are using systems.

AACSB Technology, Information technologies

PTS: 1

39. Southeast Asian countries represent opportunities for e-commerce growth due to

Spanish language websites.

Membership in ASEAN.

Global demand.

Internet economy.

AACSB Technology, Information technologies

PTS: 1

40. A new trend is that multinationals are using _______________ to their advantage.

Tall hierarchical web structures

Tacit knowledge

User Generated Content

None of the above

AACSB Technology, Information technologies

PTS: 1

ESSAY

1. What is e-commerce? What are the main types of e-commerce transactions? Discuss some of the reasons why B2B transactions make up a significant percentage of current e-commerce business?

2. Discuss some of the basic steps to building a successful e-commerce strategy.

3. What is a brick and mortar part of a company? What are some benefits of integrating the brick and mortar part of an organization with their Internet business? Why do some companies such as Barnes and Nobles still choose to have their Internet division operate independently from their brick and mortar part?

4. What are some of the major factors a company needs to take into consideration when setting up a global e-business? Why do companies with already established international brick and mortar units have an advantage in setting up global e-business compared to firms with no international presence?

5. What are some of the major factors to take into consideration when picking a country for setting up an e-commerce business? Why do trading blocks such as Mercosur, ASEAN, and the European Union present significant potential for e-commerce businesses?

6. Discuss the three-tiered ideal organizational structure of a multinational e-corporation. What are some of the essential functions served by the headquarters of the multinational e-corporation? Why should company headquarters not be responsible for local strategies?

7. What are e-commerce enablers? Why are e-commerce enablers becoming increasingly popular? Discuss some of the essential services provided by e-commerce enablers.

8. Discuss some of the technical capabilities that are needed for multinational e-commerce.

9. Discuss some of the major problems companies face when they try to globalize their Web sites. What can companies do to face these challenges?

10. What is e-commerce security? Discuss the four key aspects of information security. What can a multinational do to ensure that its e-commerce system is secure?

Chapter 11 International Human Resource Management

MULTIPLE CHOICE

1. The process by which companies choose people to fill vacant position is

Recruitment.

Compensation.

Selection.

Training and development.

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2. Inpatriates are

Employees who come from a different country where he/she is working.

Expatriate workers who come from neither the host nor the home country.

Local workers who come from the host country where the unit is located.

Employees from foreign country who work in the country where the parent company is located.

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3. Home country nationals are

Expatriate employees who come from the parent’s home country.

Employees who come from a different country where he/she is working.

Expatriate employees which come from the parent’s home country.

Employees from foreign country who work in the country where the host company is located.

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4. Expatriates are

Local workers who come from the host country where the unit is located.

Employees who come from a different country from where he or she is working.

The more talented local managers.

None of the above

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5. Expatriate workers who come from neither the host nor home country are

Host country nationals.

Parent country nationals.

Neither country nationals.

Third country nationals.

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6. One reason for US expatriate managers failure is

Personality of the manager.

Lack of technical proficiency.

Lack of motivation.

All of the above choices.

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7. All of the following are benefits that companies obtain by using expatriates EXCEPT

Receiving important strategic information.

Increased coordination and control of international operations.

Timely information on the local markets.

Reduced turnover for key international managers.

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8. All of the following are benefits of international assignments EXCEPT

International assignments help managers acquire skills necessary to develop successful strategies in a global context.

Expatriate assignments help a company coordinate and control operations dispersed geographically and culturally.

International assignments provide companies access to preferential quotas and duties.

Global assignments provide important strategic information.

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9. International cadre are

A group of managers who specialize in international careers.

Managers who are hired on a temporary basis to solve international problems.

Experts on international operations who work as part of the headquarters staff.

A group in charge of training managers for expatriate assignments.

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10. Key expatriate success factors include all of the following EXCEPT

Professional or technical skill.

Experience in at least two cultures different from the assignment country.

Stress tolerance.

Favorable family situation.

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11. A person with good relational abilities has

The capacity to adapt to strange situations.

The flexibility to modify their behavior.

A sensitivity to cultural norms and values.

All of the above

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12. Evidence on training for international assignments suggests

Cross-cultural training reduces expatriate failure rates.

Cross-cultural training makes people feel more comfortable but there are no bottom line effects on performance.

US firms invest the most in this activity.

It only beneficial for long term assignments.

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13. Which of the following is NOT true regarding low training rigor?

Low training rigor usually includes briefings concerning company operations.

Low training rigor usually lasts for a short period.

Low training rigor usually includes lectures and videos on the local culture.

Low training usually lasts over two months.

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14. Which of the following is NOT one of the issues that make expatriate performance appraisals difficult?

Unreliable data

Refusal of host company to provide performance information regarding expatriate

Time differences and distance separation

Complex and volatile environments

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15. Suggestions to improve expatriate performance appraisals include

Using the same standards as the home country to improve fairness.

Giving up on performance appraisal since they often fail in the international setting.

Evaluation only at the end of the assignment since it takes a long time to learn about another culture.

Using multiple evaluators with varying periods of evaluation.

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16. The main objective of the balance sheet approach to international compensation is

To match home and host county purchasing power.

To make sure you reward international managers for their hardship.

To save costs in inexpensive countries.

To provide headquarters’ accountants with consistent information on salaries.

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17. Adjusting wages to local lifestyles and costs of living refers to which expatriate compensation system?

The balance-sheet method

The host-based compensation system

The global pay system

The headquarters-based compensation system

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18. The use of worldwide job evaluations, performance appraisals methods, and salary scales to determine pay is the

The global pay system.

The balance sheet approach.

The multi-local pay system.

The headquarters-based system.

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19. Experts on repatriation suggest

That managers will experience no problems if they return to their home cultures.

Reverse culture shock can occur regarding national and organizational culture.

There are difficult problems with repatriation but few solutions at this time.

People may feel uncomfortable for a while but work performance will not suffer.

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20. Difficulties that managers face in coming back to their home countries and reconnecting with their home organizations is known as the

Repatriation problem.

Reverse culture shock.

Low home re-adaptation index.

Expatriation problem.

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21. According to the text, which of the following is NOT one of the strategies used to allow successful repatriation of expatriates?

Provide a strategic purpose for the repatriation

Allow the expatriate to return when he/she is ready to do so

Provide training and preparation for the return

Establish a team to aid the expatriate

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22. Studies of women expatriates suggest that all of the following statements are true about international assignments in traditional cultures EXCEPT

Women typically do not succeed in expatriate assignments.

Women have some challenges in international assignments.

Women have some advantages in international assignments.

Opportunities for women expatriates are expected to grow in global companies.

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23. The text suggests several strategies that US women may use to succeed in traditional cultures. These include

Emphasize nationality, not gender.

Develop close contact with local government officials.

Not being overly aggressive in negotiation.

Proving that women can also be successful at international assignments.

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24. All of the following explain why there may be more international assignments for women in the future EXCEPT

Legal and social pressures for equal opportunity in North America.

Acute shortage of men willing to take international assignments.

Globalization creates opportunities to hire skilled women from any country.

More federal funds to train women for international assignments.

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25. Companies with a global HRM orientation

Usually provide significant extra pay for expatriate assignments.

Evaluate their managers by headquarters’ country standards.

Focus primarily on language training as preparation for expatriate assignments.

Use similar pay and benefit packages for all international assignments.

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26. Companies with ethnocentric HRM orientations

Use similar pay and benefit packages worldwide.

Select home country nationals for key positions.

Emphasize extensive training in the company culture before allowing a manager to go international.

Often use international experience as a technical qualification for high level management.

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27. Host country nationals may have limited career development in a company with a (an)

Ethnocentric, Regio or polycentric HRM orientation.

Only an ethnocentric HRM orientation.

Regiocentric or global HRM orientation.

Only a polycentric HRM orientation.

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28. Using more local managers to reduce the costs of training expatriate managers is a benefit usually associated with

A global HRM orientation.

A polycentric or regiocentric HRM orientation.

An ethnocentric HRM orientation.

A geocentric orientation.

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29. Companies with a multi-local strategy are most likely to have a

A global HRM orientation.

A polycentric HRM orientation.

Either a ethnocentric or regiocentric HRM orientation.

A geocentric orientation.

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30. Extra money paid to expatriates for particularly difficult posting due to issues such as high risk or poor living conditions is known as

Foreign service premiums.

Hardship allowance.

Relocation allowances.

Home-leave allowances.

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31. Which of the following statements is NOT TRUE regarding women expatriates compared to male expatriates?

Women expatriates have more difficulty being taken seriously early in their careers.

Women expatriates have more pressures to balance work and family compared to male expatriates.

Women expatriates have poorer relational and communication skills than male expatriates.

Women expatriates have more pressures to worry about their spouses than male expatriates.

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32. Which of the following is NOT one of the strategies discussed in the text to help repatriation of expatriates?

Provide a strategic purpose for the repatriation

Establish a team to help with the repatriation

Provide support for the expatriate and family on reentry

Provide vacation to help the expatriate get readjusted at home

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33. The two aspects to consider when evaluating the possibility of hiring expatriates are the high cost and

Skills in multinational management.

High success rate.

High failure rate.

None of the above

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34. All of the following are possible steps that can be taken by multinationals to remove barriers faced by female expatriates EXCEPT

Provide opportunities for interpersonal networks with other female expatriates.

Provide mentors.

Identify and remove sources of barriers.

Provide more appropriate performance appraisal systems for female expatriates.

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35. International Human Resource Management

Is no different from domestic HRM.

Is the application of HRM to international settings.

Is the orientation to hiring international employees.

Is the selection and compensation of expatriates.

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36. Third-country nationals are

Workers who come from the host-country where the unit is located.

Foreign workers who work in a country where the parent company is located.

Workers who come from neither the host nor the host-country.

None of the above

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37. Employees who are sent on frequent but short-term international assignments are known as

Flexpatriates.

Inpatriates.

Shortpatriates.

Expatriates.

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38. Which of the following statements about flexpatriates is FALSE?

Flexpatriates are those workers who travel on short notice for shorter duration.

Flexpatriate assignments usually last longer than expatriate assignments.

Flexpatriates provide flexibility as the company can send someone on numerous and much shorter duration assignments.

All of the above are true.

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39. Which of the following best describes emotional intelligence, one of the factors key to the success of an expatriate?

The ability to adapt to new and strange situations

The motivation to accept international assignments

The ability to being aware of oneself and to understand and relate to others

None of the above

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40. Which of the following factors is not necessarily included in an expatriate’s compensation package?

Local market cost of living

Housing

Adjustments for taxes

All of the above are included in an expatriate’s compensation package

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ESSAY

1. Identify the components of HRM and describe how they differ for IHRM.

2. Describe the types of nationals employed by multinational firms. Explain when each type would be used.

3. Discuss and contrast the four IHRM orientations. Describe how each can support a multinational strategy.

4. Contrast the positive and negative issues for using short term flexpatriates and international cadre members as expatriate managers. Consider both the organization's perspective and the career implications for the individual manager.

5. Discuss the options available for expatriate compensation. Consider how these options might be used for a transnational and a multidomestic company.

6. Discuss how multinational companies can deal with the repatriation problem. Why is it necessary to deal with this issue?

7. What are some advantages women have in expatriate positions? Discuss some challenges that are faced by women in international assignments.

8. Discuss any three of the key expatriate success factors and their implications for selection.

Chapter 12 HRM in the Local Context: Knowing When and How to Adapt

MULTIPLE CHOICE

1. Differences in HRM policies and practices among countries stem from

Education and training of the labor force.

Laws and cultural expectations for selection practices.

Laws and traditions regarding labor practices.

All of the above

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2. An enduring system of relationships among people, such as education or the political system represent which aspect of the national context of a country?

National culture

Business culture

Social institutions

Managerial culture

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3. An abundant level of iron ore deposits in a country represents which of the following?

Country institutions

Natural factor conditions

Induced factor conditions

Resource pool

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4. Which recruitment strategy do US managers see as most effective?

Newspaper and online advertising

College or university recruiting

Employee referrals

Personal contacts

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5. The US belief in the benefits of open and public advertising reflects the

US individualistic cultural values.

US preference for in-group members.

US collectivist cultural values.

US preference for hiring friends and relatives.

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6. All of the following are true about US selection practices EXCEPT

US selection practices focus on individual achievements and not on group affiliations.

US selection practices favor hiring of relatives and friends.

The aim of the typical US selection practice is to gather information of a candidate's job qualifications.

US selection practices are governed by laws and regulations.

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7. Selection in collectivist cultures

Favors performance-related backgrounds and qualifications.

Is similar to US selection practices.

Gives preference to the in-group members.

Gives preference to individuals with technical skills.

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8. Managerial selection and recruitment in Korea and Japan are dominated by

High school and university ties.

Club membership.

Performance-related backgrounds and qualifications.

All of the above

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9. Backdoor recruitment in collectivist cultures may not always be used by foreign multinationals because

Such procedures will not work as well as newspaper advertisements.

The multinationals may not have access to the appropriate contacts.

It is almost always better to use expatriates in these situations.

They prefer to rely on internal job postings.

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10. The practice of recruiting friends or relatives of those already employed is which form of recruiting?

Front gate recruiting

Walk-ins

Backdoor recruiting

Internal recruiting

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11. All of the following are true about US training and development practices EXCEPT

The most popular training topics are management development and computer training.

Most training programs reach a majority of the workers.

Because of global competition, demand for training will increase.

There are increased pressures on businesses to supplement basic educational training.

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12. The dual-system in Germany refers to

The combination of selection and recruitment in one process.

The unification of management practices from Eastern and Western Germany.

The combination of in-house apprenticeship training with part-time vocational school training.

Academic preparation at the high school level.

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13. A study of compensation practices in ten countries revealed that

Pay incentives are important.

Pay should be contingent on group performance.

Incentives should be significant amount of pay.

All the above are true

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14. The Japanese system of life-time or permanent employment

Applies more to workers than to managers.

Is easier to implement in smaller Japanese companies.

Is likely to produce a satisfied and less motivated Japanese workforce.

Applies equally to men and women.

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15. According to a study of ten countries on nine compensation practices

There was universal consensus on all nine as being necessary.

There was universal consensus on eight as being necessary.

There was universal consensus that seniority considerations are necessary.

None of the above are true

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16. All of the following are true about the US performance appraisal system EXCEPT

It represents cultural values that espouse links among individual rights, duties, and rewards.

It attempts to be rational, logical, and legal.

It focuses primarily on the ability to function well in groups.

Research shows that it works well in all national contexts.

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17. Which of the following is most true about the typical US compensation system?

Most companies take into account external and internal factors to determine compensation.

Most companies develop formal and systematic policies to determine compensation levels.

Raises in pay are determined mostly by merit.

All of the above are true.

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18. Which of the following describes one potential way a Japanese supervisor can communicate negative feedback for poor work performance to his/her subordinate?

By simply ignoring the subordinate

With formal appraisal systems

By discussing the poor performance openly

By providing the negative feedback in writing

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19. Japanese compensation systems base pay raises mostly on

Marital status and family size.

Seniority.

Merit.

Position.

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20. Patterns of labor relations in countries are affected by

Cultural factors.

Historical factors such as the level of technology development.

Ideological reasons.

All of the above

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21. Union membership density refers to

The number of unions in any country.

The proportion of workers who belong to unions in a country.

The proportion of white collar workers/professional who belong to unions in a country.

The proportion of unions to companies in a country.

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22. All of the following are true about unions in England, Germany, France, and the U.S. EXCEPT

British unions developed with strong government interference.

German unions developed in harmony with the government and corporations.

French unions started much later and developed more slowly than did British or German unions.

US union membership has declined significantly since the 1940s.

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23. An organization of all people from a company regardless of occupation or location is a (an)

Craft union.

Enterprise union.

Ideological union.

Industrial union.

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24. A craft union

Represents one occupational group in one company.

Represents all people in one organization regardless of occupation or location.

Represents all workers based on some particular ideology.

Represents one occupational group such as plumbers.

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25. A union representing one occupational group in one company is

An enterprise union.

A craft union.

A local union.

A trade union.

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26. Which of the following is FALSE about recruitment and selection processes in collectivist cultures?

Companies prefer to hire directly out of school.

There is a preference for family and friends.

Personal information is considered important for selection.

Technical skills are considered crucial for selection.

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27. The group of employees, found in Germany, that shares plant-level responsibility with managers over issues such as working conditions is

An enterprise union.

A craft union.

A works council.

An ideological union.

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28. Major components of the legal requirements for a US performance appraisal system include

Evaluations must relate clearly to the job.

Evaluations are not required when all workers are the same gender.

All testing must be quantitative.

Older workers need not have performance appraisals.

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29. In most collectivist cultures, performance appraisals

Follow similar patterns to the US legal requirements.

Are often communicated subtly, such as by a manager ignoring a worker.

Favor and open and honest dialogue regarding performance.

Are more formal than in individualistic cultures.

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30. The practice in Germany, whereby management surrenders a traditionally reserved share of control to workers refers to

Co-determination.

Co-selection.

Veto power.

Joint planning.

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31. All of the following statements regarding Induced-factor conditions resources are true EXCEPT

Induced-factor conditions resources arise from cultural and institutional pressures.

Good examples of induced factor conditions are the high cultural value placed on education in many Asian societies creating a well-trained workforce.

Induced-factor conditions include those resources that occur naturally such as coal and gas reserves.

All of the above are true.

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32. Which of the following is not one of the factors affecting national differences in human resource management as discussed in the text?

Types of jobs favored by applicants

Education and training of the labor pool

Laws and cultural expectations regarding fair wages and promotion criteria

All of the above are factors

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33. Which of the following is NOT one of the factors determining the resource pool of a country as discussed in the text?

The quantity, quality, and accessibility of raw material

The quantity, quality and cost of personnel available

The training and development system available

The cost and amount of capital available to firms

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34. Which of the following is NOT one of the recruitment steps?

Managers determine the jobs that are available.

Managers determine the types of skills and people that are necessary for these jobs.

Managers generate a pool of applicants for the job.

Managers choose a person who fits the job.

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35. All people in a particular industry, regardless of occupational group is most likely represented by

An enterprise union.

A local union.

A craft union.

An industry union.

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PTS: 1

36. Which of the following statements regarding selection in collectivistic cultures is FALSE?

In selecting employees, employers prefer trustworthiness and loyalty.

Older male recruits are usually preferred because they can be easily molded to fit the company’s culture.

Selection often relies on referrals from family or friends.

All of the above are TRUE.

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37. The measure that considers the proportion of workers who belong to unions is known as

Union-membership scope.

Craft union density.

Union-membership density.

Trade union density.

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PTS: 1

38. A union representing all workers belonging to one religious orientation in a company is known as

An ideological union.

A craft union.

A local union.

An ideological union.

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PTS: 1

39. Which of the following statements about management development in the U.S. is false?

Management development in the U.S. is the responsibility of the firm rather than the individual.

U.S. companies can rely on senior-level managers to identify promising candidates for management development and training.

U.S. companies rely on direct assessment approaches such as assessment centers to identify individuals with managerial potential.

All of the above is true.

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40. Which of the following statements regarding union membership is FALSE?

Union membership in the U.S. has stayed the same over the past 30 years.

In many major industrialized countries, union membership is still greater than 50%.

South Africa has doubled in size in union membership.

Europe still has a high proportion of workers who are union members.

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ESSAY

1. Describe and discuss the major factors in the national context that affect a nation's HRM practices.

2. What are some of the recruitment strategies used by U.S. companies? Why is open and public advertisements seen as the most effective recruitment strategies? Why would such strategies not work in more collectivist cultures?

3. Some U.S. politicians have called for the development of a German-type apprenticeship training system in the U.S. If you were a manager of a U.S. Fortune 500 multinational company, how would you respond to this proposal and why? What are the current challenges facing the German system now?

4. You have been given the assignment to set up a training program for first level managers in a formerly government-owned eastern European company. How would you go about developing a curriculum? Why?

5. Compare and contrast the appraisal and compensation systems in the U.S. and more collectivist culture nations. Discuss legal and cultural problems that multinational managers might face using a collectivist approach to these systems in the U.S. and using a U.S. approach in more collectivist cultures.

6. Contrast the different types of unions and discuss the challenges each type may pose to a multinational manager.

7. Define and describe union membership density as it has been historically and is now. Why is it important to multinational managers?

8. How is feedback on performance given in collectivist societies, especially for managers?

Chapter 13 International Negotiation and Cross-Cultural Communication

MULTIPLE CHOICE

1. International negotiation

Is the process of making business deals across national and cultural boundaries.

Is less complex than domestic negotiation.

Can be successful regardless of ease of communication.

All of the above

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2. All of the following are true about international negotiation EXCEPT

International negotiations are more complex than domestic negotiations.

Differences in national cultures and differences in political, legal, and economic systems often separate potential business partners.

Most successful international negotiators use their home country negotiation styles.

All of the above are true.

AACSB Communication, Leadership principles

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3. The Whorf hypothesis

Suggests that language determines the nature of culture.

Suggests that nonverbal communication determines cultural patterns.

Culture comes first and requires the development of certain concepts and thus certain words.

None of the above

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4. High context languages

Are languages in which people state things directly and explicitly.

Include most northern European languages including German, English, and the Scandinavian languages.

Are languages in which people state things indirectly and implicitly.

Are languages where the words provide most of the meaning.

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5. Languages in which people state things directly and explicitly where the words provide most of the meaning are

Moral languages.

High context languages.

Low context languages.

None of the above

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6. Which of the following statements is true regarding high context languages?

Most Northern European languages, including German, English, and the Scandinavian languages are high context languages.

Words provide most of the meaning in high context languages.

In high context languages, what is left unsaid is often as important as what is said.

All of the above are true.

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7. The degree of formal communication refers to

Whether people speak directly or indirectly.

Communication without words.

Communication through formal body movements.

None of the above

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8. Nonverbal communication

Is part of face-to-face communication.

Occurs through such things as body posture, facial expression, hand gestures, and the use of personal space.

May also create (purposefully or not) situations that make a negotiator uncomfortable.

All of the above

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9. Kinesics is

Communicating through body movements.

A form of verbal communication.

Focuses on how people use space to communicate.

The type of touching that is deemed appropriate in different cultures.

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10. Proxemics

Refers to the use of body movements to communicate.

Represents the degree of formality in communication styles.

Means communicating with and without words.

Focuses on how people use space to communicate.

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11. Touch

Is related to proxemics and is a basic form of human interaction.

Refers to communication through body movements.

Represents the degree of directness in communication.

Is similar to kinesics.

AACSB Communication, Leadership principles

PTS: 1

12. Attribution

Is the process by which we interpret the meaning and intent of spoken words or nonverbal exchanges.

Is communication through body movements.

Focuses on how people use space to communicate.

A form of verbal communication.

AACSB Communication, Leadership principles

PTS: 1

13. When communicating with nonnative speakers, which of the following would make communication harder and less accurate?

Strictly following basic rules of grammar

Using words that have numerous alternative meanings

Using slang

Using most common words with their most common meanings

AACSB Communication, Leadership principles

PTS: 1

14. Gathering of extensive information on the negotiation issues, on the setting in which the negotiation will take place, and on the firm and people involved occurs in which stage of the steps in international negotiation?

Preparation

Building the relationship

Persuasion

Concession

AACSB Communication, Leadership principles

PTS: 1

15. In the relationship building stage of the International Negotiation Process

The negotiator focuses seriously on business issues.

Usually takes place at the formal negotiation place.

Is not as important as the other steps.

None of the above

AACSB Communication, Leadership principles

PTS: 1

16. All of the following are true about the steps in the Negotiation Process EXCEPT

Although each international negotiation is unique and may combine two or more steps or repeat some, the negotiation process involves five steps leading to the final step, an agreement.

The negotiation steps include preparation, building the relationship, exchanging information and the first offer, persuasion, and the agreement.

Most experts agree that the process of international negotiation includes several steps.

All of the above are true.

AACSB Communication, Leadership principles

PTS: 1

17. At the __________ stage in the negotiation, both parties exchange the specifics of their needs for the agreement.

Exchanging Information and the First Offer

Building the relationship

Persuasion

Concession

AACSB Communication, Leadership principles

PTS: 1

18. All of the following are true about the Exchanging Information and the First Offer Step of the International Negotiation process EXCEPT

Both parties exchange information on their needs for the agreement.

Parties exchange information that is task-related.

Both sides usually present their final offer.

Both sides present offers that often differ from what they hope to achieve eventually.

AACSB Communication, Leadership principles

PTS: 1

19. In the _____ stage, each side in the negotiation attempts to get the other side to agree to its position.

Exchanging Information and the First Offer

Building the relationship

Persuasion

Concession

AACSB Communication, Leadership principles

PTS: 1

20. All of the following is true about the persuasion stage EXCEPT

Each side in the negotiation attempts to get the other side to agree to its position.

It is the heart of the negotiation processes.

Numerous tactics are available to international negotiators to persuade the other side.

The emphasis and mix of tactics do not vary by the cultural background of the negotiators.

AACSB Communication, Leadership principles

PTS: 1

21. Dirty Tricks in International Negotiations refer to

The most common tactics in international negotiations that people use to gain an upper hand.

Negotiation tactics that pressure opponents to accept unfair or undesirable agreements or concessions.

Face-to-face communication that is not oral.

None of the above

AACSB Communication, Leadership principles

PTS: 1

22. Deliberate deception, one example among some common ploys in international negotiations, refers to

Negotiators presenting flagrant untruths either in the facts they present or in their intentions for the negotiation.

Negotiators waiting to the last minute before the international negotiation team plans to go home.

Negotiators making an agreement then reveal that it must be approved by senior managers or the government.

One negotiator acting agreeable and friendly while his or her partner makes outrageous or unreasonable demands.

AACSB Communication, Leadership principles

PTS: 1

23. Negotiators who make an agreement and then reveal that it must be approved by senior managers or the government is an example of which type of dirty trick?

Escalating authority

Good guy, bad guy routine

You are wealthy and we are poor

Old friends

AACSB Communication, Leadership principles

PTS: 1

24. If negotiators are using deliberate deception as a dirty tricks, the best way to deal with the deception is

Not to make any concessions.

To ignore the ploy and focus on the agreement.

To not reveal your negotiation plans.

To point out directly what you believe is happening.

AACSB Communication, Leadership principles

PTS: 1

25. All of the following are true about the final agreement EXCEPT

The final agreement is the signed contract, agreeable to all sides.

Successful negotiations do not necessarily result in the final agreement.

The final agreement must be consistent with the chosen legal system or systems.

All of the above are true.

AACSB Communication, Leadership principles

PTS: 1

26. The sequential approach to concession-making

Is very popular in Asian cultures.

Is similar to the holistic approach.

Implies that concession making begins only after all participants discuss all issues.

Implies that negotiators expect each side to give and take on individual issues in sequence.

AACSB Communication, Leadership principles

PTS: 1

27. All of the following are true about the holistic concession-making approach EXCEPT

Is very popular in Asian cultures.

Each side makes very few, if any, concession during discussions of each point in potential agreement.

Implies that concession making begins only after all participants discuss all issues.

Implies that negotiators expect each side to give and take on individual issues in sequence.

AACSB Communication, Leadership principles

PTS: 1

28. In competitive negotiation

Negotiators seek out mutually satisfactory ground that is beneficial that allows both companies to win.

Competitive negotiators view the negotiation as a win-win game.

Competitive negotiators use dirty tricks and any plot that leads to their advantage.

Competitive negotiators search for possible win situations where the outcome of the negotiation is mutually satisfactory to both sides.

AACSB Communication, Leadership principles

PTS: 1

29. __________ negotiators search for possible win-win situations where the outcome of the negotiation is mutually satisfactory to both sides.

Problem-solving

Concession-making

Competitive

None of the above

AACSB Communication, Leadership principles

PTS: 1

30. All of the following are personal characteristics of the successful international negotiator EXCEPT

Be a competitive negotiator.

Can tolerate ambiguous situations.

Has stamina, good sense of humor.

Is flexible, creative, curious, and can empathize.

AACSB Communication, Leadership principles

PTS: 1

31. Olfactics

Is the use of smells as a means of nonverbal communication.

Refers to communication through eye contact or gazing.

Communication through the use of space.

Communication through body contact.

AACSB Communication, Leadership principles

PTS: 1

32. Communication through eye contact or gaze is known as

Proxemics.

Haptics.

Oculesics.

Olfactics.

AACSB Communication, Leadership principles

PTS: 1

33. Which of the following is NOT one of the suggestions for proper use of interpreters?

Spend time with the interpreter so that he/she can understand your accent.

Insist on minimization of interruptions and have the interpreter translate after you end each statement.

Go over technical and other complex issues with your interpreter.

Request that your interpreter apologizes for your inability to speak the local language.

AACSB Communication, Leadership principles

PTS: 1

34. Which phase of the negotiation process consists of an evaluation of the success of the completed negotiation?

The post relationship building phase

The agreement phase

The post agreement phase

The performance feedback phase

AACSB Communication, Leadership principles

PTS: 1

35. Which one of the following is NOT one of the personal success characteristics of successful international negotiators as discussed in the text?

Tolerance of ambiguity and curiosity

Focus on achieving negotiation goals without making concessions

Flexibility, creativity, and sense of humor

All of the above are personal success characteristics

AACSB Communication, Leadership principles

PTS: 1

36. Haptics

Refers to communication through body contact.

Refers to communication through smell.

Refers to communication through eye contact.

None of the above

AACSB Communication, Leadership principles

PTS: 1

37. Which of the following represents one possible solution to the “Old Friends" dirty trick?

Ignore the ploy and focus on mutual benefits.

Keep a psychological distance that reflects the true nature of the relationship.

Walk out of negotiations.

Reveal when you plan to leave negotiations.

AACSB Communication, Leadership principles

PTS: 1

38. Which of the following regarding proxemics is FALSE?

Proxemics focuses on how people use space to communicate.

North Americans are more comfortable with a personal bubble of space of 20 inches.

Latin and Arab cultures prefer closer spacing than North Americans.

North Americans prefer closer spacing than the Latin and Arab cultures.

AACSB Communication, Leadership principles

PTS: 1

39. Which of the following statements regarding interpreters is FALSE?

The interpreter’s role is to provide a simultaneous translation of a foreign language while a person is speaking.

Good interpreters have the technical knowledge and vocabulary to deal with such details common in business transactions.

Interpreters are not needed if some of the negotiators can understand both languages.

All of the above are true.

AACSB Communication, Leadership principles

PTS: 1

40. Which of the following statements regarding formal communication is FALSE?

U.S. Americans have the highest degree of formal communication.

Compared to the U.S., most other business cultures acknowledge rank and titles when addressing each other.

There is more formality of dress for both genders for most other cultures compared to the U.S.

All of the above are true.

AACSB Communication, Leadership principles

PTS: 1

ESSAY

1. Discuss the steps in the negotiation process. Which step is at the heart of the process and why?

2. Compare and contrast the two basic negotiation strategies. Which would you prefer to use, and why?

3. What is the difference between a high- and a low-context language? Discuss some of the potential problems a person with a low-context language may face when negotiating with people from a high-context language.

4. Provide an example of how nonverbal negotiation tactics may be interpreted differently by people of varying cultural backgrounds.

5. What is the Whorf hypothesis? Explain.

6. Identify some cultural differences in body movements (kinesics). How might these influence a negotiation session?

7. Identify and describe some common dirty tricks in international negotiation. What can be done to counteract these dirty tricks?

8. Describe several forms of nonverbal communication. If you were a negotiator, how might you prepare for differences in these forms?

9. What are interpreters? What can managers do to ensure appropriate use of interpreters?

Chapter 14 Motivation in Multinational Companies

MULTIPLE CHOICE

1. People's expectations from work (such as work providing necessary income or work providing satisfactory experiences) refer to

Functions of work.

Work centrality.

Importance of work.

Work motivation.

AACSB Reflective thinking, Motivation concepts

PTS: 1

2. Conclusions from the World Values Survey and the European Values Survey on functions of work reveal that

People across the world assign the same degree of importance to work functions.

People across the world rate income as the most important work function.

People from different nations do not assign the same magnitude of importance to work functions.

Workers saw the most important function of work as providing contact with other people.

AACSB Reflective thinking, Motivation concepts

PTS: 1

3. The importance of work refers to

how central work is in an individual’s life.

The degree of obligations to work in the life of an individual.

The functions that work plays in people's lives.

People's expectations from work.

AACSB Reflective thinking, Motivation concepts

PTS: 1

4. The concept of work centrality refers to

The reasons why people work.

The degree of importance of work in the life of an individual.

The functions that work plays in people's lives.

Goals that people hope to achieve from working.

AACSB Reflective thinking, Motivation concepts

PTS: 1

5. All the following are true about work centrality EXCEPT

High levels of work centrality may lead to dedicated workers and more effective organizations.

Higher levels of work centrality closely match average number of hours worked in a country.

High levels of work centrality in Japan have been physically and psychologically stressing to middle-aged managers.

It represents the function of work in an organizational culture.

AACSB Reflective thinking, Motivation concepts

PTS: 1

6. All of the following statements about work in different countries are true EXCEPT

Regardless of country, money has the highest priority for why people work.

All people hope to receive certain benefits from work.

In some societies, work is very central and absorbs more of a person's life.

People from different countries have different goals for their jobs.

AACSB Reflective thinking, Motivation concepts

PTS: 1

7. Motivation refers to

A feeling of deficit or lacking.

Goal-directed behaviors to satisfy human needs.

The use of work to satisfy many needs.

Consequences of a person's behavior that discourages the behavior.

AACSB Reflective thinking, Motivation concepts

PTS: 1

8. Reactions to a person's behavior that encourage the person to continue the behavior is

Goal-directed behavior.

Punishment.

Reinforcement.

Need.

AACSB Reflective thinking, Motivation concepts

PTS: 1

9. The national context affect motivation through all of the following EXCEPT

Cultural values and norms.

Social institutions that lead to different types of organizations.

The existence of strong organizational cultures.

National differences in work centrality.

AACSB Reflective thinking, Motivation concepts

PTS: 1

10. Need theories of motivation are based on the assumption that

Motivation is a function of the individual's beliefs of what happens if one works hard.

Motivation is a result of the outcomes of one's past behaviors.

Motivation is a function of why people work.

People can satisfy basic human needs in the work setting.

AACSB Reflective thinking, Motivation concepts

PTS: 1

11. All of the following statements about Maslow's hierarchy of needs are true EXCEPT

People have six basic type of needs.

People have basic needs that follow a hierarchy from lower level to higher level needs.

People first seek to satisfy lower level needs and then move to higher level needs.

All of the above are true.

AACSB Reflective thinking, Motivation concepts

PTS: 1

12. All of the following statements are true about hygiene factors EXCEPT

Hygiene factors bring people to neutral states of motivation.

Hygiene factors include good benefits and good working conditions.

Hygiene factors can motivate workers similarly to motivating factors.

Hygiene factors include those characteristics that allow people to fulfill lower level needs.

AACSB Reflective thinking, Motivation concepts

PTS: 1

13. Which of the following motivation theory suggests that only some people have the need to win in competitive situation or to exceed excellence standards?

Expectancy theory

Motivator-hygiene theory

Achievement-motivation theory

Reinforcement theory

AACSB Reflective thinking, Motivation concepts

PTS: 1

14. When applying need theories in a cross-national context, managers should

Ignore the differences in needs between nations and apply the models uniformly.

Take into consideration the particular needs that people seek to satisfy in different countries.

Give the same magnitude of importance to work needs and apply these motivational tools.

Understand work centrality and then provide the same rewards to satisfy needs.

AACSB Reflective thinking, Motivation concepts

PTS: 1

15. Which types of motivation theories explain motivation arising from satisfaction of needs and values combined with an individual's beliefs regarding the work environment?

Needs theories

Work centrality theories

Process and reinforcement theories

Work functions theories

AACSB Reflective thinking, Motivation concepts

PTS: 1

16. Expectancy theory proposes that

Motivation is solely determined by the satisfaction of needs.

Motivation is determined by the workers’ perceptions of fairness at work.

Motivation is a result of an individual's preferences and belief that his/her effort will lead to some valued results.

Motivation is a purely automatic process.

AACSB Reflective thinking, Motivation concepts

PTS: 1

17. In a cross-national context, expectancy theory prescribes that managers

Should specify the hierarchy of needs of workers.

Identify and eliminate potential sources of inequity at work.

Identify valued outcomes and convince workers that their efforts will lead to these outcomes.

Punish workers for not achieving organizational goals.

AACSB Reflective thinking, Motivation concepts

PTS: 1

18. The theory based on the idea that employees compare their inputs and outcomes to other persons in the work setting to determine if they are being fairly treated is

Needs difference theory.

Expectancy theory.

Equity theory.

Reinforcement theory.

AACSB Reflective thinking, Motivation concepts

PTS: 1

19. All of the following statements are true EXCEPT

Equity norms prevail in individualistic cultures.

Equality norms prevail over equity norms in collectivist cultures.

Equity norms prevail in collectivist cultures.

All of the above are true.

AACSB Reflective thinking, Motivation concepts

PTS: 1

20. Principles of goal-setting theory include all of the following EXCEPT

Set clear and specific goals.

Provide incentives to achieve goals.

Give feedback on goal attainment.

Assign do-your-best types of goals.

AACSB Reflective thinking, Motivation concepts

PTS: 1

21. Setting goals for work groups is recommended in

Individualistic cultures.

Collectivist cultures.

High power distance cultures.

Goal setting for groups works equally well in all cultural settings.

AACSB Reflective thinking, Motivation concepts

PTS: 1

22. All of the following are true about the operant-conditioning model EXCEPT

Behavior is a function of its consequences.

People will stop behaviors that have unpleasant consequences.

People will continue behaviors they like irrespective of the nature of consequence.

People will continue behaviors that have pleasant consequences.

AACSB Reflective thinking, Motivation concepts

PTS: 1

23. Which motivation theory proposes that if a pleasurable consequence follows a behavior, then the behavior will continue and if an unpleasant consequence follows a behavior, the behavior will stop?

Needs theory

Expectance theory

Equity theory

Reinforcement theory

AACSB Reflective thinking, Motivation concepts

PTS: 1

24. Applying reinforcement at a cross-national level is challenging because

It is hard to identify the organizational rewards that can be used as reinforcers.

It is hard to understand how work values influence potential rewards.

It is hard to know which type of reinforcer is more applicable in different cultures.

All of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

25. All of the following statements about the US job characteristics model are true EXCEPT

The model suggests that work is more motivating when managers enrich core job characteristics.

The model suggests that enriching job characteristics is motivating for all types of individuals.

The model assumes that one critical state for motivation to occur is if the worker believes his/her work to be meaningful.

The model assumes that only some people will respond well to enriched jobs.

AACSB Reflective thinking, Motivation concepts

PTS: 1

26. The sociotechnical systems approach to job design

Gives priority to the technical efficiency of workers.

Attempts to mesh both modern technology and social needs of workers.

Has no major differences with the US job characteristics model.

Focuses on designing each worker's task for job enrichment.

AACSB Reflective thinking, Motivation concepts

PTS: 1

27. A crucial difference between the US job characteristics model and the European STS approach is

The US model focuses on core job characteristics, while the European model focuses on tasks.

The US model focuses on individuals, while the European model focuses on work teams.

The US model focuses on work teams, while the European model focuses on individuals.

There are no differences between the US job characteristics model and the European STS approach.

AACSB Reflective thinking, Motivation concepts

PTS: 1

28. Social loafing

Is the social process of sharing.

Occurs when people prefer to work in groups.

Means that everyone's work is easier in groups.

Occurs when people put out less effort when working in groups.

AACSB Reflective thinking, Motivation concepts

PTS: 1

29. Some of the detrimental effects of social loafing can be reduced if

Individuals are held responsible for performance.

Groups are held responsible for performance.

The group leader is held responsible for performance.

None of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

30. In individualistic cultures, performance drops off with the use of teamwork because

Of social loafing.

Workers believe that the group will make up any slack in their personal efforts.

Workers do not feel responsible for group outcomes.

All of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

31. A manager gives bonuses to high performing foreign employees hoping that they will continue performing at a high level. This manager is using which motivational principle?

Extinction

Goal-directed

Reinforcement

Punishment

AACSB Analytic, Motivation concepts

PTS: 1

32. An expatriate finds that one of his subordinates regularly jokes about a minority group in the country. She decides to ignore the jokes hoping that the subordinate will eventually stop such jokes. Which aspect of reinforcement theory is she using?

Avoidance

Extinction

Punishment

Operant conditioning

AACSB Analytic, Motivation concepts

PTS: 1

33. Hygiene factors include

The size of desks and color of offices.

Interesting tasks in the job.

Challenges in the job.

All of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

34. Which of the following is NOT one of the reasons discussed to explain why people engage in social loafing in individualistic cultures?

When working in groups, people in individualistic cultures often feel less pressure to work and less responsible for work outcomes.

Workers in groups in individualistic cultures often believe that the group will make up any slack in their personal efforts.

People in individualistic cultures often give priority to their own work over the group.

All of the above are reasons to explain social loafing in individualistic cultures.

AACSB Reflective thinking, Motivation concepts

PTS: 1

35. Which of the following theories is NOT considered as one of the needs theories?

Equity theory

Achievement motivation theory

Maslow's hierarchy of needs

Motivator-hygiene theory

AACSB Reflective thinking, Motivation concepts

PTS: 1

36. The need to maximize personal achievement refers to which type of need in Maslow’s hierarchy of needs

Physiological needs.

Self esteem needs.

Self actualization needs.

Security needs.

AACSB Reflective thinking, Motivation concepts

PTS: 1

37. Esteem needs refer to

Basic survival needs such as food, water and shelter.

Safety and avoidance of pain and life-threatening situations.

Being loved and having friendship.

Focus on respect and feelings of self-worth.

AACSB Reflective thinking, Motivation concepts

PTS: 1

38. According to the text, those who are underrewarded are likely to

Return their rewards.

Reduce their inputs.

Increase their inputs.

None of the above

AACSB Reflective thinking, Motivation concepts

PTS: 1

39. According to equity theory, equity conscious people are most likely those

Who behave consistently with equity theory.

Who are more likely to tolerate situations where they are underrewarded.

Are more likely to experience satisfaction if underrewarded.

None of the above

AACSB Analytic, Motivation concepts

PTS: 1

40. Which of the following refers to the aspect of a job where the person can complete a whole piece of work from beginning to end?

Feedback

Task significance

Task variety

Task identity

AACSB Reflective thinking, Motivation concepts

PTS: 1

ESSAY

1. Why is it necessary to understand the meaning of work in different cultures before planning work motivation strategies?

2. Compare and contrast the need theories of motivation to the process theories of motivation. How can these theories be applied in multinational management?

3. Describe Vroom's Expectancy Theory. What are some implications for multinational management?

4. What are the three major principles of allocating rewards? Discuss how each principle works. Why is equality preferred in more collectivistic cultures while individualistic cultures favor equity?

5. Discuss some of the implications of the operant-conditioning model for multinational management.

6. Explain why performance drops off when teams are used in individualistic cultures. Explain the significance of social loafing in the process. How can social loafing be reduced?

7. Compare and contrast the Job Diagnostics Design Approach to the European Sociotechnical Systems Approach to job design.

8. Discuss equity theory. What are the implications for multinationals?

Chapter 15 Leadership and Management Behavior in Multinational Companies

MULTIPLE CHOICE

1. All the following statements are true about leadership EXCEPT

Leadership is influencing group members to achieve organizational goals.

Excellent leaders motivate their employees to achieve more than minimal organizational requirements.

Companies can achieve success with or without good leaders.

Leading in a multinational company is an even greater challenge than in a domestic one.

AACSB Reflective thinking, Leadership principles

PTS: 1

2. Some of the characteristics of the new breed of global leaders include

The skills and abilities to interact with and manage people from the diverse cultural backgrounds that populate their multinational companies.

Sufficiently flexible to operate comfortably in pluralistic cultural environments.

Knows at least one foreign language and understands the complexities of interaction with people from other cultures.

All of the above

AACSB Reflective thinking, Leadership principles

PTS: 1

3. Trait models of leadership

Evolved from the debate regarding whether leaders are born or made.

Focuses on the behaviors leaders use to manage their employees.

Assumes that different styles and different leaders are more appropriate for different situations.

Includes Maslow's Hierarchy of Needs theory.

AACSB Reflective thinking, Leadership principles

PTS: 1

4. The idea that leaders are born with unique characteristics that make them different form ordinary people is the

Task centered leadership theory.

A contingency theory of leadership.

The great-person theory.

The leadership behaviors theory.

AACSB Reflective thinking, Leadership principles

PTS: 1

5. All of the following are true about trait leadership theories EXCEPT

Using trait theory, one can conclude that successful business, political, religious, and military leaders were born with unique characteristics that made them quite different from ordinary people.

Leadership theorists identified an exact list of leadership traits.

The great person theory of leadership assumes that leaders are born.

All of the above are true.

AACSB Reflective thinking, Leadership principles

PTS: 1

6. The type of leadership that includes behaviors that focus on completing tasks by initiating structure is known as

Task-centeredleadership.

Person-centered leadership.

Autocratic leadership.

Democratic leadership.

AACSB Reflective thinking, Leadership principles

PTS: 1

7. Person-centered leaders

Focus on completing tasks by initiating structure.

Give specific directions to subordinates so that the subordinates can feel comfortable completing tasks.

Show a concern for subordinates’ feelings and taking subordinates’ ideas into account.

Make all major decisions themselves.

AACSB Reflective thinking, Leadership principles

PTS: 1

8. Leaders who do not allow employees to share in the decision- making are

Democratic leaders.

Autocratic leaders.

Participative leaders.

Consultative leaders.

AACSB Reflective thinking, Leadership principles

PTS: 1

9. The leadership style that falls midway between autocratic and democratic styles is the

Person-centered leader.

Subordinate-oriented leader.

Consultative leader.

Task-oriented leader.

AACSB Reflective thinking, Leadership principles

PTS: 1

10. All of the following are true about the Japanese Performance-Maintenance (PM) theory of leadership EXCEPT

The Performance-Maintenance (PM) theory of leadership represents a Japanese perspective on leadership.

PM theory has two dimensions, the performance function (P) and the maintenance function (M), which are the basic aspects of the theory.

The maintenance function (M) is similar to task-centered leadership.

PM theory suggests that groups perform best when both P and M are present.

AACSB Reflective thinking, Leadership principles

PTS: 1

11. Contingency theories

Look for leadership behaviors that work in all countries.

Focus on which leadership traits or behaviors define excellent in Japan.

Assume that different styles and different leaders are more appropriate for different situations.

None of the above

AACSB Reflective thinking, Leadership principles

PTS: 1

12. All of the following are true about Fiedler's Leadership Effectiveness theory EXCEPT

Fiedler proposed that managers tend to be either task or person-centered leaders.

The success of leadership styles depends on three characteristics of the work situation.

Effective leadership occurs when the leadership style matches the situation.

Task-centered leadership works best in mixed conditions.

AACSB Reflective thinking, Leadership principles

PTS: 1

13. Path-Goal Theory

Is a popular US contingency theory.

Identifies four types of leadership styles that a manager might choose depending on the situation.

Key contingency or situational factors that determine the choice of the best leadership styles are: the nature of the subordinates and the characteristics of the subordinates’ tasks.

All of the above

AACSB Reflective thinking, Leadership principles

PTS: 1

14. Which of the following is NOT one of the leadership styles of the path-goal theory of leadership?

Directive style

Supportive style

Task-oriented style

Participative style

AACSB Reflective thinking, Leadership principles

PTS: 1

15. Consulting with subordinates, asking for suggestions, encouraging participation in decision making, represent which leadership style in path-goal theory?

Directive style

Supportive style

Participative style

Achievement-oriented style

AACSB Reflective thinking, Leadership principles

PTS: 1

16. Key leadership suggestions based on path-goal theory include all of the following EXCEPT

When subordinates have high achievement needs, successful leaders adopt the achievement-oriented style.

When subordinates with have high social needs, they respond best to the supportive leadership style.

When the subordinate's job is unstructured, the theory suggests using a supportive style.

When the subordinate's job is highly structured, the theory suggests using instrumentality.

AACSB Reflective thinking, Leadership principles

PTS: 1

17. The National Context Contingency Model of Leadership

Assumes that successful leaders need not modify their behaviors or develop particular leadership traits to succeed in different nations.

Includes two contingencies: the characteristics of subordinates and the nature of the work setting.

Includes factors related to the national culture and social institutions.

Only B and C are correct

AACSB Reflective thinking, Leadership principles

PTS: 1

18. All of the following are true about leadership traits in various national settings EXCEPT

People from different cultural backgrounds prefer certain traits.

In Germany, a desired leadership trait is modesty.

In France, leaders are considered different based on social class distinctions between cadres and non-cadres.

In the US, assertiveness is valued as a leadership trait.

AACSB Reflective thinking, Leadership principles

PTS: 1

19. U.S. managers' favored influence tactics include the following EXCEPT

Assertiveness.

Reasoning.

Aggressiveness.

Bargaining.

AACSB Reflective thinking, Leadership principles

PTS: 1

20. Building support for ideas and networking and using friendships involve the use of which influence tactics?

Assertiveness

Friendliness

Sanctioning

Coalitions

AACSB Reflective thinking, Leadership principles

PTS: 1

21. All of the following statements regarding subordinates expectations in different countries are true EXCEPT

In counties with high power distance values, including many of the Latin and Asian countries, subordinates expect autocratic leadership.

In low power distance countries, such as Sweden and Norway, subordinates expect the leader to be more like them.

Weak masculinity norms often lead to the acceptance of more authoritarian leadership.

Strong uncertainty avoidance norms may cause subordinates to expect the leader to provide more detail in directions.

AACSB Reflective thinking, Leadership principles

PTS: 1

22. When managers use rewards or punishment to influence their subordinates, they are engaging in

Rewards oriented leadership.

Transformational leadership.

Transactional leadership.

Charismatic leadership.

AACSB Reflective thinking, Leadership principles

PTS: 1

23. Transformational leadership

Means that managers use rewards or punishments to influence their subordinates.

Is similar to transactional leadership.

Succeeds because subordinates respond to the leader with high levels of performance, personal devotion, and excitement.

Is one leadership style of Fieldler's leadership theory.

AACSB Reflective thinking, Leadership principles

PTS: 1

24. Behaviors and characteristics of transformation leaders include the all of the following EXCEPT

Articulates a vision.

Breaks from the status quo.

Uses rewards or punishments to influence subordinates.

Provides goals and a plan.

AACSB Reflective thinking, Leadership principles

PTS: 1

25. The attribution approach to leadership

Emphasizes the leader's attributions regarding the causes of subordinates’ behaviors.

Focuses on using rewards or punishments to influence the attributes of subordinates.

Is similar to the trait approach, except that it focuses on a person's attributes.

Represents one key aspect of transformational leadership.

AACSB Reflective thinking, Leadership principles

PTS: 1

26. Explaining a person's behavior based on factors outside the person and beyond the person's control (e.g., natural disasters, illness, faulty equipment, etc.) is a/an

Internal attribution.

External attribution.

Fundamental attribution error.

Attribution effect.

AACSB Reflective thinking, Leadership principles

PTS: 1

27. According to the text, if a leader perceives the cause of a subordinate's behavior based on an internal attribution, then most leaders will

Tend to correct or reward the worker.

Modify the work environment.

Do nothing.

Use transformational leadership.

AACSB Reflective thinking, Leadership principles

PTS: 1

28. Thefundamental attribution error

Is a tendency for managers to believe that most people act because of internal motivations.

Is a tendency for managers to believe more often that people behave in certain ways because of outside factors, such as poor working conditions.

Occurs most often in Asian cultures.

Concerns primarily external attributions.

AACSB Reflective thinking, Leadership principles

PTS: 1

29. According to the text, all of the following statements about leadership styles in different cultures are true EXCEPT

In high power distance countries, leaders generally behave more autocratically.

In high uncertainty avoidance national cultures both leaders and subordinates often feel more comfortable when the leader initiates structure.

In low uncertainty avoidance countries leaders tell subordinates exactly what to do.

In high power distance countries, person-centered leadership works best in large groups.

AACSB Reflective thinking, Leadership principles

PTS: 1

30. The recommended leadership style for a country low on power distance and low on uncertainty avoidance is

The democrat - supportive, participative, and achievement.

The master - directive and supportive.

The professional- directive, supportive, and participative.

The boss- directive.

AACSB Reflective thinking, Leadership principles

PTS: 1

31. Which of the following statements is NOT TRUE regarding leadership in various cultures?

In countries with high power distance, subordinates expect leaders to be more like them.

Strong masculinity norms often lead to the acceptance of more authoritarian leaders.

In countries with high uncertainty avoidance, subordinates expect detail and directions to perform their tasks.

All of the above are true.

AACSB Reflective thinking, Leadership principles

PTS: 1

32. A multinational manager discovers that his leadership style is more effective when he displays visible sign of status (e.g chauffeur driven cars) and he behaves as an authoritarian leader. The manager is most likely leading in which of the following cultures?

A feminine culture

A high uncertainty avoidance culture

A low power distance culture

A high power distance culture

AACSB Analytic, Leadership principles

PTS: 1

33. Which of the following is NOT one of the behaviors/characteristics of transformational leader as discussed in the text?

Takes risk

Demonstrates high ethical and moral standards

Articulates a vision

All of the above applies to transformational leaders

AACSB Reflective thinking, Leadership principles

PTS: 1

34. An expatriate finds that if she gives specific directions to her subordinates, productivity is much higher. Which leader behavior is she displaying?

Consultative leader behavior

Democratic leader behavior

Task-centered leader behavior

Person-centered leader behavior

AACSB Reflective thinking, Leadership principles

PTS: 1

35. According to the Global Leadership and Organizational Behavior Effectiveness (GLOBE) study, which of the following leadership styles represents the leader who is modest and has a compassionate orientation?

Team-oriented leader

Self-protective leader

Participative leader

None of the above

AACSB Reflective thinking, Leadership principles

PTS: 1

36. Which statement regarding fundamental attribution errors is true?

In Western nations, people tend to make external attributions.

In Eastern nations, people tend to make internal attributions.

In Western nations, people tend to make internal attributions.

In Eastern nations, people tend to make external attributions.

AACSB Reflective thinking, Leadership principles

PTS: 1

37. According to the Global Leadership and Organizational Behavior (GLOBE) studies, which of the following leadership style characterizes a leader who is self-centered, status conscious and procedural?

The autonomous leader

The participative leader

The humane style leader

The self-protective leader

AACSB Reflective thinking, Leadership principles

PTS: 1

38. Which of the following statements regarding the autonomous leader is FALSE according to the Global Leadership and Organizational Behavior (GLOBE) studies?

Autonomous leaders are independent, individualistic and unique.

Autonomous leaders act in self-interested manner.

Germanic and Eastern European countries have the highest scores on autonomous leadership.

Autonomous leadership is seen as very effective in most cultures.

AACSB Reflective thinking, Leadership principles

PTS: 1

39. Which of the following examples characterize the use of assertiveness as an influence tactics?

Example behaviors include being friendly and humble.

Example behaviors include using logical arguments.

Example behaviors include using threats and punishments.

Example behaviors include being forceful and directive.

AACSB Reflective thinking, Leadership principles

PTS: 1

40. The recommended leadership style for a country high on power distance and low on uncertainty avoidance is

The boss - directive.

The professional - directive, supportive and participative.

The master - directive and supportive.

The democrat - supportive and participative.

AACSB Reflective thinking, Leadership principles

PTS: 1

ESSAY

1. Define leadership. How might people from different national cultures define leadership? What are the implications of these definitions for multinational leaders working in these countries?

2. Pick a national culture with which you are familiar. For this culture, identify leadership traits and behaviors that would be detrimental to organizational effectiveness.

3. From the perspective of the subordinates, discuss why culturally inappropriate leadership behaviors might be de-motivating.

4. Why do multinational managers need to understand subordinate expectations in order to lead effectively? Which leadership style works the best in countries with high power distance? Why?

5. Discuss five preferred influence tactics that U.S. managers favor. Discuss how these tactics might work in other countries.

6. Discuss whether transformational leadership qualities are culture free. That is, are transformational leaders similar regardless of cultural background or are there different types of transformational leaders for each cultural group?

7. What is attribution theory? How can leaders use attribution theory to help them be good leaders?

8. What is the fundamental attribution error? What are some implications for leadership in multinationals?

9. Compare and contrast U.S. and Japanese perspectives on leadership behavior.

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Chapters 1 Through 9

LAW & ETHICS IN THE BUSINESS ENVIRONMENT

CHAPTER 1

Law, Ethics, Business: An Introduction

Questions

1. Select the best definition of ethics:

a set of rules for behavior.

a menu of options regarding what we must do.

a menu of options regarding what we should do.

standards that must be met to avoid penalty.

2. Laws must be static and unyielding in order to provide stability for a society.

a. True

b. False

3. Choose the statement regarding duty to rescue that is false:

There is no general duty to rescue an individual.

Individual freedom of dictates that a person should not be forced to act.

Under a liberal–communitarian approach, citizens owe a duty to the state to rescue other citizens.

When one taunts another person who then puts themselves in danger in response to the teasing, the teaser has a duty to rescue the person teased.

4. All of the following are considered exceptions to the general rule that there is no duty to rescue except:

a. Pre-existing duty: For example, lifeguards have signed contracts agreeing to rescue people in exchange for pay and benefits.

b. Witnessing an accident: This creates a duty to step in and help the injured.

c. Employer: A duty exists to help an employee injured while working for that employer.

d. Endangerment: If one puts another in danger, they are obligated to rescue the person put in danger.

5. Which of the following views would be consistent with the free market ethics approach advocated by Milton Friedman?

Outsourcing to other countries is wrong because it is detrimental to the overall US economy.

When making decisions, corporate managers should consider the interests of all the corporation’s stakeholders.

The only social responsibility of business is to increase profits in a legal and ethical manner.

Automating processes and replacing workers is unethical since it does not serve a greater good.

6. Which of the following statements best illustrates the view of “utilitarianism”?

I. From each according to his abilities, to each according to his needs.

II. The risk reasonably to be perceived defines the duty to be obeyed and risks imports relation; it is risk to another or to others within the range of apprehension.

III. An action is right when maximizing welfare and total well-being.

IV. Individuals should pursue his or her own self-interest, even at the expense of others.

I only

III only

I and II

I, II, and III

7. According to deontological thinker Kant:

I. It is only acceptable to lie when done to protect an innocent person.

II. The level of respect owed to another is based on one’s relationship to that person.

III. It is wrong to use another person unless mutual benefit is attached.

IV. Once chosen, actions will be repeated whenever the same situation arises.

a. I and III

b. II and IV

c. III and IV

d. I, III, and IV

8. Virtue ethics:

a. focuses on what human beings are capable of being.

b. develop from learning how to make choices in difficult situations.

c. accepts that individuals rarely reach moral excellence.

d. are based on the concept that a person’s ethical beliefs are developed in childhood and do not change.

9. The Ethic of Care is:

a. A set of rules that explain how to prioritize those people affected by a decision so that a utilitarian analysis can be done successfully.

b. A set of universal principles, which applied evenly to all decisions will result in fairness and equity in ethical decisions.

c. The idea that we should all make decisions under the assumption that we don’t know our station in life, that we could be the person most negatively impacted by the decision.

d. A set of principles that encourage decision makers to look at human relationships as a primary motivator for a decision.

10. Assuming a business ethical dilemma, which statement best illustrates Gilligan approach suggested in her theory of “The Ethics of Care”?

individual rights and justice for all

applies only to women and not men

care and responsibility to others

obedience to independent moral rules or duties

11. Which of the following statements is INCORRECT regarding the rights of shareholders?

I. voting power on major issues and ownership in a portion of the company

II. right to transfer ownership and dividend entitlement

III. hire and fire management and select and appoint a chief executive

I and II

I, II, and III

I only

III only

12. According to Citizens United v. Federal Election Commission, which of the following is not a reason to allow corporations the right to spend money and advertise for political candidates?

a. Political speech is the most important, and most protected, speech that exists. It is crucial to the democratic process that political speech be encouraged and heard.

b. The immense wealth of a corporation allows it to be the most accurate in providing messages to people.

c. Independent expenditure by corporations do not give rise to corruption or the appearance of corruption.

d. Rapid changes in technology suggest laws restricting political speech should not be upheld.

13. Corporate director or officer decisions to dedicate corporate funds for social causes is called:

a. Corporate Social Responsibility (CSR)

b. Social Activism (SA)

c. Business Engagement in Environmental Situations (BEES)

d. Strategic Investment in Stakeholder Issues (SISI)

14. Which of the following statements regarding Benefit Corporations is true?

a. Benefit corporations are required to identify one or more specific benefit purposes.

b. Directors of benefit corporations are protected from all lawsuits from both shareholders and beneficiaries of the corporation’s public benefit purpose.

c. Benefit corporations are incorporated under state law with the intent to be profitable.

d. All of these statements regarding benefit corporations are true.

Essay Questions

15. Describe the difference between the law and ethics.

16. From where do ethical preferences originate?

17. Discuss how multinational corporations can be both a benefit and a detriment to society.

18. Explain why laws exist that do not impose a duty to rescue.

19. Describe the philosophy of noted economist, Milton Friedman, on the issue of “free market ethics.”

20. Discuss the differences in utilitarianism and virtue ethics in making a decision.

21. Discuss the similarities and differences between a traditional corporation and a benefit corporation.

CHAPTER 2

The Duty of Loyalty: Whistleblowing

Questions

22. Select the best definition of whistleblower:

the sole goal of modern ethics training

originated from the Latin "qui tam pro domino regequam pro sic ipso in hoc parte sequitur" meaning "who as well for the king as for himself sues in this matter."

a narrow exception under the general rule of at-will employment

people who report unethical or illegal activities under the control of their employers

23. Under the legal doctrine of “employment at will” an employee can be lawfully terminated from her job for:

V. wearing a shirt that clashes with her suit

VI. any non-discriminatory reason

VII. complaining about illegal activity in the workplace

VIII. only for good cause

a. I only

b. II only

c. I and II

d. III and IV

24. Exceptions to the rule of employment-at-will include which of the following?

I. organization of unions

II. passage of Sarbanes Oxley Act

III. raising of public policy issues

IV. promise of implied-contract or covenant-of-good-faith

I only

II only

I and II

I, II, III, IV

25. The Food Safety Modernization Act:

I. offers some protections for whistleblowers

II. covers vegetables, seafood and dairy

III. covers eggs and poultry

IV. gives the FDA power to make mandatory recalls

I and II only

I, III and IV only

I, II and IV only

I, II, III, IV

26. Ag Gag would criminalize:

undercover video recordings showing animal cruelty

recordings of public health violations occurring in agricultural facilities

Both a. and b.

Neither a. nor b.

27. The National Labor Relations Board has stated that the right to discuss working conditions freely and without fear of retaliation should exist at the work site. However, the Board believes the same right does not exist online.

True

False

28. The Constitution does not always protect free-speech rights for what public employees say on the job. Which of the following is true?

When a citizen enters government service, the citizen need not accept certain limitations on his or her freedom.

Public employees may speak out on matters of public concern and have First Amendment protection but not when they speak out in the course of their official duties.

As public employees speak out and receive First Amendment protection, there is an acceptable chilling of the speech of all potential whistleblowers.

None of the above

29. To determine whether a public employee receives First Amendment protection from speech (and therefore cannot be fired for it), the Supreme Court has stated that all of the following are important except:

a. The employer must have a justification for treating the employee differently than it would treat a member of the general public.

b. The speech cannot be about political topics.

c. The speech must be about something of great public concern.

d. The speech cannot be made as part of the employment (such as an internal memorandum).

30. When Qui Tam whistleblowers against the pharmaceutical industry were questioned about their motivation, several reasons were mentioned. Which of the following was NOT given as a reason?

a. Potential risk to public health.

b. Unfair employment practices.

c. Financial reward.

d. Self-preservation.

Essay Questions

31. According to research, what are the characteristics of the typical whistleblower?

32. According to the Montana Wrongful Discharge from Employment Act, what are the three elements of a wrongful discharge?

33. How was Ken Kendrick of The Peanut Corporation of America a typical whistleblower? An atypical whistleblower?

34. Explain what happened in the 1968 Supreme Court’s re-interpretation of the First Amendment to the U.S. Constitution regarding public employees’ limited speech protections.

35. Describe at least two other times since the Pickering decision in which the Supreme Court revisited the ruling. What were the outcomes?

36. As discussed in the text, False Claims Act or qui tam suits have been successful in the health care industry. The text mentions several things that all these successful claims have in common. Discuss those things.

CHAPTER 3

Privacy and Technology

Questions

In considering the legality of employer interception of employee e-mails at work, pick the correct statement.

IX. Employees have complete expectation of privacy since they can select their password for in-house and remote access of e-mails.

X. A subpoena is required by the employer to read any e-mail that is clearly marked “confidential” by the employee.

XI. No expectation of privacy exists over an employer-owned computer system at work.

XII. Statement by the employer that e-mails are confidential and privileged cannot be later used by an employer to defeat an employee’s claim of privacy

a. I only

b. II only

c. III only

d. I and IV

It is perfectly legal for employers to secretly and intrusively spy on their employees.

a. True

b. False

Which of the following are ways businesses justify electronic surveillance of employees?

I. It measures and encourages efficiency.

II. It uncovers employee disloyalty.

III. It enhances the fairness of personnel evaluations.

IV. It prevents employees from sending personal emails on company time.

a. I and II only

b. I, II and III only

c. I, II and IV only

d. I, II, III and IV

The Electronic Communications Privacy Act of 1986 (ECPA):

i. supplements the Omnibus Federal Employee Workplace Privacy Rights Law of 2008.

j. has been an effective law because employee privacy intrusions are less common and steadily declining since 2000.

k. restricts employer access to public chat room interactions.

l. fails to protect employees in most situations involving e-mail monitoring by public and private employers.

According to the article excerpted in the text entitled, The Functions of Privacy,by Alan Westin, privacyhas several functions in today’s society. These include:

a. Total freedom in the private life with no consequences to the work life.

b. The ability to vent anger at authority without being held responsible.

c. The ability to post critical information on the Internet without consequences at work.

d. The ability to spend time quietly analyzing the actions and reactions of other people.

It is illegal to increase a specific employee’s health insurance premiums based on the employee’s lifestyle.

a. True

b. False

A majority of states have enacted off-the-job privacy protection laws. What is the LEAST effective argument by an employer to regulate off-the-clock activities in a state that has not enacted such lifestyle rights legislation?

a. It will provide a healthy work force.

b. Unregulated employees are less productive.

c. There is no invasion of privacy since the employee is “at will.”

d. It will prevent higher health care and insurance costs.

According to the article, Can They Do That? By Lew Maltby:

a. A job candidate who has been arrested will probably not be disqualified unless the candidate was found guilty.

b. Psychological tests are a good way to determine a job candidate’s honesty.

c. Employees who are being treated unfairly can protect themselves by joining a union.

d. Credit score can keep you from getting a job, even if it doesn’t involve handling money.

The government cannot interfere with the choices adults make about their private family and sexual life.

An individual’s medical history cannot be publicized by the government.

Individuals are protected against unwarranted invasion of privacy by private corporations.

Corporations are protected against unreasonable government searches or seizures.

a. when a corporation has authorized an agent with direct authority to perform an electronic search of an employee’s e-mail account.

b. upon issuance of a subpoena duces tecum to bring electronic data (e-mails, files, etc.) including electronic metadata such as headers, directional information, and other such useful tracking data.

c. when the government is conducting a search.

d. during an archival search of e-mails on a corporation’s server.

When it comes to employment and social media:

I. Every U.S. law dealing with employee privacy grants significant deference to an employer’s legitimate business interest.

II. U.S employers may legally canvass social media sites for information on employees and potential employees and act upon the information found.

III. When an employer finds and uses social media information to reprimand or fire an employee, the employer is obligated to disclose the method of gaining that information to the employee.

IV. Statutes that specially govern the intersection of social media and workplace privacy were enacted in 2013.

a. I and II only

b. I, II and III only.

c. I, II and IV only

d. I, II, III and IV

The 2004 Heath Information and Portability and Accountability Act (HIPPA):

a. requires consent for medical information to be accessed and shared.

b. prohibits discriminatory use of pre-employment medical tests.

c. prohibits employers from requesting genetic information as part of a post-offer medical exam.

d. All of these statements are true.

True

False

Essay Questions

Discuss the employee claims that counter businesses’ justification of electronic surveillance.

Name the two main factors that most courts use in determining whether or not electronic monitoring of employees is an invasion of privacy.

Briefly describe what Alan Westin believes are the “functions of privacy.”

Discuss Lewis Maltby’s proposition that employers should not do drug testing (or other testing related to off-work conduct) but should instead focus on impairment testing when an employee is entering the workplace.

The term “privacy” does not appear anywhere in the Constitution of the United States. Discuss (meaning share your opinion and support it with anecdotes or evidence) whether or not the Supreme Court was correct in “finding” privacy in the Constitution.

19. Discuss the privacy expectations of millennial employees.

20. Under the Genetic Information Nondiscrimination Act of 2008 (GINA) it is unlawful for an employer to request, require or purchase genetic information related to employees of their families. List at least three exceptions to this rule.

CHAPTER 4

Valuing Diversity: Stereotyping v. Inclusion

Questions

1. Equal protection is the constitutional guarantee:

that empowers Congress to regulate equally distributed commerce with foreign Nations, and among the several States, and with the Indian Tribes.

that laws made in pursuance of the Constitution and all treaties made under the authority of the United States shall be the equally protected as the “supreme law of the land.”

embodied in the Fourteenth Amendment to the U.S. Constitution.

that grants and distributes power and responsibilities to national and state governments.

2. A mayor serving in a major metropolitan area receives an internal memorandum indicating personnel at many police stations are single-race. At the time of the report, thirty percent of the police force was black or Hispanic. She immediately calls a press conference and orders transfers of police officers to achieve racial balance across the city. The transferred police officers sue on constitutional grounds. Assuming just these facts, what is the strongest argument that might be advanced by the transferred officers based on constitutional grounds?

Executive action by the mayor is unconstitutional because there was no rational relationship to a valid governmental purpose.

The action is “void for vagueness” since transferred police officers must unnecessarily guess at the underlying public policy of the transfer process.

The mayor’s policy used race as the basis for transfers, and assignments are subject to strict scrutiny.

The transfer can be set aside based on intermediate or heightened level of scrutiny.

3. Title VII specifically addresses the issues of affirmative action, sexual harassment, and same-sex marriage.

True

False

4. Which of the following federal government agencies is charged with enforcing Title VII of the Civil Rights Act of 1964?

U.S. Department of Labor

Merit Systems Protection Board

Office of Personnel Management

Equal Employment Opportunity Commission

5. To establish a prima facie case of religious discrimination, the employee has to show all of the following except which one:

a. That religion has been a significant part of the employee’s life for a significant amount of time.

b. That the employee has a sincerely held religious belief.

c. That the employer was on notice that the religious belief was in conflict with the employer’s request.

d. That there was a negative employment action based on a conflict between the religious belief and the employment requirement.

6. The Equal Employment Opportunity Commission (EEOC) favors English-only rules because they decrease the ability for people to stereotype based on national origin or ethnicity and thus decrease illegal workplace discrimination.

a. True

b. False

7. Employment practices without business justification applied to all employees that result in a less favorable effect for one group than for another group may state a claim for:

disparate treatment

disparate impact

inclusion

reasonable accommodation

8. John Smith was assaulted on the loading dock by a coworker, Jim Jones, at the Acme Widget Company. The attack was unprovoked by Smith. After the physical assault, there was an angry verbal exchange between the parties. The incident ended when Jones yelled that Smith was a “sissy” and “everybody knows you're queer as a three dollar bill." Which of the following statements best describes the outcome of the harassment lawsuit filed by Smith under The Civil Right Act of 1964?

XIII. Sex discrimination is prohibited by federal law (The Civil Right Act of 1964).

XIV. Sexual orientation discrimination is prohibited by federal law (The Civil Right Act of 1964).

XV. Suits based on harassment due to sexual orientation cannot prevail when based on local or state laws.

XVI. Sexual orientation discrimination is not prohibited by federal law (Title VII).

I only

II only

III only

I and IV

9. Federal courts have consistently held that the Civil Rights Act’s ban on ‘discrimination on the basis of sex’ does not include discrimination based on one’s sexual orientation or affiliation.

a. True

b. False

10. All of the following are true statements regarding the Family and Medical Leave Act (FMLA, 29 U.S.C. §§ 2601, et seq.), EXCEPT which of the following?

An eligible employee is entitled to take 12 weeks of unpaid leave in any 12-month period.

Every personal or family emergency qualifies for FMLA leave.

Under most circumstances, the employer must reinstate employees when they return from leave.

An eligible employee is entitled to take paid leave because of the birth of a son or daughter.

11. In order to be covered by the ADA (Americans with Disabilities Act), a disability must be ongoing and permanent for the foreseeable future.

a. True

b. False

Essay Questions

12. Describe the term heightened scrutiny. What do the courts use to determine which type of scrutiny to use?

13. What is the EEOC guideline on English-only workplace rules? What are two reasons given for the rules?

14. What must a plaintiff show to make a prima facie case of hostile environment sexual harassment?

15. According to sociologists, what is society’s image of a good mother? A good father? How do those images impact how parents who chose to balance their work life with family (i.e. work part time) are viewed?

CHAPTER 5

Workers Rights as Human Rights: Health and Safety in the Global Workplace

Questions

16. The Fair Labor Standards Act (FLSA) of 1938:

I. sets maximum hours

II. requires minimum wages

III. requires compliance with child labor standards

IV. covers farmer workers

a. I. and II only

b. III and IV only

c. I, II and III only

d. I, II, III and IV

17. With the adoption of the ____________, the U.S. began to address the need to prevent, or minimize, workplace accidents and health hazards.

Securities Act

Occupational Safety and Health Act

Environmental Protection Agency

National Insurance Act

18. OSHA has a wide range of tools available to address the risks that workers face.

a. True

b. False

19. Typically individual stockholders are not held responsible for the actions of a corporation. Exceptions usually relate to comingling of funds, underinsuring, or similar actions by the corporate leadership. This is called:

a. risking liability

b. piercing the corporate veil

c. the privilege of the stockholders

d. free market trading of stocks

20. Almost all of the hazards that workers face are known and visible.

True

False

21. The ADA direct threat provision permits an employer to impose a:

a. “requirement that an individual shall not pose a direct threat to the health or safety of other individuals in the workplace.”

b. “requirement that an individual shall not pose a direct threat to the health or safety of themselves in the workplace.”

c. Both a. and b.

d. Neither a. nor b.

22. According to Henry Shue, firms are not in the business of protecting the interests of their workers, except when this is a means to accomplish the organizational objectives.

a. True

b. False

23. When an employee files a worker’s compensation claim:

a. The employee must prove the company was negligent.

b. The employer has the right to raise traditional defenses to negligence to defeat the claim.

c. Both a. and b.

d. Neither a. not b.

24. The Workers Rights Consortium:

I. Combats sweatshops by monitoring and investigating working conditions in factories around the world.

II. Is a U.S. government organization.

III. Covers contractors, subcontractors and manufacturers.

a. I. only

b. I and II only

c. I and III only

d. I, II, and III

25. According to Guy Mundlak and Issi Rosen-Zvi, hypotheses for the existence of CSR reports include:

I. They have instrumental value to governments.

II. They are a focal point for persuading the corporate world that a new ethical discourse is emerging.

III. They are created to persuade competitors to adopt similar measures and standards of responsibility.

IV. They are created in an attempt to persuade managers and employees that they should be proud of their workplace.

a. III and IV only

b. I, II and III only

c. II, III and IV only

d. I, II, III and IV

Essay Questions

26. According to Dr. Michael Silverstein, what are the types of risks workers find on the job today?

27. According to Henry Shue, what are the six factors required to make a cost a true harm?

28. Discuss how corporate criminal liability has been handled by OSHA since 1970.

29. Explain how worker’s compensation in the U.S. works.

30. Explain what the Workers Rights Consortium is and what it has done to combat sweatshops.

CHAPTER 6

Environmental Law and Justice: Responsibility and Survival

Questions

31. Which piece of legislation was passed first?

The Clean Water Act

The Resource Conservation and Recovery Act

The Clean Air Act

The Comprehensive Environmental Response, Compensation, and Liability Act

32. Under the ___________ plan, the EPA auctions a set number of sulfur dioxide emission allowances annually, with each allowance permitting one ton of emissions.

allocation of resources

tradeable permit

green capitalism

shareholder activism

33. The Kyoto Protocol is an international treaty to reduce greenhouse admissions, signed by over 200 countries including the United States.

a. True

b. False

34. According to MIT professor Layzer, the lobbyists for the energy corporations have used which of the following tactics to avoid stricter regulation?

I. Portray the science of global warming as uncertain and debatable

II. Focus on the financial costs of regulation

III. Provide Senators and Representatives with financial incentives to vote against regulation

IV. Portray the environmentalists as extremists and a vocal minority.

a. I and II

b. I, II and III

c. I and III

d. I, II and IV

35. When environmentalists recognized that politicians were not going to pass stricter legislation and regulations, they changed their tactics to force change. According to the Layzer article in the chapter, these new tactics included:

a. Eco-terrorism – bombing pipelines and factories.

b. Collaboration with businesses – create partnerships to improve environmental impacts.

c. Public relations campaigns – go public with their accusations and encourage consumers to demand change.

d. Work internally through shareholders to try to change corporate disclosures

I and II

II and III

III and IV

II, III and IV.

36. A “green tax” uses government taxing power to benefit the environment.

a. True

b. False

37. According to John Locke, the purpose of government is to institute restraints to protect property rights.

True

False

38. The power of the U.S. Government to take property from a private individual and use it for public purposes is:

a. Due Process

b. Equal Protection

c. Eminent Domain

d. Suffrage

39. According to Alice Kaswan, environmental justice has had:

a. an extreme impact on environmental law

b. a significant impact on environmental law

c. a modest impact on environmental law

d. no impact on environmental law

40. According to Carmen G. Gonzalez, people go hungry because:

a. there is not enough food available

b. people are too poor to grow food

c. Both a. and b.

d. Neither a. nor b.

Essay Questions

41. Explain how the tradeable permit plan works.

42. Discuss the obligations of human beings to Mother Earth according to the universal declaration of rights of Mother Earth.

43. The power of eminent domain requires the government to provide just compensation to a property owner when taking private property for public purposes. Discuss your thoughts on whether the following should be considered “public purposes.”

a. The government taking private property to transfer to a private company for development of a strip mall.

b. The government taking private property to build a highway.

c. The government taking private property to expand an airport.

44. The Fifth Amendment to the Constitution explicitly protects private property owners’ economic interests. Explain how this amendment affects owners of private property.

45. What is environmental justice? What started the movement in the United States?

46. Explain the Crisis of Agrobiodiversity as explained by Carmen G. Gonzalez.

CHAPTER 7

Marketing and Technology: Choice and Manipulation

Questions

47. Identify the true statement(s) regarding freedom of speech:

XVII. It was not until the 1920s that legal doctrines protecting speech when offensive began to be recognized by the courts.

XVIII. In the First National Bank v. Bellotti case, the Supreme Court struck down a state law prohibiting a corporation to advertise to influence voters on issues that did not “materially affect” its business.

XIX. In the Virginia Board case, the U.S. Supreme Court failed to link the “right to receive information and ideas” with the traditional values that underlie free speech.

XX. According to the Central Hudson decision, “protected commercial speech” cannot be regulated.

I & II only

II & III only

II, III and IV only

I, II III, and IV

48. Citizens have always been afforded freedom of speech after the ratification of the U.S. Constitution.

True

False

49. According to John Kenneth Galbraith, the theory of consumer demand is based on the following broad assumption(s):

I. Socialism will work in all societies because consumers are willing to share their wealth.

II. The urgency of wants does not diminish as more of them are satisfied.

III. Wants originate in the personality of the consumer.

I only

I and II

III only

II and III

50. The Lanham Act:

I. Focuses on trademark registration and protection.

II. Was passed in reaction to the Great Depression.

III. Gives competitors the right to sue for false claims a rival company makes about the competitor’s product.

IV. Does not allow a company to sue for false claims a rival company makes about their own products.

I & II only

II & III only

I, I and III only

I, II III, and IV

51. Obesity in children has continued to rise since 1976 and approximately ¾ of all teens and youth are overweight.

a. True

b. False

52. The “creative revolution” in advertising refers to

a. The move from black and white to color advertising.

b. The move from talking about a product to showing what a product can do.

c. The move from showing what a product can do to making the product a status symbol.

d. The move from making a product a status symbol to using subliminal messaging to “force” consumers to buy the product.

53. The debate over advertising fast food and other “junk foods” to kids is in effect settled, since federal and state laws have put limits on that advertising.

a. True

b. False

54. According to the Learned Intermediary Rule, pharmaceutical manufacturers do not have to warm consumers about drug dangers as long as they have adequately warned physicians.

a. True

b. False

Essay Questions

55. In the case of R.J. Reynolds Tobacco Company, et al. v. FDA, what was the majority opinion regarding the First Amendment and the graphic warning requirements?

56. What forms can deceptive advertising claims take?

57. Discuss some of the ways the FTC has curbed online marketing efforts.

58. What is the Lanham Act? To succeed in suit under the Lanham Act, what must a plaintiff prove?

59. Discuss the standards of the Creative Code of the American Associate of Advertising Agencies.

60. Discuss how the fast food industry’s response to the obesity epidemic in children has changed since the publication of the Surgeon General’s report.

61. Direct-to-consumer advertising of prescription drugs began in the late 1980’s to early 1990’s. Based on the information in the Norplant case in the text, discuss the reasons why it should or should not be allowed.

CHAPTER 8

Allocating Risk and Responsibilities in the Global Marketplace: Products Liability

Questions

62. The term caveat emptor means:

“seller take care”

“empty the cave of deceit”

“buyer beware”

“truth shall prevail”

63. In Wyeth v. Levine, the majority rejected the idea that primary responsibility for drug safety lies with the government and instead lies with the drug manufacturer.

a. True

b. False

64. The Food and Drug Administration, the Consumer Product Safety Commission and the National Highway Transportation Safety Association are

a. Cabinet departments within the Executive Branch

b. Subcommittees of the Senate and House of Representatives within the Legislative Branch

c. Judicially created organizations to implement Supreme Court mandates related to product safety.

d. Independent agencies that report to no branch of government.

65. The organization that works with companies on recalls of unsafe products (such as lead-paint laden Thomas the Train toys) is

a. The Consumer Protection Group (CPG)

b. The Consumer Product Safety Commission (CPSC)

c. The Product Protection People (P3)

d. The Buy American Coalition (BAC)

66. The most notable exception to caveat emptor was for

Food

Automobiles

Clothing

Shoes

67. To win a suit for negligence, a plaintiff must establish that the defendant:

a. breached its duty of care

b. created an unreasonable risk of harm

c. acted with total disregard to the harm that could result

d. behavior was the proximate cause of the plaintiff’s injuries

a. I and II only

b. II and III only

c. I, II and IV only

d. I, II, III and IV

68. The Ford Pinto exploded when rear-ended by another vehicle. The Pinto suffered from a(an):

Design Defect

Manufacturing Defect

Warning Defect

End-user Defect

69. Absent provisions in the contract, which of the following types of damage can be awarded to an injured party under a breach of contract?

a. General damages only

b. General and incidental damages only

c. General, incidental, and special damages only

d. General, incidental, special and punitive damages

70. According to Stephen Sugarman, performance-based regulation happens when:

the government sets targets for how much harm is allowed for each product produced and the company is fined or penalized for any harm beyond the acceptable level.

the government creates a reporting structure for consumers to report corporation performance related to safety or environmental issues and then the government imposes fines by a specific formula for companies who exceed a certain number of negative reports.

consumer advocacy groups work with the independent agencies to determine which corporations are implementing best practices for consumer safety and then create regulations to impose those practices on other companies.

the government analyzes which companies make the most profit, indicating consumer approval of their performance on safety standards and then implement those companies’ practices as legal standards.

Essay Questions

71. What did the Food Safety Modernization Act (FSMA) do? Has it accomplished what it should have? Why or why not?

72. Compare the regulation of biotechnology in the United States to that of the European Union.

73. Explain the features of Section 402A of the Restatement of Torts (Second).

74. What are punitive damages?

75. Explain how injured parties can recover damages under the UCC.

76. Discuss Sugarman’s “Performance-based regulation.” Is this a viable means to create safer products or is it unnecessary government interference?

CHAPTER 9

Ownership, Creativity and Innovation: Intellectual Property

Questions

77. Debora Halbert asserts in her essay that:

women have benefited greatly from intellectual property laws.

intellectual property has historically benefited men more than women.

in the nineteenth century, writing poetry and novels enabled women to not only express themselves intellectually but to reap financial rewards as well.

when women knitted or quilted, they were reluctant to share their patterns with other women.

78. American copyright law creates a bundle of rights for the owner, including the right to reproduce, distribute, perform, display, or adapt the work.

True

False

79. In a lawsuit for copyright infringement, a defendant can avoid liability by successfully arguing _________, based on the notion that the free flow of ideas sometimes requires quoting or borrowing from a copyrighted work.

collective rights

misappropriation

unlimited use

fair use

80. If an author owns a copyright to a non-fiction essay, then publishes that essay in an anthology of similar essays published by a major publishing company, the rights involved in this relationship would be referred to as ______.

collective work

public domain

collective bargaining

joint domain

81. Once the copyright on a work has expired,

a. The owner can renew it for a new term

b. The work is in the public domain

c. The work becomes the property of the government

d. The work is considered no longer creative

82. The difference between the Project Gutenberg (PG) and the Google book scanning project is:

a. The PG limits itself to the “classics”

b. The PG limits itself to only works in the public domain

c. Google only digitizes full documents but the PG digitizes key segments

d. The PG limits itself to “orphan” works – those with hard-to-find authors or owners.

83. Nike’s swoosh, McDonald’s arches, and the Xerox name are all identifiable trademarks. Which of the following laws protect(s) them?

XXI. Lanham Trademark Act of 1946

XXII. Federal Trademark Dilution Revision Act of 2006

XXIII. Sonny Bono Act of 1998

I only

II only

I and II

II and III

84. In order to obtain a patent under U.S. Patent Law, an inventor must have an invention that is

I. Not obvious

II. Unique

III. Useful

IV. Not a modification of any prior patents

a. I only

b. I and II

c. I, II and III

d. I, II, III and IV

85. Trade secrets are registered just like trademarks.

a. True

b. False

Essay Questions

86. Discuss how intellectual property is different from other kinds of property.

87. What must a plaintiff prove to establish copyright infringement?

88. Give a brief description of the increased protection in U.S. Copyright laws starting in 1994 and using approximate dates.

89. Discuss the Fair Use Doctrine. What are the four statutory factors used to determine if a use is fair?

90. Why was the Digital Millennium Copyright Act passed?

91. Discuss U.S. patent law. Give examples of items that can and cannot be patented.

92. Give examples of improper ways to learning a trade secret under the Uniform Trade Secrets Act. Give an example of a way that is not considered improper or wrong.

#LEG 500 Week 11 Final Exam – Strayer NEW

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LEG 500 Week 5 Discussion Questions – Strayer NEW

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Week 5 DQ

"Health and Safety in the Workplace (OSHA)" Please respond to the following:

· From the e-Activity, determine at least three (3) ways in which United States’ businesses can address the adverse effects of sweatshop labor practices. Provide one (1) specific example of each way that you have just determined to support your response.

· Considering the effect of worker rights on global and developing economies, take a position on whether or not the United States government should regulate the global workforce of the United States corporations. Justify your response.

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LEG 500 Week 5 Assignment 2 – Strayer

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Assignment 2: Employment-At-Will Doctrine

Due Week 5 and worth 150 points

Imagine you are a recently-hired Chief Operating Officer (COO) in a midsize company preparing for an Initial Public Offering (IPO). You quickly discover multiple personnel problems that require your immediate attention.

1. John posted a rant on his Facebook page in which he criticized the company’s most important customer.

2. Ellen started a blog to protest the CEO’s bonus, noting that no one below director has gotten a raise in two (2) years and portraying her bosses as “know-nothings” and “out-of-touch”

3. Bill has been using his company-issued BlackBerry to run his own business on the side.

4. After being disciplined for criticizing a customer in an email (sent from his personal email account on a company computer), Joe threatens to sue the company for invasion of privacy.

5. One of the department supervisors requests your approval to fire his secretary for insubordination. Since the secretary has always received glowing reviews, you call her into your office and determine that she has refused to prepare false expense reports for her boss.

6. Anna’s boss refused to sign her leave request for jury duty and now wants to fire her for being absent without permission.

As an astute manager, you will need to analyze the employment-at-will doctrine and determine what, if any, exceptions and liabilities exist before taking any action. As you proceed with your investigation, you discover the company has no whistleblower policy.

In preparation for this assignment, use the Internet or Strayer Library to research your state’s employment-at-will policy.

Write a four to five (4-5) page paper in which you:

1. Summarize the employment-at-will doctrine discussed in the text and then evaluate three (3) of the six (6) scenarios described by determining:

a. Whether you can legally fire the employee; include an assessment of any pertinent exceptions to the employment-at-will doctrine.

b. The primary action(s) that you should take to limit liability and impact on operations; specify the ethical theory that best supports your decision.

2. Examine your state’s policy on employment-at-will. Analyze at least one (1) real-world example of an employee or employer utilizing your state’s employment-at-will doctrine in the last five (5) years. Include a summary of the main issue and the outcome in the identified real-world example.

3. Use at least three (3) quality resources in this assignment. Note: Wikipedia is not an acceptable reference and proprietary Websites do not qualify as academic resources.

Your assignment must follow these formatting requirements:

· Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.

· Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.

The specific course learning outcomes associated with this assignment are:

· Analyze and apply the concepts of freedom versus responsibility and ethical decision making.

· Analyze and evaluate laws that protect against discrimination in the workplace.

· Analyze and evaluate the employment-at-will doctrine and exceptions, as well as the protections afforded whistleblowers.

· Explore the legal and ethical issues surrounding employee and consumer privacy.

· Use technology and information resources to research issues in law, ethics, and corporate governance.

· Write clearly and concisely about law, ethics, and corporate governance using proper writing mechanics.

#LEG 500 Week 5 Assignment 2 – Strayer

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LEG 320 Week 5 Quiz – Strayer

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Quiz 5 Chapter 8 and 9

CHAPTER 8

CRIMINAL PUNISHMENTS

MULTIPLE CHOICE

1. The Sixth Amendment requires that factual findings made for the purpose of enhancing a sentence must be made by a

jury

judge

prosecuting attorney

defense attorney

2. In Ring v. Arizona, 536 U.S. 584 (2002), the Court held that a state capital sentencing procedure that permitted the sentencing judge to make the factual determination of the aggravating and mitigating circumstances present

violated the Sixth Amendment’s right of trial by jury

violated the Sixth Amendment’s right of trial by judge

violated the Sixth Amendment’s right to a speedy trial

violated the Eight Amendment’s right to freedom from cruel and unusual punishment

3. In Blakely v. Washington, the Supreme Court held the sentence was invalid under the Sixth Amendment, because the defendant was entitled to a jury trial on the facts supporting the finding that he acted with

deliberate cruelty

deliberate indifference

deliberate apathy

deliberate malice

4. In Booker, the Court held that under the holdings of Apprendi and Blakeley, the Federal Sentencing Guidelines violated the Sixth Amendment’s right to

jury trials in criminal cases

speedy trials in criminal cases

fair trials in criminal cases

an attorney in criminal cases

5. The Federal Sentencing Guidelines are

no longer mandatory

no longer discretionary

no longer applicable

no longer fair

6. The name given to the test used to determine whether a sentence constitutes cruel and unusual punishment is

balancing

scales of justice

proportionality

moderation

7. In the 1972 case of Furman v. Georgia, death penalty laws in all states were struck down as

“arbitrary and capricious” by the U.S. Supreme Court

“arbitrary and changeable” by the U.S. Supreme Court

“random and capricious” by the U.S. Supreme Court

“arbitrary and illogical” by the U.S. Supreme Court

8. In Ingraham v. Wright, the Supreme Court considered the relationship between the cruel and unusual punishment clause and the use of corporal punishment in

public schools

prisons

the work place

private schools

9. The U.S. Supreme Court has held that reasonable corporal punishment in public schools

violates the Eighth Amendment

violates substantive due process

is not covered by the cruel and unusual punishments clause

violates equal protection

10. In a public school, any excessive, unreasonable corporal punishment which would shock the conscience would be a violation of

substantive due process

procedural due process

the cruel and unusual punishment clause

equal protection

11. The absence of fair procedures before corporal punishment is utilized on a public school student would be a violation of

substantive due process

procedural due process

the cruel and unusual punishment clause

equal protection

12. Which of the following types of defendants can be given the death penalty?

mentally retarded defendants

juvenile defendants

female defendants

insane defendants

13. In the 1972 case of _____ v. Georgia, the U.S. Supreme Court struck down all state death penalty laws as “arbitrary and capricious.”

Thomas

Cosgrove

Furman

Ellison

14. Generally, before the death penalty may be imposed, a judge or jury must find at least one of what kind of circumstance?

mitigating

balancing

concurrent

aggravating

15. What kinds of evidence must be produced if the prosecution seeks imposition of the death penalty after a jury has found the defendant guilty of the crime charged?

aggravating circumstances

mitigating circumstances

infuriating circumstances

frustrating circumstances

16. The Eighth Amendment prohibits the imposition of which kind of fines?

excessive

proportional

mitigating

monetary

17. The text of the Eighth Amendment prohibits excessive bail, excessive fines, and

cruel and unusual punishment

the death penalty

life without parole

three strikes laws

18. The Sixth Amendment requires that a jury must make factual findings for the purpose of

enhancing a sentence

putting a guilty defendant to death

a downward departure

a reduced sentence

19. Fines, like other types of punishment, must be

balanced

contingent

pro-rated

proportional

20. All states and the federal government have some type of sentence _____ statutes which typically increase the penalty if the crime was deemed a hate crime or the victim was elderly or handicapped.

mitigation

enhancement

aggravation

proportionality

21. Habitual offender or recidivist statutes that provide for a life sentence after multiple felony convictions are

unconstitutional

routinely found to be cruel and unusual punishment

allowed on the federal level but not on the state level

subject to a proportionality test, i.e., the sentence fits the crime

22. Which of the following is NOT characteristic of career-criminal programs?

longer sentences

encourages plea bargaining

speeds up prosecution of the defendant

development of special units within law enforcement agencies

23. In the Solem v. Helm case, the Supreme Court held the defendant’s sentence to life without parole for passing a “no account” check was

a harsh, but acceptable sentence

a violation of procedural due process

a violation of the Eighth Amendment

an advisable sentence which would serve to deter others

24. What case established the steps for a proportionality review of a non-capital sentence?

the Solem case

the Apprendi case

the Blakely case

the Miranda case

25. In Apprendi, the Court held that any fact that increases the penalty for the crime charged must be submitted to the jury and proved

beyond a reasonable doubt

beyond a reasonable suspicion

beyond a doubt

by a preponderance of the evidence

26. The Apprendi opinion caused many changes in

sentencing procedures

jury procedures

misdemeanor trial procedures

wording of three strikes laws

27. Blakely v. Washington, 124 S.Ct. 2531 (2004), applied the reasoning of Apprendi to

state sentencing systems

federal sentencing systems

city sentencing systems

county systems

28. The laws popularly called “three strikes and you’re out”

consistently violate the Eighth Amendment

have been repealed in all states

violate double jeopardy

apply only to felony convictions

29. Based upon the Court’s decision in Lockyer v. Andrade, “three-strikes” laws may

be unconstitutional in certain situations

not be used for nonviolent offenses

not be used in federal courts

not be used in federal or state courts

30. In Atkins v. Virginia, 536 U.S. 304 (2002), the Court held that the Cruel and Unusual Punishment Clause of the Eighth Amendment prohibited imposition of the death penalty on defendants with

mental retardation

schizophrenia

terminal illness

none of these answers are correct

TRUE/FALSE

1. The Eighth Amendment of the U.S. Constitution, ratified in 1791 as part of the Bill of Rights, provides that “excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”

2. Corporal punishment in public schools violates the Eighth Amendment.

3. In 1972, the Supreme Court, in Furman v. Georgia, invalidated all existing state death penalty laws.

4. The death penalty may not be imposed upon a person determined to be insane.

5. The Apprendi opinion caused many changes in sentencing procedures and also resulted in many reversals of sentences handed down by trial judges.

6. Blakely v. Washington, 124 S.Ct. 2531 (2004), applied the reasoning of Apprendi to state sentencing systems.

7. A defendant ordered to serve two years concurrently for conviction of two counts of a crime must serve the sentences one after the other, for a total of four years.

8. A long criminal record would be an aggravating factor while no previous criminal record would be a mitigating factor.

9. In 1984 the federal government passed the Truth in Sentencing law (TIS), which encouraged states to pass sentencing laws that guaranteed a defendant served the entire time sentenced rather than just a few years.

10. The use of a firearm or dangerous weapon while committing a crime frequently serves as a basis for sentence enhancement.

COMPLETION

1. The ban on cruel and unusual punishments requires that punishments be ____________ to the seriousness of the offense.

2. In Booker, the Court held that under the holdings of Apprendi and , the Federal Sentencing Guidelines violated the Sixth Amendment’s right to jury trials in criminal cases.

3. To impose the death penalty, the jury must find the existence of a(n) __________ circumstance.

4. Death penalty statutes allow the jury to impose a sentence other than the death penalty if they find a ____________ circumstance.

5. In 1972, in the case of ___________v. Georgia, the U.S. Supreme Court invalidated all existing state death penalty statutes.

6. The ___________ Amendment prohibits execution of a prisoner who is insane.

7. Sentences that are to be served are served at the same time.

8. The Eighth Amendment Cruel and Unusual Punishment Clause is not applicable to the use of corporal punishment for purposes in the public schools.

9. In the 1972 case of Furman v. Georgia, death penalty laws in all states were struck down as “arbitrary and ” by the U.S. Supreme Court.

10. Sentence enhancement statutes are used to ____________ the period of incarceration the defendant may be ordered to serve.

CHAPTER 9

FREE SPEECH, “STREET CRIMES,” AND THE BILL OF RIGHTS

MULTIPLE CHOICE

1. One test for when government can ban speech because of its potential for harm is the

clear and present danger test

obvious and current harm test

contingent and imminent injury test

overt and contemporary peril test

2. Which of the following are forms of speech that are NOT protected by the First Amendment?

political speech

commercial communications

fighting words

advertising

3. The fighting words exception to First Amendment protection generally requires

the use of obscenity

face-to-face confrontation

a defamatory message

vulgar language

4. Symbolic speech such as uniforms, religious garb, black armbands, and hand gestures express messages and ideas and are protected by the

First Amendment

Second Amendment

Third Amendment

Fourth Amendment

5. A statute forbidding persons not in custody from making false statements to law enforcement officers, even if not under oath, would

not violate the First Amendment

violate the First Amendment

violate the privilege against self-incrimination

violate due process

6. Patently offensive sexual material which is not protected by the First Amendment would be

pornography

obscenity

profanity

blasphemy

7. In determining whether something is obscene, the court will view the material from the point of view of

expert witnesses

a reasonable police officer

the average person applying community standards

a person well acquainted with art and literature

8. Public use of vulgar, profane, or indecent language or signs

is generally protected speech

is never protected by the First Amendment

violates the First Amendment only if it is offensive to the general public

is automatically considered a breach of the peace

9. The offense of inciting occurs

if the person incited actually commits the crime

if the person inciting participates in the criminal act

even if the unlawful act is never actually committed

if the inciting words are expressed in a loud and forceful voice

10. The crime of inciting occurs when speech or communication urges

violent lawless action

imminent lawless action

obscene lawless action

felonious lawless action

11. The two forms of defamation are

past and imminent

libel and slander

latent and patent

dangerous and offensive

12. What is the name given to speech which injures the character or reputation of another by written communication?

slander

libel

extortion

false publication

13. Defamation is the communication of false statements that

cause another to commit a breach of the peace

pose a clear and present danger

are patently offensive

damage the reputation of another

14. Which of the following has NOT been considered to be a “true threat”?

threats against public officials

threats by schoolchildren against teachers or other students

terrorist threats

all of these have been considered to be “true threats”

15. Which of the following are ways one person might stalk another person?

spying on the victim

following the victim

e-mailing the victim

all of these are ways one person might stalk another person

16. In District of Columbia v. Heller, 128 S.Ct. 2783 the U.S. Supreme Court held that the Second Amendment was a

private right

state right

federal right

government right

17. Speech that, because it will likely incite immediate violence, is not protected by the First Amendment is known as

fighting words

obscenity

rude language

incitement

18. The test used to judge government restrictions on speech is called the

clear and present danger test

libel and slander test

stalking test

violence test

19. Using the U.S. mail or e-mail to convey a threat of violence is

a form of pure speech

a form of symbolic speech

considered fighting words

a violation of federal law

20. When a city or state restricts conduct in public places

it must have proof that the conduct is or will be harmful

the public place must attract large numbers of people

the restrictions must not be aimed at speech

it must show it has a significant interest in placing restrictions and they must be no greater than necessary

21. Which of the following is NOT one of the guidelines for American courts to define obscenity established in the 1973 case of Miller v. California?

Whether “the average person applying contemporary community standards” would find that the work, taken as a whole, appeals to the prurient interest.

Whether the work or communication depicts or describes, in a patently offensive way, sexual conduct specifically defined by the applicable state law.

Whether the work or communication, taken as a whole, lacks serious literary, artistic, political, or scientific value.

all of these are guidelines established to define obscenity in the 1973 case of Miller v. California

22. A person who lies to federal investigators can be charged under the

Federal Fraudulent Claim Act

Federal Obstruction of Investigation Act

Federal Perjury Act

Federal False Statement Act

23. The offense of urging another to commit an unlawful act is

inciting

libel

slander

stalking

24. The crime of unlawful assembly

prohibits the assembly of people for an unlawful purpose or under circumstances that endanger the public peace

prohibits political demonstrations without a permit

allows the government to limit First Amendment speech

was a common crime that most jurisdictions no longer recognize

25. Stalking is a crime

if the stalker actually harms the victim

if the stalker attempts to harm the victim

even if the stalker does not attempt to harm the victim

if the victim can identify the stalker

26. The Second Amendment refers to whose right to keep and bear arms?

the states

the militias

the people

the National Guard

27. A state or federal gun control law is likely to

violate the Second Amendment

be supported by the NRA

struck down by the federal court

be upheld

28. According to the U.S. Supreme Court, the following is not protected by the First Amendment freedom of religion clause EXCEPT:

worship

violation of child labor laws

polygamy

handling dangerous animals in a religious ceremony

29. The offense of injuring the character or reputation of another by oral or written communication of false statements is

defamation

libel

slander

stalking

30. The First Amendment protects the freedom of religion, speech, free assembly, the press, and

petitioning Government for redress of grievances

suing Government for redress of grievances

libeling Government for redress of grievances

slandering Government for redress of grievances

TRUE/FALSE

1. Freedom of speech is an absolute right.

2. “Fighting words” are protected speech under the First Amendment.

3. Local, state, or federal governments in the United States cannot forbid or suppress speech and punish the speaker unless the speech is likely to bring harm to people or property.

4. According to the U.S. Supreme Court, it is the duty of law enforcement to define obscenity.

5. Violations of restraining orders are not “true threats”.

6. The offense of inciting another to commit a crime is not completed until the other person performs the unlawful act.

7. Cyber stalking, or using the Internet to stalk or harass a person, is a variation on the usual physical acts in stalking.

8. The Supreme Court has stated that the right to bear arms is a “fundamental right” made binding on states by the Due Process clause.

9. An e-mail threat against all females will constitute a “true threat.”

10. A person can stalk another by physically intruding into the other person’s life.

COMPLETION

1. Under the First Amendment, government cannot forbid ________ unless it is likely to bring harm to people or property.

2. All states have laws forbidding a breach of the peace, also known as _________ _________.

3. The two main forms of __________ are libel and slander.

4. Fighting words differ from ordinary rude language because they carry the possibility of inciting another to .

5. Violation of a restraining order can subject the violator to a ________ charge.

6. The use of public property is subject to ___________ regulations.

7. First Amendment freedoms and the rights of expression in public places are not ___________.

8. A clear and present danger is the possibility that some speech or conduct will bring harm to people or property .

9. Obscenity is speech or other communication that appeals to a reasonable person’s prurient interest, describes in an offensive manner specific defined sexual conduct, and has no social value.

10. A person can stalk another by sending messages.

#LEG 320 Week 5 Quiz – Strayer

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Chapter 1 Through 12

Chapter 1

WHAT IS RESEARCH?

Multiple-Choice Questions

*1. To be considered true research, a project must:

a. gather together a body of existing information and communicate it in a clear and

concise way.

b. uncover obscure or esoteric information and bring it to the consideration of the broader research community.

c. gather and interpret information in a systematic fashion so as to increase understanding of some phenomenon.

d. produce definitive conclusions regarding the subject of study.

**2. Which of the following examples illustrates research the way it is defined in your textbook?

a. Sally is writing a paper about the effects of the Harry Potter books on the reading habits of fourth graders in the United States and United Kingdom. She goes to a research library to find information to include in her paper.

b. Ian wants to know why the population of songbirds has declined in recent years in the Sutton Wilderness Area. He carefully collects soil and water samples, systematically surveys the entire area for predators, and then sits down to make sense of his findings.

c. Leonard is starting a woodworking business and is not sure how to calculate the cost of his labor so he can be both profitable and fair to the customers. He asks several established business owners how they calculate labor changes.

d. Bill is doing a report on the sonnets of Shakespeare. He carefully reads a number of sonnets and then carefully reads scholarly reviews of those same sonnets written by various Shakespeare scholars. He synthesizes all of this information in his report.

*3. Which of the following is defined as an organized body of concepts and principles intended to explain a particular phenomenon?

a. Theory b. Inference c. Hypothesis d. Interpretation

*4. Which of the following is defined as a reasonable guess, or a logical supposition, for explaining the phenomenon under investigation?

a. Theory b. Inference c. Hypothesis d. Interpretation

*5. The process of formal research begins with the identification of:

a. research hypotheses.

b. a feasible research plan.

c. available participants.

d. a research problem.

*6. The purpose of formal research is to:

a. prove or disprove the study hypotheses.

b. support or fail to support the study hypotheses.

c. identify alternative hypotheses.

d. move beyond the need for hypotheses.

*7. Assumptions come into play:

a. in regard to nearly every aspect of every research study.

b. in qualitative research but not in quantitative research.

c. when research is not well thought out.

d. rarely, if ever.

*8. Well-designed research manages to minimize or avoid:

a. assumptions.

b. predictions.

c. theory.

d. bias.

*9. Researchers ______ their phenomenon of interest on the basis of data analysis.

a. make inferences about

b. know facts about

c. define

d. identify

*10. A primary function of the methodology is to:

a. guide and control the acquisition of data.

b. extract meaning from the data that have been gathered.

c. both a and b

d. neither a nor b

*11. Three of the following come into play as the researcher analyzes the data. Which one does NOT?

a. The study hypothesis/hypotheses

b. Preferences for certain outcomes

c. The logical reasoning process

d. Assumptions

*12. A well-designed and well-conducted study:

a. answers questions of importance in the field.

b. raises questions of importance to the field.

c. answers some questions and raises other questions.

*13. Reading the professional literature in the field of interest:

a. will enhance an individual’s ability to design and conduct high-quality research.

b. will stifle creativity and constrain the individual to the status quo.

c. will make little difference to the quality and impact of the individual’s work.

d. is necessary only for the leaders in the field.

*14. One indication that a piece of information is of high quality is that the information:

a. is found on the Internet.

b. is found in a juried (or refereed) research report.

c. resulted from a project that received corporate funding.

d. is the firsthand account of a personal experience.

Essay Questions

15. Your chapter states: “Research is, by its nature, cyclical or, more exactly, helical.” Explain why “cyclical” is an appropriate description of the research process. Then explain why “helical” is a better description.

16. Describe an example of the word research being used inappropriately. Be clear about how your example deviates from the definition of research offered in the chapter.

17. Graduate professors like to insist that the completion of thesis or dissertation research is not merely an “academic exercise” or final hurdle to obtaining the desired degree. Explain at least one personal benefit that the individual derives from completing a high- quality thesis or dissertation. Then explain at least one societal benefit that follows from the individual’s completion of a high-quality thesis or dissertation.

18. In the most rigorous tests of hypotheses, the researcher sets out to fail to support the hypothesis. Why is the attempt to fail to support a more rigorous test of the hypothesis than an attempt to support it?

Chapter 2

TOOLS OF RESEARCH

Multiple-Choice Questions

*1. A ______ is a specific mechanism or strategy the researcher uses to collect,

manipulate, or interpret data.

a. research tool

b. research methodology

c. statistical test

d. theory

*2. Research methodology refers to:

a. the general approach the researcher takes to conducting a research project.

b. a specific device the researcher uses to collect data.

c. the specific theoretical basis of the research project.

d. the statistical tests to be employed in a research project.

**3. Sam wants to find high-quality research reports related to attribution theory that have been published in professional journals. Sam’s best approach would be to:

a. consult the library catalog.

b. consult an online or electronic database.

c. search the World Wide Web.

d. browse the shelves in the library.

**4. Sonya is a college freshman who has just been assigned her first research paper, and she doesn’t know how to get started finding information. Sonya should:

a. search the World Wide Web.

b. consult an online or electronic database.

c. consult a reference librarian.

d. browse the shelves in the library.

*5. ______ allows a researcher to receive news in an area of special interest and discuss that news with others.

a. A search engine

b. E-mail

c. A list server

d. A Web browser

*6. ______ allows researchers to personally correspond practically instantly with other users around the world.

a. A search engine

b. E-mail

c. A list server

d. A Web browser

**7. John wants to begin using e-mail. Which of the following steps is NOT necessary for John to get started as an email user?

a. Request an e-mail account

b. Obtain necessary software from the e-mail provider and load it onto a computer

c. Learn to use a Web browser to explore the Internet

d. Learn how to access and use the e-mail provider’s services

*8. Three of the following statements about measurement in the research setting are accurate. Which one is NOT accurate?

a. The purpose of measurement is to systematically limit the data in a way that makes it quantifiable.

b. Measurement is applied by researchers only to insubstantial phenomena.

c. Measurement is a tool that aids researchers in interpreting their observations.

d. Systematic measurement assists researchers in obtaining objectivity in their researcher.

*9. An ordinal scale of measurement:

a. assigns a name to a category.

b. is tied to an absolute zero.

c. incorporates equal units of measurement.

d. communicates greater than and less than relationships.

*10. An interval level of measurement:

a. assigns a name to a category.

b. communicates rank-order information.

c. incorporates equal units of measurement.

d. is tied to an absolute zero.

*11. A ratio scale of measurement:

a. assigns a name to a category.

b. communicates rank-order information.

c. is especially appropriate for opinion data.

d. is tied to an absolute zero.

**12. The main difference between an interval and a ratio scale is that only one of them:

a. includes an absolute zero.

b. uses equal units of measurement.

c. supports the use of statistical analyses.

d. is used in research with human subjects.

**13. Professor Harris is constructing a demographic questionnaire for use in a research project. One question asks students to report how politically conservative they are. It includes a 7-point scale where 1 is “not at all conservative” and 7 is “extremely conservative.” This is an example of a/an:

a. nominal scale.

b. ordinal scale.

c. interval scale.

d. ratio scale.

**14. Professor Harris is constructing a demographic questionnaire for use in a research project. One question asks students to report their highest level of education by choosing from these options: “some high school,” “completed high school,” “some college,” or “completed 4-year college degree.” This is an example of a/an:

a. nominal scale.

b. ordinal scale.

c. interval scale.

d. ratio scale.

**15. Professor Harris is constructing a demographic questionnaire for use in a research project. One question asks students to report their age in years. This is an example of a/an:

a. nominal scale.

b. ordinal scale.

c. interval scale.

d. ratio scale.

**16. Professor Harris is constructing a demographic questionnaire for use in a research project. One question asks students to report whether they are currently living in an “urban,” “suburban,” or “rural” setting. This is an example of a/an:

a. nominal scale.

b. ordinal scale.

c. interval scale.

d. ratio scale.

*17. ______ refers to whether a measurement tool actually measures what it is intended to measure.

a. Validity

b. Reliability

c. Accountability

d. Robustness

*18. ______ refers to how consistently a measurement tool will yield the same result when the phenomenon under investigation does not change.

a. Validity

b. Reliability

c. Replicability

d. Dependability

**19. Kade has spent the past month carefully observing a group of third graders on the playground during recess, taking note of how the students interact with one another. On the basis of these observations, Kade is drawing conclusions about the interaction styles of boys and girls. This is an example of:

a. hypothetical logic.

b. deductive logic.

c. inductive logic.

d. propositional logic.

**20. Kimberly knows that teenagers often do not make good decisions in areas where they have little knowledge. She also knows that most teens have little knowledge about human sexuality. Therefore, Kimberly believes that teens are likely to make poor decisions about sexual activity. This is an example of:

a. inductive logic.

b. propositional logic.

c. transductive logic.

d. deductive logic.

Essay Questions

21. In your opinion, what is the one greatest advantage to society of the information revolution? What is the one greatest disadvantage? Support your answer.

22. Near the end of Chapter 2 the authors of your textbook include a relatively lengthy section on writing the research report. Why is it important that research results are carefully written up and made available to the scientific community?

23. Do recent technological advances (e.g., the World Wide Web, electronic databases) assure that future research will be of higher quality, or of greater utility, than past research? Support your answer.

Chapter 3

THE PROBLEM: THE HEART OF THE RESEARCH PROCESS

Multiple-Choice Questions

*1. Research problems, as defined in your textbook:

a. are identified by experts in the field, and not typically knowable by novices.

b. clearly and completely specify important questions that are currently unanswered in a particular field of inquiry.

c. are broad, general statements about the incomplete state of understanding in a particular field of inquiry.

d. can be addressed by compiling and synthesizing existing information in a way that sheds light on the issue of interest.

*2. Basic research is:

a. research intended to enhance basic knowledge about the physical, biological, psychological, or social world or to shed light on historical, cultural, or aesthetic phenomena.

b. large scale research performed under contract with a governmental agency such as the National Science Foundation (NSF), National Institute of Mental Health (NIMH), etc.

c. informal research conducted locally by a small staff with a small budget, the purpose of which is to pave the way for larger research initiatives.

d. research intended to address issues that have immediate relevance to current practices, procedures, and policies.

*3. Applied research is:

a. research intended to enhance basic knowledge about the physical, biological, psychological, or social world or to shed light on historical, cultural, or aesthetic phenomena.

b. large-scale research performed under contract with a governmental agency such as the National Science Foundation (NSF), National Institute of Mental Health (NIMH), etc.

c. informal research conducted by a small staff with a small budget, the purpose of which is to shed light on a problem of local interest.

d. research intended to address issues that have immediate relevance to current practices, procedures, and policies.

**4. Which of the following represents a well-written basic research problem?

a. “Which general education course is more interesting, U.S. History or World Music?”

b. “How do business teams of six or fewer members compare to teams of more than six members in terms of productivity?”

c. “How does the organization of mathematical information in long-term memory differ between 3-year-olds and 13-year-olds?”

d. “What is the ratio of native-born students to international students on the campuses of major U.S. state universities?”

**5. Which of the following represents a well-written applied research problem?

a. “How does the organization of mathematical information in long-term memory differ between 3-year-olds and 13-year-olds?”

b. “How do business teams of six or fewer members compare to teams of more than six members in terms of productivity?”

c. “Which general education course is more interesting, U.S. History or World Music?”

d. “What is the ratio of native-born students to international students on the campuses of major U.S. state universities?”

**6. Three of the following questions lend themselves well to formal research. Which one does NOT?

a. “How does the organization of mathematical information in long-term memory differ between 3-year-olds and 13-year-olds?”

b. “How do business teams of six or fewer members compare to teams of more than six members in terms of productivity?”

c. “Does message medium, print versus television, impact the effectiveness of public service health messages?”

d. “Which general education course is more interesting, U.S. History or World Music?”

*7. Three of the following are characteristics of a well-written research problem. Which one is NOT?

a. The problem statement includes jargon associated with the field.

b. The problem statement clearly delimits the object(s) of study.

c. The problem statement identifies the important factors to be investigated in the study.

d. The problem statement explicitly identifies assumptions.

*8. A common weakness of research problems is that they:

a. delimit the object(s) of study.

b. constrain the variables to be investigated.

c. implicitly rest on common assumptions.

d. incorporate a number of subproblems.

**9. “What proportion of workers hired by selected factories in the state of Oklahoma between 1995 and 2000 held four-year college degrees?”

The chief weakness of this research problem is that:

a. it lacks clarity or completeness in the problem statement.

b. it implies only description of the data, not interpretation.

c. it does not lead to the creation/discovery of new information.

d. studying the question as stated is not feasible.

**10. “What do underemployed U.S. workers (i.e., those workers who are employed, but not in positions for which they have specialized training or expertise) identify as the primary reason for their inability to find suitable employment?”

The chief weakness of this research problem is that:

a. it lacks clarity or completeness in the problem statement.

b. it does not lead to the creation/discovery of new information.

c. it implies only description of the data, not interpretation.

d. studying the question as stated is not feasible.

**11. “What is the correlation between an index of civic-mindedness and years of involvement in local organizations and charities among members of city councils of selected midsized cities in the northeastern United States?”

The chief weakness of this research problem is that:

a. it implies only description of the data, not interpretation.

b. it does not lead to the creation/discovery of new information.

c. it lacks clarity or completeness in the problem statement.

d. studying the question as stated is not feasible.

**12. “Among social workers in selected U.S. urban areas, are the personality characteristics of Need for Structure or In-Group Preference related to prejudicial social judgments about African Americans, Latino Americans, or Asian Americans?”

Which of the following is a well-stated subproblem that follows from this research problem?

a. Which group is more discriminated against by the public at large in each of the selected areas: African Americans, Latino Americans, or Asian Americans?

b. What is the most valid existing measure of In-Group Preference?

c. What is the relationship between an index of Need for Structure and an index of prejudice targeting attitudes about Asian Americans among the selected social workers?

d. Which analytic technique is best suited to addressing the research problem, multiple regression or path analysis?

*13. In regard to research questions and hypotheses, a high-quality research study will:

a. articulate only research questions, not hypotheses, so as not to constrain the possible findings.

b. articulate only hypotheses, not research questions, in order to preserve the scientific rigor of the investigation.

c. focus only on those questions that can support the correctness of current hypotheses or theoretical positions.

d. articulate either research questions or hypotheses depending on the nature of the study.

**14. Which of the following represents a null hypothesis?

a. Class A high school basketball teams who employ a sports psychologist will have a higher proportion of wins over the course of the season than comparable teams who do not employ a sports psychologist.

b. There will be no difference in rate of skill improvement between college gymnasts who practice meditation and those who do not.

c. Does incorporating relaxation exercises into the daily practice routine of college vocal majors enhance their performance confidence?

d. None of the above

**15. Which of the following represents a research hypothesis?

b. There will be no difference in rate of skill improvement between college gymnasts who practice meditation and those who do not.

c. Does incorporating relaxation exercises into the daily practice routine of college vocal majors enhance their performance confidence?

d. None of the above

*16. The recommended order of tasks in preparing a research proposal is:

a. state the problem and subproblems, note the assumptions, note the delimitations, define the terms, note the research questions/hypotheses.

b. state the problem and subproblems, note the delimitations, note the research questions/hypotheses, note the assumptions, define the terms.

c. state the problem and subproblems, note the research questions/hypotheses, note the assumptions, define the terms, note the delimitations.

d. state the problem and subproblems, note the research questions/hypotheses, note the delimitations, define the terms, note the assumptions.

*17. Three of the following comprise the setting of the research problem. Which one does NOT?

a. A clear description of all measurement tools to be used in the research project

b. A clear statement of what the researcher will and will not do in the course of the study

c. A clear statement of the assumptions on which the research problem rests

d. A clear definition of all terms related to the research problem that might be misunderstood by a reader

Essay Questions

18. Why is it important that the researcher articulate, as clearly as possible, all assumptions that affect the research problem?

19. Your textbook authors recommend explicitly defining any term that might be misunderstood by someone reading the research proposal. If the research proposal is being written chiefly for use and review by researchers, why is such a step necessary?

20. Daphne has been a member of a research team studying interpersonal aggression among preschoolers for more than a year. In that time, her team has repeatedly employed a consistent set of techniques and procedures to study preschoolers as they interact in a number of settings. The procedures revolve around volunteer mothers bringing their children to the university child development lab for a “play session” that is the basis of the formal observations. Settings they have studied so far include: the university pre-school, affluent local day-care centers, and a pre-kindergarten program being offered in the neighborhood school district. All of these settings were fairly racially homogenous.

Daphne has just learned that a friend of a friend can help her gain research access, in the near future, to preschoolers in an unusually racially diverse though impoverished preschool setting. Daphne decides she has no time to prepare a formal research proposal before embarking on the study. “Besides,” she thinks, “this study should go just like all the others we’ve done.”

Is Daphne leaving herself open to problems in this situation, or is she safe moving ahead with no formal proposal, given how familiar she is with the study techniques and procedures?

Chapter 4

REVIEW OF THE RELATED LITERATURE

Multiple-Choice Questions

*1. Generally speaking, the best time to begin the literature review associated with a specific research project is:

a. after the research problem has been clearly articulated.

b. after the data have been collected, but before they are analyzed.

c. based on personal preference; there is no single best time.

d. before or during the formulation of the research problem.

*2. If you want to find information about books available in your local library, ______ will probably be your best resource.

a. the library catalog

b. government publications

c. an online database

d. the World Wide Web

*3. If you want to conduct a keyword or author search of research reports published in professional journals, ______ will probably be your best resource.

a. the library catalog

b. government publications

c. an online database

d. the World Wide Web

*4. If you want to find statistics on health care spending broken down by state, ______ will probably be your best resource.

a. the library catalog

b. government publications

c. an online database

d. the reference lists of important papers in your area

**5. If an important reference you want to include in your literature review is checked out to another library patron, you might:

a. obtain it through interlibrary loan.

b. obtain it by asking the library to recall the reference.

c. obtain it through an online document delivery service.

d. decide to make do without it.

**6. If an important recent research article that you want to include in your literature review is not owned by your library, you might:

a. cite it anyway for the benefit of the reader.

b. obtain it by asking the library to recall the reference.

c. obtain it through an online document delivery service.

d. decide to make do without it.

**7. If an important book that you want to include in your literature review is not owned by your library, your best move would probably be to:

a. obtain it through interlibrary loan.

b. obtain it by asking the library to recall the reference.

c. obtain it through an online document delivery service.

d. cite it anyway for the benefit of the reader.

*8. ______ is an example of a search engine.

a. Altavista

b. Books in Print

c. ERIC (Educational Resources Information Center)

d. Humanities Index

*9. ______ is an example of an electronic database.

a. Altavista

b. Books in Print

c. ERIC (Educational Resources Information Center)

d. Humanities Index

**10. Jane wants to search for information about the variety of attention disorders that are seen in childhood. Which of the following sets of keywords would best get Jane started on an effective and efficient search?

a. “attention disorders”

b. “ADHD,” “ADD,” and “children”

c. “disorders” and “children”

d. “attention disorders” and “children”

*11. If a researcher has completed a thorough search of the World Wide Web:

a. the literature search can be concluded.

b. it may also be fruitful to search an electronic database.

c. it may also be fruitful to search the Internet.

d. he/she will find largely redundant information on an electronic database.

*12. The main purpose of the review of the literature is to:

a. acknowledge the work of others by listing their findings prior to proposing your own project.

b. show how your study is superior to other work done in the area.

c. publicly demonstrate your mastery of the research literature in your area.

d. show how your study is related to, and extends, other work in the area.

*13. A well-structured literature review:

a. contains highly detailed descriptions of each work chosen for inclusion in the review.

b. begins with those studies most closely related to the research problem, then opens up to a broader perspective.

c. begins with broad/general information, then narrows the focus to those studies most closely related to the research problem.

d. contains general summaries of each work chosen for inclusion in the review.

*14. The review of the literature can be curtailed when:

a. you are no longer encountering new ideas or information.

b. all of the work done by top researchers in the area has been reviewed.

c. all published work related to a topic has been reviewed.

d. two to four weeks have been devoted to the search.

*15. A well-written literature review:

a. avoids evaluation or critique of the literature reviewed, so as not to bias the opinion of the reader.

b. emphasizes critique and synthesis of the work of others that is related to your own research problem.

c. avoids summarizing the work of others so that details of the original work are not lost in the reviewing process.

d. emphasizes detailed reporting of each piece of research included in the literature review.

*16. Typically, the literature review should:

a. include few or no works more than five years old to avoid having the work become prematurely obsolete.

b. be limited to work coming out of the very best labs and universities in the country.

c. give a broad overview of the area, without getting bogged down in the details of particular studies or theoretical perspectives.

d. emphasize how the studies being reviewed are related to the research problem under consideration.

Essay Questions

17. Describe three benefits of conducting a thorough review of existing literature before writing a research proposal.

18. Kirby is conducting a literature review in preparation for his study of “expectations regarding the sharing of financial and practical responsibilities among married and cohabiting couples in which both partners are between the ages of 20 and 29.” Conducting a keyword search on “couples” and “responsibility,” Kirby has generated a lengthy list of research articles. He decides to shorten the list of potential articles by eliminating all articles that were not published in prestigious research journals. He will include all the remaining articles in his literature review. What is your opinion of Kirby’s approach to selecting articles for the literature review? Explain.

19. You are reading a literature review written by a novice researcher in your field. You notice that the researcher seems to have relied heavily on the World Wide Web in preparing the literature review. Your hunch is supported when you glance at the reference page and find a long list of Internet addresses. What goes through your mind regarding the quality and adequacy of the literature review in this situation?

Chapter 5

PLANNING YOUR RESEARCH PROJECT

Multiple-Choice Questions

*1. A good research plan, according to your textbook, includes:

a. specific procedures and data sources, but does not lock the researcher into an analysis plan.

b. initial procedures and key data sources, but is also open to modification as the project progresses.

c. a specific plan regarding data sources and analyses, although information regarding the specific research sample is best left open.

d. includes specific sampling plan, procedures, data sources, and analysis plan.

*2. The basic format of the quantitative research process includes (in part), in chronological order:

a. pose the question, pose a hypothesis, search the literature, collect the data.

b. clearly state the research question, collect data, review the literature, write up the

findings.

c. review the literature, identify a question, collect data, analyze data.

d. pose a hypothesis, collect data, analyze data, review the literature.

*3. When considering general criteria for high-quality research projects, universality refers to the fact that:

a. the research design allows the researcher to control those factors that are central to the success of the project.

b. another researcher in the same field, using the same procedures under the same circumstances to research the same question, would obtain comparable results.

c. a well-designed research project could be carried out by any competent researcher; it does not rely on a specific individual.

d. the phenomena of interest must be quantified in some systematic way.

*4. When considering general criteria for high-quality research projects, replicability refers to the fact that:

a. the research design allows the researcher to control those factors that are central to the success of the project.

b. another researcher, using the same procedures under the same circumstances to research the same question, would obtain comparable results.

c. a well-designed research project could be carried out by a specific individual conducting research in the same field.

d. the phenomena of interest must be quantified in some systematic way.

*5. Three of the following accurately characterize data. Which one does NOT necessarily characterize data?

a. Data may be elusive.

b. Data can be volatile.

c. Data are ever changing.

d. Data reveal truth.

**6. Charlotte, an anthropologist, has been living in an Incan village for three years. During that time Charlotte has become expert in Incan weaving by observing and imitating the master weavers in the community. For Charlotte, observing weaving constitutes:

a. primary data.

b. secondary data.

c. informal data.

d. nonempirical data.

**7. Charlotte wrote a book about her experience as an anthropologist living in an Incan village for three years and becoming an expert weaver. Her book was widely read by other anthropologists, including Mira, who is an expert in Navaho weaving. For Mira, Charlotte’s book constitutes:

a. hearsay data.

b. secondary data.

c. informal data.

d. primary data.

**8. Sean, a high school wrestler, has agreed to participate in a study of cardiovascular conditioning. He is left somewhat confused when, at the first research session, he is asked to complete a questionnaire about commonly purchased grocery items. Sean’s confusion indicates a lack of ______ regarding the task.

a. construct validity

b. content validity

c. criterion validity

d. face validity

**9. A researcher decides to use a high school sample to test the relationship between her new measure of empathy and a well-established measure of interpersonal sensitivity. She finds that the two instruments are highly related, which supports the ______ of the new instrument.

a. �� predictive validity

b. content validity

c. criterion validity

d. face validity

**10. A researcher designed a new questionnaire to measure political conservatism. To test out his new instrument, he asks people leaving their polling place on election day to report their degree of political conservatism on a scale of 1 (low) to 10 (high) and then complete his questionnaire. Results show that people who identified themselves as political conservatives also had the highest scores on his questionnaire. This is an indication of the ______ of the new instrument.

a. criterion validity

b. content validity

c. face validity

d. predictive validity

**11. Dick and Jane are studying aggression among preschool children. Separately, they each watch a videotape of four children interacting in a playroom and then rate each child on the level of aggression displayed during the play session. They compare their completed ratings and are pleased to note they are highly similar. This is an example of ______ reliability.

a. interrater

b. internal consistency

c. equivalent form

d. test–retest

**12. Dr. Drive is testing a 10-question measure of achievement motivation. He notes that if his respondents agree with the first question, they tend to also agree with the other nine. Likewise, if his respondents disagree with the first question, they tend of disagree with the other nine. This is an indication of good ______ reliability.

a. interrater

b. internal consistency

c. equivalent form

d. test–retest

**13. Professor Pickle is studying civic-mindedness among senior citizens. She administers a survey of civic mindedness to a senior citizens group in early April, then again in early May. By comparing the two sets of scores, the professor can assess the ______ reliability of her measure of civic-mindedness.

a. interrater

b. internal consistency

c. equivalent form

d. test–retest

*14. Three of the following are associated with quantitative research methods. Which one is NOT?

a. The purpose is to explain or predict.

b. It is assumed that the findings will generalize to similar others.

c. Deductive reasoning is applied to data analysis and interpretation.

d. Statistical analyses are the primary source of findings.

*15. Three of the following are associated with qualitative research methods. Which one is NOT?

a. The purpose is to describe or explain.

b. No data are gathered as part of this approach.

c. Textual data are gathered from a small number of participants.

d. The study is context bound.

*16. Three of the following are techniques for strengthening the internal validity of a study. Which one is NOT?

a. Conduct the study in a controlled laboratory setting.

b. Conduct a double-blind experiment.

c. Make participants fully aware of your expected findings.

d. Build in opportunities for triangulation.

*17. Three of the following are techniques for strengthening the external validity of a study. Which one is NOT?

a. Conduct the study in a real-life setting.

b. Assure that you have a representative sample.

c. Replicate the study under a variety of relevant conditions.

d. Allow flexibility in procedures and instruments.

*18. Three of the following are techniques for strengthening the credibility or dependability of a qualitative study. Which one is NOT?

a. Spend extensive time in the field studying the phenomenon of interest.

b. Acquire rich and detailed descriptions of the phenomena being studied.

c. Exclude participants who have experiences or opinions that are very different from those of others in the study.

d. Ask participants to comment on the conclusions being drawn from the study.

*19. The requirement to keep information provided by research participants confidential applies:

a. to legal minors (children under the age of 18), but not adults.

b. only in cases where it is specifically requested by the participant.

c. to all persons under almost all conditions.

d. only in cases where participants divulge information that is potentially illegal.

*20. The altering of data is allowable:

a. when it is clear that the participant marked a response in error.

b. when the researcher suspects a participant of being careless.

c. when the researcher suspects a participant of misunderstanding the question.

d. under no circumstances.

**21. Dr. Davenport wants to conduct a study of whether high school students learn more efficiently while seated at a desk compared to in an easy chair. Participants will be seniors in local high school history classes. She hopes to publish her findings in the History Teacher Quarterly. Does Dr. Davenport need internal review board (IRB) approval for this study?

a. Yes

b. No

c. Only if the study is accepted for publication

**22. Dr. Davenport wants to conduct a study of whether high school students learn more efficiently while seated at a desk compared to in an easy chair. She knows there is a large research literature regarding similar influences on learning, and she wants to see if the findings hold true with a group of high school history students. Moreover, as a researcher she is uneasy with a lack of structure. You recommend that Dr. Davenport conduct a ______ study.

a. quantitative

b. qualitative

**23. Dr. Greenhill wants to know how it is that some early adolescents come to make a connection between their personal lifestyle and environmental problems, while others don’t. Furthermore, among those who see the connection, why do some become committed to environmentalism while others do not? Dr. Greenwald looks forward to probing the thoughts of young teens on these issues and trying to see the questions and issues through “14-year-old eyes.” You recommend that Dr. Greenhill conduct a ______ study.

a. quantitative

b. qualitative

Essay Questions

24. Professor Parsnip wants to know more about the mental process students go through as they learn about research methods. She also wants to know which instructional methods are most effective for teaching research methods to her students. Assume that Professor Parsnip decides to take a qualitative approach to studying these questions. State a specific research question related to her general research problem that lends itself well to a qualitative research approach. Then explain why your question is better addressed using a qualitative, rather than a quantitative, methodology.

25. Professor Parsnip wants to know more about the mental process students go through as they learn about research methods. She also wants to know which instructional methods are most effective for teaching research methods to her students. Assume that Professor Parsnip decides to take a quantitative approach to studying these questions. State a specific research question related to her general research problem that lends itself well to a quantitative research approach. Then explain why your question is better addressed using a quantitative, rather than a qualitative, methodology.

26. Sometimes students believe that taking the time to prepare a complete and carefully designed research proposal is something to be preached, but not really practiced. Identify at least two different problems related to research design that are commonly encountered when doing research. For each problem, explain how a complete and detailed research proposal would help the researcher avoid the problem.

Chapter 6

WRITING THE RESEARCH PROPOSAL

Multiple-Choice Questions

*1. According to the textbook, the most effective research proposals:

a. are a brief outline of the study you intend to conduct without an excess of detail.

b. justify the study to be conducted by explaining how it will contribute to the professional literature.

c. are detailed and straightforward explanations of the research problem and methodology.

d. include an autobiographical section that explains how the researcher became interested in the research topic.

*2. A proposal for a quantitative study typically includes these elements in this order:

a. a statement of the problem, a review of the literature, an explanation of the means for collecting data, a description of how the study will be conducted.

b. a review of the literature, a statement of the problem, an explanation of the means for collecting data, a description of how the study will be conducted.

c. a review of the literature, a statement of the problem, a description of how the study will be conducted, an explanation of the means for collecting data.

d. a statement of the problem, an explanation of the means for collecting data, a review of the literature, a description of how the study will be conducted.

*3. A proposal for a qualitative study typically includes these elements in this order:

a. an explanation of how the findings will fit with the larger literature, a statement of the purpose of the study and its guiding questions, a management plan, an explanation of theoretical and methodological grounding.

b. a statement of the purpose of the study and its guiding questions, an explanation of how the findings will fit with the larger literature, an explanation of theoretical and methodological grounding, a management plan.

c. a statement of the purpose of the study and its guiding questions, an explanation of theoretical and methodological grounding, an explanation of how the findings will fit with the larger literature, a management plan.

d. a statement of the purpose of the study and its guiding questions, an explanation of theoretical and methodological grounding, a management plan, an explanation of how the findings will fit with the larger literature.

*4. Proposals for ______ studies include a methodology section.

a. qualitative

b. quantitative

c. both quantitative and qualitative

d. neither quantitative or qualitative

*5. In ______ research proposal(s), the review of literature comes late in the document in conjunction with interpretation of data.

a. both quantitative and qualitative

b. neither quantitative or qualitative

c. a quantitative

d. a qualitative

*6. In ______ research proposal(s), a specific research problem is clearly stated at the outset

of the proposal.

a. both quantitative and qualitative

b. neither quantitative or qualitative

c. a quantitative

d. a qualitative

*7. In ______ research proposal(s), a specific plan for how the data will be handled is clearly laid out in the document.

a. both quantitative and qualitative

b. neither quantitative or qualitative

c. a quantitative

d. a qualitative

*8. In ______ research proposal(s), specific hypotheses regarding findings are often stated.

a. both quantitative and qualitative

b. neither quantitative or qualitative

c. �� a quantitative

d. a qualitative

*9. In regard to the style you will use for headings and subheadings in the research proposal:

a. there are no special formatting requirements unless the document is a thesis or dissertation.

b. all disciplines recognize the major formal styles, so it is a matter of personal choice.

c. the writer is free to show creativity as long as s/he is consistent throughout the document.

d. disciplines often dictate the use of specific formal styles, so you must find out what the expectations are.

*10. Experienced writers of research proposals typically:

a. plan to make revisions to the first draft of the proposal.

b. do not need to make revisions to the first draft of the proposal.

c. make revisions to the first draft of the proposal only if they are requested by a

reviewer.

d. may need to edit the first draft of the proposal for typos, but not content.

*11. When writing the proposal, you should assume that the reader:

a. will know which data analytic techniques are appropriate for your study without a detailed explanation.

b. is an expert in the area you are addressing and will be familiar with common issues, variables, instruments, etc.

c. can discern for him/herself what the importance of the study is.

d. knows nothing about the proposed project, so all the details must be thoroughly explained.

*12. When explaining how the data are to be analyzed and interpreted:

a. it is best to provide only a general plan as things will probably change over the course of the study anyway.

b. it is best to be as detailed as possible so all contingencies related to analysis and interpretation can be anticipated.

c. it is impossible to be highly detailed until one has the actual data in hand.

d. an overly specific plan may bias the analyses or interpretation, impairing the validity of the study.

*13. Research proposals that ______ are commonly judged to be of higher quality than proposals that do not.

a. favor straightforward vocabulary

b. employ complex sentence structure

c. favor a highly esoteric vocabulary

d. rely on the reader to draw inferences

*14. Three of the following are elements in the proposal revision process. Which one is NOT?

a. Reconsider the feasibility of what you are proposing to do.

b. Carefully assess the logic and organization of the information in the document.

c. Avoid breaks of 24 hours or more as the material will get too “cold” in your mind.

d. Seek feedback from knowledgeable others.

**15. The research proposal is best thought of as:

a. a general and flexible outline of how the research problem is to be investigated.

b. “Plan A,” with the expectation that “Plan B” or even “Plan C” will become necessary as the study unfolds.

c. a detailed and firm contract between the researcher and others who are involved in the research project (participants, supervisors, funding agencies, etc.)

d. a document that is written for others (internal review boards, funding agencies) and is of little value to the researcher.

Essay Questions

16. In regard to quantitative research proposals, novice researchers often find it very challenging and tedious to explain in detail how the data will be analyzed and interpreted in their study. Explain why it is essential that the researcher not cut corners in this section of the proposal.

17. Issues of feasibility are central to a well-planned research project. Discuss how feasibility issues come into play when deciding on the sampling plan.

18. Issues of feasibility are central to a well-planned research project. Discuss how feasibility issues come into play when choosing the measurement instruments or techniques.

19. There are unique challenges associated with conducting research on data that are already in existence (e.g., historical research). Discuss some of these unique challenges, pointing out pitfalls the researcher should be careful to avoid.

Chapter 7

QUALITATIVE RESEARCH

Multiple-Choice Questions

*1. In qualitative research the ______ is the most important instrument.

a. questionnaire

b. behavior checklist

c. researcher

d. participant

*2. In qualitative research, the fact that the research methodology may be vaguely described or very general in nature at the outset of the study indicates:

a. a normal and acceptable practice.

b. that the study is poorly designed.

c. that the researcher is inexperienced.

d. a common but unprofessional practice.

*3. Qualitative studies typically serve three of the following purposes. Which purpose do they NOT serve?

a. description of situations, processes, relationships, etc.

b. interpretation of information in order to gain new understanding

c. determining the final truth about a situation or phenomenon

d. evaluation of existing policies, practices, etc.

*4. In ______, a body of material is systematically examined for patterns, themes, or biases.

a. case study

b. ethnography

c. grounded theory

d. content analysis

*5. In ______, a particular group of individuals is studied in depth over a defined period of time.

a. case study

b. ethnography

c. phenomenology

d. grounded theory

*6. In ______, the researcher studies the deep meaning an event or situation holds for other people.

a. phenomenology

b. ethnography

c. grounded theory

d. content analysis

*7. In ______, a particular individual, program, or event is studied in depth over a defined period of time.

a. case study

b. ethnography

c. phenomenology

d. grounded theory

**8. Carl Compost has been living and working on a communal organic farm for the past six months. He wants to understand the political, environmental, and social perspectives shared by the members of the commune. Dr. Compost is probably employing a/an ______ methodology.

a. case study

b. ethnographic

c. phenomenological

d. content analysis

**9. Daniel Daring is an emerging playwright whose works have begun to stir great passions in the major U.S. cities where they are staged. Researcher Eugenia Edge is “shadowing” Mr. Daring for six months in an attempt to understand the artistic process. Dr. Edge is probably employing a ______ methodology.

a. case study

b. grounded theory

c. phenomenological

d. content analysis

**10. Helen Heartwell flew to New York City a few weeks after the September 11, 2001, bombing of the World Trade Center. She wanted to know how the victims of the attack were making sense of what had happened to them. Dr. Heartwell is probably employing a/an ______ methodology.

a. case study

b. grounded theory

c. phenomenological

d. ethnographic

**11. Richard Relic is carefully examining writings from the time of the U.S. Civil War to determine how each side characterized the position of their opponent. Dr. Relic is probably employing a ______ methodology.

a. case study

b. grounded theory

c. phenomenological

d. content analysis

*12. The constant comparative method of data analysis is most associated with:

a. ethnography.

b. phenomenology.

c. grounded theory.

d. content analysis.

*13. The technique of participant observation is most associated with:

a. case study.

b. ethnography.

c. grounded theory.

d. content analysis.

*14. ______ is most useful in situations where current theory regarding the subject of investigation is inadequate or nonexistent.

a. Case study

b. Ethnography

c. Grounded theory

d. Phenomenology

*15. When conducting observations to be used as data in a qualitative study, it is:

a. always necessary to obtain informed consent from those being observed.

b. not necessary to obtain informed consent if the observations are being conducted in a public place.

c. not necessary to obtain informed consent if the observer is in full view of those being observed.

d. only necessary to obtain informed consent if the study will be published.

*16. If you interview two people about the same event and their stories diverge at certain points, you can conclude that:

a. at least one of the interviewees is not being fully honest with you.

b. at least one of the participants was not paying attention to what was going on.

c. they didn’t really both witness the same event.

d. the meaning people draw from an event can vary from person to person.

*17. Three of the following are techniques that strengthen the objectivity of a qualitative study. Which one is NOT?

a. The researcher should intentionally look for evidence that contradicts his/her hunches or hypotheses.

b. The researcher should collect two or more different kinds of data (e.g., observations and interviews).

c. The researcher should acknowledge personal biases or presumptions in the research report.

d. The researcher should rely as much as possible on a single well-informed respondent.

Essay Questions

18. A goal of qualitative research is to uncover the “multiple truths” that characterize any complex phenomenon or situation. What does the term “multiple truths” refer to in this usage?

19. A fundamental pitfall in qualitative research is to confuse the actual observations with the interpretation of the observations. Why is it important that these two things remain distinctly separate?

20. Dr. D is conducting an interview with Amber, who works as a cocktail waitress. Here is an excerpt:

Dr. D: What shift do you typically work?

Amber: Night. I come in a around 7:00 p.m. and work until 2:00 a.m.

Dr. D: Cocktail waitressing has a bad reputation. How bad is it to work here?

Amber: Not so bad. Most of our customers are pretty nice guys. They’re

regulars and they don’t drink too much and get out of control. In fact, if

one customer is giving me a hard time, another often steps in and helps out.

Dr. D: As the evening progresses, the men give you more and more problems, ��

don’t they? What do you do about that?

Amber: I ignore it as long as I can. I get the manager to step in if they don’t

straighten up.

Do you notice any problems with the interviewing technique of Dr. D? Describe the problems you see in the excerpts and then explain what Dr. D should do differently.

Chapter 8

HISTORICAL RESEARCH

Multiple-Choice Questions

*1. Historical research is chiefly concerned with:

a. the study of history.

b. the meaning of past events.

c. creating an accurate chronology of past events.

d. determining an “official” interpretation of a historical event.

*2. Historical research may include:

a. qualitative, but not quantitative, methods.

b. quantitative, but not qualitative, methods.

c. both qualitative and quantitative methods.

d. neither qualitative or quantitative methods.

**3. To a historical researcher studying the lives of women pioneers in the late 1880s, letters written by Rebecca Adams, a pioneer woman on the Nebraska plains, to her sister in Philadelphia represent:

a. primary data.

b. secondary data.

**4. To a historical researcher studying the lives of women pioneers in the late 1880s, letters written by Deloris Adams of Philadelphia, describing the life of her sister, Rebecca Adams, a pioneer woman on the Nebraska plains, represent:

a. primary data.

b. secondary data.

**5. Professor McGrath is studying the history of African Americans in Oklahoma. Three of the following are primary data sources for Professor McGrath. Which one is NOT?

a. Census reports from the all-Black town of Taft

b. Photographs of Taft

c. Diaries of a school teacher in one of the first integrated schools in Taft

d. Articles from the Taft newspaper published in the late 19th century

*6. In historical research, bias:

a. generally does not exist to a problematic degree.

b. is less of a problem than in other forms of research.

c. is impossible for the researcher to detect.

d. can be used as an advantage to the researcher.

*7. In regard to bias in historical research, the researcher:

a. must be vigilant in regard to bias in secondary data, but it is not a problem with primary data.

b. must be vigilant in regard to bias in primary data, but it is not a problem with secondary data.

c. must be vigilant in regard to bias in both primary and secondary data.

d. can assume that the various biases will cancel each other out without special steps being taken by the researcher.

**8. Perry Prose is in possession of a letter allegedly written by President Theodore Roosevelt during his time in office. He has taken the letter to a number of experts, who have examined the paper, ink, handwriting, and content of the letter in an attempt to establish its authenticity. Dr. Prose is attempting to establish ______ regarding the validity of the letter.

a. external evidence

b. internal evidence

**9. Fran Freedom is trying to determine what the phrase “with liberty and justice for all” from the Pledge of Allegiance meant at the time it was penned. She suspects there were actually some limits on “all.” Dr. Freedom is attempting to establish ______ regarding the validity of the letter.

a. external evidence

b. internal evidence

**10. The information to the right is an example of:

a. ex post facto research.

b. a historiography.

c. a historic method.

d. a chronology.

*11. ______ is/are an appropriate focus of historical research.

a. Concepts

b. Ideas

c. People

d. all of the above

*12. Historical researchers can count on authoritative sources such as the Anglo-Saxon Chronology or the Cambridge Ancient History as accurate and complete accounts of history.

a. True

b. False

*13. In writing a historical research report, it is best to:

a. avoid mentioning alternative interpretations of events proposed by other scholars.

b. leave most of the interpretation of data to the reader rather than impose your own

point of view.

c. point out the weaknesses in the arguments or assertions you are making.

d. discuss the weaknesses, but not the strengths, of arguments put forth by other

scholars.

*14. A historical research report may differ from other research reports in that presentation of data and interpretation of data:

a. are confined to separate sections of the paper.

b. may not be included.

c. may be intertwined in a technical style of scientific writing.

d. may be intertwined in a flowing narrative style.

Essay Questions

15. One of the most challenging aspects of conducting historical research is systematically organizing the hundreds or thousands of notes that are collected in the course of the research project. Describe one method for handling this organizational challenge, including mention of both the strengths and weaknesses of the approach.

16. Conducting rigorous historical research involves more than reading historical documents, taking notes, and organizing those notes. Explain.

17. The authors recommend that chronological data be arrayed in a time line as part of the interpretative process. What type of information can be revealed by this technique?

18. The authors recommend that chronological data be plotted on a map as part of the interpretative process. What type of information can be revealed by this technique?

Chapter 9

DESCRIPTIVE RESEARCH

Multiple-Choice Questions

*1. Observational research, as a form of descriptive research,

a. focuses on rich narrative description of the phenomenon of interest.

b. involves counting or rating of behavior in as objective a manner as possible.

c. relies on open-ended techniques that can respond to the evolving situation.

d. allows the researcher to gather behavioral data in a relatively quick and easy

manner.

*2. Three of the following procedures or techniques are integral to observational research. Which one is NOT?

a. Pilot studies are used to test instruments and procedures.

b. Observers are carefully trained to follow specific criteria when recording the

observation data.

c. Multiple observers may independently rate the same behavior.

d. Observation instruments are intentionally general so as not to constrain the

observer.

*3. Correlational research allows the researcher to answer questions such as:

a. what is the relationship between Variable A and Variable B?

b. does change in Variable A cause change in Variable B?

c. is there a significant difference between scores on Variable A and scores on Variable B?

d. does change in Variable B causes change in Variable A?

**4. The scatterplot to the right indicates a ______ relationship between Variable A and Variable B.

a. weak

b. moderate

c. strong

d. indeterminate

**5. A researcher wishes to study developmental changes in people’s preference for action movies. The researcher locates 50 people at each of the following ages: 15, 20, 25, 30, 35, 40, 45, and 50 years. She asks them to rate their preference for action movies in relation to other sorts of movies. This is an example of a ______ design.

a. longitudinal

b. nested

c. cross-sectional

d. panel

**6. A researcher wishes to study developmental changes in the music people prefer to listen to. The researcher locates 50 people who are about 20 years old. She sends these people a questionnaire every year for the next 10 years asking about the types of music they prefer to listen to. This is an example of a ______ design.

a. longitudinal

b. nested

c. cross-sectional

d. panel

*7. Among survey methods, _____ generally generate the highest response rate, and ______ generally generate the lowest response rate.

a. face-to-face interviews; telephone interviews

b. telephone interviews; questionnaires

c. face-to-face interviews; questionnaires

d. questionnaires; telephone interviews

*8. Advantages of questionnaires include all of the following EXCEPT:

a. large numbers of people can be contacted for a relatively low cost.

b. data can be gathered from a large number of people in a relatively short period of

time.

c. participants may feel more confident about their anonymity and therefore respond more honestly.

d. because questions are in written form, they are less likely to be misunderstood by respondents.

*9. Regarding the length of questionnaires to be used in survey research, which of the following statements is most accurate?

a. Including a large number of items on the survey assures that you will get useful data for all of your trouble.

b. Keeping the survey short makes it more likely people will be willing to complete it.

c. A relatively lengthy survey communicates your seriousness about the research endeavor so people will be more willing to complete it.

d. Shorter surveys produce data that are ambiguous and therefore not useful.

**10. “How unhappy are you with your current salary?”

This question violates which rule of good survey writing?

a. It is not quantifiable.

b. It makes an unwarranted assumption.

c. It fails to keep the respondent’s task simple.

d. It uses technical language that may not be known to all.

*11. The typical return rate for a survey mailed to strangers is about:

a. 80%

b. 65%

c. 50%

d. 35%

*12. In descriptive research, the researcher typically studies a______, then draws conclusions about the______.

a. sample; population

b. population; sample

c. sample; sample

d. population; population

**13. Polly Petunia is Chief Horticulturalist for the Southwest region, encompassing Arizona, New Mexico, and Texas. She wants to survey amateur gardeners in her region to determine what, if any, water conservation practices they employ in their home gardening. Polly sends her survey to 150 randomly selected gardeners in each state. Polly is using:

a. purposive sampling.

b. proportional stratified sampling.

c. systematic sampling.

d. stratified random sampling.

**14. Paul Pollster, a political psychologist, wants to determine whether rates of voter participation in his home state vary between rural, urban, and suburban voters. He notes that there are more rural voters than suburban or urban voters in the state. Paul should use ______ in this study.

a. simple random sampling

b. cluster sampling

c. proportional stratified sampling

d. systematic sampling

**15. Simon Cinema wants to know what the audience thought of tonight’s advanced screening of a heralded psychological thriller called “I Can’t Sleep.” He and his research assistants stand outside the theatre exit and ask every fifth person leaving the theatre to answer several questions about their impression of the movie. Simon is using:

a. systematic sampling.

b. stratified random sampling.

c. convenience sampling.

d. purposive sampling.

**16. Danny Drive wants to know the relationship between intrinsic motivation and course grade among math students. He contacts a local professor who teaches several general education math classes and asks about the possibility of gathering data in her classes. Danny is using:

a. simple random sampling.

b. cluster sampling.

c. convenience sampling.

d. systematic sampling

**17. Edward Ethics is studying public opinion regarding prayer in public schools. He plans to gather survey data from a number of churches on Sunday mornings. He also wants to include a number of people who are not associated with an organized religion in his sample. Edward is using:

a. stratified random sampling.

b. cluster sampling.

c. convenience sampling.

d. purposive sampling.

Essay Questions

18. Your chapter identifies several weaknesses related to survey data. Note one of these weaknesses and discuss the associated problems and possible ways to minimize them.

19. In writing the cover letter to accompany a mailed survey, novice researchers often stress the immediacy of their need for the data. Is this the best approach to take in the cover letter? If not, what do you recommend instead?

20. The authors of your textbook suggest that sampling bias is virtually unavoidable and that it is important to disclose and discuss possible sources of bias in the study report. Do you agree? Explain your position.

Chapter 10

EXPERIMENTAL AND EX POST FACTO DESIGNS

Multiple-Choice Questions

*1. Experimental research differs from descriptive research in that it:

a. is less sensitive to sampling bias.

b. employs statistical analyses.

c. attempts to determine causality.

d. is conducted in a laboratory.

*2. In experimental design, the variable that is manipulated is the:

a. dependent variable.

b. independent variable.

c. confounding variable.

d. constant.

*3. In experimental design, the variable that reflects the outcome of the treatment is the:

a. dependent variable.

b. independent variable.

c. confounding variable.

d. constant.

**4. “There will be gender differences in degree of mood elevation seen in depressed clients after receiving cognitive-behavioral therapy.”

In this hypothesis, gender is the:

a. dependent variable.

b. independent variable.

c. confounding variable.

d. constant.

**5. “There will be differences in degree of mood elevation seen in depressed clients after receiving either cognitive-behavioral or psychoanalytic therapy.”

In this hypothesis, mood elevation is the:

a. dependent variable.

b. independent variable.

c. confounding variable.

d. constant.

**6. “There will be differences in degree of mood elevation seen in depressed clients after receiving either cognitive-behavioral or psychoanalytic therapy.”

In this hypothesis, type of therapy is the:

a. dependent variable.

b. confounding variable.

c. independent variable.

d. constant.

**7. “There will be differences in degree of mood elevation seen in depressed clients after receiving either cognitive-behavioral or psychoanalytic therapy.”

During a test of this hypothesis, it was discovered that some of the participants lived with family members and others lived alone. This variable, living situation, is a/an _____.

a. independent variable.

b. dependent variable.

c. constant.

d. confoundingvariable.

**8. Dr. Dow Jones wants to know whether a problem-based approach to teaching economics will result in higher academic performance than his traditional method. Of the six sections of Economics 101 at his university, Dr. Jones randomly assigns three sections to the traditional method and three sections to the problem-based method. At the end of the semester, all students complete the same final exam. In this design, students studying under the traditional method constitute the:

a. placebo group.

b. treatment group.

c. sample.

d. control group.

**9. Dr. Dow Jones wants to know whether a problem-based approach to teaching economics will result in higher academic performance than his traditional method. Of the six sections of Economics 101 at his university, Dr. Jones randomly assigns three sections to the traditional method and three sections to the problem-based method. At the end of semester all students complete the same final exam. In this design, students studying under the problem-based method constitute the:

a. placebo group.

b. treatment group.

c. sample.

d. control group.

**10. Dr. Dow Jones wants to know whether a problem-based approach to teaching economics will result in higher academic performance than his traditional method. Of the six sections of Economics 101 at his university, Dr. Jones randomly assigns three sections to the traditional method and three sections to the problem-based method for Unit 1 of the course. Then all sections switch instructional method for Unit 2. He plans to compare the performance of the two groups of sections on their Unit 1 and Unit 2 exams. This study employs a ______ design.

a. within subjects (repeated measures)

b. quasi-experimental

c. true experimental

d. ex post facto

**11. Penny Poodle wanted to know which dog obedience training program was more effective: Puppy Pride, the approach she has been using for many years, or Doggie Do-Right, a new approach. Penny convinced 50 human companions of untrained dogs to participate in her study. The dogs and their humans were randomly assigned to complete the Puppy Pride or Doggie Do-Right course. At the end of the training programs, all of the dogs were scored on their level of obedience on a standardized dog obedience checklist (scores could range from 10 to 100). In this study, ______ is the dependent variable.

a. Doggie Do-Right

b. type of dog training program

c. score on the dog obedience checklist

d. obedience training versus no training

**12. Penny Poodle wanted to know which dog obedience training program was more effective: Puppy Pride, the approach she has been using for any years, or Doggie Do-Right, a new approach. Penny convinced 50 human companions of untrained dogs to participate in her study. The dogs and their humans were randomly assigned to complete the Puppy Pride or Doggie Do-Right course. At the end of the training programs, all of the dogs were scored on their level of obedience on a standardized dog obedience checklist (scores could range from 10 to 100). In this study, ______ is the independent variable.

a. Doggie Do-Right

b. type of dog training program

c. score on the dog obedience checklist

d. obedience training versus no training

**13. Penny Poodle wanted to know which dog obedience training program was more effective: Puppy Pride, the approach she has been using for any years, or Doggie Do-Right, a new approach. Penny convinced 50 human companions of untrained dogs to participate in her study. The dogs and their humans were randomly assigned to complete the Puppy Pride or Doggie Do-Right course. At the end of the training programs, all of the dogs were scored on their level of obedience on a standardized dog obedience checklist (scores could range from 10 to 100). This study employed a/an ______ design.

a. one-shot experimental

b. ex post facto

c. posttest-only control group design

d. within subjects

**14. Dr. Robbins wants to know if there are different opinions regarding the value of public school education between Native Americans who have at least one relative who attended Indian Boarding School and Native Americans who have no family experience with Indian Boarding School. Dr. Robbins contacts 35 Native American participants in each group. He wants each group to include younger as well as older adults, and a mix of male and female participants. He asks each person to complete a survey about their attitudes toward public education. In this study, _____ is the independent variable.

a. score on the “attitude toward public schools” measure

b. experience with Indian boarding school

c. gender of participant

d. age of participant

**15. Dr. Robbins wants to know if there are different opinions regarding the value of public school education between Native Americans who have at least one relative who attended Indian Boarding School and Native Americans who have no family experience with Indian Boarding School. Dr. Robbins contacts 35 Native American participants in each group. He wants each group to include younger as well as older adults, and a mix of male and female participants. He asks each person to complete a survey about their attitudes toward public education. In this study, _____ is the dependent variable.

a. score on the “attitude toward public schools” measure

b. experience with Indian boarding school

c. gender of participant

d. age of participant

**16. Dr. Robbins wants to know if there are different opinions regarding the value of public school education between Native Americans who have at least one relative who attended Indian Boarding School and Native Americans who have no family experience with Indian Boarding School. Dr. Robbins contacts 35 Native American participants in each group. He wants each group to include younger as well as older adults, and a mix of male and female participants. He asks each person to complete a survey about their attitudes toward public education. This study employs a/an ______ design.

a. pre-experimental

b. factorial

c. true experimental

d. ex post facto

*17. Three of the following are examples of true experimental designs. Which one is NOT?

a. Multiple baseline design

b. Solomon four-group design

c. Within subjects design

d. Pretest–posttest control group design

*18. Three of the following are examples of quasi-experimental designs. Which one is NOT?

a. Nonrandomized pretest–posttest control group design

b. Control group time-series design

c. Single-subjects design

d. One-shot experimental design

*19. A meta-analysis is used when:

a. the researcher wishes to analyze the analyses of a number of existing studies.

b. there is little existing literature to use as a launching pad for a new study.

c. the researcher has no access to sophisticated statistical techniques.

d. several researchers jointly conduct a large-scale study.

Essay Questions

20. A researcher is studying the effectiveness of two different resident adolescent drug treatment programs. Program A is used at Summerhill adolescent facility. Program B is used at Winterdale adolescent facility. Because random assignment to treatments is not possible in this situation, what can the researcher do to minimize possible effects of sample bias?

21. Factorial designs allow researchers to study the effects of more than one independent variable simultaneously. Why is this advantageous? What information can factorial designs yield that nonfactorial designs cannot?

Chapter 11

STRATEGIES FOR ANALYZING QUANTITATIVE DATA

Multiple-Choice Questions

*1. How are inferential statistics different from descriptive statistics?

a. Descriptive statistics allow one to draw inferences from the sample to a target population.

b. Descriptive statistics verify the accuracy of the inferential statistics.

c. Inferential statistics describe the results of a study.

d. Inferential statistics allow one to draw inferences from the sample to a target population.

*2. ____ are characteristics of samples, wheras _______ are characteristics of populations.

a. Concepts; statistics

b. Parameters; statistics

c. Statistics; parameters

d. Parameters; estimations

*3. In a normal distribution, what percentage of scores falls between one standard deviation below the mean and one standard deviation above the mean?

a. 16%

b. 50%

c. 68%

d. 90%

*4. Dorothy has been surveying the Munchkins to determine their level of life satisfaction. The possible scores on the life satisfaction questionnaire range from 0 to 100. If Dorothy decides to statistically compare the male and female Munchkins on their level of satisfaction, she should use a _______ test.

a. parametric

b. nonparametric

**5. Here is a set of scores: 5, 3, 7, 3, 6, 2, 5, 3. The mean of this set of scores is ______.

a. 3

b. 4

c. 4.25

d. 4.5

**6. Here is a set of scores: 5, 3, 7, 3, 6, 2, 5, 3. The median of this set of scores is ______.

a. 2

b. 3

c. 4

d. 4.5

**7. Here is a set of scores: 5, 3, 7, 3, 6, 2, 5, 3. The mode of this set of scores is ______.

a. 3

b. 4

c. 4.22

d. 4.5

*8. The measure(s) of central tendency that is/are appropriate for use with nominal data is/are:

a. the median only.

b. the mode only.

c. the median and the mean.

d. the median and the mode.

*9. When summarizing ordinal data, the ______ is the most useful measure of central tendency.

a. arithmetic mean

b. mode

c. median

d. geometric mean

*10. When reporting growth data, the ______ is the most useful measure of central tendency.

a. arithmetic mean

b. mode

c. median

d. geometric mean

*11. When the ____ is the measure of central tendency, the _____ is the most appropriate and informative measure of dispersion.

a. median; standard deviation

b. median; interquartile range

c. mean; interquartile range

d. mean; range

**12. An exam was given to two sections of the same course. In Section 1, the exam mean was 51 and the standard deviation was 7. In Section 2, the exam mean was 51 and the standard deviation was 13. Which of the following conclusions is accurate?

a. Section 1 did better on the exam than Section 2.

b. Section 1 scores were more variable than Section 2.

c. Section 1 scores were less variable than Section 2.

d. Section 1 did less well on the exam than Section 2.

*13. The z-score, or standard score, allows the research to determine:

a. how far a target individual’s score is from the group mean.

b. what percentage of individuals in the sample scored above the target individual.

c. the mean for the population based on the mean for the sample.

d. what percentage of individuals in the sample scored below the target individual.

*14. The percentile rank allows the researcher to determine:

a. how far a target individual’s score is from the group mean.

b. what percentage of individuals in the sample scored above the target individual.

c. the mean for the population based on the mean for the sample.

d. what percentage of individuals in the sample scored below the target individual.

**15. Danzell is a purchasing agent for a major grocery store chain. He has noticed over the years that the higher the outdoor temperature, the more likely people are to buy fresh fruit. Based on Danzell’s observations, we would say there is ______ relationship between outdoor temperature and buying of fresh fruit.

a. a positive

b. a negative

c. a causal

d. no

**16. Frank Fitness found a correlation coefficient of –.74 between hours of strenuous exercise each week and a standard measure of body mass. He interprets this to mean that there is a ______ and ______ relationship between hours of strenuous exercise and body mass.

a. strong; positive

b. strong; negative

c. weak; positive

d. weak; negative

*17. Three of the following factors are associated with a relatively small standard error of the mean. Which one is NOT?

a. Sample size is relatively large.

b. Sample standard deviation is relatively small.

c. The variance in the sample is relatively large.

d. The sample is highly representative of the population.

**18. Seamus has determined that there is a 95% chance that the number of people visiting the Blarney Stone in the month of June will be between 1,760 and 2,025. This is a/an ______ estimate.

a. point

b. interval

*19. Statistical hypothesis testing involves testing the:

a. research hypothesis.

b. probability level.

c. significance level.

d. null hypothesis.

**20. On the basis of statistical findings, Ron determines that the differences between males and females on a test of spatial reasoning are not due merely to chance. If, in fact, there are no gender differences in the population, Ron will have made a:

a. Type I error.

b. Type II error.

**21. On the basis of statistical findings, Becky determines that the difference between males and females on a test of abstract mathematical reasoning is merely due to chance. If, in fact, there are gender differences in the population, Becky will have made a:

a. Type I error.

b. Type II error.

Essay Questions

22. A medical researcher is concerned about mistakenly concluding that a new medication is effective when it really is not. What type of error is the researcher concerned about making (Type I or Type II)? Describe what the researcher might do to decrease the likelihood of making that type of error. Discuss ramifications of your suggested approach for other types of error in the study.

23. Note several steps researchers can take to optimize the power of their statistical tests.

24. After completing planned analyses, the researcher must interpret the results of statistical tests. Note several steps that are involved in such interpretation.

Chapter 12

TECHNICAL DETAILS: STYLE, FORMAT, AND ORGANIZATION

OF THE RESEARCH REPORT

Multiple-Choice Questions

*1. When writing the research report, the findings of statistical analyses are typically reported in the ______ section.

a. review of literature

b. method

c. results

d. discussion

*2. When writing the research report, the descriptions of instruments used for data gathering are typically included in the ______ section.

a. introduction

b. method

c. results

d. discussion

*3. When writing the research report, the interpretation of study findings is typically included in the ______ section.

a. introduction

b. method

c. results

d. discussion

*4. When writing the research report, the research problem is typically described in the ______ section.

a. introduction

b. review of literature

c. method

d. results

*5. When writing the research report, information regarding the study design is typically included in the ______ section.

a. introduction

b. review of literature

c. method

d. results

*6. The reference list is included in the:

a. front matter.

b. end matter.

c. appendices.

d. body of the report.

*7. Copies of the survey instruments are included in the:

a. front matter.

b. end matter.

c. appendices.

d. body of the report.

*8. The abstract is included in the:

a. front matter.

b. end matter.

c. appendices.

d. body of the report.

*9. In a quantitative study, the description of participants (subjects) is included in the:

a. front matter.

b. end matter.

c. appendices.

d. method section.

*10. The acknowledgments are included in the:

a. front matter.

b. end matter.

c. appendices.

d. body of the report.

**11. “Johnson eliminated three interviews from the data set due to noncompliance on the part of the respondents.”

This sentence is an example of:

a. active voice.

b. passive voice.

**12. “The third subscale was dropped from further consideration due to problems with internal consistency.”

This sentence is an example of:

a. active voice.

b. passive voice.

*13. The style manual of the American Psychological Association (APA) suggests that ____ tense be used when writing the method section and ______ tense be used when presenting conclusions.

a. present; present

b. past; past

c. present; past

d. past; present

Essay Questions

14. Throughout your textbook the authors return to the importance of interpreting the findings of a research project. Explain why this is an essential element in a high-quality research report.

15. Imagine that you just completed a research project in which the data failed to support your chief hypothesis. Why might this have happened? Discuss several possibilities.

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Chapters 1 Through 6

Chapter 1

1.Principlesare

a.lawsandregulationsthatguidebehaviorinthe worldofbusiness. b.mores,values,andcustomsthatguidebehavioringeneral.

c.specificandpervasiveboundariesforbehaviorthatareuniversalandabsolute.

d.theobligationsbusinessesassumeto maximizetheirpositiveimpactandminimizetheirnegativeimpacton stakeholders.

e.themores,values,andcustomsthatparentsteachtheirchildren.

2.Social responsibilityis

a.anorganization'sobligationtomaximizeitspositiveeffectsand minimizeitsnegativeeffectsonstakeholders. b.principlesandstandardsthatguidebehaviorinthe worldofbusiness.

c.abusiness'sresponsibilitynotto pollutetheenvironment.

d.a business'sresponsibilitytomanufactureproductsthatfunctionproperly. e.charitablecontributionsmadeby abusinesstoenhanceits image.

3.The

was/wereenactedtorestoreconfidenceinfinancialreportingandbusinessethicsaftertheaccounting

scandalsoftheearly2000s.

a.DefenseIndustryInitiativeon BusinessEthicsandConduct b.Sarbanes-OxleyAct

c.FederalSentencingGuidelinesforOrganizations d.ForeignCorruptPracticesAct

e.Dodd-FrankWallStreetReformandConsumerProtectionAct

4.Thetermbusinessethicsisbestdescribedbythe followingstatement:

a.Itisthestudyand philosophyofhumanconduct,withanemphasisondeterminingrightand wrong.

b.Itisan"inquiryintothe natureandgroundsofmoralitywherethe termmoralityistakentomeanmoral judgments,standardsandrulesofconduct."

c.Itisthe"studyof thegeneralnatureof moralsandof specificmoralchoices;moralphilosophy;andtherules orstandardsgoverningtheconductofthemembersofaprofession."

d.Itisanorganization'sobligationtomaximizeitspositiveeffectsand minimizeitsnegativeeffectson stakeholders.

e.Itcomprisesthe principles,values,andstandardsthatguidebehaviorinthe worldofbusiness.

5.Whichofthefollowingis notone oftherightsspelledout byJohnF.Kennedyinhis"Consumers'BillofRights"?

a.Therighttochoose b.Therightto safety

c.Therighttobeinformed d.Therighttobeethical

e.Therightto beheard

6.Duringthe1990stheinstitutionalizationofbusinessethicswas largelydrivenbywhichpieceoflegislation?

a.Sarbanes-OxleyAct

b.FederalSentencingGuidelinesforOrganizations

c.Dodd-FrankWallStreetReformandConsumerProtectionAct d.ForeignCorruptPracticesAct

e.Global SullivanPrinciples

7.Businessethics,asafield,haspassedthroughwhichofthefollowingstates?

a.Afieldofstudytotheologicaldiscussiontorecognitionofsocialissues b.Recognitionofsocialissuestoa fieldofstudytotheologicaldiscussion c.Afieldofstudytorecognitionofsocialissuestotheologicaldiscussion d.Recognitionofsocialissuestotheologicaldiscussiontoa fieldofstudy e.Theologicaldiscussiontorecognitionofsocialissuestoa fieldofstudy

8.The1960ssawariseofconsumerism.Whatis consumerism?

a.An increaseinconsumerrightsbyorganizationsandgovernments b.Thegrowthofinternationalretailchainstores

c.Activitiesundertakenbyindependentindividuals,and groupsto protecttheirrightsasconsumers d.Thewidespreadadoptionof consumerorientedmarketingstrategiesamongbusinesses

e.Organizations’tendencytoseekwaystotakeadvantageofconsumers

9.Ethicsisa partofdecisionmaking

a.atall levelsof workandmanagement.

b.primarilyatthe uppermanagementlevelsofanorganization. c.mostlyforpolicymakers.

d.thatislessimportantthanotherdecisionmakingprocesses. e.onlyatthatlowerlevelsoforganizationalmanagement.

10.Whichofthe followingwasdevelopedinthe 1980stoguidecorporatesupportfor ethicalconductbyestablishinga methodfordiscussingbestpractices?

a.FederalSentencingGuidelinesforOrganizations

b.DefenseIndustryInitiativeon BusinessEthicsandConduct c.Corporatecodesofconduct

d.UnitedStatesSentencingCommission e.MERCOSUR

11.The

focus(es)onfirmstakingactionto preventanddetectbusinessmisconductin cooperationwith

governmentregulation.

a.UnitedStatesSentencingCommission

b.DefenseIndustryInitiativeon BusinessEthicsandConduct c.WorldTradeOrganization

d.UnitedNationsGlobalCompact

e.FederalSentencingGuidelinesforOrganizations

12.Thestudyofbusinessethicsisimportanttobetterunderstandallofthe followingexcept

a.thata person'sownmoralphilosophiesanddecision-makingexperiencemaynotbesufficienttoguidehimor herinthebusinessworld.

b.howandwhypeoplemakeethicalorunethicaldecisions.

c.howto copewithconflictsbetweenaperson'sownvaluesandthoseoftheorganizationin whichheorshe works.

d.thatbusinessethicsisentirelyanextensionofanindividual'sownpersonalethics. e.howtoidentifyethicalissuesarisinginthebusinessworld.

13.Accordingto theroleofethicalculturein performance,allofthesearedriversofprofitexcept

a.trust.

b.investorloyalty.

c.employeecommitment. d.customersatisfaction.

e.opportunityformisconduct.

14.Morethana complianceprogram,businessethicsisbecoming a.amanagementissueto achievecompetitiveadvantage.

b.lessacceptedbysociety.

c.mainlyagovernmentregulatoryissue.

d.an initiativeledby nonprofitorganizations.

e.aprogramthatdecreasesprofitsbutincreasessocietalbenefits.

15.Havingacceptablepersonalethicsisprobablynotgoingto besufficientto handlecomplexbusinessethicalissues whenanindividualhas

a.familyconcerns. b.an unethicalboss.

c.limitedbusinessexperience. d.financialtraining.

e.a marketingbackground.

16.OneofthemajorethicalissuesPresidentObama’sadministrationfocusedonwas

a.decreasingenvironmentallegislation. b.deregulation.

c.taxdecreases.

d.incentivesto oilcompanies.

e.healthcareandconsumerprotection.

17.Whichof thefollowingisgenerallynotconsidereda businessethicsissue?

a.Harassment

b.Accountingfraud c.Employeetheft

d.Misuseoforganizationalresources e.Corporatehierarchy

18.Whichrepresenteda far-reachingchangetoorganizationalcontrolandaccountingsystems,makingsecuritiesfrauda criminaloffense?

a.CouncilonEconomicPrioritiesandSocialAccountability8000. b.Sarbanes-OxleyAct.

c.ConsumerProtectionAct.

d.DefenseIndustryInitiativeon BusinessEthicsandConduct.

e.Dodd-FrankWallStreetReformandConsumerProtectionAct.

19.TheForeignCorruptPracticesActoutlawed a.accountingfraud.

b.pricecollusion.

c.corruptioningovernment.

d.briberyofofficialsin othercountries. e.executivemisconduct.

20.WhichofthefollowingwasnotaprovisionoftheSarbanes-OxleyAct?

a.Itstiffenedpenaltiesforcorporatefraud.

b.It createdanaccountingoversightboardthatrequirescorporationsto establishcodesofethicsforfinancial reporting.

c.Itrequiredtopexecutivestosignoffon theirfirms'financialstatements. d.Itoutlawedbriberyofofficialsinothercountries.

e.Itmadesecuritiesfrauda criminaloffense.

21.Whichofthefollowingis notcitedas an exampleof a globalcollaborativeefforttoestablishstandardsof business conduct?

a.CouncilonEconomicPriorities'SocialAccountability8000 b.EthicalTradingInitiative

c.U.S.ApparelIndustryPartnership

d.UnitedStatesSentencingCommission e.WorldTradeOrganization

22.Becauseof Sarbanes-Oxley,publiclytradedcompaniesmustdevelop financialreporting.

a.ethicsofficers

b.ethicsprograms c.codesofethics d.legalcounsel

e.accountants

toassistinmaintainingtransparencyin

23. isessentialinbuildinglong-termrelationshipsbetweenbusinessesandconsumers. a.Profits

b.Dividends c.Trust

d.Hubris

e.Codesofethics

24.TheDodd-FrankWallStreetReformandConsumerProtectionAct a.wasverypopularamongWallStreetbankers.

b.representedonlymodestreform.

c.cameout oftheologicaldiscussionsin the1920s.

d.wasdesignedtomakethefinancialservicesindustrymoreresponsible. e.madeitmandatoryforpubliccorporationstohireethicsofficers.

25.IntheReagan/Busheras,themajorfocusofthebusinessworldwason a.self-regulationratherthanregulationbygovernment.

b.decreasingthenumberofmergers.

c.decreasingthemultinationalpresencein theU.S.marketplace. d.increasinggovernmentinfluenceon theeconomicarena.

e.improvingbusinessethics.

26.Thesixprinciplesof theDefenseIndustryInitiativeon BusinessEthicsandConductbecamethefoundationfor a.BetterBusinessBureauethicalguidelines.

b.theFederalSentencingGuidelinesforOrganizations. c.theEthicalTradingInitiative.

d.the FederalTradeCommissioncompliancerequirements. e.theSarbanes-OxleyAct.

27.Ethicalcultureisdefinedas

a.rules,standards,and moralprinciplesregardingwhatis rightorwrongin specificsituations. b.theestablishmentandenforcementof ethicalcodesthroughouttheorganization.

c.thedevelopmentofrulesandnormsthataresociallyenforced.

d.the codificationoflawstorewardorganizationsfor takingactiontopreventmisconduct. e.acceptablebehaviorasdefinedbythecompanyandindustry.

28.TheFederalSentencingGuidelinesfor Organizationsset the tonefor organizationalethicscomplianceprogramsby a.codifyingintolaw incentivesfororganizationstotakeactionsuchasdevelopingethicalcomplianceprograms

topreventmisconduct.

b.forcingallorganizationstodevelopmandatoryreportingsystems.

c.eliminatingmostofthefederallegislationthatcreatedinefficientand time-consumingactivitiesforbusinesses. d.providingastudyof moralphilosophies.

e.providinganexaminationofcompanycodesofethics.

29.WhichofthefollowingstatementsabouttheFederalSentencingGuidelinesforOrganizationsisfalse?

a.Theyusearoutinemechanicalapproachthatforcesallfirmstousethesamemeanstoavertserious penalties.

b.Theystrivetopreventmisconduct.

c.Theyencouragecompaniesto developstandardsandprocedurescapableofdetectingandpreventing misconduct.

d.Theyutilizea carrotandstickapproachbytakingpreventiveactionagainstmisconduct.

e.Theyencouragethe appointmentofhigh-levelpersonnelresponsiblefor oversightofthe complianceprogram.

30.Whichofthefollowingis notoneofthe benefitsofbeingethicalandsociallyresponsibleinbusiness?

a.Greateremployeecommitment

b.Ahighdegreeof employeedissent

c.Improvedcustomertrustandsatisfaction d.Increasedinvestorloyalty

e.Betterfinancialperformance

31.Employees'perceptionsof theirfirmas havingan ethicalclimateleadsto a.lackoffocusongoals.

b.greaterfocusoneducation.

c.increasedcommunityinvolvement.

d.improvedrelationshipswith competitors. e.enhancedperformance.

32.Employeesfeellesspressuretocompromiseethically,observelessmisconduct,aremoresatisfiedwiththeir organizations,andfeelmorevaluedwhen

a.theyarenewattheirjobs.

b.theyarepaidtoignoreproblemsintheworkplace. c.theydo notagreewithan organization’svalues.

d.theyhaveveryhighcompensation.

e.theyseehonesty,respect,andtrustappliedin theworkplace.

33.Investorsareconcernedaboutbusinessethicsbecausetheyknowthatmisconductcan a.fosterstability.

b.improveemployeecommitment. c.improvecustomerloyalty.

d.lowerstockvalueandprices.

e.complicatebusinessfinancialreporting.

34.Mostorganizationswithstrongethicalclimatesusuallyfocuson thecorevalueof placing interestsfirst. a.customers'

b.employees'

c.stockholders' d.suppliers'

e.distributors'

35.Whichofthefollowingis notsomethinga firmmightdotoencourageorganizationalethicsand compliance?

a.Employeeethicstraining

b.Hiringa complianceofficer

c.Ignoringpotentialethicalissues d.Writingacodeof ethics

e.Conductinganethicsand complianceaudit.

36.Howdoesethicscontributeto customersatisfaction?

37.Discusstheevolutionofbusinessethicsasafieldofstudyfrombefore1960to thepresent.

38.Whyisit importantthatbusinesspeoplestudybusinessethics?

39.Wealllearnvaluesfromsourcessuchasfamily,religion,andschool.Whymightthesesourcesofindividualvalues not proveveryhelpfulwhenmakingcomplexbusinessdecisions?

40.Discussthecurrentstateofbusinessethicsinthetwenty-firstcentury.

41.Howdo valuesandjudgmentsplayacriticalrolewhenwemakeethicaldecisions?

Chapter 2

1.Thosewhohaveaclaimin someaspectofafirm'sproducts,operations,markets,industry,andoutcomesareknown as

a. shareholders. b. stockholders. c. stakeholders. d.claimholders.

e.special-interestgroups.

2.Stakeholders'poweroverbusinessesstemsfromtheir a.abilitytowithdraworwithholdresources.

b.abilitytogenerateprofits. c.mediaimpact.

d.politicalinfluence. e.stockownership.

3.Whichofthefollowingdonottypicallyengageintransactionswithacompanyandthusarenotessentialforits survival?

a.Employees

b.Secondarystakeholders c.Primarystakeholders

d.Investors

e.Customers

4.Afirmthatmakesuseofa

recognizesotherstakeholdersbeyondinvestors,employees,andsuppliers,and

explicitlyacknowledgesthetwo-waydialogthatexistsbetweenafirm'sinternalandexternalenvironments. a.stakeholdermodelofcorporategovernance

b.stakeholderbias c.codeofethics

d.stakeholderinteractionmodel e.corporateinterfacemodel

5.Thedegreetowhichafirmunderstandsandaddressesstakeholderdemandscanbereferredtoas a.a stakeholderorientation.

b.a shareholderorientation.

c.the stakeholderinteractionmodel. d.atwo-waystreet.

e.acontinuum.

6.Whichof thefollowingindustriestendstogeneratea highleveloftrustfromconsumersandstakeholders?

a.Insurance

b.Technology c.Banks

d.Mortgagelenders e.Financialservices

7.Whichofthefollowingis nota benefitthatprimarystakeholderstendtoprovidetoorganizations?

a.Suppliesofcapitalandresources. b.Expertiseandleadership

c.Word-of-mouthpromotion d.Infrastructure

e.Pro-bonobookkeeping

8.A stakeholdergroupthatis absolutelynecessaryforafirm’ssurvivalis definedas

a.direct.

b.tertiary.

c.secondary.

d.special-interest. e.primary.

9.Whenunethicalactsarediscoveredin afirm,in mostinstances a.theyare causedbyunwillingparticipants.

b.thecauseisduetoexternalstakeholders.

c.theperpetratorsarecaughtandprosecuted.

d.therewasknowingcooperationorcomplicityfromwithinthecompany. e.thecauseisacorruptBoardofDirectors.

10.Whichofthefollowingis nota methodtypicallyemployedbyfirmswhenresearchingrelevantstakeholdergroups?

a.Surveys

b.Focusgroups

c.Internetsearches d.Pressreviews

e.Guessing

11.Astakeholderorientationcanbeviewedasa(n)

a.necessityforbusinesssuccess. b.continuum.

c.polarizingconcept.

d.good marketingploy. e.expensiveproposition.

12.Shareholdersprovideresourcestoan organizationthatarecriticaltolongtermsuccess.Whichof thefollowingdoes thebooksuggestthatsuppliersoffer?

a.Thepromiseofcustomerloyalty

b.Materialresourcesand/orintangibleknowledge c.Infrastructure

d.Revenue

e.Leadershipskills

13.Whichofthefollowingis notassociatedwiththestakeholderinteractionmodel?

a.Involvesatwo-wayrelationshipbetweenfirmandstakeholders b.Recognizestheinputofinvestors,employees,and suppliers

c.Explicitlyacknowledgesdialoguewith afirm'sinternalenvironment d.Explicitlyacknowledgesdialoguewithafirm'sexternalenvironment

e.Identifiesthemassmedia,specialinterestgroups,competitors,andtradeassociationsas primarystakeholders

14.Thefirstofthethreeactivitiesthatareassociatedwiththestakeholderorientationis the a.organization-widegenerationofdata.

b.organization'sresponsivenesstointelligence. c.setof consumerattributesidentified.

d.organizationalstrategyoftargetmarkets.

e.humanrelationsdepartment'ssetof priorities.

15.Publichealthandsafetyandsupportof localorganizationsareissuesmostrelevanttowhichstakeholdergroup?

a.Investors

b.Community c.Suppliers

d.Customers e.Employees

16.Minimizingtheuseof energyandreducingemissionsandwasteareissuesof importancetowhichstakeholder?

a.Environmentalgroups b.Suppliers

c.Employees

d.Industryleaders e.Investors

17.Theideathatthe missionofbusinessistoproducegoodsandservicesata profit,thusmaximizingitscontributionto societyisassociatedwith

a.AdamSmith.

b. TheodoreLevitt. c. Norman Bowie. d.HermanMiller

e.MiltonFriedman.

18.Theoriginatorof theideaof theinvisiblehand,whichis afundamentalconceptin freemarketcapitalism,was a.AdamSmith.

b. TheodoreLevitt. c. Norman Bowie. d.HermanMiller

e.MiltonFriedman.

19.Someeconomistsbelievethatifcompaniesaddresseconomicandlegalissues,theyaresatisfyingthedemandsof society,and thattryingto anticipateand meetadditionalneedswouldbealmostimpossible.Whicheconomist’s theoryaretheyfollowingmostcloselywiththis belief?

a.AdamSmith.

b. TheodoreLevitt. c. Norman Bowie. d.HermanMiller

e.MiltonFriedman.

20.Inascendingorder,Carroll'sfourlevelsofsocialresponsibilityare a.ethical,legal,economic,philanthropic.

b.economic,ethical philanthropic,legal. c.economic,legal, ethical,philanthropic. d.legal, ethical,economic,philanthropic. e.ethical,legal,moral,economic.

21.Thetermusedtoexpresshowa firmmeetsits stakeholderexpectationsof its economic,legal,ethical,and philanthropicresponsibilitiesis

a.reputation.

b.corporatecitizenship.

c.corporateethicalaudit. d.ethicalcitizenship.

e.fiduciaryduties.

22.In corporategovernance, istheprocessof auditingandimprovingorganizationaldecisionsandactions. a.profit

b.loyalty

c.accountability d.control

e.diligence

23.Accountability,oversight,andcontrolallfallunderthedefinitionandimplementationofcorporate a.profit.

b.loyalty. c.care.

d.governance. e.diligence.

24.Majorcorporategovernanceissuesnormallyinvolve decisions.(Choosetheresponsethatismostcorrect)

a.strategic-level b.tactical-level

c.divisional-level d.marketing-level e.accounting-level

25.Whichof thefollowingisamajorethicalconcernamongcorporateboardsof directors?

a.Compensation

b.The non-traditionaldirectorshipapproach c.Dividendreporting

d.Corporatesocialaudits e.Debtswaps

26.OnepolicytoaddresstheissueofexecutivepaywasimplementedbyJ.P.Morgan,itstatedthat

a.thereshouldbe no limiton whattopexecutivescanearn.

b.managersshouldearnnomorethantwentytimesthepayofotheremployees. c.topmanagersshouldmakethesameamountasotheremployees.

d.employeescandeterminehowmuchmanagersmake.

e.thegovernmentshoulddeterminetheworthofeachmanager’sservice.

27.Thespecificstepsfor implementingthe stakeholderperspectivedonotincludewhichofthe following?

a.Identifyingstakeholdergroups b.Identifyingstakeholderissues

c.Identifyingand gainingstakeholderfeedback d.Identifyingandgaininggovernmentfeedback

e.Assessingorganizationalcommitmentto socialresponsibilitygroups

28.Whatare the fourlevelsofsocialresponsibility?

a.Financial,religious,ethical,andphilanthropic

b.Ethical,philanthropic,selfish,andshort-sighted c.Economic,long-term,ethical,andphilanthropic. d.Legal,economic,ethical,andphilanthropic

e.Economic,compliance,legal,andphilanthropic

29.The modelisfoundedinclassiceconomicprecepts. a.economic

b. shareholder c. stakeholder d.board

e.ISO

30.Whichofthefollowingarenottypicallysecondarystakeholders?

a.Televisionnewsanchors b.Special-interestgroups

c.Customers

d.Tradeassociations e.Journalists

31.Whichofthefollowingarenottypicallyprimarystakeholders?

a.Customers

b.Tradeassociations c.Employees

d.Shareholders e.Suppliers

32.Whydo criticsarguethathighcompensationforboardsof directorsisabadthing?

a.Itistooexpensivefor the organization.

b.It couldcauseconflictsofinterestbetweenthedirectorsandtheorganization. c.Itisnotfairtopoorlycompensatedemployees.

d.Highpaywillrendertheboardlesscomplacent.

e.Boardof directorcompensationisnotamajorissue.

33.Boardmembersbeinglinkedtomorethanonecompanyisanexampleof a.strategicphilanthropy.

b.stakeholdercommitment. c.interlockingdirectorate.

d.conflictof interest. e.anillegalactivity.

34.Whatisthe firststepinimplementinga stakeholderperspectiveinanorganization?

a.Identifyingresourcesanddeterminingurgency b.Identifyingstakeholdergroups

c.Identifyingstakeholderissues

d.Assessingthecorporateculture

e.Assessingorganizationalcommitmentto socialresponsibility

35.Astakeholderorientationisnot completeunlessitincludes a.clearaccountingprocedures.

b.majorfinancingactivities. c.marketingstrategy.

d.feedbackfromspecial-interestgroups.

e.activitiesthatactuallyaddressstakeholderissues.

36.Compareandcontrastthestakeholderandshareholdermodelsofcorporategovernance.

37.Whyisethicalmisconductmoredifficulttoovercomethanpoorfinancialperformance?

38.Discussthedifferencebetweenprimaryandsecondarystakeholdersin thestakeholderinteractionmodelandgive examplesforeachtype.

39.Whydo somebusinesspeopleandscholarsquestionwhetherethicsshouldhavearoleinbusiness?

40.Discussthreecorporategovernanceissues,whytheyaredefinedasissues,andhowyouwouldsolvethem.Use examplesin youranswer.

Chapter 3

1.Anethicalissueisaproblem,situation,oropportunity a.thathasnocorrectanswer.

b.thatharmstheenvironment.

c.requiringsocietyasawholeto chooseamongseveralactionsthatmustbeevaluatedasrightorwrong.

d.requiringanindividual,group,ororganizationtochooseamongseveralactionsthatmustbeevaluatedasright orwrong,ethicalorunethical.

e.requiringanindividual,group,ororganizationto choosebetweenharmingconsumersortheenvironmentand earningmoreprofits.

2.Ethicalissuesinbusinesstypicallyarisebecauseofconflictsbetweenindividuals'personalmoralphilosophiesand valuesandthe

a.valuesandattitudesofthe organizationinwhichtheywork. b.valuesandattitudesof thesocietyinwhichtheylive.

c.valuesandattitudesofthe organizationinwhichtheyworkandthe societyinwhichtheylive. d.lawsandregulationsofthe countryinwhichtheylive.

e.valuesandattitudesof theirparentsandreligion.

3. isanimportantelementofvirtueandmeansbeingwhole,sound,andinunimpairedcondition. a.Optimization

b.Ethicalissue c.Honesty

d.Trust

e.Integrity

4.A courtfoundanoilcompanyguiltyofplacingprofitsoverthesafetyand well-beingofitsemployees.Thissituation canbeclassifiedas

a.ethical.

b.unethical.

c.anethicalissue. d.adilemma.

e.ajusticeissue.

5.A personuncomfortablewithhisemployer'sunspokenpolicyofhiringonlywhitemenisexperiencing a.aconflictofinterest.

b.anethicalissue. c.afeelingofguilt.

d.cognitivedissonance. e.amoralattribute.

6.Issuesrelatedtofairnessandhonestymayarisebecausebusinessissometimesregardedasa a.legalcase,whereeverythingmustbedonetotheletterofthelaw.

b.contest,withthemostethicalfirm"winning."

c.guerillawarwhereanythinggoesinthefightforconsumers'dollars. d.gamegovernedbyitsownrulesratherthanthoseofsociety.

e.gamegovernedbytherulesofsociety.

7.Warmetaphorsarecommonin business.Thiskindofmindsetcanbedangerousforbusinessleadersbecause a.it mayleadexecutivestobecomeviolent.

b.itmayfostertheideathathonestyis unnecessaryin business. c.itmayleadorganizationstobe excessivelyaggressive.

d.businessisnotlikewarfareandthemetaphorsarenotappropriate. e.businessismorelikea gamethana war.

8.Conflictsofinterestexistwhenemployeesmustchoosewhetherto

a.advancetheirownpersonalinterests,thoseoftheorganization,orthoseofsomeothergroup. b.advancetheinterestsoftheorganizationorthoseofsociety.

c.acceptbribesornot.

d.carryoutanassignmenttheyperceiveto beunethical. e.reportanunethicalcoworker.

9. istheofferingof somethingof valueinordertogainan illicitadvantage. a.Shouldersurfing

b.Hacking

c.Giftexchange

d.Conflictsofinterest e.Bribery

10.Concernsinvolvingcopyrightinfringementonbooks,moviesandmusic,andotherillegallyproducedgoodsrelateto whichtypeof ethicalissue?

a.Conflictofinterest b.Honesty

c.Communications d.Discrimination

e.Intellectualpropertyrights

11.

isdefinedasanypurposefulcommunicationthatdeceives,manipulates,orconcealsfactsinordertocreatea falseimpression.

a.Stealing b.Lying

c.Fraud

d.Misappropriation e.Accountingfraud

12.In marketingcommunications,lyingcausespredicamentsforcompaniesbecauseitdestroys a.trust.

b.honor.

c.confidence. d.integrity.

e.products.

13.Whena commercialstatesthata productissuperiortoanyotheronthemarket,themarketerrisksaccusationsof a.concealedfacts.

b.false labeling.

c.deceptiveadvertising. d.concealedfacts.

e.puffery.

14.Optimizationis definedas

a.thequalityofbeingjust,equitable,andimpartial. b.atrade-offbetweenequityandefficiency.

c.aninterchangeofgivingandreceivingin socialrelationships.

d.howwealthorincomeisdistributedbetweenemployeeswithinacompany.

e.alack ofintegrity,incompletedisclosure,andanunwillingnessto tellthetruth.

15.Whichof thefollowinghasbeenidentifiedby theEthicsResourceCenteras theleadingformof observed misconductinorganizations?

a.Discrimination b.Bullying

c.Lying

d.Misuseofcompanyresources e.Sexualharassment

16.Anactivityisprobablyethicalifit

a.is approvedofbymostindividualsin theorganizationandis customaryin theindustry.

b.isapprovedofbynooneinthe organization,buthasbeencarriedoutinthe industrybefore. c.is customaryin theindustry.

d.isnotillegal.

e.doesnotmakeconsumersfeelcheated,deceived,ormanipulated.

17.Thefirststeptowardunderstandingbusinessethicsis to a.knowyourcompany'sethicalpolicies.

b.knowyourownmoralsandphilosophies. c.knowsociety'sethicalpolicies.

d.developethical-issueawareness.

e.developa set ofdecision-makingrules.

18.Amongretailstores, isa largerproblemthancustomershoplifting. a.poorstockperformance

b.weakleadership

c.internalemployeetheft d.misuseof merchandise e.employeedissatisfaction

19.Theethicaldecision-makingprocessbegins a.withaconflictof interest.

b.whenan individualexperiencesa conflictbetweenhisor hervaluesandthoseof hisor herfirm. c.whenstakeholderstriggerethicalissueawarenessandindividualsopenlydiscussitwithothers. d.witha conflictinvalues.

e.whenanindividualexperiencesaconflictbetweenhisorhervaluesandthoseofsociety.

20.Whichofthefollowingis nota side-effectofbeingthe victimofworkplacebullying?

a.Increasedproductivity b.Sleepdisturbance

c.Depression

d.Increasedsickdays e.Stomachproblems

21.Accountantsmustabideby astrictcodeof ethicsthatdefinestheirresponsibilitiesto a.their clientsonly.

b.theirclientsandthe publicinterest. c.thepubliconly.

d.theirinvestorsandshareholders. e.governmentregulators.

22.Whichofthe followingstatementsismostcorrect?

a.Affirmativeactionprogramsrequirequotastogovernemploymentdecisions. b.Affirmativeactionprogramshave eliminateddiscriminationinemployment.

c.Affirmativeactionprogramsare requiredinallorganizationsbylaw.

d.Affirmativeactionprogramsinvolveeffortsto recruit,hire,train,andpromotequalifiedindividualsfromgroups thathavetraditionallybeendiscriminatedagainstonthebasisofrace,gender,orothercharacteristics.

e.Affirmativeactionprogramsinvolveeffortsto avoidrecruiting,hiring,training,andpromotingqualified individualsfromgroupsthathavetraditionallybeendiscriminatedagainstonthe basisofrace,gender,orother characteristics.

23.Whichofthefollowingis notaquestionyouneedto askwhenyoususpectthatworkplacebullyinghasoccurred?

a.Isyourbosstreatingyouwellandcompensatingyouadequately?

b.Is yourbossaskingobviouslyimpossiblethingsfromyou withouttrainingandstatingthat,oncecompleted,the workisnevergoodenough?

c.Aresurprisemeetingscalledwithoutyourknowledge?

d.Haveothersatworktoldyoutostopworking,talking,orsocializingwiththem?

e.Areyouneverleftalonetodo yourjobwithoutinterference?

24.isassociatedwitha hostileworkplacewheresomeoneconsidereda targetisthreatened,harassed,belittled, orverballyabused.

a.A codeof conduct b. Sexualharassment c.Coercivepower

d.Bullying e.Rewards

25.Whichofthefollowingis nota consequenceofethicalmisconduct?

a.Decreasedreputation

b.Shakencustomerloyalty

c.Reducedinvestorconfidence d.Increasedsales

e.Legalactionsby wrongedparties

26.TheAgeDiscriminationinEmploymentAct specificallyoutlawshiringpracticesthatdiscriminateagainstpeople a.whoareundertheageof18.

b.whoarebetween16and20. c.whoarebetween39-69.

d.whoarepastretirementage.

e.whoareyoungerthan18andolderthan49.

27.Abusiveorintimidatingbehavioris themostcommonethicalproblemforemployees.Whichofthefollowingis not

relatedtothisconcept?

a.Physicalthreats

b.Falseaccusations c.Being annoying

d.Profanity

e.Performanceprobation

28.The

makesitillegalfor individuals,firms,orthirdpartiesdoingbusinessinAmericanmarketsto“make

paymentsto foreigngovernmentofficialsto assistin obtainingorretainingbusiness.”

a.U.S.ForeignCorruptPracticesAct(FCPA)

b.KyotoProtocol

c.WorldTradeOrganization(WTO)

d.ConsumerProtectionAct e.Gramm-Leach-BlileyAct

29.Mr.Smithtoldhisclient,Mr.Jabar,whowasnotanITexpert,thatthenewsoftwaresystemsweremuchbetter thanhisexistingones.ToconvinceMr.Jabar,Mr.Smithusedagreatdealof technicaljargonthathisclientdidnot reallyunderstand.Mr.SmithdidthisintentionallytoconfuseMr.Jabar.Thisisanexampleof

a.false advertising. b. commissionlying. c.omissionlying.

d.noise.

e.surrogatelying.

30. involvestrickingindividualsintorevealingtheirpasswordsorothervaluablecorporateinformation. a.Shouldersurfing

b.Remotehacking

c.Socialengineering d.Physicalhacking e.Dumpsterdiving

31.WhenDevonlookedat whatanotheremployeewastypingin orderto getapassword,hecommitted a.shouldersurfing.

b.whacking

c.discrimination

d.passwordguessing e.hacking

32.Acompanycanbesuedfor discriminationifit a.hires minorities.

b.maintainsreasonableminoritystandards.

c.dischargesa minorityindividual,but has a just causefordoingso. d.usesageas ahiringor firingcriterion.

e.hasmorementhanwomenonstaff.

33.Affirmativeactionprograms

a.involvethepromotionof unqualifiedemployees. b.arenotimposedby federallawon employers.

c.arenotverycommonlyusedanymorebecausethereis noneedto protectminorities. d.onlyinvolvethe trainingofindividuals.

e.involvetherecruitment,hiring,promotion,andtrainingof qualifiedindividuals.

34.Whattypeoffraudinvolvesintentionaldeceptiononthepartofanindividualorgroupinordertoderiveanunfair economicadvantageoveranorganization?

a.Channel

b. Integrative c. Consumer d.Product

e.Conventional

35.Whattypeof fraudulentactivitycouldinvolvea consumerstagingan accidenttoseekdamages?

a.Whacking b.Duplicity c.Guile

d.Defamation e.Collusion

36.Whattypeof fraudulentactivityinvolvesan employeewhoassistsaconsumerinfraud?

a.Whacking b.Duplicity c.Guile

d.Defamation e.Collusion

37.Priortothefinancialmeltdown,bondratingsagencieswereaccusedofhaving

becausetheywerepaidbythe

organizationsthattheyrated.Theorganizationswouldshoparoundfortheagencythatgavethemthebestrating. a.highethicalstandards

b.excessivelycomplicatedsystems c.a hostileworkplace

d.conflictsof interest

e.agoodbusinessmodel

38. areusedto obtainorretainbusinessandarenotgenerallyconsideredillegalin theU.S. a.Facilitationpayments

b.Bribes c.Gifts

d.Coercivetechniques e.Threats

39.Discusshowonegoesaboutrecognizingan ethicalissue.

40.Listthreebusinessproblems,situations,oropportunitiesthatyoubelieveare ethicalissues.Explainwhy.

41.Describethe differentmethodsofobtainingcorporateintelligencethatcompetitorscommonlyuse.

42.Whatis aconflictofinterest?Provideanexample.

43.Whatarethedifferentdefinitionsof bribery?

44.Discussthefactorsthatgo intocreatinga hostileworkenvironment.Whyisthisa badthing?Givean exampleof a hostileworkenvironment.

Chapter 4

1.Whichofthefollowingis notanaspectoftheinstitutionalizationofsocialresponsibility?

a.Voluntarypractices b.Legal responsibilities c.Corepractices

d.Familialresponsibilities e.Strategicphilanthropy

2.Whichofthefollowingactscan beclassifiedasprocompetitivelegislation?

a.EqualPayActof1963 b.CivilRightsActof1964

c.McCarran-FergusonActof1944 d.ShermanAntitrustActof 1890

e.OccupationalSafetyandHealthActof1970

3.Whichofthefollowingactsexemptedtheinsuranceindustryfromantitrustlegislation?

a.EqualPayActof1963 b.CivilRightsActof1964

c.McCarran-FergusonActof1944 d.ShermanAntitrustActof 1890

e.OccupationalSafetyandHealthActof1970

4.Whichofthe followingacts,passedinresponsetopublicoutrageoverconditionsdescribedinUptonSinclair'sThe

Jungle,wasthe firstconsumerprotectionlegislation?

a.CivilRightsActof1964

b.ShermanAntitrustActof 1890

c.Magnuson-MossWarrantyActof1974 d.ConsumerProductSafetyActof1972 e.PureFoodandDrugActof1906

5.The

wasestablishedafterthelatestfinancialcrisis,inresponsetoa situationthatcausedmanyconsumersto

losetheirhomes.

a.EnvironmentalProtectionAgency b.WorldBank

c.ConsumerFinancialProtectionBureau d.WorldTradeOrganization

e.Sarbanes-OxleyAct

6.Whichofthefollowingis notaprovisionoftheSarbanes-OxleyAct?

a.Strengthenspenaltiesforcorporatefraud

b.Discouragesthecreationof ethicalandlegalcomplianceprograms c.Requirescodesofethicsfor financialreportingincorporations

d.Makesfraudulentfinancialreportinga criminaloffense e.Requiresgreatertransparencyinfinancialreporting

7.Whichof theforcesof thebusinessenvironmentinvolvestherivalryamongbusinessesforcustomersandprofits?

a.Theeconomicdimension b.Thelegaldimension

c.Thecompetitivedimension

d.Thetechnologicaldimension

e.Thevoluntaryresponsibilitiesdimension

8.The

regulatestobacco,dietarysupplements,vaccines,veterinarydrugs,medicaldevices,cosmetics,products

that giveoffradiation,andbiologicalproducts. a.WorldTradeOrganization

b.ConsumerFinancialProtectionAgency c.DepartmentofJustice

d.EnvironmentalProtectionAgency e.The FoodandDrugAdministration

9.Whichof thefollowinggroupsis notagroupthatreceivesspeciallegalprotections?

a.The elderly b.Children

c.Seniorcitizens

d.Thehighlyeducated e.Youngconsumers

10.The

wascalled“asweepingoverhaulofthefinancialregulatorysystem…onascalenotseensincethe

reformsthatfollowedtheGreatDepression.”

a.EqualPayAct

b.AmericanswithDisabilitiesAct

c.Dodd-FrankWallStreetReformandConsumerProtectionAct d.AgeDiscriminationin EmploymentAct

e.VIIofthe CivilRightsAct

11. lawdefinesthe rightsanddutiesofindividualsandorganizations(includingbusinesses). a.Civil

b.Criminal

c.Competitive

d.Administrative e.Regulatory

12.

lawnotonlyprohibitsspecificactionsinbusinesssuchasfraud,theft,orsecuritiestradingviolations,butalso imposesfinesorimprisonmentaspunishmentfor breakingthe law.

a.Civil

b.Criminal

c.Competitive

d.Administrative e.Regulatory

13.Whichofthefollowingis notaprovisionoftheDodd-FrankWallStreetReformandConsumerProtectionAct?

a.Increasestheaccountabilityandtransparencyof financialinstitutions b.Createsa bureautoeducateconsumersinfinancialliteracy

c.Createsanorganizationtopaythe billsoflow-incomeconsumers d.Createincentivesforwhistle-blowerstocomeforward

e.Increasesoversightof thefinancialindustry

14.

is thesynergisticandmutuallybeneficialuseofanorganization’scorecompetenciesandresourcesto deal

withkeystakeholderssoastobringaboutorganizationalandsocietalbenefits. a.Socialresponsibility

b.Businessethics

c.Corporatephilanthropy d.Strategicphilanthropy

e.Cause-relatedmarketing

15.Anticompetitivestrategiesthatfocusonweakeningordestroyinga competitorhavespurredantitrustlegislationand includeallofthe followingexcept

a.sustainedpricecuts. b.freesamples.

c.discriminatorypricing. d.pricecollusion.

e.corporateespionage.

16.Whichis notoneof thefoursourcesof criminalandcivillaws?

a.Judiciallaw

b.Commonlaw

c.Constitutionallaw d.Administrativelaw e.Statutorylaw

17.The

isanindependentagencywithintheFederalReserveSystemthat“regulate[s]theofferingandprovision

ofconsumerfinancialproductsorservicesundertheFederalconsumerfinanciallaws.”

a.ConsumerFinancialProtectionBureau b.FederalReserve

c.WorldTradeOrganization d.DepartmentofJustice

e.FederalTradeCommission

18.Theprimaryobjectiveof U.S.antitrustlawsisto

a.protectconsumersfromhighpricesandforeignproducts. b.protectdomesticbusinesses.

c.protectemployees.

d.promotestrategiesthatenhancebusinesswelfareoverconsumerwelfare.

e.distinguishcompetitivestrategiesthatenhanceconsumerwelfarefromthosethatreduceit.

19.Whatisa primaryreasonwhysomesmallbusinessesresisttheopeningof largechainretailerslikeWalmartor

HomeDepot?

a.Becausethelargesizecreateseconomiesofscaleandtheycanchargelowerprices b.Becausetheselectioninthestoresistoolarge

c.Becauselargeretailersattractcrimetoneighborhoodsinwhichtheyarebased d.Becausecommunityleadersdo notlikethetopmanagement

e.Becauselargeretailersalmostneverhirelocalworkersasemployees

20.

focus(es)ondevelopingsoundorganizationalpracticesandintegrityfor financialandnonfinancial

performancemeasures,ratherthanon an individual’smorals.

a.TheDodd-FrankWallStreetReformandConsumerProtectionAct b.Compliance

c.Organizationalethics d.Corepractices

e.TheSarbanesOxleyAct

21.Whichofthefollowingis notoneofthesevenstepsthattheU.S.SentencingCommissionrequiresforaneffective complianceprogram?

a.Developa codeofconduct

b.Provideoversightby high-rankingpersonnel

c.Createacommunicationsystemfordisseminatingstandardsandprocedures d.Monitorandauditsystemsdesignedtodetectmisconduct

e.ComplywithISO14000guidelines

22.TheSarbanes-OxleyActcreatedthe establishrulesandstandardsfor auditing.

tooverseetheaccountingfirmsthatauditpubliccorporationsandto

a.Public CompanyAccountingOversightBoard b. CorporateAccountingOversightCommission c.EnronAccountingFraudAdministration

d.OccupationalHealthandSafetyAdministration e.EqualEmploymentOpportunityCommission

23. responsibilitiesrelateto abusiness’scontributionsto stakeholders.

a.Economic b.Legal

c.Ethical

d.Voluntary

e.Socialresponsiveness

24.PassedbyCongressin 1991,the complianceprograms.

a.Sarbanes-OxleyAct

createdincentivesfororganizationsto developandimplementethical

b.U.S.SentencingCommission'sGuidelinesforEthicalCompliance c.EthicalComplianceAct

d.SocialResponsivenessComplianceAct

e.FederalSentencingGuidelinesforOrganizations

25.DonationofcomputerequipmenttoschoolsbyToshibawouldbeassociatedwith responsibilities. a.economic

b.voluntary c.legal

d.ethical

e.minimum

26.Byprohibitingaccountingfirmsfromprovidingbothauditingandconsultingservicesto thesamecorporateclients withoutpermission,theSarbanes-OxleyAct isattemptingtoeliminate

a.conflictsof interest. b.cronyism.

c.reportingtransparency. d.corporateespionage.

e.dual reporting.

27.Whichofthefollowingis nota benefittobusinessesofengaginginvoluntaryresponsibilities?

a.Helpcreateanethicalcultureandvaluesthatcanactasa buffertoorganizationalmisconduct b.Reducegovernmentinvolvementbyprovidingassistancetostakeholders

c.Developemployeeleadershipskills

d.Improveemployeecompensationandretention e.Improvethequalityoflifeincommunities

28.Companiesthat will mostlikelybefoundin violationofprocompetitivelegislation. a.pollutewaterways

b.knowinglyharmconsumers c.contractwithsweatshops

d.establishmonopolies e.helpconsumers

29. tie(s)anorganization’sproduct(s)directlyto asocialconcernthroughamarketingprogram.

a.Voluntarycontributions b.Cause-relatedmarketing c.Strategicphilanthropy

d.Corporategiving

e.Employeebenefits

30.TitleVII oftheCivilRightsAct of1964

a.prohibitsdiscriminationonthebasisofrace, color,sex,religion,ornationalorigin. b.penalizesthe topexecutivesinanorganizationfor misconduct.

c.isbasicallythesameastheSarbanes-OxleyAct.

d.discourageswhistle-blowersfromreportingmisconduct. e.prohibitspaydiscriminationonthebasisofgender.

31.Causerelatedmarketingcanaffectconsumer causeareseenasagoodfit.

a.individualethics b.tastes

c.perceptions d.budgets

e.buyingpatterns

,ifconsumersaresympathetictothecauseandthebrandand

32.Whoprovidesinformationtomanagers,investors,taxauthorities,andotherstakeholderswhomakeresource allocationdecisionsforcorporations?

a.Accountants

b.Federalregulators

c.TheSecuritiesandExchangeCommission d.TheDepartmentofJustice

e.HumanResourcesdepartments

33.The ofethicsinvolvesembeddingvalues,norms,andartifactsinorganizations,industries,andsociety. a.institutionalization

b.rationalization

c.commercialization d.mobilization

e.enforcement

34.Whichofthefollowingis notareasonwhytheinstitutionalizationof businessethicshasprogressedin recent decades?

a.Institutionalizationofethicsisnowmandatedforallorganizationsbygovernmentsaroundtheworld b.Stakeholdershaverecognizedthe needfor improvingbusinessethics

c.Thegovernmenthassteppedin whenscandalsandmisconducthavedamagedkeyconstituentsofbusinesses d.Gatekeepershavebeenquestionedasto theircontributionsto majorscandals

e.Highlyethicalcompaniestendtobemoreprofitablethanthosesufferingfrommisconductissues

35.Partofthe reasonwhycreditratingsfirmsdidnotcatchmajorproblemspriortothe globalfinancialmeltdownof

2008wasbecausetheywerepaidbythefirmsthattheyrank,whichcreates a.economiesofscale.

b.synergy.

c.aconflictofinterest. d.cooperation.

e.efficiency.

36.Investigationsinto thefinancialratingindustryafterthefinancialmeltdownof2008foundallofthefollowingexcept

a.analystscutcornerswhenfacedwithlesstimeto performduediligence. b.analysts’ratingswereinaccurate.

c.manyhighratingswerebasedon inadequatehistoricaldata.

d.analystswereoverwhelmedwiththevolumeandcomplexityof trades.

e.mostanalystswerecompletelyuntrainedandunpreparedtodo theirjobs.

37.Some,especiallythoseinbusiness,complainthattheSarbanes-OxleyAct and similarlegislation a.isexcessivelycomplexand financiallyburdensome.

b.isnotnecessary. c.isfair toallfirms.

d.hasreducedrestatementsoffinancialreports. e.istoosimplistic.

38.Anethicalorganizationalculturecreatesan environmentinwhichtostructurebehaviorthatisthenevaluatedby stakeholders.Thekey elementsofanorganizationalcultureincludeallofthefollowingexcept

a.values. b.norms.

c.artifacts.

d.legalcompliance.

e.employeecompensation

39.Whichofthefollowingprovideincentivesfordevelopingcorepracticeswithinafirmthatcouldhelpensureethical and legalcompliance?

a.Departmentof JusticeandOpenComplianceEthicsGroup b.DepartmentofJusticeandtheSarbanes-OxleyAct

c.FederalSentencingGuidelinesforOrganizationsandtheSarbanes-OxleyAct d.FoodandDrugAdministrationandtheSarbanes-OxleyAct

e.SecuritiesandExchangeCommissionandtheSarbanes-OxleyAct

40.Lawsandregulationschangeovertime;however,in theUnitedStatesthethrustofmostbusinesslegislationcanbe summedup as

a.anypracticeis permitted.

b.anypracticeispermittedthatdoesnotsubstantiallyreducecompetitionandharmconsumersor society.

c.anypracticeispermittedthatdoesnotsubstantiallyharmconsumersorsociety,butthisappliesonlywithinthe

UnitedStates.

d.anypracticeis permittedthatdoesnotharmtheenvironment. e.anypracticeispermittedthatdoesnotbreakthelaw.

41.Whydo youthinkthecostsof compliancewithSarbanesOxleygo downovertime?

42.Accordingtothetext,theopinionsof society,as expressedthroughlegislation,canchangeovertimeanddifferent courtsandgovernmentlegislaturesmaytakedifferentviewsabouttheacceptabilityof specificbusinessactivities. Whyisthisso?

43.Whatethicalissuesaffectingconsumersandsocietyasa wholearecreatedbyunfaircompetition?

44.Societyoftenexpectsalotfrombusiness.Doyouthinkthatitispossibletobalanceprofitandotherbusiness objectiveswiththegoalsanddesiresofsociety?Whyorwhynot?

Chapter 5

1.Whichofthe followingisthe firststepinthe ethicaldecisionmakingprocess?

a.Beingsocializedintothe firm'scorporateculture

b.Applyingapersonalmoralphilosophyin orderto individualizetheethicaldecisionmakingprocess

c.Recognizingthatanissuerequiresanindividualorworkgrouptomakea choicethatultimatelywillbejudged by stakeholdersas rightor wrong

d.Solicitingtheopinionsofothersina workgrouporintheoverallbusinessinordertogainfeedback e.Enforcingthefirm'sethicalstandardswithrewardsandpunishment

2.Whichofthefollowingis notoneofthe six "spheresofinfluence"towhichindividualsare subjectwhenconfronted withan ethicalissue?

a.Educationalattainment b.Workplace

c.Family

d.Legalsystem e.Community

3.Theperceivedrelevanceorimportanceofanethicalissuetothe individual,workgroup,ororganizationis a.organizationalculture.

b.immediatejobcontext. c.ethicalissueintensity. d.leadership.

e.locusofcontrol.

4.Studieshavefoundthatmorethanathirdof theunethicalsituationsthatlowerandmiddle-levelmanagersfacecome from_____.

a.stakeholderexpectationsandpressures. b.pressurestosatisfycustomers.

c.pressuresfromthegovernmentto performat ahighlevel.

d.internalpressuresandambiguitysurroundinginternalorganizationalrules. e.investorexpectations.

5.Accordingtotheethicaldecision-makingframework,theabsenceof punishmentprovidesa(n)

behavior. a.reason

b. significantother c.individual factor d.opportunity

e.ethicalissueintensity

forunethical

6. havebeenfoundtodecreaseunethicalpracticesandincreasepositiveworkbehavior. a.Higheducationalattainmentlevels

b.Highlevels ofcommunityinvolvement c.Charismaticleaders

d.Strongreligiousbeliefs e.Goodpersonalvalues

7. involvessubordinatessimplyfollowingthe directivesofa superiorwithoutquestion.Itdemonstratesthe influencethatsignificantotherscanexertin theworkplace.

a.Obediencetoauthority b.Locusofcontrol

c.Opportunity

d.Transactionalleadership e.Immediatejob context

8.Multipleelementsworkon individualstoaffecttheir behavior.Whilean individualmay intendtodo theright thing,

canalterthisintent. a.cognitivedissonance

b.familialexpectations c.religiousbeliefs

d.the desirefor financialgain

e.organizationalorsocialforces

9.If managementfailsto identifyandeducateemployeesaboutethicalproblemareas,ethicalissuesmaynotreachthe critical

a.awarenesslevel. b.aptitudelevel.

c.ethicallevel.

d.organizationallevel. e.individuallevel.

10.The

canbedefinedasasetofvalues,norms,andartifacts,includingwaysofsolvingproblemssharedby

membersofanorganization. a.corporateculture

b.intentionsof acorporate c.ethicalissueawareness

d.determinationofacorporation e.individualfactors

11.Whichof thefollowingwouldnotbeconsideredanegativereinforcementofemployeebehavior?

a.Demotions b.Firings

c.Ignoringthebehavior d.Reprimands

e.Paypenalties

12.Codes,rules,andcomplianceare essentialinorganizations.However,anorganizationbuilton todevelopa highintegritycorporateculture.

a.a charismaticleader

b.thepreferencesoftheCEO

c.thegrapevine

d.formalrelationships

e.informalrelationships

ismorelikely

13.Followingthe ethicaldirectivesofa superiorrelatesto a.aninternallocusofcontrol.

b.obediencetoauthority. c.moralintensity.

d.gender.

e.ethicalissueintensity.

14.Whichofthefollowingis notconsidereda significantothergroupinthe workplace?

a.Peers

b.Managers c.Spouses

d.Coworkers

e.Subordinates

15.Studieshaveshownthat thananyotherfactor.

a.significantothers b.religion

c.education

d.chiefexecutiveofficers e.ethicalissues

withintheorganizationhavemoreimpactonaworker'sdecisionsonadailybasis

16.Externalandinternalrewardsrelateto whichpartoftheethicaldecision-makingframework?

a.Individualfactors b.Significantothers

c.Cognitivemoraldevelopment d.Obediencetoauthority

e.Opportunity

17.Whichofthefollowingis notan issuethathelpsinbusinessethicsevaluationsanddecisions?

a.Ethicalissueintensity b.Individualfactors

c.Organizationalfactors d.Personalguilt

e.Opportunity

18. isthefirstsignthatanunethicaldecisionhasoccurred. a.Guilt

b.Reward

c.Punishment

d.Cognitivedissonance e.Happiness

19.Peoplewhobelievein , gowiththeflowbecausetheyfeeltheeventsin theirlivesareuncontrollable. a.ethicaldecisionmaking

b.internallocusofcontrol c.anethicalculture

d.externallocusofcontrol e.significantothers.

20.Whichofthefollowingis notanindividualfactorthataffectsbusinessethics?

a.Nationality b.Age

c.Religion

d.Significantothers e.Education

21.

isanorganizationalfactorthatgivesa companyspecificcharacteristics.Overtime,stakeholdersbegintosee thecompanyaslike alivingorganismwithamindandwill ofitsown.

a.Oversight

b.Significantothers c.Corporateculture d.Theethicalclimate e.The legalclimate

22.Anethicalcorporatecultureneeds

alongwith

toestablishanethicsprogramandmonitorthecomplex

ethicaldecisionsbeingmadebyemployees. a.individualethics;ethicalissue intensity

b.ethicalissueintensity;ethicstraining

c.organizationalfactors;individualfactors d.employeeevaluations;goodintentions

e.sharedvalues;properoversight

23.Thosewhohaveinfluencein aworkgrouparereferredto assignificantothersandinclude a.peers,managers,coworkers,andsubordinates.

b.familymembers,peers,andcoworkers. c.spousesandfriends.

d.employeesinsimilarjobsituations. e.employeeswhoholdthe samejob.

24.Researchconcerningnationalityandthe abilitytomakeethicaldecisions a.showsnorelationshipbetweenthetwo.

b.ishardtointerpretina businesscontextbecauseofculturaldifferences.

c.suggeststhatorganizationsshouldbeveryconcernedaboutanemployee'snationality. d.suggeststhatcorporationspaya lotofattentiontosuchresearch.

e.suggeststhatthe influenceofnationalityoncorporatecultureisgrowing.

25.Therelationshipbetweenbusinessethicsandage a.showsanegativecorrelation.

b.issimple.Greaterexperienceleadstobetterethicaldecisionmaking.

c.is complex,althoughexperiencehelpsolderemployeesmakeethicaldecisions.

d.suggeststhatemployeeswithlessexperiencehaveagreaterabilitytodealwithcomplexindustry-specific ethicalissues.

e.doesnotdemonstratea statisticallysignificantcorrelation.

26.Employeesthatseethemselvesasgoingwiththeflowbecausethat'salltheycandohavea(n)

a.externallocusofcontrol. b.moral intensity

c.obediencetoauthority d.opportunity

e.internallocusofcontrol.

27.For peoplewhobeginthevalueshiftthatleadsto unethicaldecisions,whichofthefollowingisnota usual justificationtoreduceandeliminateguilt?

a.I needa paycheckandcan'taffordtoquitrightnow. b.Thosearoundmearedoingitso whyshouldn'tI?

c.IfIdon'tdothis,Imightnotbeabletogeta goodreferencefrommybosswhenIleave. d.IfI don'tdo this,I mightneverbe promoted.

e.Thisisinkeepingwithmypersonalmoralsandthe codeofconduct,soit isokay.

28. istheabilitytoperceivewhethera situationor decisionhasan ethicaldimension. a.Ethicalissueintensity

b.Locusofcontrol

c.Ethicalawareness d.Moralintensity

e.Opportunity

29.

others.

relatestoindividuals'perceptionsof socialpressureandtheharmtheybelievetheirdecisionswillhaveon

a.Ethicalawareness b.Moralintensity

c.Individualfactors

d.Ethicalissueintensity e.Socialawareness

30.Theethicaldecisionmakingprocessin businessincludesallofthefollowingexcept

a.Individualfactors b.Opportunity

c.Ethicalissueintensity

d.Makingethicaldecisions e.Organizationalfactors

31.

cultureinvolvesvaluesandnormsthatprescribea widerangeof behaviorfororganizationalmembers,while culturereflectstheintegrityof decisionsmadeandisafunctionof manyfactors,includingcorporatepolicies,

topmanagement'sleadershipon ethicalissues,theinfluenceof coworkers,andtheopportunityforunethical behavior.

a.Ethical, corporate b. External,internal c. Corporate,ethical d.Positive,negative

e.Compromising,collaborative

32.Allof thefollowingaretruewithregardstoorganizationalfactorsexcept

a.Employeesapproachethicalissueson thebasisof whattheylearnedfromothersintheorganization. b.Analignmentbetweenaperson'sownvaluesandthevaluesoftheorganizationhelpcreatepositive

organizationaloutcomes.

c.Congruenceinpersonaland organizationalvaluesisrelatedtocommitment,satisfaction,motivation,ethics, workstress,andanxiety.

d.Ethicalchoicesin organizationsaremostoftenmadeindividually.

e.Justasa familyguidesanindividual,specificindustriesgivebehavioralcuestofirms.

33.The includesthemotivational"carrotsandsticks"superiorsusetoinfluenceemployeebehavior. a.Obediencetoauthority

b.Immediatejob context c.Locusofcontrol

d.Normativeapproach e.Descriptiveapproach

34.Allofthe followingare truewithregardstoopportunityandethicaldecisionmakingexcept

a.Despitetheexistenceof rules,misconductcanstilloccurwithoutproperoversight.

b.Theopportunitiesthatemployeeshaveforunethicalbehaviorinanorganizationcan beeliminatedthrough formalcodes,policies,andrulesadequatelyenforcedby management.

c.Opportunityalsocomesfromknowledge.

d.Theopportunityforunethicalbehaviorcanbe eliminatedwithaggressiveenforcementof codesandrules. e.Opportunityresultsfromconditionsthateitherproviderewardsor failtoerectbarriersagainstunethical

behavior.

35.Whenwediscuss issue.

a.Normative b.Individual

c.Descriptive

d.Organizational e.Values-based

approaches,wearetalkingabouthoworganizationaldecisionmakersshouldapproachan

36.Byincorporating objectivesintocorporatecorevalues,companiesbeginto view assignificant. a.shareholder,stakeholders

b.stakeholder,shareholders c.CEO,CEOs

d.customer,customers

e.stakeholder,stakeholders

37.Normativebusinessethicstakesintoaccountthe standards.

a.Descriptive b.Political

c.Social

d.Economic e.Normative

realitiesoutsidethelegalrealmin theformofindustry

38. institutionsincludereligion,education,andindividualssuchasthefamilyunit. a.Social

b.Conservative c.Economic

d.Liberal e.Political

39.Allofthefollowingaretrueregardinginstitutionsexcept

a.Stakeholderscloselyalignwith institutions.

b.Theregulatorysystemalignswith politicalinstitutions.

c.Thereisnoclearlinkbetweeninstitutionaltheoryandthe stakeholderorientationofmanagement. d.Competitionrelatesto economicinstitutions.

e.Personalvaluesandnormsderivefromsocialinstitutions.

40.Highlevelsof createahigherprobabilitythatfirmscutcornersbecausemarginsareusuallylow. a.Profit

b.Return

c. Cooperation d. Competition e.Loss

41.The thoughtexperimentusedbyJohnRawlsthat examinedhowindividualswouldformulateprinciplesif theydidnot knowwhattheirfuturepositioninsocietywouldbeiscalled

a.Equalityprinciple b.Utilitarianveil

c.Libertyprinciple

d.Universalprinciple e.Veilofignorance

42.The

statesthateconomicandsocialequalitiesshouldbearrangedtoprovidethemostbenefittotheleast-

advantagedmembersofsociety. a.Equalityprinciple

b.Differenceprinciple

c.Constitutionalprinciple d.Libertyprinciple

e.Justiceprinciple

43.Valueshaveallthe followingcharacteristicsexcept

a.Providesguidancetoorganizations b.Subjectiveandrelatedtochoice

c.Widelyaccepted

d.Usedtodevelopnorms

e.Differsacrossculturesandfirms

44.Companiestakebasic andtranslatethemintocore . a.Customs,values

b.Values,principles c.Cultures,principles d.Cultures,customs e.Principles,values

45.Organizationsthathaveethicsprogramsbasedona

orientationarefoundtomakea greatercontributionthan

thosebasedsimplyoncompliance,orobeyinglawsand regulations. a.Customer

b.Political

c.Principles d.Values

e.Social

Essay

46.Theethicaldecision-makingframeworkincludestheconceptsofethicalissueintensity,individualfactors, organizationalfactors,andopportunity.Discusshowtheseconceptsinfluencetheethicaldecision-makingprocess.

47.Tracethe ethicaldecision-makingprocess.Youmayfindit helpfultoapplythe modeltoa realbusinesssituationor toa hypotheticalethicalissueyoudevelopyourself.

48.Discusshowthe threecategoriesofinstitutions(political,economic,andsocial)are importantinestablishinga foundationfornormativevalues.

49.Describeanddemonstratesomeofthesimilaritiesanddifferencesbetweenprinciplesandvalues.Whyareprinciples andvaluesimportantnormativeconsiderationsin ethicaldecisionmaking?

50.Discuss,withexamples,at leastthreewaysthatopportunitycanaffectthedecisionmakingprocess.

Chapter 6

1.Moralphilosophyrefersto

a.asubjectthatmostbusinesspeopledo notconsiderveryimportant. b.themoralityofbusinessactivities.

c.theprinciplesor rulesthatpeopleusetodecidewhatisrightandwrong. d.thelegalityofbusinessactivities.

e.the principlesorrulesthatpolicymakersusetocreatelegislation.

2.Whichmoralphilosophyevaluatesthemoralityof an actionon thebasisof its consequencesforeveryoneaffected

(seeksthegreatestgoodforthegreatestnumber)?

a.Actdeontology b.Ruledeontology c.Egoism

d.Utilitarianism e.Hedonism

3.Whichmoralphilosophyconsidersanact tobemorallyrightoracceptableifit producessomedesiredresult?

a.Teleology

b.Deontology

c.Therelativistperspective d.Ethicalformalism

e.Hedonism

4.Whichmoralphilosophyfocusesontherightsofindividualsand ontheintentionsassociatedwithaparticular behavior,ratherthanitsconsequences?

a.Deontology

b.Therelativistperspective c.Teleology

d.Egoism

e.Utilitarianism

5. areperson-specific,whereas meetbusinessobjectives.

a.Organizationalfactors;businessethics b.Codesofconduct;individualfactors

c.Individualfactors;codesofconduct d.Businessethics;moralphilosophies

e.Moralphilosophies;businessethics

arebasedondecisionsmadebygroupsorwhencarryingouttasksto

6.AccordingtoKohlberg'smodel,as apersonprogressesthroughthestagesof moraldevelopment,andwithtime, education,andexperience,he/she

a.isunlikelytochangehis/hervaluesand ethicalbehavior. b.maychangehis/hervaluesandethicalbehavior.

c.willlikelybepromoted.

d.will dependmoreontheinputofsignificantothersin ethicaldecisionmaking. e.willexperiencelessopportunitytobehaveunethically.

7.Anindividualwhodefineswhatisrightbyconsideringhis/herdutytosociety,not just tootherspecificpeople,isin whichofKohlberg'sstagesofcognitivemoraldevelopment?

a.Punishmentandobedience

b.Individualinstrumentalpurposeandexchange

c.Mutualinterpersonalexpectations,relationships,andconformity d.Socialsystemandconsciencemaintenance

e.Priorrights,socialcontract,orutility

8.Whichisthe lastofKohlberg'sstagesofcognitivemoraldevelopment?

a.Individualinstrumentalpurposeandexchange b.Needachievement

c.Socialsystemandconsciencemaintenance d.Punishmentandobedience

e.Universalethicalprinciples

9.A personwhooffersafacilitationpaymentin orderto secureacontractthatwillkeephercompanyfromgoing bankruptandlayingoffhundredsof employeesmaybe a(n)

a.egoist.

b.teleologist. c.utilitarian. d.relativist.

e.humanitarian.

10.Whichmoralphilosophyevaluatesthemoralityofanactiononthebasisofitsconformitytogeneralmoralprinciples and respectforindividualrights?

a.Therelativistperspective b.Actutilitarianism

c.Ruleutilitarianism d.Actdeontology

e.Ruledeontology

11.

isconsideredthefatheroffreemarketcapitalism.Hebelievedthatbusinesswasandshouldbeguidedbythe moralsofgoodmen.

a.JohnMaynardKeynes b.HenryKissinger

c.GeorgeWashington d.AdamSmith

e.LawrenceKohlberg

12._____believethatnoonethingisintrinsicallygood. a.Hedonists

b.Pluralists c.Relativists

d.Deontologists e.Teleologists

13.Kant'scategoricalimperativeandthe GoldenRuleare examplesofwhichmoralphilosophy?

a.Teleology

b.Deontology

c.Therelativistperspective d.Egoism

e.Utilitarianism

14.Amarketingmanagerwhoordersthata manufacturingplantberefittedtomakeit saferforworkers,nomatterwhat thecost,maybea(n) becausehebelievesintherightsofallindividuals.

a.egoist

b.utilitarian

c.deontologist d.relativist

e.hedonist

15.Whichmoralphilosophyevaluatesthemoralityofanactiononthebasisofprinciplesorrulesdesignedtopromote thegreatestoverallutilityratherthan by examiningsituationsindividually?

a.Ruleutilitarianism b.Actutilitarianism c.Ruledeontology

d.Actdeontology e.Egoism

16.Whichmoralphilosophyevaluatesthemoralityofanactiononthebasisoftheequity,fairness,and impartialityofthe action,withrulesservingasguidelinesinthedecision-makingprocess?

a.Ruleutilitarianism b.Actutilitarianism c.Ruledeontology

d.Actdeontology

e.Therelativistperspective

17.Whichmoralperspectivedefinesethicalbehaviorsubjectivelyfromtheuniqueexperiencesofindividualsand groups?

a.Virtueethics b.Egoism

c.Therelativistperspective d.Absolutism

e.Justice

18.Throughtimeanact cancometobeviewedasunethicalunderwhichofthe followingphilosophiesand perspectives?

a.Therelativistperspective b.Teleology

c.Deontology d.Egoism

e.Ruledeontology

19.

typicallyfocusesontheendresultofactionsandhappinesscreatedbythem,whereas themeansandmotivesbywhichactionsare justified.

a.Pragmatism;hedonism

b.Deontology;pragmatism c.Utilitarianism;deontology

d.Utilitarianism;agoodnesstheory

e.Agoodnesstheory;anobligationtheory

emphasizes

20.An individualwhobelievesthatanactionisethicalbecauseotherswithinhis orhercompanyandindustryregularly engageinthe activityisprobablya(n)

a.utilitarian. b.relativist.

c.teleologist.

d.deontologist. e.egoist.

21.Enlightenedegoism

a.is whenanindividualputs spiritualfeelingsaboveallothers. b.centerscompletelyon theshort-termwell-beingof others. c.centersonone'sshort-termself-interest.

d.centersonone'slongtermselfinterestbuttakesothers’wellbeingintoaccount.

e.centerson thelong-termwell-beingof others.

22.Whichmoralphilosophyisbasedon thepremisethatequalrespectmustbe giventoall persons?

a.Therelativistperspective b.Deontology

c.Egoism

d.Teleology

e.Utilitarianism

23.

havelowerethicalissuesensitivity,meaningtheyarelesslikelyto detectethicalissues.Theymaybemore committedtocompletingprojectsandmorededicatedtogroupvaluesandobjectives.

a.Relativists b.Hedonists

c.Pragmatists

d.Deontologists e.Teleologists

24. justiceis basedontheevaluationofoutcomesorresultsofthebusinessrelationship. a.Procedural

b.Interactional c.Distributive d.Ethical

e.Egotistical

25.Kohlberg'ssixstagesofcognitivemoraldevelopmentcanbereducedto threelevelsofethicalconcern.Personsat thesecondlevel

a.definerightasthatwhichconformsto theexpectationsofgoodbehaviorofthelargersociety. b.see beyondthenorms,laws,and authorityofgroupsorindividuals.

c.areconcernedwiththeirimmediateinterestsandwithexternalrewardsandpunishments. d.areconcernedwiththeirlong-terminterestsandwithinternalrewardsandpunishments. e.areunethical.

26.

arguesthatethicalbehaviorinvolvesnotonlyadheringtoconventionalmoralstandardsbutalsoconsidering

whata maturepersonwitha “good”moralcharacterwoulddeemappropriate.

a.Actutilitarianism b.Virtueethics

c.Reciprocity d.Hedonism

e.Ruledeontology

27.Whenapersondefinesrightandwrongonthebasisoflegalcontracts,heorsheis usingwhichofKohlberg'sstages ofdevelopment?

a.Punishmentandobedience(1ststage)

b.Mutualinterpersonalexpectations,relationships,andconformity(3rdstage)

c.Socialsystemandconsciencemaintenance(4thstage)

d.Priorrights,socialcontract,orutility(5thstage)

e.Universalethicalprinciples(6thstage)

28.

dealswiththeissueof whatindividualsfeeltheyareduebasedontheirrightsandperformancein the workplace,and thereforeismorelikelytobebasedondeontologicalmoralphilosophiesthanonteleologicalor utilitarianones.

a.Rights

b.Virtueethics c.Justice

d.Relativism e.Egoism

29.A centralproblemwithrelativismis

a.thatitemphasizespeople’sdifferences,notsimilarities.

b.thatfewpeoplebelievethattheseprinciplesareimportant. c.thattheyareverycomplicated.

d.thattheyrepresentunattainablegoals.

e.thatmanyfeelthatvirtueethicsonlyworksintheory.

30.Whichis notconsidereda whitecollarcrime?

a.Corporatetaxevasion b.Creditcardfraud

c.Insidertrading d.Identitytheft

e.Muggingsomeone

31.Anindividualwhoemphasizesothersratherthanhimselforherselfinmakingdecisionsisinwhichofthefollowingof

Kohlberg'sstagesofdevelopment?

a.Universalethicalprinciples(6thstage)

b.Mutualinterpersonalexpectations,relationships,andconformity(3rdstage)

c.Socialsystemandconsciencemaintenance(4thstage)

d.Punishmentandobedience(1ststage)

e.Priorrights,socialcontract,orutility(5thstage)

32.Ericviewsanimalresearchinthepharmaceuticalindustryas awaytoimprovedrugsthatwillbenefitmankind.

Whichmoralphilosophymostcloselyrepresentshis viewpoint?

a.Egoism

b.Relativism

c.Humanitarianism d.Utilitarianism

e.Individualism

33.InKohlberg’smodel,the stageofmutualinterpersonalexpectations,relationships,andconformity(Stage3)differs fromthestageofindividualinstrumentalpurposeand exchange(Stage2)in termsoftheindividual’smotivesin

a.consideringfairnesstoothers. b.maintainingthesocialorder.

c.consideringdutytosociety.

d.upholdingthebasicvaluesofsociety. e.maintainingobediencetoauthority.

34.The elementsof and truthfulness. a.egoism

b.utilitarianism c.deontology

d.moralphilosophy

e.virtue

importantto businesstransactionshavebeendefinedastrust,self-control,empathy,fairness,

35. justiceconsiderstheprocessesandactivitiesthatproducetheoutcomeorresults. a.Disruptive

b.Procedural

c.Interactional

d.Communications e.Evaluative

36.Whatis whitecollarcrimeandwhyhasitbecomesuchawidespreadproblem?

37.Compareand contrastthetwoteleologicalphilosophies:egoismand utilitarianism.Includeadiscussionofthebases thateachtypeusesto evaluatethemoralityofactivities.

38.Compareandcontrastthe twomoralphilosophies:teleologyanddeontology.Discussthe baseseachphilosophytype usestoevaluatethemoralityof aparticularactivity.

39.Discussthe distinctionsbetweenthe ruleandact categoriesofutilitarianismanddeontology.Whydoyouthinksome peopleevaluatethemoralityofanactiononthebasisoftheactionitself,whereasothersevaluateitin termsofits conformitytoparticularmoralprinciplesorrulesofconduct?

40.Explainhowthe levelsofKohlberg'smodelofcognitivemoraldevelopmentmayinfluencea person'sperceptionof andresponsetoanethicalissue.

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Chapters 1 Through 7

CHAPTER 1

OVERVIEW OF EMPLOYMENT LAW

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. U.S. employment law is:

a. a complete body of federal law

b. a complete body of federal and state law

c. a fragmented work in progress

d. a fragmented body of common law

2. The best HR managers will:

a. be proactive

b. anticipate legal problems and try to avoid them

c. strictly enforce company policy when it conflicts with the law

d. a and b only

e. a through c

3. Sources of employment law include:

a. state and federal constitutions

b. state but not federal constitutions

c. executive orders

d. regulations

e. all of the above

f. a, c and d

4. The Employment at Will Doctrine means that:

a. an employer may fire an employee for any reason not prohibited by law

b. an employer may fire an employee only for cause

c. an employer may not fire an employee

d. none of these

5. The Employment at Will Doctrine is:

a. the starting point for any analysis of an employment issue

b. the rule, unless the parties have an employment contract

c. the rule, unless the parties have signed a collective bargaining agreement

d. all of the above

6. Employment law gives employees certain substantive rights. Among these are:

a. the right not to be fired except for cause

b. the right to vacation time and sick days

c. the right to an employer paid health insurance plan

d. none of these

7. In order to determine which employment laws apply to a certain business, one needs to consider:

a. the geographic location of the business

b. whether the business is public or private

c. how many employees the business has

d. all of these

e. two of these

8. An employee about to bring a claim for a violation of employment law must consider:

a. whether she has the right to bring a private cause of action

b. whether formal notice must be given before a claim can be made

c. whether the employee has worked for the employer for at least one year

d. all of these

e. a and b only

9. Tri-State Computers, Inc. decided to institute a mandatory arbitration agreement policy, so posted notice of the policy on its company website for all of the employees to see. The policy, as described is:

a. enforceable

b. unenforceable

10. The role of Human Resource managers in compliance with legal requirements regarding employment law includes:

a. recognizing and analyzing employment law issues

b. taking action to avoid or prevent employment disputes

c. enforcing legal requirements governing employment law

d. all of these

e. two of these

CHAPTER 1

OVERVIEW OF EMPLOYMENT LAW

MULTIPLE CHOICE QUESTIONS

1. William, aged 59, has been employed by your firm for more than 26 years, and has continually received above-average evaluations. Just before his 27th anniversary with the firm, you are ordered by your superior, the HR Manager, to tell him that his employment with the firm is terminated immediately. Given the facts, as presented, the issues most likely to be raised are:

a. legal

b. ethical

c. medical

d. contract

e. none of these

2. Under U.S. employment laws, employees have the right to:

a. not be fired, as long as they do a good job and the employer’s financial condition does not require that employment levels be cut

b. be treated fairly in all aspects of the workplace, including receiving fair compensation

c. have health insurance and other basic benefits, provided that they are full-time employees

d. all of the above

e. none of the above

3. In order to determine which employment laws apply to a certain employer, the employer should consider which of the following factors?

a. the number of employees that work for the company

b. whether the employer sells goods or services to the federal government

c. the state(s) in which the employer operates

d. all of the above

e. none of the above

4. Regarding the historical development of employment law in the U.S., which of the following statements is true?

a. Most federal employment laws were passed in the first half of the 19th century in response to growing industrialization

b. The earliest employment laws focused on wages and hours

c. Most employment laws were passed with little conflict, since the need for these laws was evident to employers, employees and legislators.

d. The importance of employment at will has increased over time.

e. None of the above.

5. Which of the following is generally true regarding the process of enforcing employment laws?

a. courts and government agencies hear cases only after employees come forward with complaints about violations of the law

b. employees are very likely to seize the opportunity to sue their employers, because all of the cost of employment litigation is borne by the employer

c. once a claim is brought, a company’s attorneys deal with it, and managers have little involvement in the case

d. all of the above

e. none of the above

6. In Nino v The Jewelry Exchange, plaintiff bank employee sued alleging discrimination, and his employer sought to dismiss the suit, stating that the employee had signed a mandatory arbitration agreement, so that the suit should go to arbitration. The employee responded that the mandatory arbitration agreement he had signed was unconscionable, and therefore, unenforceable. Among other things, the employee alleged that the arbitration agreement was unconscionable because gave him only 5 days to make a demand for arbitration. The court ruled:

a. for the Plaintiff employee, because the agreement was both procedurally and substantively unconscionable.

b. for the Plaintiff employee, because the arbitration agreement was procedurally unconscionable.

c. for the Defendant employer, because none of the provisions of the arbitration agreement was unconscionable.

d. for the Defendant employer because the unconscionable parts of the arbitration agreement could be stricken, and the arbitration could proceed.

7. Under the “payroll method” approved by the U.S. Supreme Court:

a. employers whose payrolls exceed $500,000 annually are covered by Title VII

b. employers are covered by Title VII if they had at least 20 employees on the payroll at the time of the alleged discrimination

c. employers are covered by Title VII if they had at least 15 employees working and being paid for each working day during at least 20 weeks in the same or the preceding year

d. employees are counted for each full week between when they are hired and when they leave employment, regardless of the number of days or hours worked.

e. none of the above

8. Which of the following statements is true of arbitration?

a. historically, arbitration has been used to resolve disputes over contractual rights

b. arbitrators’ decisions are usually advisory and not considered final

c. arbitrators have less control over the outcomes of disputes than do mediators.

d. arbitration is always more costly and time-consuming than litigation

e. none of these

9. Regarding the interrelationship of federal and state employment laws:

a. state laws must be identical to federal law or the state law is void

b. states may pass laws which reduce employee rights, but may not enact laws that expand employee protections granted in federal laws

c. states may pass laws which expand employee rights, but may not enact laws that reduce employee protections granted in federal laws

d. employment law is exclusively a federal domain, so states may not enact laws when federal law already exists

10. In Wal-Mart Stores v Dukes, Plaintiffs, all female employees, sued alleging discrimination in pay and promotions based on gender, and sought to represent a class of about 1 ½ million female employees, past and present. The case was certified as a class action, and Wal-Mart appealed, alleging that the certification did not comply with the Federal Rules of Civil Procedure in that the claimants had not suffered the same injury, and the claims did not have questions of law and fact in common. The court ruled:

a. for the Plaintiff employees, because they had all suffered the same injury – a violation of Title VII

b. for the Plaintiff employees, because Wal-Mart was guilty of a pattern or practice of discrimination based on its corporate culture

c. for Wal-Mart, because a lawsuit with 1.5 million plaintiffs was simply unwieldy

d. for Wal-Mart, because the claims did not have common questions of law and fact

11. In EEOC v Fed Ex, the EEOC sued Fed Ex on behalf of a deaf employee who was denied reasonable accommodation under the Americans with Disabilities Act (ADA) over a two year period. The court found for EEOC, and entered judgment for compensatory and punitive damages. Fed Ex appealed, in part based on the award of punitive damages, contending, among other things, that Fed Ex had made a good-faith effort to comply with the law. In particular, Fed Ex offered evidence of its ADA compliance policy set forth in the employee manual. The court ruled:

a. the establishment of an ADA compliance policy was sufficient to establish a good faith effort to comply with the ADA

b. the establishment of an ADA compliance policy was not sufficient by itself to establish a good faith effort to comply, in the absence of any affirmative steps to ensure the implementation of its policy

c. a good faith effort was not required

d. none of these

12. Which of the following is true regarding enforcement of employee rights and enforcement of employment laws?

a. finding a lawyer willing to take an employment law case is difficult because lawyers accept only about 50% of employment discrimination cases brought to them

b. if an employer has a complaint or grievance procedure, the employee is required to exhaust the remedies afforded under the internal procedure before taking the case to an enforcement agency or court

c. the EEOC encourages the parties to discrimination cases to use mediation

d. the EEOC encourages the parties to discrimination cases to use arbitration

13. An employer considering whether to use mandatory arbitration agreements should recognize which of the following limitations of their use?

a. the agreements probably won’t apply to any of its unionized employees

b. the agreements will not deter the EEOC from investigating and possibly litigating to recover remedies for individuals

c. the agreements may not be enforceable if they do not provide employees with the same remedies as those available through the courts

d. all of the above

e. none of the above

14. Which of the following is true of the enforcement process for discrimination charges brought under Title VII?

a. the plaintiff may choose to begin in the state civil rights agency, or may file directly with the EEOC as they wish

b. charges must be brought within 60 days of the alleged discriminatory act

c. a right to sue letter must be obtained from the EEOC before going to court

d. all of the above

e. none of the above

15. A mandatory arbitration agreement which provides that all claims be brought within 90 days of the date of the alleged violation would likely be:

a. enforceable

b. unenforceable

c. subject to amendment by the court

16. Dean got a job as a copyrighter for a publishing firm, and after working for the firm for two years, was told he was required to sign a mandatory arbitration agreement, submitting any employment disputes to binding arbitration, and that if he would not sign it as is, he would be fired. Dean:

a. will have to sign the agreement if he wants to keep his job

b. does not have to sign the agreement, and can still keep his job

17. The contract referred to in Question #16 above is:

a. procedurally unconscionable

b. substantively unconscionable

c. neither of these

d. both of these

18. Which of the following provisions, if included in a mandatory arbitration agreement, would be likely to render it unenforceable?

a. a provision that the employee pay the costs of the arbitrator’s services

b. a provision that gives the employer the right to choose any arbitrator

c. a provision that bars all discovery

d. a provision that requires the employee to prove his case

e. all of these

f. all of these except d

19. As the Human Resources manager of your firm, the task of putting into effect the firm’s new mandatory arbitration agreement has fallen to you. At a minimum, legally, which of the following actions are required to make the policy enforceable?

a. send email notice to all employees that a mandatory arbitration policy has been adopted

b. post the mandatory arbitration policy on the firm’s website, and ask employees to visit the site and review the policy

c. provide employees with a copy of the agreement, and ask them to sign it

d. make certain that the agreement provides, and the employees understand, that they are waiving their rights to sue

e. all of these are legally required

f. none of these are legally required

g. only c and d are legally required

20. Your firm has just gotten a contract with the U.S. government to build security gates for the new fence along the U.S.-Mexican border. In addition to the employment laws which already apply to your business, the following will now also apply:

a. Title IX

b. the Federal Security Fence Funding Act of 2008

c. EO # 11246

d. all of these

e. none of these

ESSAY QUESTIONS

1. Employment law arises from a variety of sources. Name and briefly discuss each of them.

2. Describe what the role of a good human resources manager should be in managing employment law issues.

CHAPTER 2

OVERVIEW OF EMPLOYMENT LAW

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. If an employment relationship exists, an employer must do this for its employee:

a. withhold income taxes from wages

b. provide workers’ compensation insurance

c. provide unemployment insurance

d. all of these

2. Who has the burden of proving the status of a hired worker whose status as either employee or independent contractor is disputed?

a. the hiring party

b. the worker hired

c. the agency before which the disputed case is pending

d. the judge presiding over the case in court

e. none of these

3. Of the following, which is considered in determining whether someone is an independent contractor or an employee?

a. who has the right to control how and where the work is done

b. does the worker work for one firm or many

c. who supplies necessary tools and supplies

d. whether benefits are provided to the worker

e. all of these

f. only a thru c

4. Which of the following statements is true?

a. an employer may be held liable for the actions of its employees outside the scope of employment

b. an employer may not be held liable for the actions of its employees outside the scope of employment

c. employers may limit their liability for the actions of its employees pursuant to contract

d. none of these

5. Which one of these is different from all the others?

a. independent contractor

b. employee

c. temp worker

d. partner

e. volunteer

f. students

g. interns

6. Match each term to its correct definition.

[c] 1. employee

[b] 2. employer

[e] 3. independent contractor

[a] 4. right of control

[f] 5. scope of employment

a. how the IRS distinguishes employees from independent contractors

b. one who hires another to work for him and directs the work

c. one who works regularly for an employer and is directed by the employer

d. principal and agent

e. one with his own business who offers his services to others

f. all of the services an employee performs for his employer are within this

g. agency

CHAPTER 2

THE EMPLOYMENT RELATIONSHIP

MULTIPLE CHOICE QUESTIONS

1. Distinguishing between employees and independent contractors is important because:

a. income tax must be withheld for employees, but not independent contractors

b. employers have fewer legal obligations to independent contractors

c. employers can defend their actions under employment laws by proving that persons performing work are independent contractors

d. all of the above

e. none of the above

2. Under the economic realities test:

a. if the hired party depends on the job for the majority of her income, that favors the conclusion that she is an employee

b. if the hired party performs tasks that are central to the hiring party’s business, that favors the conclusion that she is an independent contractor

c. if the hired party performs low-skilled work, that favors the conclusion that she is an independent contractor

d. if the hired party provides her own tools and materials, that favors the conclusion that she is an independent contractor

e. all of the above

3. In Narayan v EGL, Inc., the plaintiffs were drivers hired in California by a Texas firm, which had them sign independent contractor agreements under Texas law. They sued, contending they were employees, entitled to overtime pay and other benefits, and summary judgment was entered against them because of the independent contractor agreement. They appealed, and on appeal, the court ruled:

a. that they were independent contractors, because they signed the independent contractor agreement

b. that they were employees, because Texas law did not apply in California

c. that summary judgment was vacated, and the case remanded for trial, since a jury could determine from the evidence that they were employees

d. none of these

4. Which of the following is true of the common law test?

a. it is especially useful for distinguishing partners from employees

b. it focuses on the right of control

c. it focuses on the hired party’s ability to sell his services to a variety of hiring parties

d. it is especially useful for determining whether individuals should be covered as family members under benefit plans

e. none of the above

5. If a worker is an employee, the employer must:

a. withhold income taxes

b. pay the employer's share of Social Security and Medicare taxes

c. pay the employee's share of Social Security and Medicare taxes

d. all of these

e. a and b only

6. Which of the following is an accurate statement regarding independent contractor agreements?

a. they will usually be treated as indicators of independent contractor status, provided that they are signed and notarized

b. they are useless as indicators of independent contractor status

c. they can be renewed automatically and as often as necessary

d. they can support a claim to independent contractor status, but the actual relationship is the most important factor

e. a and c

7. The primary lesson to be learned from the lawsuit brought by Microsoft’s temporary workers in the 1990s is that:

a. it is safest legally to hire temp workers through a temporary staffing agency

b. employers must provide benefits to all of their employees

c. companies that use temp workers will often be deemed joint employers of those workers

d. employers cannot arbitrarily exclude some employees from benefit plans by labeling them as temporary workers

e. none of the above

8. If a worker is an employee, the employer must:

a. provide worker's compensation coverage for the employee

b. provide unemployment insurance for the employee

c. provide health insurance for the employee

d. all of the above

e. a and b only

9. Persons performing volunteer work are more likely to be deemed employees if:

a. their services are provided to non-profit agencies

b. they receive significant remuneration for their services

c. they retain control over their volunteer work schedule

d. all of the above

e. none of the above

10. A company has one office with nine employees and a second office with 12 employees. If an employee who works in the first office is harassed and attempts to sue under Title VII, which of the following questions becomes a relevant issue:

a. whether this is a single, integrated enterprise

b. whether these are joint employers

c. whether the multi-employer doctrine applies

d. whether the joint payroll method applies

e. whether Title VII applies extraterritorially

11. Which of the following statements regarding managers is most correct?

a. under most employment laws, managers are not deemed to be protected employees

b. managers are usually not individually liable when they violate employees’ rights

c. employers are liable for the actions of managers taken within the scope of their employment

d. a and c

e. none of the above

12. Employers may be liable for the actions of their employees within the scope of employment. With regard to the actions of employees outside the scope of employment, which of the following statements is true?

a. An employer can never be liable for the actions of its employee outside the scope of employment.

b. An employer is always liable for the actions of its employee outside the scope of employment.

c. An employer might be liable for the actions of its employee outside the scope of employment if the employer was negligent or reckless in allowing it to occur, or for other reasons.

d. None of these is true

13. You started your own business 2 years ago, and needed several part-time workers, but did not want and could not afford to pay them a minimum wage, or payroll taxes, so you classified them as independent contractors. At the time, a decent argument could be made that they were independent contractors, as there had been no rulings on your particular arrangement. Recently, for a business very similar to yours, the Department of Labor ruled that the workers of the business were employees, and not independent contractors. What should you do?

a. nothing, unless the Department of Labor challenges your arrangement

b. nothing, unless one of the workers complains

c. have all of the workers sign independent contractor agreements immediately

d. begin to treat them as employees, including paying a minimum wage, and withholding income taxes

14. The main reason employers would rather hire independent contractors than employees is:

a. its cheaper

b. the employer has more control over independent contractors

c. the independent contractor has fewer rights under law than an employee

d. all of these

e. a and c only

15. A worker who is not an employee is likely:

a. a partner

b. a volunteer

c. an independent contractor

d. any one of these

16. What test is used to determine whether a worker is an employee or an independent contractor?

a. The Economic Realities Test

b. The Right to Control Test

c. The Common Law Test

d. Each agency or entity having an interest in the question uses a different test

e. None of these

17. Your sister works at a large, well- known firm which has had trouble sustaining the kind of profit margins their shareholders want to see. In order to keep their numbers up over the years, they have tried every cost-cutting measure they could think of, including some that were of questionable legality. You know about this only because you and your sister talk regularly. You know that she is concerned about losing her job, as there have been many rounds of downsizing, and you have promised her that you would not disclose these matters to anyone. Yesterday, she told you that the firm has been using temp workers for about the last two years, and they are a continuing problem. They come from a temp agency, and there are new workers every month or so, whom she must train. They do little to no work all day, and they are seemingly accountable to no one, since the supervisors don’t make them work, yet they still get paid. Your sister knows you are taking this Employment Law course, and she wants you to tell her whether what the company is doing with the temp workers is illegal. Is it?

a. Yes

b. No

18. Regarding independent contractor (IC) agreements, which of the following statements is NOT true?

a. There is no point in using an independent contractor agreement.

b. A good, well-drafted independent contractor agreement can help avoid liability for the firm hiring the worker.

c. Independent contractor agreements can help the parties clarify their employment relationship.

d. A well-drafted IC agreement will address many issues that are used by agencies in determining the status of workers.

19. Which of the following items should NOT be included in a well-drafted independent contractor agreement?

a. a requirement that the worker hire his own assistants

b. a requirement that the firm provide health insurance for the worker

c. a flat fee payment arrangement for the work

d. a requirement that workers pay their own expenses

20. Regarding employees, actions within the scope of employment are those which:

a. relate to work the worker was hired to perform

b. occur on company time at the usual place of work

c. occur during work hours

d. serve only the interests of the employer

e. all of these

f. a thru c only

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. When using independent contractors, firms must be prepared to relinquish most of their control over how work is done.

b. Firms should closely review the status of long-term independent contractors and not assign new projects to them without renewing agreements.

c. Independent contractor agreements should be used, but only when they document actual independent contractor relationships.

d. Be particularly cautious about changing the status of workers from employees to contingent workers or having workers with different statuses perform the same work for long periods of time.

e. Client companies should refrain from closely supervising agency temporary workers or selecting individual temp workers for hiring or firing.

2. Regarding undocumented workers (non-citizens in the US illegally), the policy of federal agencies has been to enforce employment laws for such workers without inquiring as to their legal status. However, the remedies available to such a worker may be limited because of his status. State and explain the policy reasons behind each of these decisions.

3. With regard to Question # 2 above, do you agree or disagree with each stated policy? Why or why not? State and explain what kind of policies as to enforcement of employment laws and remedies for violations of such laws you believe would most encourage compliance with employment laws, and describe what the incentives would be in your preferred policies to encourage the desired conduct.

CHAPTER 3

OVERVIEW OF EMPLOYMENT DISCRIMINATION

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. Which of the following is not a real federal anti-discrimination law?

a. Title VII of the Civil Rights Act of 1964

b. Equal Pay Act

c. Equal Opportunity Act

d. Rehabilitation Act

2. The protected classes under the current Title VII law and other federal non-discrimination laws are:

a. race, color, religion, sex, national origin

b. race, color, religion, sex, national origin, age, disability

c. race, color, religion, sex, national origin, disability, sexual orientation

d. race, color, religion, sex, national origin, age, disability, sexual orientation

3. Which of the following protected classes are recognized under some state laws, but not under federal law?

a. disability

b. sexual orientation

c. sexual discrimination

d. none of these

4. In this kind of claim, a seemingly neutral policy has a discriminatory effect.

a. disparate treatment

b. disparate impact

c. pattern or practice

d. none of these

5. In this kind of claim, a member of a protected class who was qualified was not hired, while a member of an unprotected class was hired.

a. disparate treatment

b. disparate impact

c. pattern or practice

d. none of these

6. “Retaliation” is:

a. an adverse action taken against plaintiff following plaintiff’s performance of a protected activity

b. a discriminatory remark made by a supervisor within hearing of the person discriminated against

c. hiring the plaintiff

d. none of these

7. The Age Discrimination in Employment Act makes it illegal to:

a. discriminate against workers over 40 and those under 20

b. discriminate against workers over 40 and under 75

c. discriminate against workers over 40

d. discriminate against workers over 50

e. none of these

8. The federal law that makes it illegal to discriminate in employment against a person based on religion is:

a. The Religious Discrimination Act

b. The Freedom of Religion Act

c. Title VII

d. there is no such federal law; the protection is based on the US Constitution

9. In a case in which an employer fires an employee for reasons that are partly legal and partly illegal, the kind of discrimination is called:

a. reverse discrimination

b. pattern or practice

c. harassment

d. mixed motive

10. Match each term to its correct definition.

[c] 1. pretext

[e] 2. protected class

[a] 3. disparate treatment

[d] 4. retaliation

[b] 5. adverse impact

a. intentional discrimination

b. discriminatory effect

c. a purported reason (but not the real one) for a discriminatory action

d. action taken against an employee for exercising legal rights

e. a group of people sharing a characteristic which has been the object of discrimination

f. a pattern or practice of discrimination

g. action taken to get even

CHAPTER 3

OVERVIEW OF EMPLOYMENT DISCRIMINATION

Test Bank Questions

MULTIPLE CHOICE QUESTIONS

1. Which of the following is true regarding discrimination?

a. the number of discrimination claims filed has decreased over the past decade as employers have paid more attention to promoting diversity in the workplace

b. discrimination has become more subtle and difficult to eliminate in recent years

c. the main challenge in confronting discrimination is to get women and persons of color into workplaces; they can take it from there

d. discrimination occurs anytime that persons are treated unequally or unfairly in the workplace

e. none of the above

2. Which of the following is a protected class characteristic?

a. religion

b. height

c. intelligence

d. management status

e. all of the above

3. Which of the following is true? Title VII of the Civil Rights Act:

a. protects employees against discrimination based on race, sex, national origin, and disability

b. applies to employers that have 15 or more employees

c. protects employees against discrimination based on sexual orientation

d. protects employees against discrimination based on height, weight and physical appearance

e. all of the above

4. In disparate treatment cases:

a. the focus is on proving the employer’s discriminatory intent

b. the focus is on showing the discriminatory effects of the employer’s actions

c. the focus is on showing that unfair treatment occurred

d. the focus is on showing that the employer holds racist or sexist views

e. the focus is on showing that the employer was trying to get back at the employee for something the employee did

5. Which of the following must be shown in order to establish a prima facie case of

retaliation?

a. that the employee was replaced by someone with differing protected class characteristics

b. that the employee lost an employment opportunity shortly after engaging in protected activity

c. that the employer’s action was based on the employee’s race, sex, or other protected class characteristic

d. that the employer’s action was based on a disagreement with a superior and that the firing was unrelated to quality of the employee’s job performance

e. all of the above

6. Three employees working for the same company were found to have stolen company cargo. Two of the employees were white, and one was black. The two white employees were fired, but not the black employee. If the white employees sue, the court will most likely decide:

a. for the employer, because the employees were guilty of theft

b. for the employer, because the employees were employees at will

c. for the employee, because the employer treated him differently based on his race

d. for the employee, because his employer was within its discretion to fire some, but not all employees guilty of theft

7. Regarding cases alleging disparate treatment and pretext, it is correct to say:

a. disparate treatment is unintentional or accidental

b. evidence in a pretext case can be either direct or circumstantial

c. the employer has violated Title VII if it would not have made the same decision absent the discriminatory motive

d. they are relatively rare and with current legislation are not likely to be significant in the future

8. Which of the following is among the things that a plaintiff must show in order to establish a prima facie case of disparate treatment in a pretext case?

a. proof that the employer intended to discriminate

b. proof that the employer’s stated motive is not credible

c. statistical evidence of discriminatory effects

d. all of the above

e. none of the above

9. The key element in disparate treatment is discriminatory intent. In this context, that means that:

a. the decision-maker made the decision with intent to harm

b. the decision-maker made the decision with intent to break the law

c. the decision-maker made the decision in whole or in part based on the protected class characteristic of the employee

d. none of these

10. A firm had been sued and found guilty of racial discrimination against African-Americans, and managers were instructed to be very careful to avoid another similar suit. To that end, African-American employees, but not others, were given raises. Of the following, what is the most correct assessment of this policy?

a. the policy is sound, both legally and ethically

b. the policy is sound legally, but not ethically

c. the policy is neither legally nor ethically sound

d. none of these

11. Which of the following is a type of disparate treatment?

a. adverse impact

b. retaliation

c. both of the above

d. none of the above

12. In an adverse impact case, if an employer can show that a challenged employment practice is job related and consistent with business necessity, the plaintiff can still win by showing that:

a. there is an alternative practice that would have less discriminatory effects, but the employer declines to use it

b. the employer has engaged in a pattern or practice of discrimination

c. the difference in selection rates across protected class groups is statistically significant

d. the four-fifth’s rule has been violated

e. there is additional evidence of a discriminatory motive

13. Which of the following is a neutral requirement that is likely to result in adverse impact?

a. race

b. language requirement

c. physical strength test

d. b and c

e. all of the above

14. Protected activity in a retaliation claim under Title VII includes:

a. peaceful protests opposing an employer’s alleged discrimination

b. testifying in court about another employee’s discrimination claim

c. knowingly filing a false discrimination charge against an employer

d. all of the above

e. none of the above

15. For a disparate treatment case involving pretext, which is the correct order of proof?

a. plaintiff’s prima facie case, defendant’s lawful motive, plaintiff’s additional evidence supporting discriminatory intent

b. plaintiff’s evidence supporting discriminatory intent, defendant’s lawful motive, plaintiff’s prima facie case

c. plaintiff’s primary evidence, defendant’s primary evidence, plaintiff’s rebuttal showing discriminatory motive

d. none of these

16. Of the elements necessary to prove a case of disparate treatment involving pretext, which of the following is NOT required?

a. plaintiff applied for the employment opportunity

b. plaintiff was qualified for the employment opportunity

c. plaintiff was not hired for the employment opportunity

d. plaintiff was as qualified for the employment opportunity as the person hired

17. In disparate impact cases:

a. the focus is on proving the employer’s discriminatory intent

b. the focus is on showing the discriminatory effects of the employer’s actions

c. the focus is on showing that unfair treatment occurred

d. the focus is on showing that the employer holds racist or sexist views

e. the focus is on showing that the employer was trying to get back at the employee for something the employee did

18. An experienced female crane operator just hired by a new firm was told it was company policy that crane operators urinate over the side of their cranes rather than stop work. The same policy applied to male crane operators. She objected to the policy, was offered alternative jobs, but none as a crane operator, and she quit. Does she have a valid claim for sex discrimination?

a. No, because practice is neutral, and therefore non-discriminatory.

b. No, because she was offered alternative positions.

c. Yes, because the practice was a form of disparate impact.

d. Yes, because the firm did not create a different rule for bathroom breaks for her.

19. Of the following, the most effective way for an employer to respond to an employee’s claim of retaliation would be:

a. to show that the employee is lying

b. to show that the employee was not retaliated against, but rather disciplined for poor performance or the like

c. to show that the employee should never have been hired in the first place.

d. none of these

20. In Collazo v. Bristol-Myers Squibb,, an employee was fired after he assisted another employee with her claim of sexual harassment. He sued alleging retaliation. The firm contended that no sexual harassment had occurred, so that it was not legally possible for him to sustain a claim of retaliation. On appeal, the court ruled:

a. against the employee, because no sexual harassment was proven, and so no claim for retaliation could be maintained

b. against the employee, because he could not prove retaliation

c. for the employee, because the public policy exception to employment at will applied

d. for the employee, because it was not necessary for him to prove a violation of Title VII in order to sustain a claim for retaliation

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. Employers must not make employment decisions based, in whole or in part, on the protected class characteristics of employees.

b. Employers should have policies and be consistent in how they apply and enforce them.

c. Employment requirements and practices should be scrutinized for their potential to disadvantage protected class groups and for evidence of their job relatedness and business necessity.

d. Employers need to exercise particular care in making employment decisions regarding employees that have filed charges or spoken out about discrimination.

e. Employers need to maintain good documentation and be prepared to explain why particular employment decisions were made.

2. Certain protected classes are recognized under various state law but not under federal law. Name them.

CHAPTER 4

RECRUITMENT, APPLICATIONS AND INTERVIEWS

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. Word of mouth advertising for employees may be discriminatory because:

a. it reaches so few people

b. people tend to associate with others like themselves

c. it is not in writing

d. none of these

2. H1-B visas are granted to:

a. hardship cases

b. those with specialty occupations

c. agricultural workers

d. a and b

e. b and c

3. Employers conducting an interview for an open position:

a. may ask only job-related questions

b. must make a conditional offer of employment before asking health-related questions

c. may discriminate pre-hire

d. none of these

4. Regarding medical inquiries in an interview, it is correct to say that:

a. they may be made at any time during the job interview

b. they may be made after a conditional offer of employment

c. they may never be made

d. they may be made after the employee applies for insurance

5. During an interview, one may inquire about an applicant’s protected class status:

a. directly

b. indirectly only

c. not at all

6. Match each term to its correct definition.

[e] 1. relevant labor market

[c] 2. neutral wording

[b] 3. nepotism

[d] 4. word-of-mouth hiring

[a] 5. medical inquiries

a. questions about previous workers’ compensation claims would be one of these

b. hiring one’s relatives, or the relatives of one’s employees

c. want ads which do not mention any protected class have this

d. employees tell their friends, who tell their friends about job openings

e. qualified available workforce

f. the percentage of a protected class in the local labor market

g. women and minorities are encouraged to apply

CHAPTER 4

RECRUITMENT, APPLICATIONS, AND INTERVIEWS

Test Bank Questions

MULTIPLE CHOICE QUESTIONS

1. In Stewart v. Jackson & Nash, the court examined the issue of fraudulent inducement.

The court decided that:

a. actions for fraudulent inducement against an employer are never available when the employee is an employee at will

b. actions for fraudulent inducement against an employer are only available with regard to future promises

c. actions for fraudulent inducement against an employer are only available with regard to present facts

d. actions for fraudulent inducement against an employer are only available when the promises made to the employee are in writing

2. Which of the following is a difference between employing foreign nationals with work visas for work in the U.S. and employing U.S. citizens?

a. the eligibility of foreign nationals to work in the U.S. must be documented on an I-9 form, while this is not required for citizens

b. the duration of employment is limited for foreign nationals, but not for citizens

c. foreign nationals can be paid lower wages and offered fewer benefits than citizens

d. all of the above

e. none of the above

3. For purposes of determining discrimination in recruitment, the “relevant labor market” is defined as:

a. the protected class composition of the employer’s applicant pool

b. the population as a whole

c. the protected class composition of people qualified for the job, and living geographically close enough to be likely candidates

d. none of the above

4. Which of the following is true regarding want ads and job announcements?

a. employers are legally required to post written job announcements and ads

b. the wording of job announcements and ads must be neutral

c. job announcements and ads must not be placed in publications that are narrowly targeted toward particular protected class groups

d. all of the above

e. none of the above

5. Nepotism and word of mouth hiring:

a. are specifically prohibited by Title VII because of their potential to produce discriminatory effects

b. are not optimal recruiting procedures, but they raise no significant legal issues

c. tend to produce discriminatory effects, depending on how racially homogeneous an employer’s existing workforce is

d. have been subjected to numerous legal challenges, but have been consistently upheld under Title VII

e. none of the above

6. Determining whether discrimination has occurred regarding recruitment requires an analysis of:

a. the relevant labor market

b. the overall labor force

c. the national labor force

d. the international labor market

7. Which of the following would not create potential liability for the employer if asked

during an interview?

a. Have you ever filed a workers’ compensation claim for a work-related injury or illness?

b. Do you believe in God?

c. How often do you go out on dates?

d. Why do you want to work for this company?

e. Your accent is beautiful, where are you from?

8. Your new boss has asked you to advertise for a job opening at the firm, but said he did not want to hire any “foreigners,” by which he means, anyone who is not 100% a Caucasian, and a male. He also insists that you fill the position within one week. You know, from personal experience, that when you advertise this job for only a week, only white male applicants will apply. Given your legal and ethical obligations in this situation (and wanting to keep your job), the best course of action for you to take would be:

a. place the ad, and hire a white male for the position within one week

b. tell your boss that the law requires that you place the ad for two weeks; do that, then hire the best of the applicants who apply

c. place the ad, but also review your saved resumes for this position from previous applicants, knowing that they are a diverse group; start calling them in for interviews immediately, and hopefully, hire someone within a week

d. quit and go find another job

9. Which of the following inclusions in a want ad would be least likely to be considered

discriminatory:

a. young persons wanted

b. recent college graduates wanted

c. servers/waitstaff wanted

d. recent high school graduates wanted

e. all of the above would likely be considered discriminatory

10. In Harrison v. Benchmark Electronics, a temporary employee was asked by his supervisor to apply for the job as a permanent worker. He did so, and took a pre-employment drug test, which was positive. The Medical Review Officer, upon learning that the applicant had epilepsy, and his drugs were legally prescribed, cleared him to be hired, but his supervisor, who sat in on the Medical Review meeting, fired him. The court ruled that:

a. employers are permitted to make pre-employment medical inquiries prior to a conditional offer of employment

b. non-disabled applicants are not protected from pre-employment inquiries under the ADA

c. the firm had a legal right to ask questions about the drug use, but not to inquire about disability pre-employment

d. because the applicant had tested positive for drugs, the employer could lawfully proceed to ask questions regarding disability prior to making a conditional offer of employment

11. Of these possible means of recruitment, which has the greatest potential to be discriminatory?

a. use of an employment agency

b. nepotism or “word of mouth”

c. want ads

d. none of these

12. It is a violation of anti-discrimination laws to place a want ad indicating a preference based on:

a. race

b. religion

c. sex

d. national origin

e. all of these

f. none of these

13. Sex-linked job titles:

a. are always neutral

b. are never neutral

c. may be neutral, depending on the circumstances

d. none of these

14. Which of the following practices would be discriminatory?

a. placing an ad for a waitress

b. placing an ad for a waiter

c. placing an ad asking for “a recent college grad”

d. all of these

e. only a and b

15. Which of the following kinds of advertising is legally prohibited?

a. advertising a job opening in a foreign language newspaper

b. advertising a job opening inviting women and minorities to apply

c. advertising a job opening in a church bulletin

d. all of these

e. none of these

16. Which of the following statements is NOT true?

a. employers should advertise written job announcements to the public

b. anti-discrimination laws do not apply to employment agencies

c. an employer should preserve evidence, especially if it suspects a claim will be filed against it

d. word of mouth advertising is potentially discriminatory

17. Which of the following practices would be discriminatory?

a. using different kinds of application forms for different people applying for the same position

b. if an applicant seems an unlikely candidate, discouraging him from applying for the job

c. accepting applications for a position for only one week

d. all of these

e. a and b only

18. In order to prevent discrimination against applicants of protected classes, your colleague decides to note the protected class characteristic of the applicants on their applications. What would be your advice to her?

a. It’s a good idea. Noting the protected class characteristic of the applicant on the application which make sure that the firm takes extra care not to discriminate against these applicants.

b. It’s NOT a good idea. Noting the protected class characteristic of the applicant on the application could be construed as discriminatory.

c. As long as you do it in pencil, then erase it after you’ve made your hiring decision, you’ll be okay.

d. None of these

19. Which of the following is true regarding fraud claims?

a. they can be completely avoided by not saying anything

b. they differ from breach of contract claims primarily in the degree of harm suffered by the plaintiff

c. the false statement was made intentionally or with reckless disregard for the truth

d. if injury occurs, it doesn’t matter whether the false statement was made intentionally or unintentionally

20. Which of the following interview topics would be considered inquiries regarding an applicant’s medical condition?

a. previous injury

b. previous illness

c. current injury

d. previous workers’ compensation claims

e. all of these would be inquiries regarding a medical condition

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. Use multiple recruiting mechanisms, rather than rely solely on one way of getting the word out about employment opportunities.

b. If applications are being accepted, then no individual wishing to apply should be discouraged from submitting an application.

c. For applicants that are not hired, application forms and other documents should be retained for at least one year from when the decision not to hire was made.

d. Whether on application forms, during interviews, or otherwise, employers should refrain from asking, directly or indirectly, about the protected class characteristics of job candidates.

e. Be careful not to present false or misleading information that a job candidate would reasonably rely on in accepting a job.

2. You have been hired by the owners of Brew & Beef, a local family owned restaurant. They would like to open a second restaurant (Brew & Beef II) across town and have asked your advice regarding the recruitment of employees. One of the owners and her sister will be managing the new site and they are transferring part of their chef staff to the new facility so they need your advice regarding the hiring of wait staff, bus staff, custodial help and kitchen help. Recent discrimination law suits have been in the news and they want things to go smoothly and legally. What advice would you give them?

CHAPTER 5

BACKGROUND CHECKS, REFERENCES, AND VERIFYING

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. Background checks may include all of these EXCEPT:

a. verifying past employment

b. checking driving records

c. obtaining prior health insurance claims information

d. confirming the candidate actually has required degrees, licenses, and the like

2. Under the common law doctrine of respondeat superior, employers are generally liable for the actions of their employees:

a. outside the scope of their employment

b. within the scope of their employment

c. if those actions are foreseeable

d. none of these

3. Regarding background checks, it is correct to say that:

a. no particular measure is required in all cases

b. employer should always follow their own procedures

c. inconsistencies and gaps in an applicant’s information must be tracked down

d. all of these are true

4. One defense to a claim of defamation is:

a. truth

b. falsity

c. negligence

d. careless hiring

5. Regarding references, which of the following statements is NOT true?

a. An employer has no duty to give a reference for a former employee.

b. An employer has a duty to give a reference for a former employee.

c. If an employer gives a reference, it must do so with due care.

d. All of these statements are true.

6. Match each term to its correct definition.

Respondeat superior the liability of an employer for the acts of its employee within the scope of the employment

Foreseeable reasonable anticipation of the possible results of an action

Qualified privilege an exemption from liability under certain conditions

Defamation a false statement which damages a person’s reputation

Consumer credit report a communication regarding a person’s credit standing and reputation

CHAPTER 5

BACKGROUND CHECKS, REFERENCES,

AND VERIFYING

MULTIPLE CHOICE QUESTIONS

1. Negligent hiring:

a. makes employers liable for harm that occurs when employees act within the scope of their employment

b. makes employers liable for any harm that is caused by their employees

c. makes employers liable for harm that occurs when employees who were not properly screened act outside the scope of their employment

d. all of the above

e. none of the above

2. In order to avoid liability for negligent hiring, the primary question an employer must consider is:

a. whether the employer’s own written hiring policies are adequate

b. whether placing an unfit person in the particular job could be expected to result in harm

c. whether there is evidence of a candidate’s unfitness that could be found through a thorough personal interview with the applicant

d. all of the above

e. none of the above

3. In D.D.N. v. FACE, a music-festival organizer hired a man who had a conviction for criminal sexual assault without doing a background check. The man was hired to be “camping staff, front.” He was given a “staff” T-shirt, and a wristband that gave him access to all parts of the concert venue. He sexually assaulted a concert-goer, and she sued for neghligent hiring. Although the hiring manager acknowledged an increased risk of sexual assault in that venue, the employer argued that they owed her no duty, and her injury was not foreseeable. The court ruled that:

a. the employer was liable under respondeat superior because the assault occurred on concert grounds, and was carried out by a management-level employee

b. the employer was liable for negligent hiring because employers are legally obligated to perform criminal background checks and contact references for all persons hired

c. the employer was liable for negligent hiring because sexual assault was an increased risk in this venue, it was foreseeable that an unfit person hired as for this position could harm others, and the employer failed to conduct an adequate background check

d. the employer was not liable for negligent hiring because even if it had undertaken a more thorough background check, clear evidence of unfitness for the job was not available

e. none of the above

4. A company hired a file clerk, but did not inquire into his criminal history. In fact, he has had several convictions for driving while intoxicated. On a lunch break, he got drunk and assaulted a waitress at a nearby restaurant. If the waitress sues the employer, a court would most likely decide that:

a. the employer is liable under respondeat superior for the harmful act of the employee because it occurred during the workday

b. the employer is liable for negligent hiring because the employer had an obligation to check his criminal background, it did not do so, and this led to him harming another person

c. the employer is not liable for negligent hiring because the employee did not assault the waitress on company property

d. the employer is not liable for negligent hiring because the job does not subject people to risk, and the evidence of unfitness was not related to the job

e. none of the above

5. A valid background check should NOT include:

a. checking an applicants marital status

b. verifying an applicants military service

c. checking an applicants driving record

d. verifying an applicants degrees and/or licenses

e. none of the above may be validly inquired into

6. Which of the following is a defense to a defamation claim against an employer?

a. the employee gave his consent to make the statement

b. the statement was within the employer’s qualified privilege

c. the statement was truthful

d. all of the above

e. none of the above

7. In Sigal Construction v. Stanbury, a project manager sued because statements made by his former employer in the course of providing a reference untruthfully minimized his abilities. The court ruled that:

a. the employer did not defame the former employee because its statements were merely opinions and did not purport to be factual

b. the employer did not defame the former employee because he had consented to having information about him shared with the prospective new employer

c. the employer did not defame the former employee because the statements, although harsh, were truthful

d. the employer defamed the former employee because statements made in references are not subject to qualified privilege

e. the employer defamed the former employee because the employer was recklessly indifferent to the truthfulness of the statements made

8. In M.P. v. City of Sacramento, a 24-year-old woman working as a photographer attended the “Porn Star Costume Ball.” A firefighter captain attended, and allowed other firefighters to attend, drive their trucks to the event, and “pick up” women. Some of the firefighters were on duty, and some were drinking. This was not the first time firefighters had been allowed to bring their fire trucks to bars and parties. The woman was asked to take pictures of the firefighters in the truck, and two of them (one of whom was on duty) sexually assaulted her. She sued, contending that the City of Sacramento was liable for the assault against her. The court ruled:

a. the city was not liable because under California law, a public employee who commits a sex crime on duty is not acting within the scope of employment, so that the employer is not vicariously liable

b. the city was liable because under California law, a public employee who commits a sex crime on duty is acting within the scope of employment, so that the employer is vicariously liable

9. Under the Fair Credit Reporting Act, employers must do which of the following?

a. notify an applicant that the employer plans to reject her based on information from a credit report

b. obtain the consent of an applicant before conducting any background check

c. verify that the information in a credit report reasonably appears to be accurate

d. all of the above

e. none of the above

10. Mike is the chair of the management department at a local university and Tom is an

ethics professor in that department. They dislike each other immensely due to a number

of professional and social disagreements. Mike calls Tom into his office and closes the

door. He then informs Tom that he believes that Tom is guilty of plagiarism and also

guilty of an improper sexual relationship with Kathy, a 19 year old management student.

In fact, Tom is a happily married man who is extremely well respected in the community

and has never committed adultery. Deeply believing in ethics, he has never committed

plagiarism in his life. Furthermore, he has always been absolutely professional with

regard to his student Kathy. Tom vehemently denies these charges and as he gets up to

leave, Mike states, “Give me any more trouble and I go public.” Tom goes right to his

attorney who files a defamation law suit that afternoon.

a. Tom will win because the statements are both lies, challenging his integrity and character

b. Tom will win because his reputation has been damaged

c. Mike will win because as chair, he has a qualified privilege to make these types of statements

d. Mike will win because the statements were not published

11. The Immigration Reform and Control Act:

a. requires that employers not hire or employ aliens

b. requires that employers not discriminate based on national origin and citizenship

c. allows employers to hire an unlimited number of foreign nationals under the H-1B visa program

d. all of the above

e none of the above

12. Which of the following is true regarding criminal background checks?

a. an employer is required to do a criminal background check for all applicants; otherwise, it may be deemed guilty of discrimination if it does checks for some types of jobs but not for others

b. a thorough criminal background check is required only when the applicant will be working with money

c. employers should consider the seriousness, recentness, and job-relatedness of convictions before denying employment on that basis

d. all of the above

e. none of the above

13. Which of the following is a true statement regarding employer compliance with the

Immigration Reform and Control Act?

a. employers must verify a person’s eligibility to work in the United States before the new employee begins work

b. employers are required to copy and retain copies of the documents used by the employee to prove eligibility to work in the United States

c. if they appear to be genuine, employers are not required to investigate or verify the authenticity of documents presented or supplied by the employee

d. employees must present certified copies of whatever documents they use to verify eligibility to work

e. all of the above

14. The Fair Credit Reporting Act refers to which two kinds of reports?

a. a consumer credit report, which reports only credit-worthiness, and an investigative report, which reports the results of interviews with neighbors, colleagues, and the like

b. a consumer credit report, which reports credit information and general character information, and an investigative report, which reports the results of interviews with neighbors, colleagues, and the like

c. a fair credit report, which guarantees accuracy, and a character reference report, based on personal interviews of neighbors, colleagues, and the like

15. After three weeks in your new position as Assistant Human Resources Director, the HR Director has asked you to take a candidate all the way through the process, from application to interview, to background check. The firm has an opening for an electrical engineer who is proficient with construction blueprints. The engineer will be helping to build the company’s new warehouse, which is about to begin construction. Which of the following steps would be necessary to take during the background check?

a. do a thorough criminal background check through all 50 states

b. check to see that the applicant has a degree in electrical engineering

c. check references at the applicant’s former places of employment

d. all of these

e. b and c only

16. You’ve now been on the job for a few months in your role as Assistant Human Resources Director, and have acquired some experience in interviewing and background checks. While doing a background check on a candidate for a secretarial position, you discover that the candidate was arrested several years ago while in college, and accused of damaging university property. What should you do?

a. disqualify the candidate for unfitness

b. talk to the candidate to find out what the report is all about

c. disregard the report, as it’s an arrest, and not a conviction

d. none of these

17. Which of the following steps could an employer take that would help to eliminate possible claims of defamation?

a. obtaining a signed consent from a former employee, authorizing the employer to provide information about her job performance

b. negotiating an agreed letter of reference for an employee who is leaving

c. giving only information that verifies that the former employee worked for the employer, the rate of pay, and the dates of employment

d. all of these

18. Which of the following statements is NOT true?

a. Employers must always perform a criminal background check before hiring an employee

b. Employers must always conduct a thorough and comprehensive background check of every applicant

c. Employers must obtain an applicant’s consumer credit report

d. all of these are true

e. none of these is true

19. "Knowledge" as an element of the tort of negligent hiring, means that:

a. the employer knew the employee was unfit

b. the employer should have known the employee was unfit

c. the employer would have known the employee was unfit if it had done an appropriate background check

d. any of these might constitute such “knowledge”

e. none of these constitutes such “knowledge”

20. While doing a background check on a candidate who is superbly qualified for the sales job for which he has applied, you learn that he was dishonorably discharged from the U.S. Army. When you ask him about it, he explains that he was 18 years old at the time, and the death of his father, whom he had only recently met, had a devastating impact on him. He began to drink to excess, often failed to report to his duty station. After his dishonorable discharge, he righted himself, started working, and got counseling. Everyone at your firm who has interviewed him found him to be very personable, and very able, and they’re eager for him to start. You’ve told them about the dishonorable discharge, and it’s made no difference to their decision. Should you tell other employees about the dishonorable discharge?

a. Yes

b. No

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. Background checks must be more extensive when hiring for positions in which unfit employees could do serious harm to others.

b. Employers should document all efforts to obtain information on job candidates, even when those efforts are not successful.

c. Former employers should verify the identities of persons seeking information about former employees, such as by requiring that requests be made on company letterhead.

d. Employers should consider, on an individual basis, the seriousness, job relatedness, and recentness of any criminal convictions before using them as grounds for denying employment.

e. For all persons hired, employers must view documents establishing identity and eligibility to work in the U.S. and record the documents examined on I-9 forms.

Answer: Immigration Reform and Control Act – This is the mechanism through with the Act’s prohibition against hiring undocumented workers is implemented.

2. You have been hired as the assistant director of a company’s Human Resource Department. The director calls you in and tells you that she is considering a suggestion to the Board of Directors that the company adopt a policy of refusing to give substantive information on employee references. She asks you if adopting such a policy makes sense. What advice will you give to her?

CHAPTER 6

Employment Testing

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. Drug testing in employment is used:

a. prior to hiring

b. as part of medical exams

c. to verify that employees who have been through drug rehab programs are “clean”

d. all of the above

2. Regarding drug testing, which of the following statements is NOT true?

a. No one rule applies to employers uniformly.

b. Drug testing laws vary from state to state.

c. About 10 states grant employers the right to drug test at any time.

d. Random drug testing of union members is subject to their CBA.

3. With some exceptions for certain industries, public employers may not use random drug-testing because:

a. of their union collective bargaining agreement

b. it violates the U.S. Constitution’s 4th amendment

c. it is unfair

d. none of these; public employers may use random drug-testing

4. Pursuant to the Genetic Information Nondiscrimination Act of 2008:

a. Employers are required to genetically test their employees for insurance purposes.

b. Employers are forbidden from genetically testing their employees.

c. Employees must disclose their genetic information to their employers.

d. None of these

5. Polygraphs may be administered by employers:

a. pre-hire, to determine the honesty of the applicant

b. after a theft or other serious event

c. randomly

d. all of these statements are true

6. Match each term to its correct definition.

Medical examination for example, an HIV test

Chain of custody tracking the location of a sample from the time its taken

Four-fifths rule an EEOC rule of thumb

Banding grouping similar scores together and treating them similarly

Drug-Free Workplace Act a federal law which applies to firms that do business with the federal government

CHAPTER 6

EMPLOYMENT TESTING

MULTIPLE CHOICE QUESTIONS

1. Which of the following statements is most correct about the legality of drug testing?

a. drug testing will usually be upheld, provided that the employer had reasonable grounds for suspecting that the individual employee was under the influence of drugs

b. drug testing will usually not be upheld if it is legally challenged

c. drug testing will be upheld for private sector employees, but not for public employees

d. drug testing will usually be upheld, but random testing procedures are the most susceptible to challenge

2. Drug testing may include samples of all of the following EXCEPT:

a. blood

b. saliva

c. hair

d. fingernails

3. The Drug Free Workplace Act of 1988 requires that:

a. employees must be drug tested at the time of hire and whenever there is reasonable suspicion of drug use in the workplace

b. employers must develop and communicate polices prohibiting drug use, possession, or sale in the workplace

c. employers must terminate all employees who are found more than once to be using drugs in the workplace

d. all of the above

e. none of the above

4. Which of the following is considered a medical exam under the ADA?

a. drug test

b. genetic test

c. physical fitness/agility test

d. vision tests for ability to read or recognize objects

e. none of the above

5. Which of the following is true regarding medical exams under the ADA?

a. all medical exams must be voluntary

b. medical exams conducted following conditional offers of employment are unrestricted in scope

c. only if an employee’s condition makes him a direct threat to himself or others can he be denied an employment opportunity based on a medical exam

d. people who are disabled or look disabled may be singled out to receive medical exams based on their condition

e. none of the above

6. Which of the following is true regarding HIV tests?

a. they must not be given until after a conditional offer of employment has been made

b. forced testing of public employees will usually violate the Constitution

c. it will usually not be legal to deny an employment opportunity based on the fact that a job candidate or employee has tested positive

d. all of the above

e. none of the above

7. About half of the states have drug testing laws, some of which:

a. prohibit blood testing

b. require testing of certain employees, or under certain conditions

c. regulate more fully random drug testing

d. all of these

e. all of these except a

8. Employers must show that a test is job related and consistent with business necessity:

a. only if the test is having discriminatory effects

b. any time that a test is used

c. only if content validity cannot be established

d. none of the above

9. To determine if a test is having discriminatory effects:

a. see if the number of women and persons of color hired is at least four-fifth’s of the number of white males hired

b. see if the proportion of women and persons of color hired is roughly equal to the proportion of women and persons of color in the relevant labor market

c. compare the pass rates for different protected class groups and see if the pass rate for any group is less than four-fifth’s of the pass rate for the most successful group

d. compare the number of persons from different protected class groups that pass the test and see if the number of persons passing for any group is less than four-fifth’s of the number for the most successful group

e. examine the individual test questions looking for evidence of bias

10. Which of the following is NOT true regarding the Employee Polygraph Protection Act?

a. it applies to voice stress analyzers, mechanical and electronic truth determining devices as well as polygraphs

b. it only applies to private sector employers but not to governmental agencies

c. it prohibits the use of polygraphs by private sector employers for any reason

d. it does not apply to, or prohibit, pencil and paper honesty tests

11. Content validation studies:

a. examine whether behaviors and skills tested closely represent behaviors and skills used on the job

b. examine test items to ensure that they measure what they purport to measure and do not include irrelevant or biased questions

c. demonstrate a statistical association between test performance and job performance

d. all of the above

e. none of the above

12. In Lanning v. SEPTA, female applicants for transit police jobs failed the physical fitness test at a much higher rate than male applicants and were rarely hired. The major conclusion to be drawn from this case is that______:

a. employers should reasonably accommodate women when conducting physical fitness tests

b. if physical fitness tests are professionally developed, they will usually not produce discriminatory effects

c. cut-off scores on physical fitness tests should reflect the minimum level of physical ability needed to successfully perform the job

d. employers must not establish different cut-off scores for men and women on physical fitness tests

e. none of the above

13. A criterion validation study must:

a. be based on a thorough job analysis

b. include a representative sample

c. demonstrate a statistical association between test performance and job performance

d. all of the above

e. none of the above

14. Regarding drug tests:

a. the employer must perform a second confirmatory test if requested by the employee

b. the employer must allow the employee access to samples so that the employee can have her own test done

c. a and b

d. none of the above; if the test is done by an independent certified laboratory and there is no evidence that the test was compromised or invalid, the original test is all that needs to be done

15. For union employers, drug testing is:

a. prohibited

b. permitted only under certain conditions

c. a subject of mandatory bargaining

d. none of these

16. Drug testing laws, both state and federal, require that:

a. employers use due care in conducting tests and handling samples

b. employers refrain from drug testing unless required by law

c. employers routinely drug test all employees

d. none of these

17. You have just concluded an employment interview with an applicant you like, who is qualified for the inside sales job you have been interviewing for, and have made a conditional offer of employment. You tell the applicant that you want her to take a medical exam, and if she passes, she has the job. She is at first obviously happy and seemingly relieved, but then breaks down in tears. She tells you that a medical will show that she is HIV positive. What should you do?

a. Tell her not to worry, and that if she otherwise passes the medical exam, she has the job

b. Tell her that you’re sorry to hear about her affliction, and obviously, you cannot hire her

c. Report her to the County Health authorities

d. none of these

18. You are the HR Manager of your firm, and you pride yourself on being up to date with legal requirements, and on the cutting edge of your field. You’ve just gotten a mailer about a new test kit which would perform genetic testing by pricking a finger, dripping the blood sample onto a tab, and mailing it in to a lab. You think how this could be applied to your employees and applicants, and what you might be able to save on health insurance costs. What should you do?

a. Order a gross of the genetic testing kits as soon as possible.

b. Call the company attorney to ask how you could test the entire staff without their knowledge

c. Throw the mailer in the trash; it’s use in this context would be illegal

d. none of these

19. Your firm’s lunchroom has been a congenial gathering place for employees while they are taking their lunch breaks, but lately, lunches that employees have brought from home and put into the refrigerator in the morning have disappeared by lunch time. This has happened several times, and the employees have now started to accuse one another of stealing lunches. Morale has fallen, and you must do something. Of the following, which is your best option?

a. conduct polygraph tests of all of the employees

b. conduct polygraph tests of all employees who use the lunchroom

c. install a video camera, and train it on the refrigerator in the lunchroom

d. prohibit use of the refrigerator by anyone

20. You are in the process of revising your pre-employment tests, as your current test is out of date, and may have discriminatory effects. A new company offering a pre-employment test has given you a sample of their test, which they tell you has had great success in screening to acquire only honest employees. Applicants are to agree or disagree with several statements, including this one: “I believe God wants us to conduct ourselves with honesty in all things, including at work.” Which of the following statements is most correct?

a. The test will have no discriminatory effect, and will successfully screen for honest employees

b. The test may have a discriminatory effect, and should not be used

c. You should wait to see how the test performs for other companies, so that you can decide whether or not to adopt it

d. none of these

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. Supervisors should be well-trained at identifying signs of drug use and impairment.

b. Information about medications taken should be sought only after positive drug test results occur.

c. Drug testing programs should require confirmatory tests to verify positive results, provide for documentation of the chain of custody, use reputable labs and monitor their performance, and use a Medical Review Officer.

d. Employers should have evidence of validity for all of their tests, but must do so for tests that have discriminatory effects.

e. Content valid tests should be used to the extent feasible, but not to assess intangible characteristics and not for tasks that could readily be learned on the job.

2. Non-medical tests used for making employment selection decisions must be scored in some way. Name and discuss the various legal and illegal methods that employers utilize.

CHAPTER 7

HIRING AND PROMOTION DECISiONS

Online Quiz Questions

MULTIPLE CHOICE QUESTIONS

1. A “facially discriminatory policy or practice” is:

a. one that is discriminatory on its face

b. one that uses face recognition software to identify employees

c. one that is necessary to conduct business

d. all of the above

2. One defense to a claim of discrimination is:

a. Age Discrimination in Employment Act (ADEA)

b. bona fide occupational qualification (BFOQ)

c. a thorough background check

d. a collective bargaining agreement (CBA)

3. One employer refused to hire women with children under age 5, but did hire men with children under age 5. This is an example of what kind of case?

a. disparate impact

b. sex plus

c. retaliation

d. none of these

4. A person who was interviewed and hired, but the job offer was withdrawn before he/she began may have a cause of action for:

a. breach of contract

b. negligent hiring

c. promissory estoppel

d. all of these

5. The artificial barriers based on attitudinal or organizational bias that prevent qualified individuals from advancing in their organization into upper management positions are known as:

a. luck of the draw

b. the glass ceiling

c. seniority

d. subjective criteria

6. Match each term to its correct definition.

Authenticity required for believability even though discriminatory

BFOQ discrimination which is reasonably necessary to the business

Sex-stereotyping for example, women as homemakers and men as fighters

Subjective criteria measures without clear standards, about which people may disagree

Promissory estoppel one who relies to his detriment may have this cause of action

CHAPTER 7

HIRING AND PROMOTION DECISIONS

MULTIPLE CHOICE QUESTIONS

1. The bona fide occupational qualification (BFOQ) defense:

a. applies to intentionally discriminatory policies but not to neutral policies that result in discrimination

b. permits race or color to be used as selection criteria, but only under circumstances where employers can make a very strong case for why that is necessary

c. is the only means by which employers can avoid liability for facially discriminatory policies or practices

d. all of the above

e. none of the above

2. Which of the following is most likely a proper application of a BFOQ?

a. transferring pregnant women out of a department that worked with chemicals known to be harmful to a fetus

b. not hiring women for the night shift because the factory is in a very dangerous part of town and the company parking lot requires a ½ mile walk to the site

c. requiring airline pilots to retire at 60 years old

d. all of the above

e. none of the above

3. The machinery in a plant is old and was designed for use by an “average-sized male.” Citing safety concerns, the company hires only average-sized males for jobs working in the plant. If a female applicant for a job at the plant is not hired and sues, a court would most likely rule that:

a. the employer violated Title VII by facially discriminating based on sex

b. the employer violated Title VII by not attempting to accommodate women so that they could work in the plant

c. the employer violated Title VII because the selection criterion of size has an adverse impact on women and is not job related and consistent with business necessity

d. the employer did not violate Title VII because the employer could establish a BFOQ based on its safety concerns

e. the employer did not violate Title VII because any adverse impact its hiring criterion created was justified as job related and consistent with business necessity

4. Which of the following would NOT be considered a sex-plus policy issue?

a. hiring women only after they have gone through menopause

b. requiring men, but not women, over 40 years old to have annual physicals

c. hiring male newlyweds but not hiring female newlyweds

d. asking men and women about childcare arrangements during a pre-employment interview

e. none of the above

5. xxA female teacher who worked for a school district alleged that she was discriminated against and denied tenure because she was a young mother who her superiors felt could not do a good job and be a good mother simultaneously.

a. the teacher was successful because they proved that in the year Back was hired, 85% of the teachers employed were women and 71% of these women had children

b. the school district was successful because Back did not prove or even allege that males with children were treated more favorably than she was treated

c. Back was successful because a jury could find that the justifications for the negative tenure recommendation and evaluation offered by Back’s superiors were pretextual and that discrimination was a motivating factor for the negative recommendation

d. Back was successful because Hastings did not establish that not having young children was a legitimate BFOQ for her administrative position

6. Which of the following is true regarding grooming and appearance standards for employees?

a. applying different standards to men and women does not automatically constitute sex-plus discrimination

b. standards that are sex-stereotypical in nature are likely to be discriminatory

c. dress requirements that result in harassment are likely to be discriminatory

d. all of the above

e. none of the above

7. The use of subjective criteria by employers:

a. is legal as long as the criteria can be systematically measured and quantified

b. tends to result in the hiring of fewer African-Americans and Latinos

c. requires a formal validation study to be conducted if the criteria produce adverse impact

d. all of the above

e. none of the above

8. Which of the following statements is most correct regarding the interviewing process:

a. the degree of subjectivity in interviewing applicants tends to be low

b. the use of a structured interview may provide more uniform results, and fewer charges of discrimination

c. the degree of subjectivity in interviewing applicants tends to be uniform

d. interviewers generally know when they are responding negatively based on stereotypes

9. Trends in jobs and hiring criteria raise new legal questions because:

a. increased emphasis on “soft skills” that are assessed subjectively limits employment opportunities for persons of color

b. increased emphasis on flexible job descriptions and teamwork limits employment opportunities for older workers

c. increased emphasis on organization-fit limits employment opportunities for disabled persons

d. all of the above

e. none of the above

10. The bona fide seniority system (BFSS) defense:

a. applies to facially discriminatory policies or practices

b. will not succeed if it results in the limitation of employment opportunities for lower seniority women or persons of color

c. is one of two statutory defenses to discrimination charges included in Title VII

d. all of the above

e. none of the above

11. Which of the following is an element necessary to establish the existence of a contract?

a. a written document signed by both parties and reviewed by lawyers

b. a written document signed by both parties and whether reviewed by lawyers or not

c. face to face negotiations over contract terms

d. a clear offer and acceptance of the offer

12. Promissory estoppel claims:

a. arise when employment contracts are breached

b. require evidence of intent to deceive

c. require reasonable reliance on a clear promise

d. all of the above

e. none of the above

13. xxIn Everson v. Michigan Department of Corrections, the defendant claimed that hiring

only female Corrections and Residential Housing Unit Officers was justified as a BFOQ.

The court:

a. agreed based on prisoner’s privacy concerns

b. agreed based on prisoner’s preference concerns

c. disagreed based on perceived security concerns

d. disagreed because there were reasonable alternatives shown that would allow both men and women to perform the officer positions without adversely affecting the institution or the prisoners

14. “Glass ceilings”:

a. are primarily a problem for women rather than persons of color

b. have been the focus of enforcement actions by the OFCCP

c. are primarily a problem in the financial sector

d. all of the above

e. none of the above

15. Regarding promotions, which of the following would NOT constitute good information and advice for managers?

a. assessing who is eligible for a promotion may begin with the jobs to which people are assigned when they are hired

b. training and development programs should be developed, and made available to all

c. since not all are qualified to be promoted, it is not advisable to post or announce possible promotion opportunities; rather one should advise only the people who may be qualified

d. one should consider applications for promotion from all who are interested, even if they do not appear to qualify.

16. Which of the following statements is NOT true as to discrimination against caregivers?

a. sex stereotyping is a common form of discrimination against caregivers

b. the EEOC has highlighted the issue of discrimination against caregivers

c. “caregiver” is a new protected class under EEOC guidelines

d. disparate treatment is the most common form of discrimination against caregivers

17. You are the manager of your division at a large technology firm, and have been waiting to get approval to hire a new person. You have someone in mind: your long-time friend and college roommate, who you know would be a terrific fit with your team. But you are also aware that the company wants to increase its diversity, especially with regard to women. You worry about this, since your team is all male, and adding a woman would change the dynamics considerably. You’ve now advertised the new position, as required, and the two best candidates are your friend, and a Latina woman you have never met before. Neither candidate has met your team. Of the following, which would be the best decision?

a. hire your friend; you know he’ll fit with the current team

b. hire the woman; the firm will be happy that you’ve improved diversity

c. have both candidates meet with your team, each one separately, and get their input on the candidates; then decide based on their preference

d. have both candidates meet with your team, each one separately, and get their input on the candidates; then make the decision on your own, objectively

18. Your firm has been repeatedly accused of discrimination, and your boss, knowing that you just graduated from college with a degree in Management, and a certificate in Human Resources Management, has asked you to review the company’s practices and procedures with regard to hiring and promotion, and eliminate those that could lead to discrimination. Which of the following practices would likely lead to discrimination?

a. evaluating candidates based upon technical skills (30%) and interviews (70%)

b. having the interviewers meet as a group to “coordinate” their interview scores

c. weighting the answers to some questions over others

d. all of these would likely lead to discrimination

e. none of these would likely lead to discrimination

19. With regard to the situation in # 18, above, which of the following practices would you recommend to help avoid discrimination, and what is the basis for your recommendation?

a. change the weight given to the evaluation of candidates to rely more heavily on technical skills than on the interview, because this would make the assessment more objective

b. do not allow the interviewers to change their scores developed during the interview, as this will remove score manipulation

c. continue to weight the answers to those questions which are more important, because this is necessary to acquiring compatible workers, and does not discriminate

d. all of these would help avoid discrimination

e. only a and b would help avoid discrimination

20. Your firm has been wanting to hire another engineer for some time, and your supervisor has just made an offer to someone from out of state. The hiree is in the process of selling his house, and moving his family to your city. But you are well aware that the economic downturn has sharply curtailed business, and you don’t see how the current level of business can support another engineer. In fact, you are all a little concerned about layoffs. You know that your supervisor also knows all of this, but he has told you that he won’t withdraw the offer until he absolutely has to. By that time, the hiree may well have sold his home and moved his family, but have no new job with your firm. If the offer is withdrawn under these circumstances, and the hiree sues, which causes of action, if any, might be successful?

a. breach of contract and promissory estoppel

b. promissory estoppel and fraud

c. fraud only

d. breach of contract only

e. none of these

ESSAY QUESTIONS

1. Why is each of the following good legal advice?

a. Rather than use protected class characteristics to identify persons with desired abilities, employers should find more individualized means of assessing job-related abilities.

b. Employers must not exclude older employees from safety-sensitive jobs based on assumptions about health status, unless there is evidence that older employees pose greater risk and it is not feasible to adequately assess the health of individuals.

c. Employers must not establish employment requirements that apply to one protected class group but not others.

d. Employers should give substantial weight to subjective assessments only if they are specific and clearly grounded in statements or actions of job candidates.

e. Employers should, with the help of legal counsel, put employment offers in writing.

2. What rules and procedures should employers establish with regard to interviews of job applicants?

#HRM 510 Week 5 Midterm Exam – Strayer NEW

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HRM 500 Week 5 Discussion Questions – Strayer

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Week 5 D1

From the scenario, propose two approaches that a company can use to leverage a 360-degree performance appraisal system to evaluate individual performance. Support your answer with examples.

Week 5 D2

Describe two instances where performance pressure can lead to unethical behavior by employees in the effort to meet company goals. Propose two suggestions that HRM can take to limit unethical behavior by employees.

#HRM 500 Week 5 Discussion Questions – Strayer

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Midterm Exam Chapter 18 Through 23

CHAPTER 18—PUBLIC AND PRIVATE FINANCING: INITIAL OFFERINGS, SEASONED OFFERINGS, AND INVESTMENT BANKS

TRUE/FALSE

1. If its managers make a tender offer and buy all shares that were not held by the management team, this is called a private placement.

2. Going public establishes a market value for the firm's stock, and it also ensures that a liquid market will continue to exist for the firm's shares. This is especially true for small firms that are not widely followed by security analysts.

3. The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.

4. The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering. The banker is, in effect, "buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.

5. Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.

6. The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it "carves out" some of their value.

7. Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.

8. The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.

9. If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.

10. When a firm refunds a debt issue, the firm's stockholders gain and its bondholders lose. This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.

MULTIPLE CHOICE

11. Which of the following is generally NOT true and an advantage of going public?

Increases the liquidity of the firm's stock.

Makes it easier to obtain new equity capital.

Establishes a market value for the firm.

Makes it easier for owner-managers to engage in profitable self-dealings.

Facilitates stockholder diversification.

12. Which of the following statements about listing on a stock exchange is most CORRECT?

Any firm can be listed on the NYSE as long as it pays the listing fee.

Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business.

Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.

The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.

Listing is a decision of more significance to a firm than going public.

13. Which of the following statements is most CORRECT?

Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.

Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.

The SEC requires that all private placements be handled by a registered investment banker.

Private placements can generally bring in funds faster than is the case with public offerings.

In a private placement, securities are sold to private (individual) investors rather than to institutions.

14. Which of the following statements is most CORRECT?

The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity.

The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.

If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.

Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.

If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.

15. Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?

A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.

The flotation costs associated with issuing new bonds rise.

The firm's CFO believes that interest rates are likely to decline in the future.

The firm's CFO believes that corporate tax rates are likely to be increased in the future.

The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.

16. Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?

If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market.

Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm.

Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer.

The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.

The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.

17. Which of the following statements is NOTCORRECT?

"Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares.

Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC.

When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.

It is possible for a firm to go public and yet not raise any additional new capital.

When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held."

18. In its negotiations with its investment bankers, Patton Electronics has reached an agreement whereby the investment bankers receive a smaller fee now (6% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 200,000 shares at $5.00 per share. Patton will go public by selling $5,000,000 of new common stock. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker's required return on such arrangements is 15%, and ignore taxes.

$1,235,925

$1,300,973

$1,369,446

$1,441,522

$1,517,391

19. To finance its ongoing construction project, Bowen-Roth Inc. will need $5,000,000 of new capital during each of the next 3 years. The firm has a choice of issuing new debt or equity each year as the funds are needed, or issue only debt now and equity later. Its target capital structure is 40% debt and 60% equity, and it wants to be at that structure in 3 years, when the project has been completed. Debt flotation costs for a single debt issue would be 1.6% of the gross debt proceeds. Yearly flotation costs for 3 separate issues of debt would be 3.0% of the gross amount. Ignoring time value effects, how much would the firm save by raising all of the debt now, in a single issue, rather than in 3 separate issues?

$79,425

$83,606

$88,006

$92,406

$97,027

20. 10 years ago, the City of Melrose issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.

$453,443

$476,115

$499,921

$524,917

$551,163

21. Five years ago, the State of Oklahoma issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant.

$278,606

$292,536

$307,163

$322,521

$338,647

22. Palmer Company has $5,000,000 of 15-year maturity bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations⎯assume that the firm's tax rate is zero.

The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?

9.57%

10.07%

10.60%

11.16%

11.72%

23. Stanovich Enterprises has 10-year, 12.0% semiannual coupon bonds outstanding. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual "breakeven rate"?

9.29%

9.78%

10.29%

10.81%

11.35%

24. Refer to Exhibit 18.1. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?

$5,049,939

$5,315,725

$5,595,500

$5,890,000

$6,200,000

25. Refer to Exhibit 18.1. What will the after-tax annual interest savings for NWW be if the refunding takes place?

$664,050

$699,000

$768,900

$845,790

$930,369

26. Refer to Exhibit 18.1. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?

$6,480

$7,200

$8,000

$8,800

$9,680

27. Refer to Exhibit 18.1. What is the NPV if NWW refunds its bonds today?

$1,746,987

$1,838,933

$1,935,719

$2,037,599

$2,241,359

CHAPTER 19—LEASE FINANCING

TRUE/FALSE

1. Many leases written today combine the features of operating and financial leases. Such leases are often called "combination leases."

2. A sale and leaseback arrangement is a type of financial, or capital, lease.

3. Operating leases help to shift the risk of obsolescence from the user to the lessor.

4. Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

5. The full amount of a lease payment is tax deductible provided the contract qualifies as a true lease under IRS guidelines.

6. Leasing is often referred to as off-balance sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

7. Leasing is typically a financing decision and not a capital budgeting decision. Thus, the availability of lease financing cannot affect the size of the capital budget.

8. A leveraged lease is more risky from the lessee's standpoint than an unleveraged lease.

9. A synthetic lease is a combination of derivative securities and asset purchases that mimic the cash flows of an operating lease.

10. In a synthetic lease a special purpose entity (SPE) is set up by a corporation that wants to acquire the use of an asset. The SPE borrows up to 97% of its capital, uses its funds to buy the asset, and then leases it to the sponsoring corporation on a short-term basis. This keeps both the asset and the debt off the sponsoring company's books.

11. If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

12. Assume that a piece of leased equipment has a relatively high rather than low expected residual value. From the lessee's viewpoint, it might be better to own the asset rather than lease it because with a high residual value the lessee will likely face a higher lease rate.

MULTIPLE CHOICE

13. From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

capital budgeting project cash flows.

debt cash flows.

pension fund cash flows.

sales.

equity cash flows.

14. Operating leases often have terms that include

full amortization over the life of the lease.

very high penalties if the lease is canceled.

restrictions on how much the leased property can be used.

much longer lease periods than for most financial leases.

maintenance of the equipment by the lessor.

15. Which of the following statements is most CORRECT?

Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.

The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.

Capital, or financial, leases generally provide for maintenance by the lessor.

A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.

Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.

16. Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

residual value as a liability.

present value of future lease payments as an asset and also showing this same amount as an offsetting liability.

undiscounted sum of future lease payments as an asset and as an offsetting liability.

undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.

residual value as a fixed asset.

17. Heavy use of off-balance sheet lease financing will tend to

make a company appear less risky than it actually is because its stated debt ratio will appear lower.

affect a company's cash flows but not its degree of risk.

have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.

affect the lessee's cash flows but only due to tax effects.

make a company appear more risky than it actually is because its stated debt ratio will be increased.

18. In the lease versus buy decision, leasing is often preferable

because, generally, no down payment is required, and there are no indirect interest costs.

because lease obligations do not affect the firm's risk as seen by investors.

because the lessee owns the property at the end of the least term.

because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.

because it has no effect on the firm's ability to borrow to make other investments.

19. A lease versus purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset purchased

is financed with long-term debt.

is financed with debt whose maturity matches the term of the lease.

is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.

is financed with retained earnings.

is financed with short-term debt.

20. Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.

$177,169

$196,854

$207,215

$217,576

$228,455

21. To finance some manufacturing tools it needs for the next 3 years, Waldrop Corporation is considering a leasing arrangement. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000, but this cost would be borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

$96

$106

$112

$117

$123

22. Delamont Transport Company (DTC) is evaluating the merits of leasing versus purchasing a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the loan rate would be 10%, and the loan would be amortized over the truck's 4-year life, so the interest expense for taxes would decline over time. The loan payments would be made at the end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance contract that costs $1,000 per year, payable at the end of each year. The lease terms, which include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of each year. DTC's tax rate is 40%. What is the net advantage to leasing? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.15, and 0.07.)

$849

$896

$945

$999

$1,047

23. Carmichael Cleaners needs a new steam finishing machine that costs $100,000. The company is evaluating whether it should lease or purchase the machine. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL? (Note: Assume MACRS rates for Years 1 to 4 are 0.3333, 0.4445, 0.1481, and 0.0741.)

$5,734

$6,023

$6,324

$6,640

$6,972

CHAPTER 20—HYBRID FINANCING: PREFERRED STOCK, WARRANTS, AND CONVERTIBLES

TRUE/FALSE

1. The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

2. Unlike bonds, the cost of preferred stock to the issuing firm is the same on a before-tax and after-tax basis. This is because dividends on preferred stock are not tax deductible, whereas interest on bonds is deductible.

3. A warrant is an option, and as such it cannot be used as a "sweetener."

4. A warrant holder is not entitled to vote, but he or she does receive any cash dividends paid on the underlying stock.

5. The problem of dilution of stockholders' earnings never results from the sale of call options, but it can arise if warrants are used.

6. A detachable warrant is a warrant that can be detached and traded separately from the bond with which it was issued. Most traded warrants are originally attached to bonds or preferred stocks.

7. The owner of a convertible bond owns, in effect, both a bond and a call option.

8. A convertible debenture can never sell for more than its conversion value or less than its bond value.

9. Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

10. Firms generally do not call their convertibles unless the conversion value is greater than the call price.

11. Many preferred stocks extend voting rights to preferred shareholders if the preferred dividend has been omitted for some specified period, for example, 4 quarters.

12. Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.

13. Preferred stock typically has a par value, and the dividend is often stated as a percentage of par. The par value is also important in the event of liquidation, as the preferred stockholders are generally entitled to receive the par value before anything is given to the common stockholders.

14. Preferred stock can provide a financing alternative for some firms when market conditions are such that they cannot issue either pure debt or common stock at any reasonable cost.

15. Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price, which is desirable for liquidity portfolios, and they also benefit from the 70% tax exemption on preferred dividends received.

MULTIPLE CHOICE

16. Which of the following statements is most CORRECT?

By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm's common stock.

From the issuer's point of view, preferred stock is less risky than bonds.

Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.

Unlike bonds, preferred stock cannot have a convertible feature.

Preferred stock generally has a higher component cost of capital to the firm than does common stock.

17. Which of the following statements about convertibles is most CORRECT?

One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.

Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.

At the time it is issued, a convertible's conversion (or exercise) price is generally set equal to or below the underlying stock's price.

For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm's otherwise similar straight debt and the expected return on its common stock.

The coupon interest rate on a firm's convertibles is generally set higher than the market yield on its otherwise similar straight debt.

18. Which of the following statements concerning warrants is correct?

Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops.

Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen.

A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.

A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.

Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants were used but remains the same if it used convertibles.

19. Which of the following statements is most CORRECT?

One important difference between warrants and convertibles is that convertibles bring in additional funds when they are converted, but exercising warrants does not bring in any additional funds.

The coupon rate on convertible debt is normally set below the coupon rate that would be set on otherwise similar straight debt even though investing in convertibles is more risky than investing in straight debt.

The value of a warrant to buy a safe, stable stock should exceed the value of a warrant to buy a risky, volatile stock, other things held constant.

Warrants can sometimes be detached and traded separately from the debt with which they were issued, but this is unusual.

Warrants have an option feature but convertibles do not.

20. The common stock of Southern Airlines currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2025. What is the conversion value of the bond?

$707.33

$744.56

$783.75

$825.00

$866.25

21. Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012. At any time prior to maturity on February 1, 2032, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

$40.00

$42.00

$44.10

$46.31

$48.62

22. Mariano Manufacturing can issue a 25-year, 8.1% annual payment bond at par. Its investment bankers also stated that the company can sell an issue of annual payment preferred stock to corporate investors who are in the 40% tax bracket. The corporate investors require an after-tax return on the preferred that exceeds their after-tax return on the bonds by 1.0%, which would represent an after-tax risk premium. What coupon rate must be set on the preferred in order to issue it at par?

6.66%

6.99%

7.34%

7.71%

8.09%

23. Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm's straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

7.83%

8.24%

8.65%

9.08%

9.54%

24. McGovern Enterprises is interested in issuing bonds with warrants attached. The bonds will have a 30-year maturity and annual interest payments. Each bond will come with 20 warrants that give the holder the right to purchase one share of stock per warrant. The investment bankers estimate that each warrant will have a value of $10.00. A similar straight-debt issue would require a 10% coupon. What coupon rate should be set on the bonds-with-warrants so that the package would sell for $1,000?

6.75%

7.11%

7.48%

7.88%

8.27%

25. Potter & Lopez Inc. just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

$3.76

$3.94

$4.14

$4.35

$4.56

26. Mikkleson Mining stock is selling for $40 per share and has an expected dividend in the coming year of $2.00, and has an expected constant growth rate of 5.00%. The company is considering issuing a 10-year convertible bond that would be priced at its $1,000 par value. The bonds would have an 8.00% annual coupon, and each bond could be converted into 20 shares of common stock. The required rate of return on an otherwise similar nonconvertible bond is 10.00%. What is the estimated floor price of the convertible at the end of Year 3?

$794.01

$835.81

$879.80

$926.10

$972.41

27. Refer to Exhibit 20.1. What is the bond's conversion ratio?

27.14

28.57

30.00

31.50

33.08

28. Refer to Exhibit 20.1. What is the bond's conversion value?

$698.15

$734.89

$773.57

$814.29

$857.14

29. Refer to Exhibit 20.1. What is the bond's straight-debt value?

$684.78

$720.82

$758.76

$798.70

$838.63

30. Refer to Exhibit 20.1. What is the minimum price (or "floor" price) at which the Neuman's bonds should sell?

$698.15

$734.89

$773.57

$814.29

$857.14

CHAPTER 21—DYNAMIC CAPITAL STRUCTURES

TRUE/FALSE

1. In a world with no taxes, MM show that a firm's capital structure does not affect the firm's value. However, when taxes are considered, MM show a positive relationship between debt and value, i.e., its value rises as its debt is increased.

2. According to MM, in a world without taxes the optimal capital structure for a firm is approximately 100% debt financing.

3. MM showed that in a world with taxes, a firm's optimal capital structure would be almost 100% debt.

4. MM showed that in a world without taxes, a firm's value is not affected by its capital structure.

5. The Miller model begins with the MM model with taxes and then adds personal taxes.

6. The Miller model begins with the MM model without corporate taxes and then adds personal taxes.

7. Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient.

8. The MM model with corporate taxes is the same as the Miller model, but with zero personal taxes.

9. The MM model is the same as the Miller model, but with zero corporate taxes.

10. In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity.

11. In the MM extension with growth, the appropriate discount rate for the tax shield is the WACC.

12. In the MM extension with growth, the appropriate discount rate for the tax shield is the after-tax cost of debt.

13. When a firm has risky debt, its equity can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the debt.

14. When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.

MULTIPLE CHOICE

15. The major contribution of the Miller model is that it demonstrates that

personal taxes decrease the value of using corporate debt.

financial distress and agency costs reduce the value of using corporate debt.

equity costs increase with financial leverage.

debt costs increase with financial leverage.

personal taxes increase the value of using corporate debt.

16. Which of the following statements concerning capital structure theory is NOT CORRECT?

Under MM with zero taxes, financial leverage has no effect on a firm's value.

Under MM with corporate taxes, the value of a levered firm exceeds the value of the unlevered firm by the product of the tax rate times the market value dollar amount of debt.

Under MM with corporate taxes, rs increases with leverage, and this increase exactly offsets the tax benefits of debt financing.

Under MM with corporate taxes, the effect of business risk is automatically incorporated because rsL is a function of rsU.

The major contribution of Miller's theory is that it demonstrates that personal taxes decrease the value of using corporate debt.

17. Which of the following statements concerning the MM extension with growth is NOT CORRECT?

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.

For a given D/S, the WACC is less than the WACC under MM's original (with tax) assumptions.

The total value of the firm increases with the amount of debt.

The tax shields should be discounted at the unlevered cost of equity.

18. Which of the following statements concerning the MM extension with growth is NOT CORRECT?

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.

For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.

The total value of the firm increases with the amount of debt.

The tax shields should be discounted at the cost of debt.

19. Which of the following statements concerning the MM extension with growth is NOT CORRECT?

The value of a growing tax shield is greater than the value of a constant tax shield.

For a given D/S, the levered cost of equity is greater than the levered cost of equity under MM's original (with tax) assumptions.

For a given D/S, the WACC is greater than the WACC under MM's original (with tax) assumptions.

The total value of the firm is independent of the amount of debt it uses.

The tax shields should be discounted at the unlevered cost of equity.

20. The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L's cost of equity?

11.4%

12.0%

12.6%

13.3%

14.0%

21. The market value of Firm L's debt is $200,000 and its yield is 9%. The firm's equity has a market value of $300,000, its earnings are growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what would Firm L's total value be if it had no debt?

$358,421

$377,286

$397,143

$417,000

$437,850

22. A local firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm's tax shield, i.e., how much value does the use of debt add?

$92,571

$102,857

$113,143

$124,457

$136,903

23. Refer to Exhibit 21.1. What is the value of the firm according to MM with corporate taxes?

$475,875

$528,750

$587,500

$646,250

$710,875

24. Refer to Exhibit 21.1. What is the firm's cost of equity?

21.0%

23.3%

25.9%

28.8%

32.0%

25. Refer to Exhibit 21.1. Assume that the firm's gain from leverage according to the Miller model is $126,667. If the effective personal tax rate on stock income is TS = 20%, what is the implied personal tax rate on debt income?

16.4%

18.2%

20.2%

22.5%

25.0%

26. Refer to Exhibit 21.2. According to the MM extension with growth, what is the value of Kitto's tax shield?

$156,385

$164,616

$173,280

$182,400

$192,000

27. Refer to Exhibit 21.2. According to the MM extension with growth, what is Kitto's unlevered value?

$1,296,000

$1,440,000

$1,600,000

$1,760,000

$1,936,000

28. Refer to Exhibit 21.2. According to the MM extension with growth, what is Kitto's value of equity?

$1,492,000

$1,529,300

$1,567,533

$1,606,721

$1,646,889

29. Refer to Exhibit 21.3. What is the value (in millions) of Wilson Dover's equity if it is viewed as an option?

$228.77

$254.19

$282.43

$313.81

$345.19

30. Refer to Exhibit 21.3. What is the value (in millions) of Wilson Dover's debt if its equity is viewed as an option?

$167.57

$186.19

$204.81

$225.29

$247.82

31. Refer to Exhibit 21.3. What is the yield on Wilson Dover's debt?

6.04%

6.36%

6.70%

7.05%

7.42%

CHAPTER 22—MERGERS AND CORPORATE CONTROL

TRUE/FALSE

1. In a merger with true synergies, the post-merger value exceeds the sum of the separate companies' pre-merger values.

3. A spin-off is a type of divestiture in which the assets of a division are sold to another firm.

4. A conglomerate merger occurs when two firms with either a horizontal or a vertical business relationship combine.

5. Merger activity is likely to heat up when interest rates are high because target firms can expect to receive an especially high premium over the pre-announcement stock price.

6. Most defensive mergers occur as a result of managers' actions to maximize shareholders' wealth.

7. Post-merger control and the negotiated price paid by the acquirer are two of the most important issues in agreeing on the terms of a merger.

8. A company seeking to fight off a hostile takeover might employ the services of an investment banking firm to develop a defensive strategy.

9. Since the primary rationale for any operating merger is synergy, in planning such mergers, the development of accurate pro forma cash flows is the single most important action.

10. Currently (2012), mergers can be accounted for using either the purchase method or the pooling method.

11. Borrowing funds on terms that would require immediate repayment of all funds if the firm is acquired, selling off valuable assets, and granting huge "golden parachutes" that open if the firm is acquired are three procedures used to defend against hostile takeovers. These strategies are known as "poison pills."

12. A joint venture is one in which two, or sometimes more, independent companies agree to combine resources in order to achieve a specific objective, usually limited in scope.

13. The two principal advantages of holding companies are (1) the holding company can control a great deal of assets with limited equity and (2) the dividends received by the parent from the subsidiary are not taxed if the parent holds at least 50% of the subsidiary's stock.

14. The purchase of assets at below their replacement cost and tax considerations are two factors that motivate mergers.

15. The primary reason managers give for most mergers is to acquire more assets so as to increase sales and market share.

16. Since managers' central goal is to maximize stock price, managerial control issues do not interfere with mergers that would benefit the target firm's stockholders.

17. One of the main reasons why foreign firms are interested in buying U.S. companies is to gain entrance to the U.S. market. A decline in the value of the dollar relative to most foreign currencies makes this competitive strategy especially attractive.

18. If a petrochemical firm that used oil as feedstock merged with an oil producer that had large oil reserves and a drilling subsidiary, this would be a vertical merger.

19. A congeneric merger is one where the merging firms operate in related businesses but do not necessarily produce the same products or have a producer-supplier relationship.

20. Since a manager's central goal is to maximize the firm's stock price, any merger offer that provides stockholders with significant gains over the current stock price will be approved by the current management team.

21. Only if a target firm's value is greater to the acquiring firm than its market value as a separate entity will a merger be financially justified.

22. Discounted cash flow methods are not appropriate for evaluating mergers because the cash flows are uncertain and the discount rate can only be determined after the merger is consummated.

23. In a financial merger, the relevant post-merger cash flows are simply the sum of the expected cash flows of the two companies, measured as if they were operated independently.

24. Coca-Cola's acquisition of Columbia Pictures and its announcement that it would operate its new subsidiary separately could be described as primarily a financial merger.

25. A two-tier merger offer is one where the acquiring company offers to purchase the target company in a two-part transaction. Cash is paid to some stockholders, bonds are issued to others, but the total values of each part of the transaction are equal.

26. The distribution of synergistic gains between the stockholders of two merged firms is almost always based strictly on their respective market values before the announcement of the merger.

27. The rate used to discount projected merger cash flows should be the cost of capital of the new consolidated firm because it incorporates the actual capital structure of the new firm.

28. Any goodwill created in a merger must be amortized over its expected life, usually 40 years, for shareholder reporting purposes.

29. Although goodwill created in a merger may not be amortized for shareholder reporting purposes, it may be amortized for Federal tax purposes.

30. The three main advantages of holding companies are (1) control with fractional ownership, (2) taxation benefits, and (3) isolation of operating risks.

31. If the capital structure is stable, and free cash flows are expected to be growing at a constant rate at the horizon date, then the horizon value is calculated by discounting the free cash flows plus the expected future tax shields at the weighted average cost of capital.

32. The present value of the free cash flows discounted at the unlevered cost of equity is the value of the firm's operations if it had no debt.

MULTIPLE CHOICE

33. Which of the following are legal and acceptable reasons for the high level of merger activity in the U.S. during the 1980s?

A profitable firm acquires a firm with large accumulated tax losses that may be carried forward.

Attempts to stabilize earnings by diversifying.

Purchase of assets below their replacement costs.

Reduction in competition resulting from mergers.

Synergistic benefits arising from mergers.

34. Firms use defensive tactics to fight off undesired mergers. These tactics do not include

getting a white squire to purchase stock in the firm.

getting white knights to bid for the firm.

repurchasing their own stock.

changing the bylaws to eliminate supermajority voting requirements.

raising antitrust issues.

35. Which of the following statements is most CORRECT?

Regulations in the United States prohibit acquiring firms from using common stock to purchase another firm.

Defensive mergers are designed to make a company less vulnerable to a takeover.

Hostile mergers always create value for the acquiring firm.

In a tender offer, the target firm's management always remain after the merger is completed.

A conglomerate merger is one where a firm combines with another firm in the same industry.

36. Which of the following statements is most CORRECT?

The smaller the synergistic benefits of a particular merger, the greater the scope for striking a bargain in negotiations, and the higher the probability that the merger will be completed.

Since mergers are frequently financed by debt rather than equity, a lower cost of debt or a greater debt capacity are rarely relevant considerations when considering a merger.

Managers who purchase other firms often assert that the new combined firm will enjoy benefits from diversification, including more stable earnings. However, since shareholders are free to diversify their own holdings, and at what's probably a lower cost, diversification benefits is generally not a valid motive for a publicly held firm.

Operating economies are never a motive for mergers.

Tax considerations often play a part in mergers. If one firm has excess cash, purchasing another firm exposes the purchasing firm to additional taxes. Thus, firms with excess cash rarely undertake mergers.

37. Which of the following statements is most CORRECT?

Financial theory says that the choice of how to pay for a merger is really irrelevant because, although it may affect the firm's capital structure, it will not affect its overall required rate of return.

The basic rationale for any financial merger is synergy and, thus, the estimation of pro forma cash flows is the single most important part of the analysis.

In most mergers, the benefits of synergy and the premium the acquirer pays over the market price are summed and then divided equally between the shareholders of the acquiring and target firms.

The primary rationale for most operating mergers is synergy.

The acquiring firm's required rate of return in most horizontal mergers will not be affected, because the 2 firms will have similar betas.

38. Which of the following statements about valuing a firm using the APV approach is most CORRECT?

The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the cost of debt.

The horizon value is calculated by discounting the expected earnings at the WACC.

The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the WACC.

The horizon value must always be more than 20 years in the future.

The horizon value is calculated by discounting the free cash flows beyond the horizon date and any tax savings at the levered cost of equity.

39. Which of the following statements about valuing a firm using the APV approach is most CORRECT?

The value of equity is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.

The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows before the horizon date at the unlevered cost of equity.

The value of equity is calculated by discounting the horizon value and the free cash flows at the cost of equity.

The APV approach stands for the accounting pre-valuation approach.

The value of operations is calculated by discounting the horizon value, the tax shields, and the free cash flows at the cost of equity.

40. Which of the following statements is most CORRECT?

A defensive merger is one where the firm's managers decide to merge with another firm to avoid or lessen the possibility of being acquired through a hostile takeover.

Acquiring firms send a signal that their stock is undervalued if they choose to use stock to pay for the acquisition.

Cash payments are used in takeovers but never in mergers.

Managers often are fired in takeovers, but never in mergers.

If a company that produces military equipment merges with a company that manages a chain of motels, this is an example of a horizontal merger.

41. A parent holding company sells shares in its subsidiary such that the parent now owns only 65% of the subsidiary and, thus, the tax returns of the parent and its subsidiary can't be consolidated. The parent receives annual dividends from the subsidiary of $2,500,000. If the parent's marginal tax rate is 34% and if the exclusion on intercompany dividends is 70%, what is the effective tax rate on the intercompany dividends, and how much net dividends are received?

10.2%; $2,245,000

10.2%; $2,135,000

23.8%; $1,905,000

10.2%; $1,750,000

34.0%; $1,650,000

42. A regional restaurant chain, Club Café, is considering purchasing a smaller chain, Sally's Sandwiches, which is currently financed using 20% debt at a cost of 8%. Club Café's analysts project that the merger will result in incremental free cash flows and interest tax savings of $2 million in Year 1, $4 million in Year 2, $5 million in Year 3, and $117 million in Year 4. (The Year 4 cash flow includes a horizon value of $107 million.) The acquisition would be made immediately, if it is to be undertaken. Sally's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8%, and the market risk premium is 4%. What is the appropriate rate for use in discounting the free cash flows and the interest tax savings?

12.0%

13.9%

14.4%

16.0%

16.9%

43. The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain. Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Craftworks is 16%. Craftworks has 4 million shares outstanding and no debt. Craftworks' current price is $16.25. What is the maximum price per share that Arthouse should offer?

$16.25

$16.97

$17.42

$18.13

$19.00

44. Holland Auto Parts is considering a merger with Workman Car Parts. Workman's market-determined beta is 0.9, and the firm currently is financed with 20% debt, at an interest rate of 8%, and its tax rate is 25%. If Holland acquires Workman, it will increase the debt to 60%, at an interest rate of 9%, and the tax rate will increase to 35%. The risk-free rate is 6% and the market risk premium is 4%. What will Workman's required rate of return on equity be after it is acquired?

7.4%

8.9%

9.3%

9.6%

9.7%

45. Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP). Raymond's analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values:

Year

Free cash flow

Unlevered horizon value

Tax shield

Horizon value of tax shield

Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Raymond?

$53.40 million

$61.96 million

$64.64 million

$76.96 million

$79.64 million

46. Juicers Inc. is thinking of acquiring Fast Fruit Company. Juicers expects Fast Fruit's NOPAT to be $9 million the first year, with no net new investment in operating capital and no interest expense. For the second year, Fast Fruit is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Fast Fruit will need $10 million of net new investment in operating capital. Fast Fruit's marginal tax rate is 40%. After the second year, the free cash flows and the tax shields from Fast Fruit to Juicers will both grow at a constant rate of 4%. Juicers has determined that Fast Fruit's cost of equity is 17.5%, and Fast Fruit currently has no debt outstanding. Assume that all cash flows occur at the end of the year, Juicers must pay $45 million to acquire Fast Fruit. What it the NPV of the proposed acquisition? Note that you must first calculate the value to Juicers of Fast Fruit's equity.

$45.0 million

$68.2 million

$86.5 million

$113.2 million

$133.0 million

47. Refer to Exhibit 22.1. What is Glassmakers' pre-merger WACC?

9.02%

9.50%

9.83%

10.01%

11.29%

48. Refer to Exhibit 22.1. What discount rate should you use to discount Glassmakers' free cash flows and interest tax savings?

10.01%

10.06%

11.29%

11.44%

13.49%

49. Refer to Exhibit 22.1. What is the value of Glassmakers' equity to Best? (Round your answer to the closest thousand dollars.)

$16,019,000

$17,111,000

$18,916,000

$22,111,000

$22,916,000

CHAPTER 23—ENTERPRISE RISK MANAGEMENT

TRUE/FALSE

1. One objective of risk management can be to reduce the volatility of a firm's cash flows.

2. Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.

3. Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.

4. In theory, reducing the volatility of its cash flows will always increase a company's value.

5. The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T-bills.

MULTIPLE CHOICE

6. Which of the following are NOT ways risk management can be used to increase the value of a firm?

Risk management can help a firm maintain its optimal capital budget.

Risk management can reduce the expected costs of financial distress.

Risk management can help firms minimize taxes.

Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.

Risk management can increase debt capacity.

7. Which of the following statements about interest rate and reinvestment rate risk is CORRECT?

Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.

Interest rate price risk can be eliminated by holding zero coupon bonds.

Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.

Interest rate risk can never be reduced.

Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.

8. A swap is a method used to reduce financial risk. Which of the following statements about swaps, if any, is NOT CORRECT?

The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.

Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.

A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.

A company can swap fixed interest payments for floating interest payments.

A swap involves the exchange of cash payment obligations.

9. Which of the following statements is most CORRECT?

Futures contracts generally trade on an organized exchange and are marked to market daily.

Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.

There are futures contracts for currencies but no forward contracts for currencies.

Futures contracts don't have any margin requirements but forward contracts do.

One advantage of forward contracts is that they are default free.

10. A commercial bank recognizes that its net income suffers whenever interest rates increase. Which of the following strategies would protect the bank against rising interest rates?

Entering into an interest rate swap where the bank receives a fixed payment stream, and in return agrees to make payments that float with market interest rates.

Purchase principal only (PO) strips that decline in value whenever interest rates rise.

Enter into a short hedge where the bank agrees to sell interest rate futures.

Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.

Buying inverse floaters.

11. Company A can issue floating-rate debt at LIBOR + 1% and can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5% and can issue fixed-rate debt at 9.4%. Suppose A issues floating-rate debt and B issues fixed-rate debt, after which they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. What are the resulting net payments of A and B?

A pays a fixed rate of 9%, B pays LIBOR + 1.5%.

A pays a fixed rate of 8.95%, B pays LIBOR + 1.45%.

A pays LIBOR plus 1%, B pays a fixed rate of 9.4%.

A pays a fixed rate of 7.95%, B pays LIBOR.

None of the above answers is correct.

12. Suppose the September CBOT Treasury bond futures contract has a quoted price of 89'09. What is the implied annual interest rate inherent in this futures contract?

6.32%

6.65%

7.00%

7.35%

7.72%

13. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. What is the implied annual interest rate inherent in the futures contract?

6.86%

7.22%

7.60%

8.00%

8.40%

14. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80'07. If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)

−$78.00

−$82.00

−$86.00

−$90.00

−$95.00

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Chapter 1 Through 7

Chapter 1—Multinational Financial Management: An Overview

1. The commonly accepted goal of the MNC is to:

maximize short-term earnings.

maximize shareholder wealth.

minimize risk.

A and C.

maximize international sales.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

2. With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____.

shareholder wealth; short-term earnings

shareholder wealth; shareholder wealth

short-term earnings; sales volume

short-term earnings; shareholder wealth

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

3. For the MNC, agency costs are typically:

non-existent.

larger than agency costs of a small purely domestic firm.

smaller than agency costs of a small purely domestic firm.

the same as agency costs of a small purely domestic firm.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

4. Which of the following could reduce agency problems for an MNC?

stock options as managerial compensation.

hostile takeover threat.

investor monitoring.

all of the above are forms of corporate control that could reduce agency problems for an MNC.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to ____ and when foreign currencies denominating these cash flows are expected to ____.

decrease; appreciate

increase; appreciate

decrease; depreciate

increase; depreciate

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

6. Which of the following theories identifies specialization as a reason for international business?

theory of comparative advantage.

imperfect markets theory.

product cycle theory.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

7. Which of the following theories identifies the non-transferability of resources as a reason for international business?

theory of comparative advantage.

imperfect markets theory.

product cycle theory.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

8. Which of the following theories suggests that firms seek to penetrate new markets over time?

theory of comparative advantage.

imperfect markets theory.

product cycle theory.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

9. Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries?

assembly line production.

specialized professional services.

nuclear missile planning.

planning for more sophisticated computer technology.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

10. Due to the risks involved in international business, firms should:

only consider international business in major countries.

maintain international business to no more than 20% of total business.

maintain international business to no more than 35% of total business.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

11. A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

12. Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

13. The agency costs of an MNC are likely to be lower if it:

scatters its subsidiaries across many foreign countries.

increases its volume of international business.

uses a centralized management style.

A and B.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

14. An MNC may be more exposed to agency problems if most of its shares are held by:

a few mutual funds

a widely dispersed set of individual investors

a few pension funds

all of the above would prevent agency problems

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

15. The Sarbanes-Oxley Act improves corporate governance of MNCs because it:

makes executives more accountable for verifying financial statements

eliminates stock options as a form of compensation

ties executive compensation to firm performance

places a limit on the amount of funds that managers can spend

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

16. MNCs can improve their internal control process by all of the following, except:

establishing a centralized data base of information

ensuring that all data are reported consistently among subsidiaries

ensuring that the MNC always borrows from countries where interest rates are lowest

using a system that checks internal data for unusual discrepancies

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

17. Franchising is the process by which national governments sell state owned operations to corporations and other investors.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

18. The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

19. If a publicly-traded MNC's managers make poor decisions that reduce its value, it may encourage other firms to acquire it.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

20. Institutional investors such as mutual funds or pension funds which have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

21. In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI.

higher; higher

higher; lower

lower; lower

lower; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

22. Which of the following is an example of direct foreign investment?

exporting to a country.

establishing licensing arrangements in a country.

purchasing existing companies in a country.

investing directly (without brokers) in foreign stocks.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

23. According to the text, a disadvantage of licensing is that:

it prevents a firm from importing.

it is difficult to ensure quality control of the production process.

it prevents a firm from exporting.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

24. ____ are most commonly classified as a direct foreign investment.

Foreign acquisitions

Purchases of international stocks

Licensing agreements

Exporting transactions

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

25. Imperfect markets represent conditions under which factors of production are immobile.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

26. The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

27. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders).

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

28. The valuation of an MNC is reduced if the required return on its investments in foreign countries is reduced.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

29. Which of the following is not mentioned in the text as an additional risk resulting from international business?

exchange rate fluctuations.

political risk.

interest rate risk.

exposure to foreign economies.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

30. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____.

a specialized sales or service strategy; its technology

its technology; a specialized sales or service strategy

its technology; its technology

a specialized sales or service strategy; a specialized sales or service strategy

its technology; an initial investment

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

31. Which of the following is not a way in which agency problems can be reduced through corporate control?

executive compensation.

threat of hostile takeover.

acquisition of a foreign subsidiary.

monitoring by large shareholders.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

32. The goal of a multinational corporation (MNC) is the maximization of shareholder wealth.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

33. A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

34. If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

35. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

36. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

37. A centralized management style for an MNC results in relatively high agency costs.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

38. The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

39. If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

40. The acquisition of a foreign subsidiary is commonly considered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

41. If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

42. If markets were perfect, then labor and other costs of production would be easily transferable.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

43. International trade:

is a relatively conservative approach to foreign market penetration.

entails minimal risk.

does not require large amount of investment.

all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

44. Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation?

International Trade

Licensing

Franchising

Direct foreign investment

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

45. The valuation of MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

46. The MNC's value depends on all of the following, except:

MNC's required rate of return

Amount of MNC's cash flows in particular currency

The exchange rate at which cash flows are converted to dollars

The value of MNC depends on all of the above factors

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

47. Which of the following is not an example of political risk?

Government may impose taxes on subsidiary

Government may impose barriers on subsidiary

Consumers may boycott the MNC

Consumers' income levels will decrease, thus decreasing consumption.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

50. International trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business.

higher; lower

higher; higher

lower; higher

lower; lower

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

51. Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co?

Joint venture

Licensing

Partial acquisition of existing Japanese firm

Establishment of Japanese subsidiary

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

52. A decentralized management style of MNC results in relatively high agency costs.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

53. The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co?

$200,000

$559,500

$582,500

$393,500

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value?

A weaker Mexican economy

Lower Mexican interest rates

Depreciation of the Mexican peso

Appreciation of the Mexican peso.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations.

depreciates; appreciates

appreciates; appreciates

appreciates; depreciates

depreciates; depreciates

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

57. A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

58. An MNC will always use the same required rate of return in the valuation of foreign projects, as it would for its domestic projects.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.?

$100,000

$200,000

$160,000

$60,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

65. The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

66. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

67. Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

69. International trade is the most common form of direct foreign investment (DFI).

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

70. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

72. One form of an exposure to political risk is terrorism.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

73. The goal of a multinational corporation (MNC) is

The minimization of taxes remitted from foreign subsidiaries.

The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically.

The maximization of shareholder wealth.

The maximization of social benefits resulting from actions such as the employment of foreign managers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

74. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because

Monitoring of managers located in foreign countries is more difficult.

Foreign subsidiary managers raised in different cultures may not follow uniform goals.

MNCs are relatively large.

All of the above

A and B only

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

75. Which of the following is not one of the more common methods used by MNCs to improve their internal control process?

Establishing a centralized database of information

Ensuring that all data are reported consistently among subsidiaries

Speeding the process by which all departments and all subsidiaries have access to the data that they need

Making executives more accountable for financial statements by personally verifying their accuracy

All of the above are common methods used by MNCs to improve their internal control process.

76. Which of the following is not mentioned in the text as a theory of international business?

Theory of Comparative Advantage

Imperfect Markets Theory

Product Cycle Theory

Globalization of Business Theory

All of the above are mentioned in the text as theories of international business

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

77. The most risky method(s) by which firms conduct international business is (are):

Franchising.

The acquisitions of existing operations.

The establishment of new subsidiaries.

All of the above

B and C only

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

78. The least risky method by which firms conduct international business is:

Franchising.

The acquisitions of existing operations.

International Trade.

The establishment of new subsidiaries.

Licensing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

79. Which of the following does not constitute a form of direct foreign investment?

Franchising

International trade

Joint ventures

Acquisitions of existing operations

Establishment of new foreign subsidiaries

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03

NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

Chapter 2—International Flow of Funds

1. Recently, the U.S. experienced an annual balance of trade representing a ____.

large surplus (exceeding $100 billion)

small surplus

level of zero

deficit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

2. A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.

increase; increase

increase; decrease

decrease; decrease

decrease; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

3. If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments).

decrease

increase

remain unaffected

either A or C are possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

4. ____ purchases more U.S. exports than the other countries listed here.

Italy

Spain

Mexico

Canada

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

5. An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.

upward

downward

upward or downward (depending on the size of the deficit)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).

increase

have no impact on

reduce

all of the above are equally possible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

7. The International Financial Corporation was established to:

enhance development solely in Asia through grants.

enhance economic development through non-subsidized loans (at market interest rates).

enhance economic development through low-interest rate loans (below-market rates).

enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

8. The World Bank was established to:

enhance development solely in Asia through grants.

enhance economic development through non-subsidized loans (at market interest rates).

enhance economic development through low-interest rate loans (below-market rates).

enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

9. The International Development Association was established to:

enhance development solely in Asia through grants.

enhance economic development through non-subsidized loans (at market interest rates).

enhance economic development through low-interest rate loans (below-market rates).

enhance economic development of the private sector through investment in stock of corporations.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

10. Which of the following would likely have the least direct influence on a country's current account?

inflation.

national income.

exchange rates.

tariffs.

a tax on income earned from foreign stocks.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

11. The "J curve" effect describes:

the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross national product.

the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.

the tendency for exporters to initially reduce the price of goods when their own currency appreciates.

the reaction of a country's currency to initially depreciate after the country's inflation rate declines.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

12. An increase in the use of quotas is expected to:

reduce the country's current account balance, if other governments do not retaliate.

increase the country's current account balance, if other governments do not retaliate.

have no impact on the country's current account balance unless other governments retaliate.

increase the volume of a country's trade with other countries.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

13. The U.S. typically has a balance of trade surplus in its trade with ____.

China

Japan

A and B

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

14. The North American Free Trade Agreement (NAFTA) increased restrictions on:

trade between Canada and Mexico.

trade between Canada and the U.S.

direct foreign investment in Mexico by U.S. firms.

none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:

higher in the U.S. than in European countries.

lower in the U.S. than in European countries.

higher in the U.S. than in about half the European countries, and lower in the U.S. than the others.

about the same in the U.S. as in European countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.

increased; increased

increased; decreased

decreased; decreased

decreased; increased

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

17. Which of the following countries purchases the largest amount of exports by U.S. firms?

Mexico

Japan

Canada

France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

18. The primary component of the current account is the:

balance of trade.

balance of money market flows.

balance of capital market flows.

unilateral transfers.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.

member countries and the U.S.

member countries

member countries and European non-members

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

20. Over the last several years, international trade has generally:

increased for most major countries.

decreased for most major countries.

stayed about constant for most major countries.

increased for about half the major countries and decreased for the others.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

21. Which is not a concern about the North American Free Trade Agreement (NAFTA)?

its impact on U.S. inflation.

its impact on U.S. unemployment.

lower environmental standards in Mexico.

different health laws for workers in Mexico.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:

increased trade restrictions outside of North America.

lower trade restrictions around the world.

uniform environmental standards around the world.

uniform worker health laws.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

23. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports).

It could attempt to reduce its home currency's value.

The government could require firms to engage in outsourcing.

The government could require that its local firms pursue outsourcing.

All of the above are mentioned.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

24. The demand for U.S. exports tends to increase when:

economic growth in foreign countries decreases.

the currencies of foreign countries strengthen against the dollar.

U.S. inflation rises.

none of the above.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

25. "Dumping" is used in the text to represent the:

exporting of goods that do not meet quality standards.

sales of junk bonds to foreign countries.

removal of foreign subsidiaries by the host government.

exporting of goods at prices below cost.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

26. ____ is (are) income received by investors on foreign investments in financial assets (securities).

Portfolio income

Direct foreign income

Unilateral transfers

Factor income

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

27. A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

it reduces the prices of imports paid by local companies.

it increases the prices of exports by local companies.

it prevents international trade transactions from being prearranged.

foreign companies may reduce the prices of their products to stay competitive.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

28. Intracompany trade makes up approximately ____ percent of all international trade.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

29. Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.

World Bank

International Financial Corporation (IFC)

World Trade Organization (WTO)

International Development Association (IDA)

Bank for International Settlements (BIS)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

30. The World Bank's Multilateral Investment Guarantee Agency (MIGA):

offers various forms of export insurance.

offers various forms of import insurance.

offers various forms of exchange rate risk insurance.

provides loans to developing countries.

offers various forms of political risk insurance.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

World Bank

International Financial Corporation (IFC)

World Trade Organization

International Development Association (IDA)

Bank for International Settlements (BIS)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

32. Direct foreign investment into the U.S. represents a ____.

capital inflow

trade inflow

capital outflow

trade outflow

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

33. A balance of trade surplus indicates an excess of imports over exports.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

34. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

35. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

36. The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

37. The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

38. Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

39. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

40. The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

41. Exporting of products by one country to other countries at prices below cost is called elasticity.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

43. The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

44. Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

45. Intracompany trade represents the exporting of products by one country to other countries below cost.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

46. A tariff is a maximum limit on imports.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

47. A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.

does; does

does; does not

does not; does not

does not; does

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

51. In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China.

small; surplus

large; surplus

small; deficit

large; deficit

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

53. U.S. government officials would likely prefer that China devalue the yuan against the dollar.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

55. Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____.

reduce; flipping

reduce; pirating

increase; pirating

increase; flipping

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

56. Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.

low; small

high; small

low; large

high; large

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

57. Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level.

more; lower

more; higher

less; lower

less; higher

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

58. The primary component of the capital account is the balance of trade.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

59. A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

61. A balance of trade deficit indicates an excess of imports over exports.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

62. The capital account reflects changes in country ownership of long-term (but not short-term) assets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

65. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

66. The ____ is the difference between exports and imports.

balance of trade

balance on goods and services

balance of payments

current account

capital account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.03

KEY: Bloom's: Knowledge

67. Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)?

A decrease in the country's rate of inflation

A decrease in the country's national income level

An increase in government restrictions in the form of tariffs or quotas

An appreciation of the country's currency

All of the above will result in an increased current account balance.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

68. Which of the following factors probably does not directly affect a country's capital account and its components?

Inflation

Interest rates

Withholding taxes on foreign income

Exchange rate movements

All of the above will directly affect a country's capital account.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

69. The ____, an accord among 117 nations, called for lower tariffs around the world.

General Agreement on Tariffs and Trade (GATT)

North American Free Trade Agreement (NAFTA)

Single European Act of 1987

European Union Accord

None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance of trade deficit with Country Y?

The government of Country X eliminates environmental restrictions.

The government of Country X subsidizes firms in its country to facilitate dumping.

The government of Country X provides tax breaks to firms in specific industries.

The government of Country X removes a tariff on goods imported from Country Y.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

71. Which of the following statements is not true?

Exporters commonly complain that they are being mistreated because the currency of their country is too weak.

Outsourcing affects the balance of trade because it means that a service is purchased in another country.

Sometimes, trade policies are used to punish countries for various actions.

Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

72. Which of the following would increase the current account of Country X? Country Y is Country X's sole trading partner.

Inflation increases in countries X and Y by comparable amounts.

Country X's and Country Y's currencies depreciate by the same amount.

Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X's exports.

The central banks of Country X and Country Y reduce the money supply to increase interest rates.

Country X imposes a quota on imports, and Country Y retaliates by imposing an identical quota on X's exports.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.02.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

73. ____ represent aid, grants, and gifts from one country to another.

Transfer payments

Factor income

The balance of trade

The balance of payments

The capital account

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

74. Which of the following is not a goal of the International Monetary Fund (IMF)?

To promote cooperation among countries on international monetary issues

To promote stability in exchange rates

To enhance a country's long-term economic growth via the extension of structural adjustment loans

To promote free trade

To promote free mobility of capital funds across countries

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

75. According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.

decrease; increase

increase; decrease

decrease; decrease

increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

Chapter 3—International Financial Markets

1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is:

about 4.44%.

about 4.26%.

about 4.03%.

about 4.17%.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is:

about 4.99%.

about 4.88%.

about 4.65%.

about 4.43%.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent.

3 to 7

.01 to .03

10 to 15

.5 to 1

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

4. ____ is not a factor that affects the bid/ask spread.

Order costs

Inventory costs

Volume

All of the above factors affect the bid/ask spread

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

5. The forward rate is the exchange rate used for immediate exchange of currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

6. The ask quote is the price for which a bank offers to sell a currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

7. According to the text, the forward rate is commonly used for:

hedging.

immediate transactions.

previous transactions.

bond transactions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could:

obtain a 90-day forward purchase contract on euros.

obtain a 90-day forward sale contract on euros.

purchase euros 90 days from now at the spot rate.

sell euros 90 days from now at the spot rate.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could:

obtain a 90-day forward purchase contract on Canadian dollars.

obtain a 90-day forward sale contract on Canadian dollars.

purchase Canadian dollars 90 days from now at the spot rate.

sell Canadian dollars 90 days from now at the spot rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is:

about .3621 Canadian dollars.

about .3977 Canadian dollars.

about 2.36 Canadian dollars.

about 2.51 Canadian dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

11. Which of the following is not true with respect to spot market liquidity?

The more willing buyers and sellers there are, the more liquid a market is.

The spot markets for heavily traded currencies such as the Japanese yen are very liquid.

A currency's liquidity affects the ease with which an MNC can obtain or sell that currency.

If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

12. Forward markets for currencies of developing countries are:

prohibited.

less liquid than markets for developed countries.

more liquid than markets for developed countries.

only available for use by government agencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

13. A forward contract can be used to lock in the ____ of a specified currency for a future point in time.

purchase price

sale price

A or B

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

14. The forward market:

for euros is very illiquid.

for Eastern European countries is very liquid.

does not exist for some currencies.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

15. ____ is not a bank characteristic important to customers in need of foreign exchange.

Quote competitiveness

Speed of execution

Forecasting advice

Advice about current market conditions

All of the above are important bank characteristics to customers in need of foreign exchange.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries.

capital requirements

deposit rates

deposit insurance

bank failure policies

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

17. The international money market primarily concentrates on:

short-term lending (one year or less).

medium-term lending.

long-term lending.

placing bonds with investors.

placing newly issued stock in foreign markets.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

18. The international credit market primarily concentrates on:

short-term lending (less than one year).

medium-term lending.

long-term lending.

providing an exchange of foreign currencies for firms who need them.

placing newly issued stock in foreign markets.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

19. The main participants in the international money market are:

consumers.

small firms.

large corporations.

small European firms needing European currencies for international trade.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

20. LIBOR is:

the interest rate commonly charged for loans between banks.

the average inflation rate in European countries.

the maximum loan rate ceiling on loans in the international money market.

the maximum deposit rate ceiling on deposits in the international money market.

the maximum interest rate offered on bonds that are issued in London.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

21. A syndicated loan:

represents a loan by a single bank to a syndicate of corporations.

represents a loan by a single bank to a syndicate of country governments.

represents a direct loan by a syndicate of oil-producing exporters to a less developed country.

represents a loan by a group of banks to a borrower.

A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

22. The international money market is primarily served by:

the governments of European countries, which directly intervene in foreign currency markets.

government agencies such as the International Monetary Fund that enhance development of countries.

several large banks that accept deposits and provide loans in various currencies.

small banks that convert foreign currency for tourists and business visitors.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

23. International money market transactions normally represent:

the equivalent of $1 million or more.

the equivalent of $1,000 to $10,000.

the equivalent of between $10,000 and $100,000.

the equivalent of between $100,000 and $200,000.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

25. From 1944 to 1971, the exchange rate between any two currencies was typically:

fixed within narrow boundaries.

floating, but subject to central bank intervention.

floating, and not subject to central bank intervention.

nonexistent; that is currencies were not exchanged, but gold was used to pay for all foreign transactions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

26. As a result of the Smithsonian Agreement, the U.S. dollar was:

the currency to be used by all countries as a medium of exchange for international trade.

forced to be freely floating relative to all currencies without any boundaries.

devalued relative to major currencies.

revalued (upward) relative to major currencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

27. According to the text, the average foreign exchange trading around the world ____ per day.

equals about $200 billion

equals about $400 billion

equals about $700 billion

exceeds $1 trillion

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

28. Assume a Japanese firm invoices exports to the U.S. in U.S. dollars. Assume that the forward rate and spot rate of the Japanese yen are equal. If the Japanese firm expects the U.S. dollar to ____ against the yen, it would likely wish to hedge. It could hedge by ____ dollars forward.

depreciate; buying

depreciate; selling

appreciate; selling

appreciate; buying

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

29. The bid-ask spread on an exchange rate can be used to directly determine:

how an exchange rate will change.

the transaction cost of foreign exchange.

the forward premium.

the currency option premium.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

30. Futures contracts are typically ____; forward contracts are typically ____.

sold on an exchange; sold on an exchange

offered by commercial banks; sold on an exchange

sold on an exchange; offered by commercial banks

offered by commercial banks; offered by commercial banks

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

31. Eurobonds:

are usually issued in bearer form.

typically carry several protective covenants.

cannot contain call provisions.

A and B

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

32. Which of the following is true?

Non-U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.

U.S. firms may desire to issue bonds in the U.S. due to less regulations in the U.S.

U.S. firms may desire to issue bonds in the non-U.S. markets due to less regulations in non-U.S. countries.

A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

33. Eurobonds:

can be issued only by European firms.

can be sold only to European investors.

A and B

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

34. Which currency is used the most to denominate Eurobonds?

the British pound.

the Japanese yen.

the U.S. dollar.

the Swiss franc.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

35. When the foreign exchange market opens in the U.S. each morning, the opening exchange rate quotations will be based on the:

closing prices in the U.S. during the previous day.

closing prices in Canada during the previous day.

prevailing prices in locations where the foreign exchange markets have been open.

officially set by central banks before the U.S. market opens.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

36. The U.S. dollar is not ever used as a medium of exchange in:

industrialized countries outside the U.S.

in any Latin American countries.

in Eastern European countries where foreign exchange restrictions exist.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

37. Which of the following is not true regarding the Bretton Woods Agreement?

It called for fixed exchange rates between currencies.

Governments intervened to prevent exchange rates from moving more than 1 percent above or below their initially established levels.

The agreement lasted from 1944 until 1971.

Each country used gold to back its currency.

All of the above are true regarding the Bretton Woods Agreement.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

38. A Japanese yen is worth $.0080, and a Fijian dollar (F$) is worth $.5900. What is the value of the yen in Fijian dollars (i.e., how many Fijian dollars do you need to buy a yen)?

73.75.

125.

1.69.

0.014.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

39. The existence of imperfect markets has prevented the internationalization of financial markets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

40. Under the gold standard, each currency was convertible into gold at a specified rate, and the exchange rate between two currencies was determined by their relative convertibility rates per ounce of gold.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

41. An investor engaging in a transaction whereby he or she contracts to purchase British pounds one year from now is an example of a spot market transaction.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

42. The Single European Act prevented a trend toward increased globalization in the banking industry.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

43. A cross exchange rate expresses the amount of one foreign currency per unit of another foreign currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

44. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

45. The strike price is also known as the premium price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

46. The interest rate commonly charged for loans between banks is called the cross rate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

47. The Bretton Woods Agreement is an agreement to standardize banks' capital requirements across countries; the resulting capital ratios are computed using risk-weighted assets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

48. The Basel Accord is an agreement among the major European countries to make regulations more uniform across European countries and to reduce taxes on goods traded between these countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

49. A futures contract is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

50. Eurobonds are certificates representing bundles of stock.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

51. A share of the ADR of a Dutch firm represents one share of that firm's stock that is traded on a Dutch stock exchange. The share price of the firm was 15 euros when the Dutch market closed. As the U.S. market opens, the euro is worth $1.10. Thus, the price of the ADR should be ____.

$13.64

$15.00

$16.50

16.50 euros

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

52. The ADR of a British firm is convertible into 3 shares of stock. The share price of the firm was 30 pounds when the British market closed. When the U.S. market opens, the pound is worth $1.63. The price of this ADR should be $____.

48.90

146.70

55.21

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

53. If there is a large supply of savings relative to the demand for short-term funds, the interest rate for that country will be relatively low.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

54. If there is a strong demand to borrow a currency, and a low supply of savings in that currency, the interest rate will be relatively low.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

55. The preferences of corporations and governments to borrow in foreign currencies and of investors to make short-term investments in foreign currencies resulted in the creation of the international bond market.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

56. Large commercial banks play a major role in the international money market by accepting short-term deposits in large amounts (such as the equivalent of $1 million or more) and in various currencies, and channeling the money to corporations and government agencies that need to borrow those short-term funds in the desired currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

57. The term "eurobor" is widely used to reflect the interbank offer rate on euros.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

58. The term "eurobor" is widely used to reflect the total amount of euros borrowed by the firms in Europe per month to finance their growth.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

59. Institutional investors such as commercial banks, mutual funds, insurance companies, and pension funds from many countries are major participants in the international bond market.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

60. In response to the Sarbanes-Oxley Act, the reporting costs were reduced, and many non-U.S. firms that issued new shares of stock decided to place their stock in the United States.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

61. Global regulations require that shareholders in all countries have the same rights wherever there are stock markets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

62. Shareholders have more voting power in some countries than others.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

63. Shareholders can have influence on a wider variety of management issues in some countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

64. The legal protection of shareholders is the same among countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

65. Shareholders in some countries may have more power to effectively sue publicly-traded firms if their executives or directors commit financial fraud.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

66. In general, common law countries such as the U.S., Canada, and the United Kingdom allow for more legal protection than French civil law countries such as France or Italy.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

67. The government enforcement of securities laws varies among countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

68. The degree of financial information that must be provided by public companies is the same among countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

69. In general, stock markets allow for more price efficiency and attract more investors when they have all of the following except:

more voting rights for shareholders.

more legal protection.

more enforcement of the laws.

less stringent accounting requirements.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

70. In general, companies are attracted to the stock market in which there are very limited voting rights for shareholders.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

71. If companies can rely on stock markets to obtain funds, they will have to rely more heavily on the ____ market to raise long-term funds.

derivative

long-term credit

money

foreign exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

72. The strike price on a currency option is also known as an exercise price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

73. Assume that the bank's bid quote of Mexican peso is $.126 and ask price is $.129. If you have Mexican pesos, what is the amount of pesos that you need to purchase $100,000?

12,600

775,194

793,651

12,900

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

74. When receiving quotations on a currency's exchange rate, the bank's bid quote is the rate at which the bank is willing to sell currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

75. An obligation to purchase a specific amount of currency at a future point in time is called a:

call option

spot contract

put option

forward contract

both B and D

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

76. Which of the following is not a method that can be used to invest internationally?

Investment in MNC stocks

American depository receipts (ADRs)

World Equity benchmark Shares (WEBS)

International mutual funds

All of the above are methods that can be used to invest internationally.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

77. The interest rate in developing countries is usually very low.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

78. Assume that $1 is equal to .85 Euros and 98 yen. The value of yen in euros is

.01

118

1.18

.0087

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

79. When obtaining a loan, the risk premium paid above LIBOR depends on the:

risk-free interest rate of the borrower.

credit risk of the borrower.

borrower's stock price.

lender's stock price.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

80. The largest global exchange is:

NASDAQ

Tokyo Stock Exchange

NYSE Euronext

London Stock Exchange

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

81. Which of the following is not true about syndicated loans?

A borrower that receives a syndicated loan incurs various fees besides the interest rate.

The loans are only denominated in U.S. dollars.

The loans are provided by a group of banks to a borrower.

The loans are usually formed in 6 weeks or less.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

82. The interest rate on the syndicated loan depends on the:

currency denominating the loan.

maturity of the loan.

creditworthiness of the borrower.

interbank lending rate.

all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

83. Assume a U.S. firm has to pay for Korean imports in 60 days. It expects that Korean won will depreciate, but it still wants to hedge its risk. What type of hedging is more appropriate in this situation:

Buy dollars forward

Sell dollars forward

Purchase call option

Purchase put option

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

84. Certificates representing bundles of stock of non-U.S. firms are called:

Eurobonds

ADRs

FRNs

Eurobor

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

85. Assume that the spot rate of the Singapore dollar is $.664. The ADR of a Singapore firm is convertible into 3 shares of stock. The price of an ADR is $20. What is the share price of the firm in Singapore dollars?

13.28

30.12

39.84

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

86. Which of the following is not true regarding ADRs?

ADRs are denominated in the currency of the stock's home country.

ADRs enable U.S. investors to avoid cross-border transactions

ADRs allow non-U.S. firms to tap into U.S. market for funds.

ADRs sometimes allow for arbitrage opportunities.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

87. The more intense the competition for the traded currency, the larger the bid/ask spread.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

88. Banks charge larger bid/ask spreads than they would on less liquid, less traded currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

89. At any given point in time, a bank's bid quote will be greater than its ask quote.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

90. An MNC with receivables in Japanese Yen purchases yen forward to hedge its exposure to exchange rate fluctuations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

91. A currency put option provides the right, but not the obligation, to buy a specific currency at a specific price within a specific period of time.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

92. The LIBOR varies among currencies because the market supply of and demand for funds vary among currencies.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

93. The international money market is frequently accessed by MNCs for short-term investment and financing decisions, while longer term financing decisions are made in the international credit market or the international bond market and in international stock markets.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.06

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

94. Which of the following is not a possible bid/ask quotation for the Barbados dollar?

$.50/$.51

$.49/$.50

$.52/$.51

$.51/$.52

All of the above are possible bid/ask quotations.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

95. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now if you sell yen forward?

$44,500

$45,000

$526 million

$47,500

$556 million

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

96. Which of the following is probably not an example of the use of forward contracts by an MNC?

Hedging pound payables by selling pounds forward

Hedging peso receivables by selling pesos forward

Hedging yen payables by purchasing yen forward

Hedging peso payables by purchasing pesos forward

All of the above are examples of using forward contracts.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

97. A quotation representing the value of a foreign currency in dollars is referred to as a(n) ____ quotation; a quotation representing the number of units of a foreign currency per dollar is referred to as a(n) ____ quotation.

direct; indirect

indirect; direct

direct; direct

indirect; indirect

cannot be answered without more information

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

98. You observe a quotation of the Japanese yen (¥) of $0.007. You are, however, interested in the number of yen per dollar. Thus, you calculate the ____ quotation of ____ ¥/$.

direct; 142.86

indirect; 142.86

indirect; 150

direct; 150

indirect; 0

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

99. Which of the following is not true regarding electronic communications networks (ECNs)?

They have a visible trading floor.

Trades are executed by a computer network.

They have been created in many countries to match orders between buyers and sellers.

They allow investors to place orders on their computers.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

100. Which of the following is probably not appropriate for an MNC wishing to reduce its exposure to British pound payables?

Purchase pounds forward

Buy a pound futures contract

Buy a pound put option

Buy a pound call option

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

101. Futures contracts are sold on exchanges and are consequently ____ than forward contracts, which can be ____ to satisfy an MNC's needs.

more standardized; standardized

more standardized; custom-tailored

more custom-tailored; standardized

more custom-tailored; custom-tailored

less standardized; custom-tailored

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

102. An MNC's short-term financing decisions are satisfied in the ____ market, while its medium debt financing decisions are satisfied in the ____ market.

international money; international credit

international money; international bond

international credit; international money

international bond; international credit

international money; international stock

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

Chapter 4—Exchange Rate Determination

1. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the Australian dollar was $0.69. The Australian dollar ____ by ____%.

depreciated; 5.80

depreciated; 4.00

appreciated; 5.80

appreciated; 4.00

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

2. If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

liquid; highly sensitive

illiquid; insensitive

illiquid; highly sensitive

none of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

3. ____ is not a factor that causes currency supply and demand schedules to change.

Relative inflation rates

Relative interest rates

Relative income levels

Expectations

All of the above are factors that cause currency supply and demand schedules to change.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

4. A large increase in the income level in Mexico along with no growth in the U.S. income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in Mexican demand for U.S. goods, and the Mexican peso should ____.

increase; appreciate

increase; depreciate

decrease; depreciate

decrease; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

5. An increase in U.S. interest rates relative to German interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros for sale.

reduce; increase

increase; reduce

reduce; reduce

increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

6. Investors from Germany, the United States, and the U.K. frequently invest in each other based on prevailing interest rates. If British interest rates increase, German investors are likely to buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.

fewer; depreciate

fewer; appreciate

more; depreciate

more; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

7. When the "real" interest rate is relatively low in a given country, then the currency of that country is typically expected to be:

weak, since the country's quoted interest rate would be high relative to the inflation rate.

strong, since the country's quoted interest rate would be low relative to the inflation rate.

strong, since the country's quoted interest rate would be high relative to the inflation rate.

weak, since the country's quoted interest rate would be low relative to the inflation rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

8. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This will place ____ pressure on the value of the British pound. Also, assume that interest rates in the U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____ pressure on the value of the British pound.

upward; downward

upward; upward

downward; upward

downward; downward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

9. In general, when speculating on exchange rate movements, the speculator will borrow the currency that is expected to appreciate and invest in the country whose currency is expected to depreciate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

10. Baylor Bank believes the New Zealand dollar will appreciate over the next five days from $.48 to $.50. The following annual interest rates apply:

Currency

Lending Rate

Borrowing Rate

Dollars

7.10%

7.50%

New Zealand dollar (NZ$)

6.80%

7.25%

Baylor Bank has the capacity to borrow either NZ$10 million or $5 million. If Baylor Bank's forecast is correct, what will its dollar profit be from speculation over the five-day period (assuming it does not use any of its existing consumer deposits to capitalize on its expectations)?

$521,325.

$500,520.

$104,262.

$413,419.

$208,044.

11. Assume the following information regarding U.S. and European annualized interest rates:

Currency

Lending Rate

Borrowing Rate

U.S. Dollar ($)

6.73%

7.20%

Euro (€)

6.80%

7.28%

Trensor Bank can borrow either $20 million or €20 million. The current spot rate of the euro is $1.13. Furthermore, Trensor Bank expects the spot rate of the euro to be $1.10 in 90 days. What is Trensor Bank's dollar profit from speculating if the spot rate of the euro is indeed $1.10 in 90 days?

$579,845.

$583,800.

$588,200.

$584,245.

$980,245.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.04.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

12. The equilibrium exchange rate of pounds is $1.70. At an exchange rate of $1.72 per pound:

U.S. demand for pounds would exceed the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

U.S. demand for pounds would be less than the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

U.S. demand for pounds would exceed the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

U.S. demand for pounds would be less than the supply of pounds for sale and there would be a surplus of pounds in the foreign exchange market.

U.S. demand for pounds would be equal to the supply of pounds for sale and there would be a shortage of pounds in the foreign exchange market.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

13. Assume that Swiss investors have francs available to invest in securities, and they initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest rates increase while British interest rates stay the same. This would likely cause:

the Swiss demand for dollars to decrease and the dollar will depreciate against the pound.

the Swiss demand for dollars to increase and the dollar will depreciate against the Swiss franc.

the Swiss demand for dollars to increase and the dollar will appreciate against the Swiss franc.

the Swiss demand for dollars to decrease and the dollar will appreciate against the pound.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

14. The real interest rate adjusts the nominal interest rate for:

exchange rate movements.

income growth.

inflation.

government controls.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

15. If U.S. inflation suddenly increased while European inflation stayed the same, there would be:

an increased U.S. demand for euros and an increased supply of euros for sale.

a decreased U.S. demand for euros and an increased supply of euros for sale.

a decreased U.S. demand for euros and a decreased supply of euros for sale.

an increased U.S. demand for euros and a decreased supply of euros for sale.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

16. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same, there would be:

an inward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

an outward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

an outward shift in the demand schedule for NZ$ and an outward shift in the supply schedule for NZ$.

an inward shift in the demand schedule for NZ$ and an inward shift in the supply schedule for NZ$.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

17. If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but little financial flows, ____ directly influences their exchange rate the most.

interest rate differentials; interest rate differentials

inflation and interest rate differentials; interest rate differentials

income and interest rate differentials; inflation differentials

interest rate differentials; inflation and income differentials

inflation and income differentials; interest rate differentials

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

18. If inflation increases substantially in Australia while U.S. inflation remains unchanged, this is expected to place ____ pressure on the value of the Australian dollar with respect to the U.S. dollar.

upward

downward

either upward or downward (depending on the degree of the increase in Australian inflation)

none of the above; there will be no impact

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

19. Assume that British corporations begin to purchase more supplies from the U.S. as a result of several labor strikes by British suppliers. This action reflects:

an increased demand for British pounds.

a decrease in the demand for British pounds.

an increase in the supply of British pounds for sale.

a decrease in the supply of British pounds for sale.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

20. The exchange rates of smaller countries are very stable because the market for their currency is very liquid.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

21. The phrase "the dollar was mixed in trading" means that:

the dollar was strong in some periods and weak in other periods over the last month.

the volume of trading was very high in some periods and low in other periods.

the dollar was involved in some currency transactions, but not others.

the dollar strengthened against some currencies and weakened against others.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

22. Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event should immediately cause the U.S. demand for Chilean pesos to ____ and the value of the peso to ____.

increase; increase

increase; decline

decline; decline

decline; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

23. Any event that increases the U.S. demand for euros should result in a(n) ____ in the value of the euro with respect to ____, other things being equal.

increase; U.S. dollar

increase; nondollar currencies

decrease; nondollar currencies

decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

24. Any event that reduces the U.S. demand for Japanese yen should result in a(n) ____ in the value of the Japanese yen with respect to ____, other things being equal.

increase; U.S. dollar

increase; nondollar currencies

decrease; nondollar currencies

decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

25. Any event that increases the supply of British pounds to be exchanged for U.S. dollars should result in a(n) ____ in the value of the British pound with respect to ____, other things being equal.

increase; U.S. dollar

increase; nondollar currencies

decrease; nondollar currencies

decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

26. Any event that reduces the supply of Swiss francs to be exchanged for U.S. dollars should result in a(n) ____ in the value of the Swiss franc with respect to ____, other things being equal.

increase; U.S. dollar

increase; nondollar currencies

decrease; nondollar currencies

decrease; U.S. dollar

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

27. Assume that the U.S. experiences a significant decline in income, while Japan's income remains steady. This event should place ____ pressure on the value of the Japanese yen, other things being equal. (Assume that interest rates and other factors are not affected.)

upward

downward

upward and downward (offsetting)

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

28. News of a potential surge in U.S. inflation and zero Chilean inflation places ____ pressure on the value of the Chilean peso. The pressure will occur ____.

upward; only after the U.S. inflation surges

downward; only after the U.S. inflation surges

upward; immediately

downward; immediately

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

29. Assume that Canada places a strict quota on goods imported from the U.S. and that the U.S. does not retaliate. Holding other factors constant, this event should immediately cause the supply of Canadian dollars to be exchanged for U.S. dollars to ____ and the value of the Canadian dollar to ____.

increase; increase

increase; decline

decline; decline

decline; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

30. Assume that Japan places a strict quota on goods imported from the U.S. and the U.S. places a strict quota on goods imported from Japan. This event should immediately cause the U.S. demand for Japanese yen to ____, and the supply of Japanese yen to be exchanged for U.S. dollars to ____.

increase; increase

increase; decline

decline; decline

decline; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

31. Which of the following is not mentioned in the text as a factor affecting exchange rates?

relative interest rates.

relative inflation rates.

government controls.

expectations.

all of the above are mentioned in the text as factors affecting exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

32. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

decrease; increase; upward

decrease; decrease; upward

increase; decrease; downward

decrease; increase; downward

increase; decrease; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

33. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

increase; decrease; downward

decrease; increase; upward

increase; decrease; upward

decrease; increase; downward

increase; increase; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

34. An increase in U.S. inflation relative to Singapore inflation places upward pressure on the Singapore dollar.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

35. When expecting a foreign currency to depreciate, a possible way to speculate on this movement is to borrow dollars, convert the proceeds to the foreign currency, lend in the foreign country, and use the proceeds from this investment to repay the dollar loan.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

36. Since supply and demand for a currency are constant (primarily due to government intervention), currency values seldom fluctuate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

37. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

38. The main effect of interest rate movements on exchange rates is through their effect on international trade.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

39. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

40. Increases in relative income in one country vs. another result in an increase in the first country's currency value.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

41. Trade-related foreign exchange transactions are more responsive to news than financial flow transactions.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

42. Signals regarding future actions of market participants in the foreign exchange market sometimes result in overreactions.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

43. The markets that have a smaller amount of foreign exchange trading for speculatory purposes than for trade purposes will likely experience more volatility than those where trade flows play a larger role.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

44. Liquidity of a currency can affect the extent to which speculation can impact the currency's value.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

45. Forecasting a currency's future value is difficult, because it is difficult to identify how the factors affecting the currency value will change, and how they will interact to impact the currency's value.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

46. The standard deviation should be applied to values rather than percentage movements when comparing volatility among currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

47. Movements of foreign currencies tend to be more volatile for shorter time horizons.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

48. If a currency's spot market is ____, its exchange rate is likely to be ____ to a single large purchase or sale transaction.

liquid; highly sensitive

illiquid; insensitive

liquid; insensitive

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

49. The value of euro was $1.30 last week. During last week the euro depreciated by 5%. What is the value of euro today?

$1.365

$1.235

$1.330

$1.30

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

50. Government controls can only affect the supply of a given currency for sale and not the demand.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

51. If one foreign currency will appreciate against the dollar, then all foreign currencies will appreciate against the dollar but by different degrees.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

52. Assume that the income levels in U.K. start to rise, while U.S. income levels remain unchanged. This will place ____ pressure on the value of British pound. Also, assume that U.S. interest rates rise, while the British pound remains unchanged. This will place ____ pressure on the value of British pound.

downward; downward

upward; downward

upward; upward

downward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

53. If the Fed announces that it will decrease the U.S. interest rates, and European Central Bank takes no action, then the value of euro will ____ against the value of U.S. dollar. The Fed's action is called ____ intervention.

appreciate; direct

depreciate; direct

appreciate; indirect

depreciate; indirect

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

54. Assume that the total value of investment transactions between U.S. and Mexico is minimal. Also assume that total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. Overall, this would put ____ pressure on the value of Mexican peso. The inflation effect should be ____ pronounced than the interest rate effect.

downward; more

upward; more

downward; less

upward; less

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

55. If U.S. experiences a sudden surge in inflation and surge in interest rates while Japanese inflation and interest rates remain unchanged, the value of Japanese yen will ____ against the U.S. dollar.

appreciate

depreciate

remain unchanged

cannot be determined from the information provided.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

56. If the Japanese yen is expected to appreciate against the U.S. dollar and interest rates in the U.S. and Japan are similar, banks may try speculating on this anticipated exchange rate movement by borrowing ____ and investing in ____.

yen; dollars

yen; yen

dollars; yen

dollars; dollars

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

57. British investors frequently invest in the U.S. or Italy, depending on the prevailing interest rates. If Italian interest rates suddenly rise high above U.S. rates, the investors will ____ the supply of pounds to be exchanged for dollars and thus put ____ pressure on the value of the pound against the U.S. dollar.

increase; downward

decrease; upward

increase; upward

decrease; downward

PTS: 1 DIF: Moderate �� OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

58. The equilibrium exchange rate of the Swiss franc is $0.90. At an exchange rate $.83:

U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.

U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a shortage of francs in the foreign exchange market.

U.S. demand for Swiss francs would exceed the supply of francs for sale and there would be a surplus of francs in the foreign exchange market.

U.S. demand for Swiss francs would be less than the supply of francs for sale and there would be a surplus of Swiss francs in the foreign exchange market.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

59. Financial flow foreign exchange transactions are more responsive to news than trade-related transactions.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

60. Assume that the British government eliminates all controls on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

increase; increase; increase

decrease; increase; decrease

remain unchanged; increase; decrease

remain unchanged; increase; increase

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

61. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in capital flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. inflation would affect the exchange rate of Country Y's currency more than the exchange rate of Country X's currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

62. Assume that U.S. inflation is expected to surge in the near future. The expectation of surge in inflation will most likely place ____ pressure on U.S. dollar immediately.

upward

downward

cannot be determined

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

63. When the Japanese yen appreciates against the U.S. dollar, this means that the U.S. dollar is strengthening relative to the yen.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

64. Illiquid currencies tend to exhibit less volatile exchange rate movements than liquid currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

65. The supply curve for a currency is downward sloping since U.S. corporations would be encouraged to purchase more foreign goods when the foreign currency is worth less.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

66. Relatively high Japanese inflation may result in an increase in the supply of yen for sale and a reduction in the demand for yen, other things being equal.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

67. If the British government desires an appreciation in its currency with respect to the U.S. dollar, it would consider intervening in the foreign exchange market by buying dollars with pounds.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

68. Country X frequently engages in trade flows with the U.S. (such as imports and exports). Country Y frequently engages in financial flows with the U.S. (such as financial investments). Everything else held constant, an increase in U.S. interest rates would affect the exchange rate of Country X's currency more than the exchange rate of Country Y's currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

69. Illiquid currencies tend to exhibit ____ volatile exchange rate movements, as the equilibrium prices of their currencies adjust to ____ changes in supply and demand conditions.

less; even minor

less; only large

more; even minor

more; only large

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

70. Which of the following is not mentioned in the text as a factor affecting exchange rates?

Relative interest rates

Relative inflation rates

Government controls

Expectations

All of the above are mentioned in the text as factors affecting exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

71. Which of the following events would most likely result in an appreciation of the U.S. dollar?

U.S. inflation is very high.

The Fed indicates that it will raise U.S. interest rates.

Future U.S. interest rates are expected to decline.

Japan is expected to increase interest rates in the near future.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

72. Which of the following interactions will likely have the least effect on the dollar's value? Assume everything else is held constant.

A reduction in U.S. inflation accompanied by an increase in real U.S. interest rates

A reduction in U.S. inflation accompanied by an increase in nominal U.S. interest rates

An increase in U.S. inflation accompanied by an increase in nominal, but not real, U.S. interest rates

An increase in Singapore's inflation accompanied by an increase in real U.S. interest rates

An increase in Singapore's interest rates accompanied by an increase in U.S. inflation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

73. If a country experiences high inflation relative to the U.S., its exports to the U.S. should ____, its imports should ____, and there is ____ pressure on its currency's equilibrium value.

decrease; increase; upward

decrease; decrease; upward

increase; decrease; downward

decrease; increase; downward

increase; decrease; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

74. If a country experiences an increase in interest rates relative to U.S. interest rates, the inflow of U.S. funds to purchase its securities should ____, the outflow of its funds to purchase U.S. securities should ____, and there is ____ pressure on its currency's equilibrium value.

increase; decrease; downward

decrease; increase; upward

increase; decrease; upward

decrease; increase; downward

increase; increase; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.04.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

Chapter 5—Currency Derivatives

1. Kalons, Inc. is a U.S.-based MNC that frequently imports raw materials from Canada. Kalons is typically invoiced for these goods in Canadian dollars and is concerned that the Canadian dollar will appreciate in the near future. Which of the following is not an appropriate hedging technique under these circumstances?

purchase Canadian dollars forward.

purchase Canadian dollar futures contracts.

purchase Canadian dollar put options.

purchase Canadian dollar call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

2. Graylon, Inc., based in Washington, exports products to a German firm and will receive payment of €200,000 in three months. On June 1, the spot rate of the euro was $1.12, and the 3-month forward rate was $1.10. On June 1, Graylon negotiated a forward contract with a bank to sell €200,000 forward in three months. The spot rate of the euro on September 1 is $1.15. Graylon will receive $____ for the euros.

224,000

220,000

200,000

230,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

3. The one-year forward rate of the British pound is quoted at $1.60, and the spot rate of the British pound is quoted at $1.63. The forward ____ is ____ percent.

discount; 1.9

discount; 1.8

premium; 1.9

premium; 1.8

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

4. The 90-day forward rate for the euro is $1.07, while the current spot rate of the euro is $1.05. What is the annualized forward premium or discount of the euro?

1.9 percent discount.

1.9 percent premium.

7.6 percent premium.

7.6 percent discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

5. Thornton, Inc. needs to invest five million Nepalese rupees in its Nepalese subsidiary to support local operations. Thornton would like its subsidiary to repay the rupees in one year. Thornton would like to engage in a swap transaction. Thus, Thornton would:

convert the rupees to dollars in the spot market today and convert rupees to dollars in one year at today's forward rate.

convert the dollars to rupees in the spot market today and convert dollars to rupees in one year at the prevailing spot rate.

convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at today's forward rate.

convert the dollars to rupees in the spot market today and convert rupees to dollars in one year at the prevailing spot rate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Analysis

6. In the U.S., the typical currency futures contract is based on a currency value in terms of:

euros.

U.S. dollars.

British pounds.

Canadian dollars.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

7. Currency futures contracts sold on an exchange:

contain a commitment to the owner, and are standardized.

contain a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

8. Currency options sold through an options exchange:

contain a commitment to the owner, and are standardized.

contain a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

9. Currency options are commonly traded through the ____ system.

robot

Euro

GLOBEX

Scope

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

10. Forward contracts:

contain a commitment to the owner, and are standardized.

contain a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and can be tailored to the desire of the owner.

contain a right but not a commitment to the owner, and are standardized.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

11. Which of the following is the most likely strategy for a U.S. firm that will be receiving Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

purchase a call option on francs.

sell a futures contract on francs.

obtain a forward contract to purchase francs forward.

all of the above are appropriate strategies for the scenario described.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

12. Which of the following is the most unlikely strategy for a U.S. firm that will be purchasing Swiss francs in the future and desires to avoid exchange rate risk (assume the firm has no offsetting position in francs)?

purchase a call option on francs.

obtain a forward contract to purchase francs forward.

sell a futures contract on francs.

all of the above are appropriate strategies for the scenario described.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Analysis

13. If your firm expects the euro to substantially depreciate, it could speculate by ____ euro call options or ____ euros forward in the forward exchange market.

selling; selling

selling; purchasing

purchasing; purchasing

purchasing; selling

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

14. When you own ____, there is no obligation on your part; however, when you own ____, there is an obligation on your part.

call options; put options

futures contracts; call options

forward contracts; futures contracts

o; forward contracts

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

15. The greater the variability of a currency, the ____ will be the premium of a call option on this currency, and the ____ will be the premium of a put option on this currency, other things equal.

greater; lower

greater; greater

lower; greater

lower; lower

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

16. When currency options are not standardized and traded over-the-counter, there is ____ liquidity and a ____ bid/ask spread.

less; narrower

more; narrower

more; wider

less; wider

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

17. The shorter the time to the expiration date for a currency, the ____ will be the premium of a call option, and the ____ will be the premium of a put option, other things equal.

greater; greater

greater; lower

lower; lower

lower; greater

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

18. Assume that a speculator purchases a put option on British pounds (with a strike price of $1.50) for $.05 per unit. A pound option represents 31,250 units. Assume that at the time of the purchase, the spot rate of the pound is $1.51 and continually rises to $1.62 by the expiration date. The highest net profit possible for the speculator based on the information above is:

$1,562.50.

−$1,562.50.

−$1,250.00.

−$625.00.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

19. Which of the following is true?

The futures market is primarily used by speculators while the forward market is primarily used for hedging.

The futures market is primarily used for hedging while the forward market is primarily used for speculating.

The futures market and the forward market are primarily used for speculating.

The futures market and the forward market are primarily used for hedging.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

20. Which of the following is true?

Most forward contracts between firms and banks are for speculative purposes.

Most future contracts represent a conservative approach by firms to hedge foreign trade.

The forward contracts offered by banks have maturities for only four possible dates in the future.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

21. If you expect the euro to depreciate, it would be appropriate to ____ for speculative purposes.

buy a euro call and buy a euro put

buy a euro call and sell a euro put

sell a euro call and sell a euro put

sell a euro call and buy a euro put

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

22. If you expect the British pound to appreciate, you could speculate by ____ pound call options or ____ pound put options.

purchasing; selling

purchasing; purchasing

selling; selling

selling; purchasing

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Analysis

23. Which of the following is correct?

The longer the time to maturity, the less the value of a currency call option, other things equal.

The longer the time to maturity, the less the value of a currency put option, other things equal.

The higher the spot rate relative to the exercise price, the greater the value of a currency put option, other things equal.

The lower the exercise price relative to the spot rate, the greater the value of a currency call option, other things equal.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

24. Research has found that the options market is:

efficient before controlling for transaction costs.

efficient after controlling for transaction costs.

highly inefficient.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

25. Assume no transactions costs exist for any futures or forward contracts. The price of British pound futures with a settlement date 180 days from now will:

definitely be above the 180-day forward rate.

definitely be below the 180-day forward rate.

be about the same as the 180-day forward rate.

none of the above; there is no relation between the futures and forward prices.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

26. Assume that a currency's spot and future prices are the same, and the currency's interest rate is higher than the U.S. rate. The actions of U.S. investors to lock in this higher foreign return would ____ the currency's spot rate and ____ the currency's futures price.

put upward pressure on; put upward pressure on

put downward pressure on; put upward pressure on

put upward pressure on; put downward pressure on

put downward pressure on; put downward pressure on

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

27. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:

buying an identical futures contract.

selling an identical futures contract.

buying a futures contract with a different settlement date.

selling a futures contract for a different amount of currency.

purchasing a put option contract in the same currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

28. If the spot rate of the euro increased substantially over a one-month period, the futures price on euros would likely ____ over that same period.

increase slightly

decrease substantially

increase substantially

stay the same

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

29. A U.S. firm is bidding for a project needed by the Swiss government. The firm will not know if the bid is accepted until three months from now. The firm will need Swiss francs to cover expenses but will be paid by the Swiss government in dollars if it is hired for the project. The firm can best insulate itself against exchange rate exposure by:

selling futures in francs.

buying futures in francs.

buying franc put options.

buying franc call options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

30. A firm wants to use an option to hedge 12.5 million in receivables from New Zealand firms. The premium is $.03. The exercise price is $.55. If the option is exercised, what is the total amount of dollars received (after accounting for the premium paid)?

$6,875,000.

$7,250,000.

$7,000,000.

$6,500,000.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

31. If you purchase a straddle on euros, this implies that you:

finance the purchase of a call option by selling a put option in the euros.

finance the purchase of a call option by selling a call option in the euros.

finance the purchase of a put option by selling a put option in the euros.

finance the purchase of a put option by selling a call option in the euros.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

32. The premium on a pound put option is $.03 per unit. The exercise price is $1.60. The break-even point is ____ for the buyer of the put, and ____ for the seller of the put. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

$1.63; $1.63

$1.63; $1.60

$1.63; $1.57

$1.57; $1.63

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

33. The existing spot rate of the Canadian dollar is $.82. The premium on a Canadian dollar call option is $.04. The exercise price is $.81. The option will be exercised on the expiration date if at all. If the spot rate on the expiration date is $.87, the profit as a percent of the initial investment (the premium paid) is:

0 percent.

25 percent.

50 percent.

150 percent.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

34. You purchase a call option on pounds for a premium of $.03 per unit, with an exercise price of $1.64; the option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $1.65, your net profit per unit is:

−$.03.

−$.02.

−$.01.

$.02.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

35. You purchase a put option on Swiss francs for a premium of $.02, with an exercise price of $.61. The option will not be exercised until the expiration date, if at all. If the spot rate on the expiration date is $.58, your net profit per unit is:

−$.03.

−$.02.

−$.01.

$.02.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

36. You are a speculator who sells a call option on Swiss francs for a premium of $.06, with an exercise price of $.64. The option will not be exercised until the expiration date, if at all. If the spot rate of the Swiss franc is $.69 on the expiration date, your net profit per unit, assuming that you have to buy Swiss francs in the market to fulfill your obligation, is:

−$.02.

−$.01.

$.01.

$.02.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

37. You are a speculator who sells a put option on Canadian dollars for a premium of $.03 per unit, with an exercise price of $.86. The option will not be exercised until the expiration date, if at all. If the spot rate of the Canadian dollar is $.78 on the expiration date, your net profit per unit is:

−$.08.

−$.03.

$.05.

$.08.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

38. European currency options can be exercised ____; American currency options can be exercised ____.

any time up to the expiration date; any time up to the expiration date

any time up to the expiration date; only on the expiration date

only on the expiration date; only on the expiration date

only on the expiration date; any time up to the expiration date

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

39. Macomb Corporation is a U.S. firm that invoices some of its exports in Japanese yen. If it expects the yen to weaken, it could ____ to hedge the exchange rate risk on those exports.

sell yen put options

buy yen call options

buy futures contracts on yen

sell futures contracts on yen

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

40. A call option on Australian dollars has a strike (exercise) price of $.56. The present exchange rate is $.59. This call option can be referred to as:

in the money.

out of the money.

at the money.

at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

41. A put option on British pounds has a strike (exercise) price of $1.48. The present exchange rate is $1.55. This put option can be referred to as:

in the money.

out of the money.

at the money.

at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

42. Which of the following is not an instrument used by U.S.-based MNCs to cover their foreign currency positions?

forward contracts.

futures contracts.

non-deliverable forward contracts.

options.

all of the above are instruments used to cover foreign currency positions.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

43. When the futures price on euros is below the forward rate on euros for the same settlement date, astute investors may attempt to simultaneously ____ euros forward and ____ euro futures.

sell; sell

buy; sell

sell; buy

buy; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

44. When the futures price is equal to the spot rate of a given currency, and the foreign country exhibits a higher interest rate than the U.S. interest rate, astute investors may attempt to simultaneously ____ the foreign currency, invest it in the foreign country, and ____ futures in the foreign currency.

buy; buy

sell; buy

buy; sell

buy; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

45. Which of the following would result in a profit of a euro futures contract when the euro depreciates?

buy a euro futures contract; sell a futures contract after the euro has depreciated.

sell a euro futures contract; buy a futures contract after the euro has depreciated.

buy a euro futures contract; buy an additional futures contract after the euro has depreciated.

none of the above would result in a profit when the euro depreciates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

46. Which of the following is not true regarding options?

Options are traded on exchanges, never over-the-counter.

Similar to futures contracts, margin requirements are normally imposed on option traders.

Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.

Currency options can be classified as either put or call options.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

47. A U.S. corporation has purchased currency put options to hedge a 100,000 Canadian dollar (C$) receivable. The premium is $.01 and the exercise price of the option is $.75. If the spot rate at the time of maturity is $.85, what is the net amount received by the corporation if it acts rationally?

$74,000.

$84,000.

$75,000.

$85,000.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

48. A U.S. corporation has purchased currency call options to hedge a 70,000 pound payable. The premium is $.02 and the exercise price of the option is $.50. If the spot rate at the time of maturity is $.65, what is the total amount paid by the corporation if it acts rationally?

$33,600.

$46,900.

$44,100.

$36,400.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

49. Frank is an option speculator. He anticipates the Danish kroner to appreciate from its current level of $.19 to $.21. Currently, kroner call options are available with an exercise price of $.18 and a premium of $.02. Should Frank attempt to buy this option? If the future spot rate of the Danish kroner is indeed $.21, what is his profit or loss per unit?

no; −$0.01.

yes; $0.01.

yes; −$0.01.

yes; $0.03.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

50. Carl is an option writer. In anticipation of a depreciation of the British pound from its current level of $1.50 to $1.45, he has written a call option with an exercise price of $1.51 and a premium of $.02. If the spot rate at the option's maturity turns out to be $1.54, what is Carl's profit or loss per unit (assuming the buyer of the option acts rationally)?

−$0.01.

$0.01.

−$0.04.

$0.04.

−$0.03.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

51. Johnson, Inc., a U.S.-based MNC, will need 10 million Thai baht on August 1. It is now May 1. Johnson has negotiated a non-deliverable forward contract with its bank. The reference rate is the baht's closing exchange rate (in $) quoted by Thailand's central bank in 90 days. The baht's spot rate today is $.02. If the rate quoted by Thailand's central bank on August 1 is $.022, Johnson will ____ $____.

pay; 20,000

be paid; 20,000

pay; 2,000

be paid; 2,000

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

52. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.

selling; buying; buying

buying; selling; buying

selling; buying; selling

buying; buying; buying

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

53. A put option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.

spot and exercise; exercise

spot and exercise; spot

exercise and spot; exercise

exercise and spot; spot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

54. A call option premium has a lower bound that is equal to the greater of zero and the difference between the underlying ____ prices. The upper bound of a call option premium is the ____ price.

spot and exercise; exercise

spot and exercise; spot

exercise and spot; exercise

exercise and spot; spot

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

55. Assume the spot rate of the Swiss franc is $.62 and the one-year forward rate is $.66. The forward rate exhibits a ____ of ____.

premium; about 6%

discount; about 6%

discount; about 6.45%

premium; about 6.45%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

56. Assume the spot rate of a currency is $.37 and the 90-day forward rate is $.36. The forward rate of this currency exhibits a ____ of ____ on an annualized basis.

discount; 11.11%

premium; 11.11%

premium; 10.81%

discount; 10.81%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

57. Which of the following are most commonly traded on an exchange?

forward contracts.

futures contracts.

currencies

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

58. Conditional currency options are:

options that do not require premiums.

options where the premiums are canceled if a trigger level is reached.

options that allow the buyer to decide what currency the option will be settled in.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

59. Which of the following is true regarding the options markets?

Hedgers and speculators both attempt to lower risk.

Hedgers attempt to lower risk, while speculators attempt to make riskless profits.

Hedgers and speculators are both necessary in order for the market to be liquid.

all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

60. The premium of a currency put option will increase if:

the volatility of the underlying asset goes up.

the time to maturity goes up.

the spot rate declines.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

61. Which of the following is true of options?

The writer decides whether the option will be exercised.

The writer pays the buyer the option premium.

The buyer decides if the option will be exercised.

More than one of these.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

62. The purchase of a currency put option would be appropriate for which of the following?

Investors who expect to buy a foreign bond in one month.

Corporations who expect to buy foreign currency to finance foreign subsidiaries.

Corporations who expect to collect on a foreign account receivable in one month.

all of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

63. If you have bought the right to sell, you are a:

call writer.

put buyer.

futures buyer.

put writer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

64. If you have a position where you might be obligated to buy Euros, you are:

a call writer.

a put writer.

a put buyer.

a futures seller.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

65. Which of the following is true for futures, but not for forwards?

actual delivery.

no transactions costs.

self regulation.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

66. Your company expects to receive 5,000,000 Japanese yen 60 days from now. You decide to hedge your position by selling Japanese yen forward. The current spot rate of the yen is $.0089, while the forward rate is $.0095. You expect the spot rate in 60 days to be $.0090. How many dollars will you receive for the 5,000,000 yen 60 days from now?

$44,500.

$45,000.

$526 million.

$47,500.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

67. The spot rate for the Singapore dollar is $.588. The 30-day forward rate is $.590. The forward rate contains an annualized ____ of ____%.

discount; −4.07

premium; 4.07

discount; −4.08

premium; 4.08

premium; 3.40

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

68. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

69. The price of a futures contract will generally vary significantly from that of a forward contract.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

70. If the futures rate is lower than the forward rate, astute investors would attempt to simultaneously buy futures and sell forward. Such actions would place downward pressure on the futures price and upward pressure on the forward rate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

71. Forward contracts are usually liquidated by actual delivery of the currency, while futures contracts are usually liquidated by offsetting transactions.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

72. If an investor who previously sold futures contracts wishes to liquidate his position, he could sell futures contracts with the same maturity date.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

73. Since futures contracts are traded on an exchange, the exchange will always take the "other side" of the transaction in terms of accepting the credit risk.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

74. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

75. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

76. The writer of a call option is obligated to sell the underlying currency to the buyer of the option if the option is exercised.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

77. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

78. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

79. Due to put-call parity, we can use the same formula to price calls and puts.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

80. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

81. If the futures rate is above the forward rate, actions by rational investors would put upward pressure on the forward rate and downward pressure on the futures rate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

82. Futures contracts are standardized with respect to delivery date and the futures price specified for the settlement date.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

83. If an investor who has previously purchased a futures contract wishes to liquidate her position, she would sell an identical futures contract with the same settlement date.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

84. Margin requirements are deposits placed by investors in futures contracts with their respective brokerage firms when they take their position. They are intended to minimize credit risk associated with futures contracts.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

85. A European option can only be exercised at the expiration date, while an American option can be exercised any time prior to the expiration date.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

86. The highest amount a buyer of a call or a put option can lose is the exercise price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

87. A straddle is a speculative strategy that represents the purchase of both a call and a put.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

88. A currency put option is a contract specifying a standard volume of a particular currency to be exchanged on a specific settlement date.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

89. An option writer is the seller of a call or a put option.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

90. The forward premium is the price specified in a call or put option.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

91. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign receivables. To do so, the MNC can either sell the foreign currency forward or sell futures.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

92. Hedgers should buy puts if they are hedging an expected inflow of foreign currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

93. Forward contracts are the best technique for managing exposure arising from project bidding.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

94. The currency futures markets are regulated by the International Monetary Fund.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

95. It is possible to have an opportunity loss when using futures to hedge.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

96. Margin is used in the forward market to mitigate default risk.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

97. There are no transactions costs associated with trading futures or options.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

98. Futures and options are available for crossrates.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

99. Options can be traded on an exchange or over the counter.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

100. The writer of an uncovered call can experience a loss limited to the option premium.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

101. American style options can be exercised any time up to maturity.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

102. If a currency put option is out of the money, then the present exchange rate is less than the strike price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

103. As mentioned in the text, the most common maturities for forward rates are:

one, three, six, and twelve months.

one, three, six, and twelve years.

two, three, and five years.

two, three, and five weeks.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

104. Managers of MNCs are typically expected to use currency derivatives for speculation in order to improve profits.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

105. The 180-day forward rate for the euro is $1.34, while the current spot rate of the euro is $1.29. What is the annualized forward premium or discount of the euro?

7.46% premium

7.46% discount

7.75% premium

7.75% discount

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

106. The annualized forward premium on the euro is 7%. What is the 90-day forward rate on the euro if the spot rate today is $1.25?

$1.27

$1.34

$1.16

$1.23

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

107. The one-year forward rate of the Japanese yen is quoted at $.013, and the spot rate of Japanese yen is quoted at $.011. The forward ____ is ____ percent.

discount; 18.18

premium; 18.18

discount; 15.38

premium; 15.38

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

108. The spot rate of British pound is quoted at $1.49. The 90-day forward rate exhibits a 2% discount. What is the 90-day forward rate of the pound?

$1.52

$1.61

$1.37

$1.46

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

109. The spot rate of euro is quoted at $1.29. The annualized forward premium on the euro is 10%. What is the 30-day forward rate of the euro?

$1.28

$1.30

$1.42

$1.16

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

110. The premium on a euro call option is $.02. The exercise price is $1.32. The break-even point is ____ for the buyer of the call, and ____ for the seller of the call. (Assume zero transactions costs and that the buyer and seller of the put option are speculators.)

$1.30; $1.30

$1.34; $1.30

$1.30; $1.34

$1.34; $1.34

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

111. If you have a position where you might be obligated to sell pounds, you are:

a call writer.

a call buyer.

a put writer.

a put buyer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

112. If you have bought a right to buy foreign currency, you are:

a call writer.

a call buyer.

a put writer.

a put buyer.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

113. The premium on a pound put option is $.04. The spot rate and the exercise price is $1.52. The spot rate at the time of this option expiration is expected to be $1.51. The speculators could profit by:

writing a put option.

buying a put option.

buying a call option

writing a call option and buying a call option simultaneously.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

114. A call option on Japanese yen has a strike (exercise) price of $.012. The present exchange rate is $.011. This call option can be referred to as:

in the money.

out of the money.

at the money.

at a discount.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

115. A put option on Swiss franc has a strike (exercise) price of $.92. The present exchange rate is $.89. This put option can be referred to as:

in the money.

out of the money.

at the money.

at a discount.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

116. Crown Co. is expecting to receive 100,000 British pounds in one year. Crown expects the spot rate of British pound to be $1.49 in a year, so it decides to avoid exchange rate risk by hedging its receivables. The spot rate of the pound is quoted at $1.51. The strike price of put and call options are $1.54 and $1.53 respectively. The premium on both options is $.03. The one-year forward rate exhibits a 2.65% premium. Assume there are no transaction costs. What is the best possible hedging strategy and how many U.S. dollars Crown Co. will receive under this strategy?

buy a put option and receive $150,000.

sell pounds forward and receive $155,000.

sell a call option and receive $156,000.

sell a put option and receive $157,000.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

117. J&L Co. is a U.S.-based MNC that frequently exports computers to Italy. J&L typically invoices these goods in euros and is concerned that the euro will depreciate in the near future. Which of the following is not an appropriate technique under these circumstances?

purchase euro put options.

sell euros forward.

sell euro futures contracts.

sell euro put options.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

118. The ____ the existing spot price relative to the strike price, the ____ valuable the call options will be.

higher; less

higher; more

lower; less

lower; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

119. The ____ the existing spot price relative to the strike price, the ____ valuable the put options will be.

higher; less

higher; more

lower; less

lower; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

120. On January 1st, Madison Co. ordered raw material from Japan and agreed to pay 100 million yen for this order on April 1st. It negotiated a 3-month forward contract to obtain 100 million Japanese yen on that date at $.009. On February 1st, the Japanese firm informed Madison Co. that it won't be able to fulfill that order. The Japanese yen spot rate on February 1st is $.0087 and 2-month forward rate exhibits 3% discount. To offset its existing contract Madison Co. will negotiate a forward contract to ____ for the date of April 1st and the profit/loss generated from this transaction is a ____ U.S. dollars.

sell yen; gain of $60,000

sell yen; loss of $60,000

buy yen; gain of $30,000

to buy yen; loss of $30,000

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

121. Assume that a speculator received news that makes her believe that the yen will appreciate or depreciate substantially in the near future, but she is not certain of the direction. Also assume that exercise price of call and put options are the same. The most appropriate method for speculation is ____and it may be achieved by ____.

straddle; purchase put option and purchase call option.

strangle; purchase put option and sell call option.

strangle; sell put option and sell put option.

straddle; sell put option and buy call option.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Analysis

122. Which of the following does not represent the risk from using forward contracts?

if a forward contract is used to hedge receivables, and the spot exchange rate at the expiration of contract exceeds the contract price.

if a forward contract is used to hedge receivables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.

if a forward contract is used to hedge payables, and the spot exchange rate at the time of expiration of contract is lower than the contract price.

if a forward contract is used to hedge payables or receivables and the amount to be received or paid is cancelled.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

123. The writer of a put option has a right, but not obligation, to buy the underlying currency from the option buyer.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

124. A straddle can only be achieved if the exercise prices of put and call options are the same.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

125. An MNC frequently uses either forward or futures contracts to hedge its exposure to foreign payables. To do so, the MNC can either sell the foreign currency forward or sell futures.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

126. Hedgers should buy calls if they are hedging an expected outflow of foreign currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

127. If a currency's forward rate exhibits a discount, the currency is forced to appreciate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

128. If a currency's forward rate exhibits a premium, that currency is forced to depreciate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

129. If a currency call option is in the money, then the present exchange rate exceeds the strike price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

130. If the forward rate for a currency is less than the spot rate for that currency, the forward rate is said to exhibit a premium.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

131. If an MNC desires to offset a forward contract that it previously created, it can simply ignore its obligation.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

132. Non-deliverable forward contracts (NDFs) are frequently used for currencies in emerging markets.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

133. Forward contracts are usually negotiated with a commercial bank, while futures contracts are traded on an organized exchange.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

134. Since corporations have specialized needs, they usually prefer futures contracts to forward contracts for hedging purposes.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

135. A speculator in futures contracts expecting the value of a foreign currency to depreciate would likely sell futures contracts.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

136. Currency options are only traded on exchanges. That is, there is no over-the-counter market for options.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

137. A currency call option grants the right to sell a specific currency at a designated price within a specific time period.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

138. Currency call options allow the purchaser to lock in the price paid for a currency. Therefore, they are often used by MNCs to hedge foreign currency payables.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

139. When the current exchange rate is less than the strike price, a call option with that strike price will be in the money and a put option with that strike price will be out of the money.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

140. Both call and put option premiums are affected by the level of the existing spot price relative to the strike price; for example, a high spot price relative to the strike price will result in a relatively high premium for a call option but a relatively low premium for a put option.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

141. Both call and put option premiums are affected by the level of the existing spot rate relative to the strike price, the length of time before the expiration date, and the potential variability of the currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

142. A straddle represents the purchase of either two call or two put options at the same exercise price.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

143. A European option can be exercised at any time prior to maturity, while an American option can only be exercised at maturity.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

144. The lower bound of the call option premium is the greater of zero and the difference between the spot rate and the exercise price; the upper bound of a currency call option is the spot rate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

145. The lower bound of a put option premium is the greater of zero and the difference between the exercise price and the spot rate; the upper bound of a currency put option is the exercise price.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

146. If an actual put option premium is less than what is suggested by the put-call parity relationship, arbitrage can be conducted.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

147. An advantage of a short straddle is that it provides the option writer with income from two separate sources.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

148. The disadvantage of a long strangle relative to a long straddle is that the underlying currency has to fluctuate more prior to expiration.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

149. With a bull spread, the spreader believes that the underlying currency will appreciate substantially, even more so than with a strangle.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

150. A forward rate for a currency is said to exhibit a discount if

the forward rate exceeds the existing spot rate.

the forward rate is less than the existing spot rate.

the forward rate exceeds the expected future spot rate.

the forward rate is less than the expected future spot rate.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

151. If the spot rate of the British pound is $1.50, and the one-year forward rate has a discount of 3 percent, the one-year forward rate is $____.

1.50

1.47

1.55

1.46

None of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

152. Which of the following is not true regarding futures contracts?

Unlike forward contracts, they are generally traded on an exchange.

Futures contracts are standardized with respect to delivery date and size of the contract.

There is an active over-the-counter market for currency futures contracts.

Currency futures can be used by speculators who attempt to profit from exchange rate movements.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

153. When the futures price is above the forward rate, astute investors may attempt to simultaneously buy a currency forward and sell futures in that currency. These actions would place ____ pressure on the forward rate and ____ pressure on the futures rate.

upward; downward

upward; upward

downward; upward

downward; downward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

154. Assume that the British pound (£) futures price for September is $1.60. Given that 62,500 units are in a British pound futures contract, the seller of British pound futures will receive $____ on the delivery date.

39,062.50

100,000

48,000

87,062.50

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

155. Which of the following would result in a profit of a futures contract when the underlying currency depreciates?

Buy a futures contract; sell a futures contract after the currency has depreciated

Sell a futures contract; buy a futures contract after the currency has depreciated

Buy a futures contract; buy an additional futures contract after the currency has depreciated

None of the above would result in a profit when the underlying currency of the futures contract depreciates.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

156. Currency futures can be used by MNCs to hedge payables. That is, an MNC would ____ futures to hedge a foreign payable position. Also, currency futures can be used for speculation. For example, a speculator expecting a currency to appreciate would ____ futures.

buy; buy

sell; sell

buy; sell

sell; buy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

157. Which of the following is not true regarding options?

Options are traded on exchanges, never over-the-counter.

Similar to futures contracts, margin requirements are normally imposed on option traders.

Although commissions for options are fixed per transaction, multiple contracts may be involved in a transaction, thus lowering the commission per contract.

Currency options can be classified as either put or call options.

All of the above are true.

PTS: 1 DIF: �� Moderate OBJ: INFM.MADU.15.05.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

158. When the existing spot rate exceeds the exercise price, a call option is ____, and a put option is ____.

out of the money; in the money

out of the money; out of the money

in the money; in the money

in the money; out of the money

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Knowledge

159. When a currency call option is classified as "in the money," this indicates that

the spot rate of the currency is less than the exercise price of the option.

the spot rate of the currency is greater than the exercise price of the option.

the buyer of the option would generate a profit; that is, the spot rate would exceed the sum of the exercise price and the premium paid.

the buyer of the option would generate a profit; that is, the exercise price would exceed the sum of the spot rate and the premium paid.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

160. A U.S. corporation has purchased currency call options to hedge a 70,000 pound (£) payable. The premium is $0.02 and the exercise price of the option is $0.50. If the spot rate at the time of maturity is $0.65, what is the total amount paid by the corporation if it acts rationally?

$33,600

$46,900

$44,100

$36,400

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

161. Andrea is an option speculator. She anticipates the Canadian dollar to depreciate from its current level of $0.90 to $0.85. Currently, Canadian dollar call options are available with an exercise price of $0.91 and a premium of $0.02. Also, Canadian dollar put options are available with an exercise price of $0.88 and a premium of $0.02. If the future spot rate of the Canadian dollar is $0.85, what is Andrea's profit or loss per unit?

$0.03

$0.05

$0.01

$0.04

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Application

162. Which of the following is not true regarding options?

The buyer of a call option has the right to buy the currency at the strike price.

The writer of a call option has the obligation to sell the currency to the buyer if the option if exercised.

The buyer of a put option has the right to sell the currency at the strike price.

The writer of a put option has the obligation to sell the currency to the buyer if the option is exercised.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.05

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

163. If the observed put option premium is less than what is suggested by the put-call parity equation, astute arbitrageurs could make a profit by ____ the put option, ____ the call option, and ____ the underlying currency.

selling; buying; buying

buying; selling; buying

selling; buying; selling

buying; buying; buying

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.05.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.10

KEY: Bloom's: Comprehension

Chapter 6—Government Influence on Exchange Rates

1. To force the value of the pound to appreciate against the dollar, the Federal Reserve should:

sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market and the European Central Bank (ECB) should not intervene.

sell dollars for pounds in the foreign exchange market and the European Central Bank (ECB) should sell pounds for dollars in the foreign exchange market.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

2. A weak dollar is normally expected to cause:

high unemployment and high inflation in the U.S.

high unemployment and low inflation in the U.S.

low unemployment and low inflation in the U.S.

low unemployment and high inflation in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

3. A strong dollar is normally expected to cause:

high unemployment and high inflation in the U.S.

high unemployment and low inflation in the U.S.

low unemployment and low inflation in the U.S.

low unemployment and high inflation in the U.S.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

4. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

5. Consider two countries that trade with each other, called X and Y. According to the text, inflation in Country X will have a greater impact on inflation in Country Y under the ____ system. Now, consider two other countries that trade with each other, called A and B. Unemployment in Country A will have a greater impact on unemployment in Country B under the ____ system.

floating rate; fixed rate

floating rate; floating rate

fixed rate; fixed rate

fixed rate; floating rate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

6. A primary result of the Bretton Woods Agreement was:

the establishment of the European Monetary System (EMS).

establishing specific rules for when tariffs and quotas could be imposed by governments.

establishing that exchange rates of most major currencies were to be allowed to fluctuate 1% above or below their initially set values.

establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

7. A primary result of the Smithsonian Agreement was:

the establishment of the European Monetary System (EMS).

establishing that exchange rates of most major countries were to be allowed to fluctuate 2.25% above or below their initially set values.

establishing specific rules for when tariffs and quotas could be imposed by governments.

establishing that exchange rates of most major currencies were to be allowed to fluctuate freely without boundaries (although the central banks did have the right to intervene when necessary).

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

8. Under a fixed exchange rate system:

a foreign exchange market does not exist.

central bank intervention in the foreign exchange market is not necessary.

central bank intervention in the foreign exchange market is often necessary.

central bank intervention in the foreign exchange market is not allowed.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

9. Under a managed float exchange rate system, the Fed may attempt to stimulate the U.S. economy by ____ the dollar. Such an adjustment in the dollar's value should ____ the U.S. demand for products produced by major foreign countries.

weakening; increase

weakening; decrease

strengthening; increase

strengthening; decrease

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

10. The value of the Canadian dollar, Japanese yen, and Australian dollar with respect to the U.S. dollar are part of a:

pegged system.

fixed system.

managed float system.

crawling peg system.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

11. The interest rate of a country with a currency board:

is less stable than it would be without a currency board.

is typically below the interest rate of the currency to which it is tied.

will move in tandem with the interest rate of the currency to which it is tied.

is completely independent of the interest rate of the currency to which it is tied.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

12. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency depreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

more; more

less; less

more; less

less; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

13. Assume Countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that Country A's currency floats against Country B's currency, and that Country C's currency is pegged to B's. If A's currency depreciates against B, then A's exports to C should ____, and A's imports from C should ____.

decrease; increase

decrease; decrease

increase; decrease

increase; increase

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

14. Assume a central bank exchanges its currency for other foreign currencies in the foreign exchange market, but does not adjust for the resulting change in the money supply. This is an example of:

pegged intervention.

indirect intervention.

nonsterilized intervention.

sterilized intervention.

A and D

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

15. If the Fed desires to weaken the dollar without affecting the dollar money supply, it should:

exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.

exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.

exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.

exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

16. Which of the following is an example of direct intervention in foreign exchange markets?

lowering interest rates.

increasing the inflation rate.

exchanging dollars for foreign currency.

imposing barriers on international trade.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

17. A strong dollar places ____ pressure on inflation, which in turn places ____ pressure on the dollar.

upward; upward

downward; upward

upward; downward

downward; downward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

18. The Fed may use a stimulative monetary policy with least concern about causing inflation if the dollar's value is expected to:

remain stable.

strengthen.

weaken.

none of the above will have an impact on inflation.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

19. A weaker dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which places ____ pressure on U.S. bond prices.

upward; downward; upward

upward; downward; downward

upward; upward; downward

downward; upward; upward

downward; downward; upward

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

20. The euro is the currency:

adopted in all western European countries as of 1999.

adopted in all eastern European countries as of 1999.

adopted in all European countries as of 1999.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

21. The euro has not been adopted by:

Slovenia.

the U.K.

Germany.

France.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

22. The exchange rate mechanism (ERM) refers to the method of linking ____ currencies to each other within boundaries.

Latin American

European

Asian

North American

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

23. Countries that have adopted the euro must agree on a single ____ policy.

monetary

fiscal

worker compensation

foreign relations

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

24. Countries that have adopted the euro tend to have very similar ____.

interest rates

inflation rates

income tax rates

budget deficits

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

25. The risk-free interest rates among countries that have adopted the euro should:

not necessarily be similar to risk-free rates in other countries.

equal the U.S. risk-free rate.

equal the risk-free rates in other European countries.

equal the risk-free rates in Asian countries.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

26. Which of the following is true regarding the euro?

Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.

It allows for more consistent economic conditions across countries.

It prevents each country from conducting its own monetary policy.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

27. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce unemployment. Which of the following is an appropriate action given this scenario?

Weaken the dollar

Strengthen the dollar

Buy dollars with foreign currency in the foreign exchange market

Implement a tight monetary policy

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

28. It has been argued that the exchange rate can be used as a policy tool. Assume that the U.S. government would like to reduce inflation. Which of the following is an appropriate action given this scenario?

Sell dollars for foreign currency

Buy dollars with foreign currency

Lower interest rates

None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

29. To strengthen the dollar using sterilized intervention, the Fed would ____ dollars and simultaneously ____ Treasury securities.

buy; sell

sell; buy

buy; buy

sell; sell

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

30. As foreign exchange activity has grown, a given degree of central bank intervention has become:

more effective.

more frequent.

less effective.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

31. When using indirect intervention, a central bank is likely to focus on:

inflation.

interest rates.

income levels.

expectations of future exchange rates.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

32. Which of the following countries was probably the least affected (directly or indirectly) by the Asian crisis?

Thailand.

Indonesia.

Russia.

China.

Malaysia.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

33. Which of the following is not true regarding Thailand?

Thailand was one of the slowest growing countries before the Asian crisis.

High levels of spending and low levels of saving placed upward pressure on prices of real estate, products, and on Thailand's local interest rate.

Thailand's baht was linked to the dollar prior to July 1997, which made Thailand an attractive site for foreign investors.

Thai banks provided many loans that were very risky in their attempt to make use of all of their funds.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

34. China's yuan is presently:

allowed to fluctuate freely without any central bank intervention.

allowed to fluctuate but with central bank intervention.

pegged to the dollar.

pegged to the euro.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

35. During the period 1944-1971, the U.S. used a ____ system.

euro exchange rate

fixed

dirty float

flexible

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

36. Which of the following are examples of currency controls?

import restrictions.

prohibition of remittance of funds.

ceilings on granting credit to foreign firms.

all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

37. From a financial management perspective, which of the following is true regarding the introduction of the Euro?

U.S.-based MNCs are not subject to exchange rate risk when they have transactions in euros.

The euro is pegged to all other European currencies.

Transactions costs decline for MNCs that conduct transactions within Europe.

The euro replaced the British pound.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

38. Which of the following countries have not adopted the euro?

Germany

Italy

Switzerland

France

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

39. Which of the following are true about the Southeast Asian currency crisis?

It was preceded by several years of large capital inflows to Asia.

It was preceded by a five-year recession in Asia.

Asian interest rates declined during the crisis.

Asian exchange rates were pegged to the Japanese yen to resolve the crisis.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

40. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

41. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

42. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

43. Under a pegged exchange rate system, the home currency's value is pegged to a foreign currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

44. A major advantage of the euro is the complete elimination of exchange rate risk on transactions between participating European countries, which encourages more trade and capital flows within Europe.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

45. The European countries conforming to the euro are completely insulated from movements in the euro's value with respect to other currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

46. The establishment of the euro allows for more consistent economic conditions across countries but eliminates the power of any individual European country to solve local economic problems with its own unique monetary policy.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

47. The Asian crisis is generally believed to have started in Japan.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

48. A possible reason why China was less affected by the Asian crisis is that its government exerts more influence on private enterprise than the governments of other Asian countries.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

49. Currency devaluation can boost a country's exports, but currency revaluation can increase foreign competition.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

50. Market forces are the determinant of exchange rates in a freely floating exchange rate system.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

51. If a government wishes to stimulate its economy in the form of increased foreign demand for its country's products, it could attempt to weaken its currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

52. In a sterilized exchange rate arrangement, a country's home currency value is pegged to a foreign currency or to some unit of account.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.03

KEY: Bloom's: Knowledge

53. The Bank of England is responsible for setting the monetary policy for the European countries participating in the euro.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

54. The Fed's indirect method of intervention is to trade dollars for or against other currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

55. China is commonly criticized for keeping the yuan's value at superficially high levels.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

56. The Bretton Woods Agreement created a system under which exchange rates are determined by market forces without intervention by various governments.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

57. Nonsterilized intervention is intervention by a central bank in the foreign exchange market without adjusting for the change in money supply.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

58. The euro is pegged to other currencies of European countries that have not adopted the euro.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

59. The Smithsonian Agreement was an agreement to allow currencies of major countries to float without any barriers.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

60. An example of indirect intervention by the Bank of Japan would be for the Bank of Japan to use interest rates to increase the value of the yen vs. the dollar.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

61. A strong home currency can harm exports; exporters typically benefit from a weaker home country currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

62. An advantage of freely floating exchange rates is that a country with floating exchange rates is more insulated from unemployment problems in other countries.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

63. All European countries now use the euro as their currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

64. A country with a currency board does not have control over its local interest rates.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

65. Dollarization refers to the replacement of local currency with U.S. dollars.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

66. A country with fixed exchange rates often faces constraints on growth.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

67. The Bretton Woods Agreement called for the establishment of a single European currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

68. The European Central Bank is responsible for monetary policy in all countries that adopted the euro as its currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

69. A currency peg is insulated from economic or political conditions, such that the exchange rate in the market will only change if the country's government breaks the peg and sets a new exchange rate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

70. If foreign investors fear that a peg may be broken because of fund outflows from that country, they may attempt to purchase more of that currency before the peg is broken.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

71. Normally, when a pegged exchange rate is broken because of a crisis in that country, there is downward pressure on the local currency of that country.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

72. Which one of the following is a disadvantage of a fixed exchange rate system:

Importers are insulated from the risk that the currency will appreciate over time.

Management of an MNC is less difficult.

The government might change the value of the currency.

Exporters are insulated from the risk that the currency will depreciate over time.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

73. The Smithsonian Agreement called for a devaluation of the U.S. dollar by about ____ percent.

2.25

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

74. Which of the following did not occur as a result of Bretton Woods Agreement?

Each currency was valued in terms of gold.

Values of all currencies were fixed with respect to each other.

Currencies were allowed to fluctuate no more than 1% above or below the initially set rates.

The United States experienced no balance-of-trade deficits.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

75. Assume that Japan and the United States frequently trade with each other. Under the freely floating exchange rate system, high inflation in the U.S. will place ____ pressure on Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

upward; reduce; unchanged

upward; increase; higher

downward; reduce; unchanged

downward; increase; higher

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

76. Which one is not a disadvantage of a freely floating exchange rate system?

It can adversely affect a country that has high unemployment.

It can adversely affect a country that has high inflation.

The government may intervene to change the value of a given currency.

The exchange rate risk is high and may be costly to manage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

77. A "dirty" float represents a system of:

freely floating exchange rates.

fixed exchange rates.

floating exchange rates, but the central bank can manipulate the currency.

fixed exchange rates, but the central bank can manipulate the currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

78. If a U.S. firm plans to frequently purchases goods from Hong Kong over the next several years, it does not have to worry about exchange rate risk.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.App.

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

79. If the French government wants to decrease inflation in France, it will exchange foreign currency for euros.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

80. The European Central Bank is located in:

London.

Denmark.

Luxembourg.

Frankfurt.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

81. Which of the following is not true regarding the eurozone?

Members cannot set unique monetary policy individually.

Members cannot apply their own fiscal policies.

Members have to agree on the ideal monetary policy.

Its creation allowed for greater political union among its members.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

82. Assuming no credit risk, the interest rates among countries in the eurozone should be similar.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

83. Which of the following is not a reason for devaluation of a currency?

high inflation.

to reduce balance-of-trade deficit.

to decrease the amount of imports.

high unemployment.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

84. Which of the following is the most likely reason for revaluation of a currency?

To reduce inflation.

To stimulate the local economy.

To increase the amount of exports.

To increase balance-of-trade surplus.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

85. To weaken the dollar using sterilized intervention, the Fed will ____ U.S. dollars and simultaneously ____ Treasury securities.

buy; sell

sell; sell

sell; buy

buy; sell

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

86. The monetary policy implemented by the European Central Bank always results in favorable effects on all countries in the eurozone.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

87. If the Fed desires to strengthen the dollar without affecting the dollar money supply, it should:

exchange dollars for foreign currencies, and sell some of its existing Treasury security holdings for dollars.

exchange foreign currencies for dollars, and sell some of its existing Treasury security holdings for dollars.

exchange dollars for foreign currencies, and buy existing Treasury securities with dollars.

exchange foreign currencies for dollars, and buy existing Treasury securities with dollars.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

88. Assume that the Fed intervenes by exchanging dollars for euros in the foreign exchange market. This will cause an ____ U.S. dollars and an ____ euros.

inward shift in demand for; outward shift in supply of

inward shift in demand for; inward shift in supply of

outward shift in supply of; outward shift in demand for

outward shift in supply of; inward shift in demand for

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

89. If the Fed ____ the interest rates when inflationary expectations remain unchanged, the most likely result is that the value of dollar will ____ and the economy may ____.

increases; appreciate; weaken

decreases; appreciate; weaken

increases; depreciate; strengthen

decreases; appreciate; strengthen

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

90. A central bank may attempt to stimulate a stagnant economy by weakening the value of the currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

91. A common way to reduce inflation is to weaken the value of the domestic currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

92. If a speculator expects that the Fed will intervene by exchanging dollars for Japanese yen, she would most likely ____ to capitalize on this intervention.

purchase yen put options

sell yen futures contracts

purchase yen call options

buy U.S. Treasury bonds

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

93. If a speculator expects that the Fed will intervene by exchanging euros for U.S. dollars, she would most likely ____ to capitalize on this intervention.

purchase euro put options

purchase euro futures contracts

purchase yen call options

sell U.S. Treasury bonds

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

94. If the Fed decides to weaken the dollar utilizing unsterilized intervention, it should be aware that this action may backfire because it will increase money supply and thus increase inflation.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

95. A strong dollar places ____ pressure on U.S. inflation, which in turn places ____ pressure on U.S. interest rates, which in turn place ____ pressure on U.S. bond prices.

downward; upward; upward

downward; downward; upward

upward; upward; downward

upward; downward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

96. The currency of Country X is pegged to the currency of Country Y. Assume that Country Y's currency appreciates against the currency of Country Z. It is likely that Country X will export ____ to Country Z and import ____ from Country Z.

more; more

more; less

less; less

less; more

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

97. If the Bank of England announces that it will start to frequently intervene in order to reduce the fluctuations of British pound, the premiums on call and put options will increase.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

98. One of the best-known pegged exchange rate arrangements that was established by several European countries in April 1972 and was difficult to maintain is called the:

European Monetary System (EMS).

snake agreement.

Maastricht Treaty.

European Union.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

99. Direct intervention is usually more effective than indirect intervention.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

100. Currency devaluations have the potential to reduce unemployment, while currency revaluations have the potential to reduce inflation.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

101. Under a fixed exchange rate system, U.S. inflation would have a greater impact on inflation in other countries than it would under a freely floating exchange rate system.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

102. An advantage of a fixed exchange rate system is that governments are not required to constantly intervene in the foreign exchange market to maintain exchange rates within specified boundaries.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

103. In a freely floating exchange rate system, high U.S. inflation rate may be magnified. This is because the depreciation of the dollar would result in more expensive foreign imports, thus reducing foreign competition.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

104. Under the system known as the "dirty" float, official boundaries for the exchange rate exist, but they are wider than they are under a fixed exchange rate system.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

105. In order to stimulate a stagnant economy, a government operating under a managed float may attempt to weaken its currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

106. Assume the Fed desires to strengthen the dollar. If it buys dollars and simultaneously buys Treasury securities, this is an example of sterilized intervention.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

107. Using indirect intervention, the Fed attempts to affect the dollar's value indirectly by influencing the factors that determine it, such as interest rates.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

108. While a weak currency can reduce unemployment at home, it can also lead to higher inflation, as local companies are better able to raise prices.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

109. While a strong currency is a possible cure for high inflation, it may cause higher unemployment due to the attractive foreign prices that result from a strong home currency.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.04

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

110. Countries usually do not have difficulty maintaining a pegged exchange rate, even when they are experiencing major political or economic problems.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

111. Which of the following is not true regarding the Mexican peso crisis?

Mexico encouraged firms and consumers to buy an excessive amount of imports because the peso was stronger than it should have been.

Many speculators based in the U.S. speculated on the potential decline in the peso by investing their funds in Mexico.

In December of 1994, the central bank of Mexico allowed the peso to float freely.

The central bank of Mexico increased interest rates after the peso declined in value in order to prevent investors from withdrawing their investments in Mexico's debt securities.

All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

112. Which of the following is true regarding the euro?

Exchange rate risk between participating European currencies is completely eliminated, encouraging more trade and capital flows across European borders.

It allows for more consistent economic conditions across countries.

It prevents each country from conducting its own monetary policy.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

113. Among the reasons for government intervention are:

to smooth exchange rate movement.

to establish implicit exchange rate boundaries.

to respond to temporary disturbances.

all of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

114. Which of the following is not true regarding government intervention?

Under the direct method of intervention, an appreciation of the dollar would be accomplished by exchanging dollars for foreign currencies.

Under nonsterilized intervention, the Fed would intervene in the foreign exchange market without adjusting the money supply.

Under sterilized intervention, the Fed would intervene simultaneously in the foreign exchange and Treasury markets.

Under indirect intervention, the Fed would attempt to affect the dollar's value by indirectly influencing the factors that determine it, such as interest rates.

All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

115. Assume that the dollar has been consistently depreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using sterilized intervention. The Fed would

buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.

buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.

sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.

sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

116. Assume that the dollar has been consistently appreciating over a long period. The Fed decides to counteract this movement by intervening in the foreign exchange market using nonsterilized intervention. The Fed would

buy dollars with foreign currency and simultaneously sell Treasury securities for dollars.

buy dollars with foreign currency and simultaneously buy Treasury securities with dollars.

sell dollars for foreign currency and simultaneously sell Treasury securities for dollars.

sell dollars for foreign currency and simultaneously buy Treasury securities with dollars.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

117. Which of the following is an appropriate form of indirect intervention?

To strengthen the dollar, the Fed increases the money supply to lower interest rates.

To weaken the dollar, the Fed reduces the money supply to increase interest rates.

To strengthen the dollar in the long run, the Fed attempts to reduce U.S. inflation.

To weaken the dollar in the long run, the Fed attempts to reduce U.S. inflation.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.06.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

Chapter 7—International Arbitrage and Interest Rate Parity

1. Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.

forward realignment arbitrage

triangular arbitrage

covered interest arbitrage

locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

2. Due to ____, market forces should realign the spot rate of a currency among banks.

forward realignment arbitrage

triangular arbitrage

covered interest arbitrage

locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

3. Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.

forward realignment arbitrage

triangular arbitrage

covered interest arbitrage

locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

4. If interest rate parity exists, then ____ is not feasible.

forward realignment arbitrage

triangular arbitrage

covered interest arbitrage

locational arbitrage

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

5. In which case will locational arbitrage most likely be feasible?

One bank's ask price for a currency is greater than another bank's bid price for the currency.

One bank's bid price for a currency is greater than another bank's ask price for the currency.

One bank's ask price for a currency is less than another bank's ask price for the currency.

One bank's bid price for a currency is less than another bank's bid price for the currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

6. When using ____, funds are not tied up for any length of time.

covered interest arbitrage

locational arbitrage

triangular arbitrage

B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

7. When using ____, funds are typically tied up for a significant period of time.

covered interest arbitrage

locational arbitrage

triangular arbitrage

B and C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

8. Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:

should exhibit a discount.

should exhibit a premium.

should be zero (i.e., it should equal its spot rate).

B or C

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

9. If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound's spot rate, then:

U.S. investors could possibly benefit from covered interest arbitrage.

British investors could possibly benefit from covered interest arbitrage.

neither U.S. nor British investors could benefit from covered interest arbitrage.

A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

10. If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:

U.S. investors could possibly benefit from covered interest arbitrage.

British investors could possibly benefit from covered interest arbitrage.

neither U.S. nor British investors could benefit from covered interest arbitrage.

A and B

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

11. Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?

downward pressure on the euro's spot rate.

downward pressure on the euro's forward rate.

downward pressure on the U.S. interest rate.

upward pressure on the euro's interest rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

12. Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?

upward pressure on the Swiss franc's spot rate.

upward pressure on the U.S. interest rate.

downward pressure on the Swiss interest rate.

upward pressure on the Swiss franc's forward rate.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

13. Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attempt to use covered interest arbitrage, what forces should occur?

spot rate of peso increases; forward rate of peso decreases.

spot rate of peso decreases; forward rate of peso increases.

spot rate of peso decreases; forward rate of peso decreases.

spot rate of peso increases; forward rate of peso increases.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

14. Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$15,385.

$15,625.

$22,136.

$31,250.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

15. Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:

larger will be the forward discount of the foreign currency.

larger will be the forward premium of the foreign currency.

smaller will be the forward premium of the foreign currency.

smaller will be the forward discount of the foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

16. Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound

$1.30

90-day forward rate of pound

$1.28

3-month deposit rate in U.S.

3-month deposit rate in Great Britain

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

$1,024,000.

$1,030,000.

$1,040,000.

$1,034,000.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

17. Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:

British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.

U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.

U.S. investors will earn 15% whether they use covered interest arbitrage or invest in the U.S.

U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

18. Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered on U.S. dollars

12%

1-year deposit rate offered on Singapore dollars

10%

1-year forward rate of Singapore dollars

$.412

Spot rate of Singapore dollar

$.400

Given this information:

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

19. Assume the following information:

Current spot rate of New Zealand dollar

$.41

Forecasted spot rate of New Zealand dollar 1 year from now

$.43

One-year forward rate of the New Zealand dollar

$.42

Annual interest rate on New Zealand dollars

Annual interest rate on U.S. dollars

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

about 11.97

about 9.63

about 11.12

about 11.64

about 10.63

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

20. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid

Ask

Bank A

$1.41

$1.42

Bank B

$1.39

$1.40

As locational arbitrage occurs:

the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will increase.

the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B will decrease.

the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will decrease.

the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

21. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$11,764.

−$11,964.

$36,585.

$24,390.

$18,219.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

22. Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

larger will be the forward discount of the foreign currency.

larger will be the forward premium of the foreign currency.

smaller will be the forward premium of the foreign currency.

smaller will be the forward discount of the foreign currency.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.

appreciate; depreciate

depreciate; appreciate

depreciate; depreciate

appreciate; appreciate

remain stable; appreciate

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

24. Assume the following information:

Spot rate today of Swiss franc

$.60

1-year forward rate as of today for Swiss franc

$.63

Expected spot rate 1 year from now

$.64

Rate on 1-year deposits denominated in Swiss francs

Rate on 1-year deposits denominated in U.S. dollars

From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.

5.00

12.35

15.50

14.13

11.22

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

25. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S. $

$.32

Exchange rate of pound in U.S. $

$1.50

Exchange rate of pound in Singapore dollars

S$4.50

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?

2.0.

2.40.

.80.

.50.

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

27. Assume that the euro's interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?

Americans using covered interest arbitrage earn the same rate of return as Germans who attempt covered interest arbitrage.

Americans who invest in the U.S. earn the same rate of return as Germans who attempt covered interest arbitrage.

Americans who invest in the U.S. earn the same rate of return as Germans who invest in Germany

A and B

None of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:

Swiss investors who attempt covered interest arbitrage earn the same rate of return as if they invested in Switzerland.

U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.

A and B

none of the above

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

29. Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound's spot rate, and ____ pressure on the pound's forward rate.

downward; downward

downward; upward

upward; downward

upward; upward

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

30. Assume that interest rate parity holds, and the euro's interest rate is 9% while the U.S. interest rate is 12%. Then the euro's interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro's forward ____ will ____ in order to maintain interest rate parity.

discount; increase

discount; decrease

premium; increase

premium; decrease

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

31. Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$7,067.

$8,556.

$10,114.

$12,238.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

32. Assume the following information:

You have $1,000,000 to invest:

Current spot rate of pound

$1.60

90-day forward rate of pound

$1.57

3-month deposit rate in U.S.

3-month deposit rate in U.K.

If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?

$1,020,500.

$1,045,600.

$1,073,330.

$1,094,230.

$1,116,250.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

33. Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks

12%

1-year deposit rate offered on Swiss francs

10%

1-year forward rate of Swiss francs

$.62

Spot rate of Swiss franc

$.60

Given this information:

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

34. Assume the following information:

Current spot rate of Australian dollar

$.64

Forecasted spot rate of Australian dollar 1 year from now

$.59

1-year forward rate of Australian dollar

$.62

Annual interest rate for Australian dollar deposit

Annual interest rate in the U.S.

Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.

about 6.00

about 9.00

about 7.33

about 8.14

about 5.59

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

35. Assume the following bid and ask rates of the pound for two banks as shown below:

Bid

Ask

Bank C

$1.61

$1.63

Bank D

$1.58

$1.60

As locational arbitrage occurs:

the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will increase.

the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D will decrease.

the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will decrease.

the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D will increase.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?

$10,003.

$12,063.

$14,441.

$16,393.

$18,219.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

37. Assume the following information for a bank quoting on spot exchange rates:

Exchange rate of Singapore dollar in U.S. $

$.60

Exchange rate of pound in U.S. $

$1.50

Exchange rate of pound in Singapore dollars

S$2.6

Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.

The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.

The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?

$2,041,667.

$9,804.

$500.

$1,639.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

39. Which of the following is an example of triangular arbitrage initiation?

buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.

buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20.

buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.

converting funds to a foreign currency and investing the funds overseas.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?

A$39.93.

A$25,043.48.

A$553.00.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

41. National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price

Quoted Ask Price

Value of a British pound (£) in $

$1.61

$1.62

Value of a New Zealand dollar (NZ$) in $

$.55

$.56

Value of a British pound in

New Zealand dollars

NZ$2.95

NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

$77.64.

$197.53.

$15.43.

$111.80.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

42. Assume the following information:

You have $900,000 to invest:

Current spot rate of Australian dollar (A$)

$.62

180-day forward rate of the Australian dollar

$.64

180-day interest rate in the U.S.

3.5%

180-day interest rate in Australia

3.0%

If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?

$56,903.

$61,548.

$27,000.

$31,500.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

43. Assume the following information:

You have $400,000 to invest:

Current spot rate of Sudanese dinar (SDD)

$.00570

90-day forward rate of the dinar

$.00569

90-day interest rate in the U.S.

4.0%

90-day interest rate in Sudan

4.2%

If you conduct covered interest arbitrage, what amount will you have after 90 days?

$416,000.00.

$416,800.00.

$424,242.86.

$416,068.77.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

Exhibit 7-1

Assume the following information:

You have $300,000 to invest:

The spot bid rate for the euro (€) is $1.08

The spot ask quote for the euro is $1.10

The 180-day forward rate (bid) of the euro is $1.08

The 180-day forward rate (ask) of the euro is $1.10

The 180-day interest rate in the U.S. is 6%

The 180-day interest rate in Europe is 8%

44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?

$318,109.10.

$330,000.00.

$312,218.20.

$323,888.90.

none of the above

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180 days? Is covered interest arbitrage feasible in this situation?

7.96%; feasible

6.04%; feasible

6.04%; not feasible

4.07%; not feasible

10.00%; feasible

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

46. According to interest rate parity (IRP):

the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.

the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.

the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.

the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso's forward ____ will ____.

premium; increase

discount; decrease

discount; increase

premium; decrease

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

48. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

49. For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

50. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

51. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

52. The interest rate on euros is 8%. The interest rate in the U.S. is 5%. The euro's forward rate should exhibit a premium of about 3%.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

53. Capitalizing on discrepancies in quoted prices involving no risk and no investment of funds is referred to as interest rate parity.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

54. Realignment in the exchange rates of banks will eliminate locational arbitrage. More specifically, market forces will increase the ask rate of the bank from which the currency was bought to conduct locational arbitrage and will decrease the bid rate of the bank to which the currency was sold to conduct locational arbitrage.

a. True

b. False

PTS: 1 DIF: Moderate

OBJ: INFM.MADU.15.07.01 NAT: BUSPROG.INFM.MADU.15.03

STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge

55. Locational arbitrage involves investing in a foreign country and covering against exchange rate risk by engaging in forward contracts.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

56. To capitalize on high foreign interest rates using covered interest arbitrage, a U.S. investor would convert dollars to the foreign currency, invest in the foreign country, and simultaneously sell the foreign currency forward.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

57. If interest rate parity (IRP) exists, then the rate of return achieved from covered interest arbitrage should be equal to the rate available in the foreign country.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

58. If interest rate parity (IRP) exists, then triangular arbitrage will not be possible.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

59. Forward rates are driven by the government rather than market forces.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

60. The foreign exchange market is an over-the-counter market.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

61. The yield curve of every country has its own unique shape.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.03

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

62. Assume the following information:

U.S. investors have $1,000,000 to invest:

1-year deposit rate offered by U.S. banks

10%

1-year deposit rate offered on British pounds

13.5%

1-year forward rate of Swiss francs

$1.26

Spot rate of Swiss franc

$1.30

Given this information:

interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.

interest rate parity doesn't exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically.

PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

63. If quoted exchange rates are the same across different locations, then ____ is not feasible.

triangular arbitrage

covered interest arbitrage

locational arbitrage

A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

64. Points above the IRP line represent situations where:

covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.

covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.

covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

covered interest arbitrage is not feasible for neither domestic nor foreign investors.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

65. Points below the IRP line represent situations where:

covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.

covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.

covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.

covered interest arbitrage is not feasible for neither domestic nor foreign investors.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?

transaction costs.

political risk.

differential tax laws.

all of the above.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.

discount; 2.73

premium; 2.73

discount; 3.65

premium; 3.65

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

68. Assume the following information:

Exchange rate of Japanese yen in U.S. $

$.011

Exchange rate of euro in U.S. $

$1.40

Exchange rate of euro in Japanese yen

140 yen

What will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?

$100,000

−$90,909

10%

−9.09%

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

69. Assume the following information:

Quoted Bid Price

Quoted Ask Price

Value of an Australian dollar (A$) in $

$0.67

$0.69

Value of Mexican peso in $

$.074

$.077

Value of an Australian dollar in

Mexican pesos

8.2

8.5

Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?

$6,133

$2,368

$6,518

$13,711

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

70. The interest rate on yen is 7%. The interest rate in the U.S. is 9%. The yen's forward rate should exhibit a premium of about 2%.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

71. The interest rate on pounds in the U.K. is 8%. The interest rate in the U.S. is 5%. Interest rate parity exists. U.S. investors will earn a lower return domestically than British investors earn domestically.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

72. Assume that the real interest rate in the U.S. and in the U.K. is 3%. The expected annual inflation in the U.S. is 3%, while in the U.K. it is 4%. The forward rate on the pound should exhibit a premium of about 1%.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

73. If the cross exchange rate of two nondollar currencies implied by their individual spot rates with respect to the dollar is less than the cross exchange rate quoted by a bank, locational arbitrage is possible.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

74. For locational arbitrage to be possible, one bank's ask rate must be higher than another bank's bid rate for a currency.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

75. Technology enables more consistent prices among banks and reduces the likelihood of significant discrepancies in foreign exchange quotations among locations.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

76. Assume locational arbitrage is possible and involves two different banks. The realignment that would occur due to market forces would increase one bank's ask rate and would decrease the other bank's bid rate.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

77. Locational arbitrage explains why prices among banks at different locations will not normally differ by a significant amount.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

78. Cross exchange rates are used to determine the relationship between the dollar and two nondollar currencies.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

79. Triangular arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

80. The equilibrium state in which covered interest arbitrage is no longer possible is called interest rate parity (IRP).

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

81. If interest rate parity exists, then the rate of return achieved from covered interest arbitrage should be equal to the interest rate available in the foreign country.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

82. Interest rate parity (IRP) states that the foreign currency's forward rate premium or discount is roughly equal to the interest rate differential between the U.S. and the foreign country.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

83. The interest rate in South Africa is 8%. The interest rate in the U.S. is 5%. The South African forward rate should exhibit a premium of about 3%.

a. True

b. False

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

84. The larger the degree by which the foreign interest rate exceeds the home interest rate, the larger will be the forward discount of the foreign currency specified by the interest rate parity (IRP) formula.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

85. For points lying to the left of the interest rate parity (IRP) line, covered interest arbitrage is not possible from a U.S. investor's perspective, but is possible from a foreign investor's perspective.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

86. If interest rate parity (IRP) exists, then foreign investors will earn the same returns as U.S. investors.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

87. If interest rate parity (IRP) does not hold, there is still the possibility that covered interest arbitrage is not worthwhile because of such factors as transaction costs, currency restrictions, and differential tax laws.

a. True

b. False

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

88. Which of the following is not mentioned in the text as a form of international arbitrage?

Locational arbitrage

Triangular arbitrage

Transactional arbitrage

Covered interest arbitrage

All of the above are mentioned in the text as forms of international arbitrage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

89. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?

$2,041,667

$9,804

$500

$1,639

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

90. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:

buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.

buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.

buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.

buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.

Locational arbitrage is not possible in this case.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Knowledge

91. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs' actions, the following adjustments must take place.

One bank's ask price will rise and the other bank's bid price will fall.

One bank's ask price will fall and the other bank's bid price will rise.

One bank's bid/ask spread will widen and the other bank's bid/ask spread will fall.

A and C

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

92. Which of the following is an example of triangular arbitrage initiation?

Buying a currency at one bank's ask and selling at another bank's bid, which is higher than the former bank's ask.

Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.

Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.

Converting funds to a foreign currency and investing the funds overseas.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

93. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?

$6,053.27

$5,030.45

$6,090.13

Triangular arbitrage is not possible in this case.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

94. National Bank quotes the following for the British pound and the New Zealand dollar:

Quoted Bid Price

Quoted Ask Price

Value of a British pound (£) in $

$1.61

$1.62

Value of a New Zealand dollar (NZ$) in $

$0.55

$0.56

Value of a British pound in

New Zealand dollars

NZ$2.95

NZ$2.96

Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?

$77.64

$197.53

$15.43

$111.80

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Application

95. Which of the following is not true regarding covered interest arbitrage?

Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.

Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.

Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country.

If covered interest arbitrage is possible, you can guarantee a return on your funds that exceeds the returns you could achieve domestically.

All of the above are true regarding covered interest arbitrage.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

96. Which of the following is not true regarding covered interest arbitrage?

Covered interest arbitrage is a reason for observing interest rate parity (IRP).

If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.

When interest rate parity holds, covered interest arbitrage is not possible.

When interest rate disparity exists, covered interest arbitrage may not be profitable.

All of the above are true.

PTS: 1 DIF: Easy OBJ: INFM.MADU.15.07.01

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Analysis

97. Which of the following is not true regarding interest rate parity (IRP)?

When interest rate parity holds, covered interest arbitrage is not possible.

When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country's currency should exhibit a discount.

When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country's currency should exhibit a premium.

When covered interest arbitrage is not feasible, interest rate parity must hold.

All of the above are true.

PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.07.02

NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02

KEY: Bloom's: Comprehension

#FIN 535 Week 5 Midterm Exam – Strayer New

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1 Which of the following statements is CORRECT?

The New York Stock Exchange is an auction market with a physical location.

Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.

If an investor sells shares of stock through a broker, then this would be a primary market transaction.

Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market.

While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

2 Which of the following statements is CORRECT?

It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.

Corporate shareholders are exposed to unlimited liability.

Corporations generally face fewer regulations than sole proprietorships.

Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.

Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

3 Which of the following statements is CORRECT?

While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

A security whose value is derived from the price of some other "underlying" asset is called a liquid security.

Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.

Money markets are markets for common stocks and long-term debt.

The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.

4 Which of the following statements is CORRECT?

Capital market instruments include both long-term debt and common stocks.

An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.

The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.

If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

5 Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Corporations generally find it relatively difficult to raise large amounts of capital.

Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.

Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.

Corporate investors are exposed to unlimited liability.

Corporations generally face relatively few regulations.

6 You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

This is an example of an exchange of physical assets.

This is an example of a primary market transaction.

This is an example of a direct transfer of capital.

This is an example of a money market transaction.

This is an example of a derivatives market transaction

7 Money markets are markets for

Foreign stocks.

Consumer automobile loans.

U.S. stocks.

Short-term debt securities.

Long-term bonds.

8 Which of the following statements is CORRECT?

If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.

If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.

The IPO market is a subset of the secondary market.

Only institutions, and not individuals, can participate in derivatives market transactions.

As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

9 DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

The firm's reported net income would increase.

The firm's operating income (EBIT) would increase.

The firm's taxable income would increase.

The firm's net cash flow would increase.

The firm's tax payments would increase.

10 Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?

The company repurchased 20% of its common stock.

The company sold a new issue of bonds.

The company made a large investment in new plant and equipment.

The company paid a large dividend.

The company had high amortization expenses.

11 Which of the following statements is CORRECT?

The statement of cash flows shows how much the firm's cash⎯the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)⎯increased or decreased during a given year.

The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.

The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.

The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.

The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

12 Which of the following statements is CORRECT?

One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.

If a firm reports positive net income, its EVA must also be positive.

One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.

One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

Actions that increase reported net income will always increase net cash flow.

13 The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

LeMond's tax liability for the year will be lower.

LeMond's taxable income will be lower.

LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year.

LeMond's cash position will improve (increase).

LeMond's reported net income after taxes for the year will be lower.

14 Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?

The company purchases a new piece of equipment.

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

15 Which of the following statements is CORRECT?

All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.

The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.

All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.

Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.

Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

16 Which of the following statements is CORRECT?

The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.

MVA gives us an idea about how much value a firm's management has added during the last year.

MVA stands for market value added, and it is defined as follows:

MVA = (Shares outstanding)(Stock price) + Book value of common equity.

EVA stands for economic value added, and it is defined as follows:

EVA = EBIT(1 - T) - (Investor-supplied op. capital) x (A - T cost of capital).

EVA gives us an idea about how much value a firm's management has added over the firm's life.

17 Which of the following items cannot be found on a firm's balance sheet under current liabilities?

Accrued payroll taxes.

Accounts payable.

Short-term notes payable to the bank.

Accrued wages.

Cost of goods sold.

18 Which of the following statements is CORRECT?

If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.

A reduction in inventories held would have no effect on the current ratio.

An increase in inventories would have no effect on the current ratio.

If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

19 Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?

The total assets turnover decreases.

The TIE declines.

The DSO increases.

The EBITDA coverage ratio increases.

The current and quick ratios both decline.

20 Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

The times interest earned ratio will decrease.

The ROA will decline.

Taxable income will decrease.

The tax bill will increase.

Net income will decrease.

21 Which of the following would indicate an improvement in a company's financial position, holding other things constant?

The current and quick ratios both increase.

The inventory and total assets turnover ratios both decline.

The debt ratio increases.

The profit margin declines.

The EBITDA coverage ratio declines.

22 The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?

The company's debt ratio increased.

The company's current ratio increased.

The company's times interest earned ratio decreased.

The company's basic earning power ratio increased.

The company's equity multiplier increased.

23 If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?

Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

24 Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?

2.03

2.13

2.25

2.36

2.48

25 Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT?

Company A trades at a higher P/E ratio.

Company A probably has fewer growth opportunities.

Company A is probably judged by investors to be riskier.

Company A must have a higher market-to-book ratio.

Company A must pay a lower dividend.

FIN 534 Midterm Exam Part 2

1 Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)

The outstanding balance declines at a slower rate in the later years of the loan's life.

The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.

Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.

Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.

The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

2 Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

3 Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?

$205.83

$216.67

$228.07

$240.08

$252.08

4 You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?

The discount rate increases.

The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.

The discount rate decreases.

The riskiness of the investment's cash flows increases.

The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

5 Which of the following statements is CORRECT?

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.

If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.

The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

6 A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is CORRECT?

The proportion of interest versus principal repayment would be the same for each of the 7 payments.

The annual payments would be larger if the interest rate were lower.

If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan.

The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.

The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

7 Which of the following statements is CORRECT?

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.

Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.

Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.

If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

8 A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?

The bond is selling below its par value.

The bond is selling at a discount.

If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.

The bond's current yield is greater than 9%.

If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.

9 Which of the following statements is NOT CORRECT?

All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.

If a bond is selling at its par value, its current yield equals its yield to maturity.

If a bond is selling at a premium, its current yield will be greater than its yield to maturity.

All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.

If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

10 A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT?

The bond's yield to maturity is 9%.

The bond's current yield is 9%.

If the bond's yield to maturity remains constant, the bond will continue to sell at par.

The bond's current yield exceeds its capital gains yield.

The bond's expected capital gains yield is positive.

Which of the following statements is CORRECT?

If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.

If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.

If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.

If a coupon bond is selling at a premium, its current yield equals its yield to maturity.

If a coupon bond is selling at par, its current yield equals its yield to maturity.

12 A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?

If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

The bond's coupon rate is less than 8%.

If the yield to maturity increases, then the bond's price will increase.

If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.

The bond's current yield is less than 8%.

13 Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?

One year from now, Bond A's price will be higher than it is today.

Bond A's current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

14 Which of the following statements is CORRECT?

The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.

Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future.

If investors become less risk averse, the slope of the Security Market Line will increase.

If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.

The slope of the SML is determined by the value of beta.

15 Which of the following statements is CORRECT?

A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.

A two-stock portfolio will always have a lower beta than a one-stock portfolio.

If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.

A stock with an above-average standard deviation must also have an above-average beta.

A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

16 Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?

The portfolio's expected return is 15%.

The portfolio's standard deviation is greater than 20%.

The portfolio's beta is greater than 1.2.

The portfolio's standard deviation is 20%.

The portfolio's beta is less than 1.2.

17 Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must be true, according to the CAPM?

Stock Y's realized return during the coming year will be higher than Stock X's return.

If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.

Stock Y's return has a higher standard deviation than Stock X.

If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.

If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

18 Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?

The required return on a stock with beta > 1.0 will increase.

The return on "the market" will remain constant.

The return on "the market" will increase.

The required return on a stock with beta < 1.0 will decline.

The required return on a stock with beta = 1.0 will not change.

19 Which of the following statements is CORRECT?

The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.

An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks.

Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.

An investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.

An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.

20 Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

6.01%

6.17%

6.33%

6.49%

6.65%

21 A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?

$23.11

$23.70

$24.31

$24.93

$25.57

22 Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Stock B must have a higher dividend yield than Stock A.

Stock A must have a higher dividend yield than Stock B.

If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.

Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.

If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

23 Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Price $25 $40

Expected growth 7% 9%

Expected return 10% 12%

The two stocks could not be in equilibrium with the numbers given in the question.

A's expected dividend is $0.50.

B's expected dividend is $0.75.

A's expected dividend is $0.75 and B's expected dividend is $1.20.

The two stocks should have the same expected dividend.

24 Which of the following statements is NOT CORRECT?

The corporate valuation model discounts free cash flows by the required return on equity.

The corporate valuation model can be used to find the value of a division.

An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.

Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.

The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

25 Which of the following statements is CORRECT?

Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.

The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.

One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.

One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

FIN 534 Midterm Exam Solution

CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL ENVIRONMENT

TRUE/FALSE

1.The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Firm organizationKEY:Bloom’s: Knowledge

2.The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not.

3.There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract large amounts of capital and thus to grow to a very large size.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:PartnershipKEY:Bloom’s: Knowledge

4.Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited personal liability for the business' debts.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:ProprietorshipKEY:Bloom’s: Knowledge

5.One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Limited liabilityKEY:Bloom’s: Knowledge

6.If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock and thus shareholders' wealth.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 1-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Value maximizationKEY:Bloom’s: Knowledge

7.If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms or individuals, Firm A is a financial intermediary.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Financial intermediariesKEY:Bloom’s: Knowledge

8.If an individual investor buys or sells a currently outstanding stock through a broker, this is a primary market transaction.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 1-8NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: Knowledge

9.Recently, Hale Corporation announced the sale of 2.5 million newly issued shares of its stock at a price of $21 per share. Hale sold the stock to an investment banker, who in turn sold it to individual and institutional investors. This is a primary market transaction.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-8NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: Knowledge

10.One of the functions of NYSE specialists is to facilitate trading by keeping an inventory of shares of the stocks in which they specialize, buying when investors want to sell and selling when they want to buy. They change the bid and ask prices of the securities so as to keep supply and demand in balance.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 1-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Stock market transactionsKEY:Bloom’s: Knowledge

11.The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:PartnershipKEY:Bloom’s: Comprehension

12.The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively formed, are two key advantages to that form of business.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:ProprietorshipKEY:Bloom’s: Comprehension

MULTIPLE CHOICE

13.Which of the following statements is CORRECT?a.One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.b.Sole proprietorships are subject to more regulations than corporations.c.In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.d.Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.e.Corporations of all types are subject to the corporate income tax.

ANS:D

PTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Firm organizationKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

14.Which of the following statements is CORRECT?a.One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.b.It is generally easier to transfer one's ownership interest in a partnership than in a corporation.c.One of the advantages of the corporate form of organization is that it avoids double taxation.d.One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., "one person, one vote."e.Corporations of all types are subject to the corporate income tax.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Firm organizationKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

15.Which of the following statements is CORRECT?a.It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.b.Corporations face fewer regulations than sole proprietorships.c.One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.d.One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.e.If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

ANS:D

16.Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a regular corporation. Which of the following statements is CORRECT?a.Assuming Cheers is profitable, less of its income will be subject to federal income taxes.b.Cheers will now be subject to fewer regulations.c.Cheers' shareholders (the ex-partners) will now be exposed to less liability.d.Cheers' investors will be exposed to less liability, but they will find it more difficult to transfer their ownership.e.Cheers will find it more difficult to raise additional capital.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Firm organizationKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

17.Which of the following statements is CORRECT?a.It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship.b.Corporate shareholders are exposed to unlimited liability.c.Corporations generally face fewer regulations than sole proprietorships.d.Corporate shareholders are exposed to unlimited liability, and this factor may be compounded by the tax disadvantages of incorporation.e.Shareholders in a regular corporation (not an S corporation) pay higher taxes than owners of an otherwise identical proprietorship.

ANS:A

18.Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?a.Corporations generally find it relatively difficult to raise large amounts of capital.b.Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership.c.Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.d.Corporate investors are exposed to unlimited liability.e.Corporations generally face relatively few regulations.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Corporate form of organizationKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

19.You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?a.This is an example of an exchange of physical assets.b.This is an example of a primary market transaction.c.This is an example of a direct transfer of capital.d.This is an example of a money market transaction.e.This is an example of a derivatives market transaction

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 1-4NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial transactionsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

20.Which of the following statements is CORRECT?a.If expected inflation increases, interest rates are likely to increase.b.If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.c.If companies have fewer good investment opportunities, interest rates are likely to increase.d.Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.e.Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 1-6NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Interest ratesKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

21.Which of the following statements is CORRECT?a.In Europe and Asia hedge funds are legal, but they are not permitted to operate in the United States.b.Hedge funds have more in common with commercial banks than with any other type of financial institution.c.Hedge funds have more in common with investment banks than with any other type of financial institution.d.In the United States hedge funds are legal, but in Europe and Asia they are not permitted to operate.e.The justification for the "light" regulation of hedge funds is that only "sophisticated" investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 1-7NAT:BUSPROG: AnalyticSTA:DISC: Investments and hybrid financingLOC:TBATOP:Hedge fundsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

22.Money markets are markets fora.Foreign stocks.b.Consumer automobile loans.c.U.S. stocks.d.Short-term debt securities.e.Long-term bonds.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 1-8NAT:BUSPROG: AnalyticSTA:DISC: Investments and hybrid financingLOC:TBATOP:Money marketsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

23.Which of the following is a primary market transaction?a.You sell 200 shares of Johnson & Johnson stock on the NYSE through your broker.b.Johnson & Johnson issues 2,000,000 shares of new stock and sells them to the public through an investment banker.c.You buy 200 shares of Johnson & Johnson stock from your younger brother. You just give him cash and he gives you the stock⎯the trade is not made through a broker.d.One financial institution buys 200,000 shares of Johnson & Johnson stock from another institution. An investment banker arranges the transaction.e.You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of Johnson & Johnson shares on the NYSE.

ANS:

PTS:1DIF:Difficulty: EasyOBJ:LO: 1-8NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

24.Which of the following statements is CORRECT?a.If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction.b.If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction.c.The IPO market is a subset of the secondary market.d.Only institutions, and not individuals, can participate in derivatives market transactions.e.As they are generally defined, money market transactions involve debt securities with maturities of less than one year.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 1-8NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

25.You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:a.A futures market transaction.b.A primary market transaction.c.A secondary market transaction.d.A money market transaction.e.An over-the-counter market transaction.

ANS:C

26.Which of the following statements is CORRECT?a.The New York Stock Exchange is an auction market with a physical location.b.Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.c.If an investor sells shares of stock through a broker, then this would be a primary market transaction.d.Consumer automobile loans are evidenced by legal documents called "promissory notes," and these individual notes are traded in the money market.e.While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 1-9NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

27.Which of the following statements is CORRECT?a.Capital market instruments include both long-term debt and common stocks.b.An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.c.The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.d.If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.e.While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

28.Which of the following statements is CORRECT?a.While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.b.A security whose value is derived from the price of some other "underlying" asset is called a liquid security.c.Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.d.Money markets are markets for common stocks and long-term debt.e.The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 1-9NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial marketsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

29.One drawback of switching from a partnership to the corporate form of organization is the following:a.It subjects the firm to additional regulations.b.It cannot affect the amount of the firm's operating income that goes to taxes.c.It makes it more difficult for the firm to raise additional capital.d.It makes the firm's investors subject to greater potential personal liabilities.e.It makes it more difficult for the firm's investors to transfer their ownership interests.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Corporate form of organizationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

30.Which of the following statements is CORRECT?a.The main method of transferring ownership interest in a corporation is by means of a hostile takeover.b.Two key advantages of the corporate form over other forms of business organization are unlimited liability and limited life.c.A corporation is a legal entity that is generally created by a state; its life and existence is separate from the lives of its individual owners and managers.d.Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.e.Although its stockholders are insulated by limited legal liability, the corporation's legal status does not protect the firm's managers in the same way; i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Corporate form of organizationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

31.Which of the following statements is CORRECT?a.In a regular partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.b.Attracting large amounts of capital is more difficult for partnerships than for corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.c.A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.d.The limited partners in a limited partnership have voting control, while the general partner has operating control over the business. Also, the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.e.A major disadvantage of all partnerships compared to all corporations is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Partnership form of organizationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

32.Which of the following statements is CORRECT?a.Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.b.In a regular partnership, liability for the firm's debts is limited to the amount a particular partner has invested in the business.c.A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.d.Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.e.A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Partnership form of organizationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

33.Which of the following statements is CORRECT?a.Most businesses (by number and total dollar sales) are organized as partnerships or proprietorships because it is easier to set up and operate in one of these forms rather than as a corporation. However, if the business gets very large, it becomes advantageous to convert to a corporation, mainly because corporations have important tax advantages over proprietorships and partnerships.b.Due to limited liability, unlimited lives, and ease of ownership transfer, the vast majority of U.S. businesses (in terms of number of businesses) are organized as corporations.c.Most business (measured by dollar sales) is conducted by corporations in spite of large corporations' often less favorable tax treatment, due to legal considerations related to ownership transfers and limited liability.d.Large corporations are taxed more favorably than sole proprietorships.e.Corporate stockholders are exposed to unlimited liability.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Firm organizationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

34.Jane Doe, who has substantial personal wealth and income, is considering the possibility of starting a new business in the chemical waste management field. She will be the sole owner, and she has enough funds to finance the operation. The business will have a relatively high degree of risk, and it is expected that the firm will incur losses for the first few years. However, the prospects for growth and positive future income look good, and Jane plans to have the firm pay out all of its income as dividends to her once it is well established. Which of the legal forms of business organization would probably best suit her needs?a.Proprietorship, because of ease of entry.b.S corporation, to gain some tax advantages and also to obtain limited liability.c.Partnership, but only if she needs additional capital.d.Regular corporation, because of the limited liability.e.In this situation, the various forms of organization seem equally desirable.

ANS:

35.Which of the following statements is CORRECT?a.The corporate bylaws are a standard set of rules established by the state of incorporation. These rules are identical for all corporations in the state, and their purpose is to ensure that the firm's managers run the firm in accordance with state laws.b.The corporate charter is a standard document prescribed by the state of incorporation, and its purpose is to ensure that the firm's managers run the firm in accordance with state laws. Procedures for electing corporate directors are contained in bylaws, while the declaration of the activities that the firm will pursue and the number of directors are included in the corporate charter.c.Companies must establish a home office, or domicile, in a particular state, and that state must be the one in which most of their business (sales, manufacturing, and so forth) is conducted.d.Attorney fees are generally involved when a company develops its charter and bylaws, but since these documents are voluntary, a new corporation can avoid these costs by deciding not to have either a charter or bylaws.e.The corporate charter is concerned with things like what business the company will engage in, whereas the bylaws are concerned with things like procedures for electing the board of directors.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-2NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Corporate charter and bylawsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

36.With which of the following statements would most people in business agree?a.The short-run profits of a corporation will almost always increase if the firm takes actions the government has determined are in the nation's best interests.b.Government agencies and firms almost always agree with one another regarding the restrictions that should be placed on hiring and firing employees.c.Although people's moral characters are probably developed before they get into a business school, it is still useful for business schools to cover ethics, including giving students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.d.Developing a formal set of rules defining ethical and unethical behavior is not useful for a large corporation. Such rules generally can't be applied in many specific instances, so it is better to deal with ethical issues on a case-by-case basis.e.Because of the courage it takes to blow the whistle, "whistle blowers" are generally promoted more rapidly than other employees.

ANS:

37.The primary operating goal of a publicly-owned firm interested in serving its stockholders should be toa.Maximize the stock price per share over the long run, which is the stock's intrinsic value.b.Maximize the firm's expected EPS.c.Minimize the chances of losses.d.Maximize the firm's expected total income.e.Maximize the stock price on a specific target date.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 1-3NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Goal of firmKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

38.Which of the following statements is CORRECT?a.The financial manager's proper goal should be to attempt to maximize the firm's expected cash flows, since that will add the most to the individual shareholders' wealth.b.The financial manager should seek that combination of assets, liabilities, and capital that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year.c.The riskiness inherent in a firm's earnings per share (EPS) depends on the characteristics of the projects the firm selects, and thus on the firm's assets. However, EPS is not affected by the manner in which those assets are financed.d.Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.e.Large, publicly owned firms like IBM and GE are controlled by their management teams. Ownership is generally widely dispersed; hence managers have great freedom in how they run the firm. Managers may operate in stockholders' best interests, but they also may operate in their own personal best interests. As long as they stay within the law, there is no way to either force or motivate managers to act in the stockholders' best interests.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-3NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Corporate goals and controlKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

39.Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?a.Prices and interest rates would both rise.b.Prices would rise and interest rates would decline.c.Prices and interest rates would both decline.d.There would be no changes in either prices or interest rates.e.Prices would decline and interest rates would rise.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-6NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Security prices and interest ratesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

40.Which of the following would be most likely to lead to higher interest rates on all debt securities in the economy?a.Households start saving a larger percentage of their income.b.The economy moves from a boom to a recession.c.The level of inflation begins to decline.d.Corporations step up their expansion plans and thus increase their demand for capital.e.The Federal Reserve uses monetary policy in an attempt to stimulate the economy.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-6NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Interest ratesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

41.Which of the following factors would be most likely to lead to an increase in interest rates in the economy?a.Households reduce their consumption and increase their savings.b.The Federal Reserve decides to try to stimulate the economy.c.There is a decrease in expected inflation.d.The economy falls into a recession.e.Most businesses decide to modernize and expand their manufacturing capacity, and to install new equipment to reduce labor costs.

ANS:

42.Which of the following statements is CORRECT?a.If General Electric were to issue new stock this year it would be considered a secondary market transaction since the company already has stock outstanding.b.Capital market transactions only include preferred stock and common stock transactions.c.The distinguishing feature between spot markets versus futures markets transactions is the maturity of the investments. That is, spot market transactions involve securities that have maturities of less than one year, whereas futures markets transactions involve securities with maturities greater than one year.d.Both Nasdaq "dealers" and NYSE "specialists" hold inventories of stocks.e.An electronic communications network (ECN) is a physical location exchange.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-11NAT:BUSPROG: AnalyticSTA:DISC: Financial markets, institutions, and interest ratesLOC:TBATOP:Financial transactionsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

43.Which of the following statements is CORRECT?a.Corporations generally are subject to more favorable tax treatment and fewer regulations than partnerships and sole proprietorships, which is why corporations do most of the business in the United States.b.Managers who face the threat of hostile takeovers are less likely to pursue policies that maximize shareholder value than are managers who do not face the threat of hostile takeovers.c.One advantage of the corporate form of organization is that liability of the owners of the firm is limited to their investment in the firm.d.Because of their simplified organization, it is easier for sole proprietorships and partnerships to raise large amounts of outside capital than it is for corporations.e.Bond covenants are an effective way to resolve conflicts between shareholders and managers.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-3NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Miscellaneous conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

44.Which of the following statements is CORRECT?a.A good goal for a firm's management is maximization of expected EPS.b.Most business in the U.S. is conducted by corporations, and corporations' popularity results primarily from their favorable tax treatment.c.Because most stock ownership is concentrated in the hands of a relatively small segment of society, firms' actions to maximize their stock prices have little benefit to society.d.Corporations and partnerships have an advantage over proprietorships because a sole proprietor is exposed to unlimited liability, but the liability of all investors in the other types of businesses is more limited.e.The potential exists for agency conflicts between stockholders and managers.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-3NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Miscellaneous conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

45.Which of the following statements is CORRECT?a.One disadvantage of operating as a corporation rather than as a partnership is that corporate shareholders are exposed to more personal liability than partners.b.There is no good reason to expect a firm's bondholders and stockholders to react differently to the types of new asset investments a firm makes.c.Bondholders are generally more willing than stockholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.d.Stockholders are generally more willing than bondholders to have managers invest in risky projects with high potential returns as opposed to safer projects with lower expected returns.e.Relative to sole proprietorships, corporations generally face fewer regulations, which makes raising capital easier for corporations.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 1-3NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Miscellaneous conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

46.Which of the following statements is NOT CORRECT?a.When a corporation's shares are owned by a few individuals and are not traded on public markets, we say that the firm is "closely, or privately, held."b."Going public" establishes a firm's true intrinsic value, and it also insures that a highly liquid market will always exist for the firm's shares.c.When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market.d.Publicly owned companies have shares owned by investors who are not associated with management, and public companies must register with and report to a regulatory agency such as the SEC.e.It is possible for a firm to go public and yet not raise any additional new capital at the time.

ANS:BPTS:1DIF:Difficulty: ChallengingOBJ:LO: 1-8NAT:BUSPROG: AnalyticSTA:DISC: Goals of the firm, role of finance, and analysis of public informationLOC:TBATOP:Ownership and going publicKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

CHAPTER 2—FINANCIAL STATEMENTS, CASH FLOW, AND TAXES

TRUE/FALSE

1.The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of stockholders' equity.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Annual reportKEY:Bloom’s: Knowledge

2.The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Annual report and expectationsKEY:Bloom’s: Knowledge

3.Consider the balance sheet of Wilkes Industries as shown below. Because Wilkes has $800,000 of retained earnings, the company would be able to pay cash to buy an asset with a cost of $200,000.

Cash$ 50,000Accounts payable$ 100,000Inventory200,000Accruals 100,000Accounts receivable 250,000Total CL$ 200,000Total CA$ 500,000Debt200,000Net fixed assets$ 900,000Common stock200,000_________Retained earnings 800,000Total assets$1,400,000Total L & E$1,400,000

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Retained earnings versus cashKEY:Bloom’s: Knowledge

4.On the balance sheet, total assets must always equal total liabilities and equity.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: Knowledge

5.Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the values at which these assets are carried on the books.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheet: non-cash assetsKEY:Bloom’s: Knowledge

6.The income statement shows the difference between a firm's income and its costs⎯i.e., its profits⎯during a specified period of time. However, not all reported income comes in the form or cash, and reported costs likewise may not correctly reflect cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Income statementKEY:Bloom’s: Knowledge

7.Net operating working capital is equal to operating current assets minus operating current liabilities.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 2-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Net operating working capitalKEY:Bloom’s: Knowledge

8.Total net operating capital is equal to net fixed assets.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 2-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Total net operating capitalKEY:Bloom’s: Knowledge

9.Net operating profit after taxes (NOPAT) is the amount of net income a company would generate from its operations if it had no interest income or interest expense.

10.The fact that 70% of the interest income received by a corporation is excluded from its taxable income encourages firms to use more debt financing than they would in the absence of this tax law provision.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 2-9NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Federal income taxes: interest incomeKEY:Bloom’s: Knowledge

11.If the tax laws were changed so that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, this would probably encourage companies to use more debt financing than they presently do, other things held constant.

12.The interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability.

13.The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, while the income statement measures the firm's financial position at a point in time.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 2-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial statementsKEY:Bloom’s: Knowledge

14.Its retained earnings is the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Retained earningsKEY:Bloom’s: Comprehension

15.The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are in fact stockholders' reinvested earnings.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Retained earningsKEY:Bloom’s: Comprehension

16.In accounting, emphasis is placed on determining net income in accordance with generally accepted accounting principles. In finance, the primary emphasis is also on net income because that is what investors use to value the firm. However, a secondary financial consideration is cash flow, because cash is needed to operate the business.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Cash flow and net incomeKEY:Bloom’s: Comprehension

17.To estimate the cash flow from operations, depreciation must be added back to net income because it is a non-cash charge that has been deducted from revenue.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Statement of cash flowsKEY:Bloom’s: Comprehension

18.The current cash flow from existing assets is highly relevant to the investor. However, since the value of the firm depends primarily upon its growth opportunities, profit projections from those opportunities are the only relevant future flows with which investors are concerned.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Future cash flowsKEY:Bloom’s: Comprehension

19.Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Federal income taxes: interest expense and dividendsKEY:Bloom’s: Comprehension

20.The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a given point in time, the income statement shows results over a period of time, and the statement of cash flows reflects changes in the firm's accounts over that period of time.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial stmts: time dimensionKEY:Bloom’s: Comprehension

MULTIPLE CHOICE

21.Which of the following statements is CORRECT?a.The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.b.The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.c.The balance sheet gives us a picture of the firm's financial position at a point in time.d.The income statement gives us a picture of the firm's financial position at a point in time.e.The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 2-1NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial statementsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

22.Which of the following statements is CORRECT?a.A typical industrial company's balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.b.The balance sheet for a given year, say 2012, is designed to give us an idea of what happened to the firm during that year.c.The balance sheet for a given year, say 2012, tells us how much money the company earned during that year.d.The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).e.For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

23.Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet?a.The company purchases a new piece of equipment.b.The company repurchases common stock.c.The company pays a dividend.d.The company issues new common stock.e.The company gives customers more time to pay their bills.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

24.Which of the following items is NOT included in current assets?a.Short-term, highly liquid, marketable securities.b.Accounts receivable.c.Inventory.d.Bonds.e.Cash.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Current assetsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

25.Which of the following items cannot be found on a firm's balance sheet under current liabilities?a.Accrued payroll taxes.b.Accounts payable.c.Short-term notes payable to the bank.d.Accrued wages.e.Cost of goods sold.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Current liabilitiesKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

26.Which of the following statements is CORRECT?a.The income statement for a given year, say 2012, is designed to give us an idea of how much the firm earned during that year.b.The focal point of the income statement is the cash account, because that account cannot be manipulated by "accounting tricks."c.The reported income of two otherwise identical firms cannot be manipulated by different accounting procedures provided the firms follow Generally Accepted Accounting Principles (GAAP).d.The reported income of two otherwise identical firms must be identical if the firms are publicly owned, provided they follow procedures that are permitted by the Securities and Exchange Commission (SEC).e.If a firm follows Generally Accepted Accounting Principles (GAAP), then its reported net income will be identical to its reported net cash flow.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 2-3NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Income statementKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

27.Below are the year-end balance sheets for Wolken Enterprises:

Assets:20132012Cash$ 200,000$ 170,000Accounts receivable864,000700,000Inventories 2,000,000 1,400,000 Total current assets$3,064,000$2,270,000Net fixed assets 6,000,000 5,600,000Total assets$9,064,000$7,870,000Liabilities and equity:Accounts payable$1,400,000$1,090,000Notes payable 1,600,000 1,800,000 Total current liabilities$3,000,000$2,890,000Long-term debt2,400,0002,400,000Common stock3,000,0002,000,000Retained earnings 664,000 580,000 Total common equity$3,664,000$2,580,000Total liabilities and equity$9,064,000$7,870,000

Wolken has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year non-callable, long-term debt in 2012. As of the end of 2013, none of the principal on this debt had been repaid. Assume that the company's sales in 2012 and 2013 were the same. Which of the following statements must be CORRECT?a.Wolken increased its short-term bank debt in 2013.b.Wolken issued long-term debt in 2013.c.Wolken issued new common stock in 2013.d.Wolken repurchased some common stock in 2013.e.Wolken had negative net income in 2013.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

28.On its 2012 balance sheet, Barngrover Books showed $510 million of retained earnings, and exactly that same amount was shown the following year in 2013. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?a.Dividends could have been paid in 2013, but they would have had to equal the earnings for the year.b.If the company lost money in 2013, they must have paid dividends.c.The company must have had zero net income in 2013.d.The company must have paid out half of its earnings as dividends.e.The company must have paid no dividends in 2013.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

29.Below is the common equity section (in millions) of Fethe Industries' last two year-end balance sheets:

20122011Common stock$2,000$1,000Retained earnings 2,000 2,340Total common equity$4,000$3,340

The company has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?a.The company's net income in 2011 was higher than in 2012.b.The company issued common stock in 2012.c.The market price of the company's stock doubled in 2012.d.The company had positive net income in both 2011 and 2012, but the company's net income in 2009 was lower than it was in 2011.e.The company has more equity than debt on its balance sheet.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Balance sheetKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

30.Which of the following statements is CORRECT?a.The more depreciation a firm has in a given year, the higher its EPS, other things held constant.b.Typically, a firm's DPS should exceed its EPS.c.Typically, a firm's EBIT should exceed its EBITDA.d.If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.e.If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-3NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:EPS, DPS, BVPS, and stock priceKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

31.Which of the following statements is CORRECT?a.Depreciation and amortization are not cash charges, so neither of them has an effect on a firm's reported profits.b.The more depreciation a firm reports, the higher its tax bill, other things held constant.c.People sometimes talk about the firm's net cash flow, which is shown as the lowest entry on the income statement, hence it is often called "the bottom line."d.Depreciation reduces a firm's cash balance, so an increase in depreciation would normally lead to a reduction in the firm's net cash flow.e.Net cash flow (NCF) is often defined as follows:Net Cash Flow = Net Income + Depreciation and Amortization Charges.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-6NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Depreciation, amortization, and net cash flowKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

32.Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.a.Companies' reported net incomes would decline.b.Companies' net operating profits after taxes (NOPAT) would decline.c.Companies' physical stocks of fixed assets would increase.d.Companies' net cash flows would increase.e.Companies' cash positions would decline.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-6NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in depreciationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

33.Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?a.The company repurchased 20% of its common stock.b.The company sold a new issue of bonds.c.The company made a large investment in new plant and equipment.d.The company paid a large dividend.e.The company had high amortization expenses.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Net cash flowKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

34.Analysts following Armstrong Products recently noted that the company's operating net cash flow increased over the prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?a.The company issued new long-term debt.b.The company cut its dividend.c.The company made a large investment in a profitable new plant.d.The company sold a division and received cash in return.e.The company issued new common stock.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Net cash flowKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

35.A security analyst obtained the following information from Prestopino Products' financial statements:

�Retained earnings at the end of 2011 were $700,000, but retained earnings at the end of 2012 had declined to $320,000.�The company does not pay dividends.�The company's depreciation expense is its only non-cash expense; it has no amortization charges.�The company has no non-cash revenues.�The company's net cash flow (NCF) for 2012 was $150,000.

On the basis of this information, which of the following statements is CORRECT?a.Prestopino had negative net income in 2012.b.Prestopino's depreciation expense in 2012 was less than $150,000.c.Prestopino had positive net income in 2012, but its income was less than its 2011 income.d.Prestopino's NCF in 2012 must be higher than its NCF in 2011.e.Prestopino's cash on the balance sheet at the end of 2012 must be lower than the cash it had on the balance sheet at the end of 2011.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Net cash flow and net incomeKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

36.Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?a.The company's operating income declined.b.The company's expenditures on fixed assets declined.c.The company's cost of goods sold increased.d.The company's depreciation and amortization expenses declined.e.The company's interest expense increased.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Net cash flow and net incomeKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

37.Which of the following statements is CORRECT?a.The statement of cash flows shows how much the firm's cash⎯the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)⎯increased or decreased during a given year.b.The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.c.The statement of cash flows shows where the firm's cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.d.The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.e.The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Statement of cash flowsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

38.Which of the following statements is CORRECT?a.In the statement of cash flows, a decrease in accounts receivable is reported as a use of cash.b.Dividends do not show up in the statement of cash flows because dividends are considered to be a financing activity, not an operating activity.c.In the statement of cash flows, a decrease in accounts payable is reported as a use of cash.d.In the statement of cash flows, depreciation charges are reported as a use of cash.e.In the statement of cash flows, a decrease in inventories is reported as a use of cash.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Statement of cash flowsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

39.For managerial purposes, i.e., making decisions regarding the firm's operations, the standard financial statements as prepared by accountants under Generally Accepted Accounting Principles (GAAP) are often modified and used to create alternative data and metrics that provide a somewhat different picture of a firm's operations. Related to these modifications, which of the following statements is CORRECT?a.The standard statements make adjustments to reflect the effects of inflation on asset values, and these adjustments are normally carried into any adjustment that managers make to the standard statements.b.The standard statements focus on accounting income for the entire corporation, not cash flows, and the two can be quite different during any given accounting period. However, for valuation purposes we need to discount cash flows, not accounting income. Moreover, since many firms have a number of separate divisions, and since division managers should be compensated on their divisions' performance, not that of the entire firm, information that focuses on the divisions is needed. These factors have led to the development of information that is focused on cash flows and the operations of individual units.c.The standard statements provide useful information on the firm's individual operating units, but management needs more information on the firm's overall operations than the standard statements provide.d.The standard statements focus on cash flows, but managers are less concerned with cash flows than with accounting income as defined by GAAP.e.The best feature of standard statements is that, if they are prepared under GAAP, the data are always consistent from firm to firm. Thus, under GAAP, there is no room for accountants to "adjust" the results to make earnings look better.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-7NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Modifying acct data for managerial purposesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

40.Which of the following statements is CORRECT?a.Net cash flow (NCF) is defined as follows: NCF = Net income - Depreciation and Amortization.b.Changes in working capital have no effect on free cash flow.c.Free cash flow (FCF) is defined as follows:FCF = EBIT(1 − T) + Depreciation and Amortization − Capital expenditures required to sustain operations − Required changes in net operating working capital.d.Free cash flow (FCF) is defined as follows:FCF = EBIT(1 − T)+ Depreciation and Amortization + Capital expenditures.e.Net cash flow is the same as free cash flow (FCF).

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-7NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Depreciation, amortization, and free cash flowKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

41.Which of the following statements is CORRECT?a.The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.b.MVA gives us an idea about how much value a firm's management has added during the last year.c.MVA stands for market value added, and it is defined as follows:MVA = (Shares outstanding)(Stock price) + Book value of common equity.d.EVA stands for economic value added, and it is defined as follows:EVA = EBIT(1 − T) − (Investor-supplied op. capital) ⋅ (A − T cost of capital).e.EVA gives us an idea about how much value a firm's management has added over the firm's life.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-8NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:MVA and EVAKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

42.Which of the following statements is CORRECT?a.The maximum federal tax rate on personal income in 2010 was 50%.b.Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies' debt ratios to be lower than they would be if interest and dividends were both deductible.c.Interest paid to an individual is counted as income for tax purposes and taxed at the individual's regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.d.The maximum federal tax rate on corporate income in 2010 was 50%.e.Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Federal income tax systemKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

43.Which of the following statements is CORRECT?a.All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.b.The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.c.All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.d.Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm's income as personal income and pay taxes on that income.e.Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Federal income tax systemKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

44.Danielle's Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?a.The company had a sharp increase in its depreciation and amortization expenses.b.The company had a sharp increase in its inventories.c.The company had a sharp increase in its accrued liabilities.d.The company sold a new issue of common stock.e.The company made a large capital investment early in the year.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-7NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:NCF, FCF, and cashKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

45.Assume that Congress recently passed a provision that will enable Barton's Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB's net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.a.Net fixed assets on the balance sheet will decrease.b.The provision will reduce the company's net cash flow.c.The provision will increase the company's tax payments.d.Net fixed assets on the balance sheet will increase.e.The provision will increase the company's net income.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in depreciationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

46.The LeMond Corporation just purchased a new production line. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.a.LeMond's tax liability for the year will be lower.b.LeMond's taxable income will be lower.c.LeMond's net fixed assets as shown on the balance sheet will be higher at the end of the year.d.LeMond's cash position will improve (increase).e.LeMond's reported net income after taxes for the year will be lower.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in depreciationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

47.Lucy's Music Emporium opened its doors on January 1, 2012, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2012 management realized that the assets would last for only 15 years. The firm's accountants plan to report the 2012 financial statements based on this new information. How would the new depreciation assumption affect the company's financial statements?a.The firm's net liabilities would increase.b.The firm's reported net fixed assets would increase.c.The firm's EBIT would increase.d.The firm's reported 2012 earnings per share would increase.e.The firm's cash position in 2012 and 2013 would increase.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in depreciationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

48.DeYoung Devices Inc., a new high-tech instrumentation firm, is building and equipping a new manufacturing facility. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?a.The firm's reported net income would increase.b.The firm's operating income (EBIT) would increase.c.The firm's taxable income would increase.d.The firm's net cash flow would increase.e.The firm's tax payments would increase.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in depreciationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

49.Which of the following statements is CORRECT?a.If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.b.Dividends paid reduce the net income that is reported on a company's income statement.c.If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet.d.If a company issues new long-term bonds during the current year, this will increase its reported current liabilities at the end of the year.e.Accounts receivable are reported as a current liability on the balance sheet.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial statementsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

50.Which of the following statements is CORRECT?a.One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.b.If a firm reports positive net income, its EVA must also be positive.c.One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.d.One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.e.Actions that increase reported net income will always increase net cash flow.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-8NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:EVA, CF, and net incomeKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

51.Which of the following statements is CORRECT?a.If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.b.Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.c.A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.d.Common equity includes common stock and retained earnings, less accumulated depreciation.e.The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 2-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Retained earningsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

52.Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?a.The company would have to pay less taxes.b.The company's taxable income would fall.c.The company's interest expense would remain constant.d.The company would have less common equity than before.e.The company's net income would increase.

ANS:EPTS:1DIF:Difficulty: ChallengingOBJ:LO: 2-9NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Changes in leverageKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

53.Jessie's Bobcat Rentals' operations provided a negative net cash flow last year, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles?a.The company had high depreciation expenses.b.The company repurchased some of its common stock.c.The company dramatically increased its capital expenditures.d.The company retired a large amount of its long-term debt.e.The company sold some of its fixed assets.

ANS:

54.Tucker Electronic System's current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm's market and book values per share differ?a.$27.50b.$28.88c.$30.32d.$31.83e.$33.43

ANS:

55.Hunter Manufacturing Inc.'s December 31, 2012, balance sheet showed total common equity of $2,050,000 and 100,000 shares of stock outstanding. During 2013, Hunter had $250,000 of net income, and it paid out $100,000 as dividends. What was the book value per share at 12/31/13, assuming that Hunter neither issued nor retired any common stock during 2013?a.$20.90b.$22.00c.$23.10d.$24.26e.$25.47

ANS:

56.Companies generate income from their "regular" operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley's operating income, or EBIT?a.$3,462b.$3,644c.$3,836d.$4,038e.$4,250

ANS:

57.Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT)?a.$3,230.00b.$3,400.00c.$3,570.00d.$3,748.50e.$3,935.93

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58.JBS Inc. recently reported net income of $4,750 and depreciation of $885. How much was its net cash flow, assuming it had no amortization expense and sold none of its fixed assets?a.$4,831.31b.$5,085.59c.$5,353.25d.$5,635.00e.$5,916.75

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59.Swinnerton Clothing Company's balance sheet showed total current assets of $2,250, all of which were required in operations. Its current liabilities consisted of $575 of accounts payable, $300 of 6% short-term notes payable to the bank, and $145 of accrued wages and taxes. What was its net operating working capital that was financed by investors?a.$1,454b.$1,530c.$1,607d.$1,687e.$1,771

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60.Over the years, Janjigian Corporation's stockholders have provided $15,250 of capital, part when they purchased new issues of stock and part when they allowed management to retain some of the firm's earnings. The firm now has 1,000 shares of common stock outstanding, and it sells at a price of $42.00 per share. How much value has Janjigian's management added to stockholder wealth over the years, i.e., what is Janjigian's MVA?a.$21,788b.$22,935c.$24,142d.$25,413e.$26,750

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61.Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.a.$3,284.55b.$3,457.42c.$3,639.39d.$3,830.94e.$4,022.48

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62.On 12/31/2013, Heaton Industries Inc. reported retained earnings of $675,000 on its balance sheet, and it reported that it had $172,500 of net income during the year. On its previous balance sheet, at 12/31/2012, the company had reported $555,000 of retained earnings. No shares were repurchased during 2013. How much in dividends did Heaton pay during 2013?a.$47,381b.$49,875c.$52,500d.$55,125e.$57,881

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63.Ullrich Printing Inc. paid out $21,750 of common dividends during the year. It ended the year with $187,500 of retained earnings versus the prior year's retained earnings of $132,250. How much net income did the firm earn during the year?a.$77,000b.$80,850c.$84,893d.$89,137e.$93,594

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64.NNR Inc.'s balance sheet showed total current assets of $1,875,000 plus $4,225,000 of net fixed assets. All of these assets were required in operations. The firm's current liabilities consisted of $475,000 of accounts payable, $375,000 of 6% short-term notes payable to the bank, and $150,000 of accrued wages and taxes. Its remaining capital consisted of long-term debt and common equity. What was NNR's total investor-provided operating capital?a.$4,694,128b.$4,941,188c.$5,201,250d.$5,475,000e.$5,748,750

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65.Last year Tiemann Technologies reported $10,500 of sales, $6,250 of operating costs other than depreciation, and $1,300 of depreciation. The company had no amortization charges, it had $5,000 of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $750. By how much will net after-tax income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.a.−463.13b.−487.50c.−511.88d.−537.47e.−564.34

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66.TSW Inc. had the following data for last year: Net income = $800; Net operating profit after taxes (NOPAT) = $700; Total assets = $3,000; and Total operating capital = $2,000. Information for the just-completed year is as follows: Net income = $1,000; Net operating profit after taxes (NOPAT) = $925; Total assets = $2,600; and Total operating capital = $2,500. How much free cash flow did the firm generate during the just-completed year?a.$383b.$425c.$468d.$514e.$566

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67.Rao Corporation has the following balance sheet. How much net operating working capital does the firm have?

Cash$ 10Accounts payable$ 20Short-term investmentsAccruals20Accounts receivable50Notes payable 50Inventory 40 Current liabilities$ 90 Current assets$130Long-term debt0Net fixed assets 100Common equity30Retained earnings 50Total assets$230Total liab. & equity$230

a.$54.00b.$60.00c.$66.00d.$72.60e.$79.86

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68.Bae Inc. has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?

Sales$2,000.00Costs1,200.00Depreciation 100.00EBIT$ 700.00Interest expense 200.00EBT$ 500.00Taxes (35%) 175.00Net income$ 325.00

a.$370.60b.$390.11c.$410.64d.$432.25e.$455.00

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69.EP Enterprises has the following income statement. How much net operating profit after taxes (NOPAT) does the firm have?

Sales$1,800.00Costs1,400.00Depreciation 250.00EBIT$ 150.00Interest expense 70.00EBT$ 80.00Taxes (40%) 32.00Net income$ 48.00

a.$81.23b.$85.50c.$90.00d.$94.50e.$99.23

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70.Tibbs Inc. had the following data for the year ending 12/31/12: Net income = $300; Net operating profit after taxes (NOPAT) = $400; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,300. What was its return on invested capital (ROIC)?a.14.91%b.15.70%c.16.52%d.17.39%e.18.26%

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71.Zumbahlen Inc. has the following balance sheet. How much total operating capital does the firm have?

Cash$ 20.00Accounts payable$ 30.00Short-term investments50.00Accruals50.00Accounts receivable20.00Notes payable 30.00Inventory 60.00 Current liabilities$110.00 Current assets$150.00Long-term debt70.00Gross fixed assets$140.00Common stock30.00Accumulated deprec. 40.00Retained earnings 40.00Net fixed assets$100.00Total common equity$ 70.00Total assets$250.00Total liab. & equity$250.00

a.$114.00b.$120.00c.$126.00d.$132.30e.$138.92

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72.Barnes' Brothers has the following data for the year ending 12/31/12: Net income = $600; Net operating profit after taxes (NOPAT) = $700; Total assets = $2,500; Short-term investments = $200; Stockholders' equity = $1,800; Total debt = $700; and Total operating capital = $2,100. Barnes' weighted average cost of capital is 10%. What is its economic value added (EVA)?a.$399.11b.$420.11c.$442.23d.$465.50e.$490.00

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73.Edwards Electronics recently reported $11,250 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was its net cash flow?a.$3,284.75b.$3,457.63c.$3,639.61d.$3,831.17e.$4,032.81

74.Wells Water Systems recently reported $8,250 of sales, $4,500 of operating costs other than depreciation, and $950 of depreciation. The company had no amortization charges, it had $3,250 of outstanding bonds that carry a 6.75% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to spend $750 to buy new fixed assets and to invest $250 in net operating working capital. How much free cash flow did Wells generate?a.$1,770.00b.$1,858.50c.$1,951.43d.$2,049.00e.$2,151.45

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75.HHH Inc. reported $12,500 of sales and $7,025 of operating costs (including depreciation). The company had $18,750 of investor-supplied operating assets (or capital), the weighted average cost of that capital (the WACC) was 9.5%, and the federal-plus-state income tax rate was 40%. What was HHH's Economic Value Added (EVA), i.e., how much value did management add to stockholders' wealth during the year?a.$1,357.13b.$1,428.56c.$1,503.75d.$1,578.94e.$1,657.88

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76.Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.a.−$383.84; $206.68b.−$404.04; $217.56c.−$425.30; $229.01d.−$447.69; $241.06e.−$471.25; $253.75

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77.Bartling Energy Systems recently reported $9,250 of sales, $5,750 of operating costs other than depreciation, and $700 of depreciation. The company had no amortization charges, it had $3,200 of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $1,250 of capital expenditures on new fixed assets and to invest $300 in net operating working capital. By how much did the firm's net income exceed its free cash flow?a.$673.27b.$708.70c.$746.00d.$783.30e.$822.47

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CHAPTER 3—ANALYSIS OF FINANCIAL STATEMENTS

TRUE/FALSE

1.Ratio analysis involves analyzing financial statements in order to appraise a firm's financial position and strength.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Ratio analysisKEY:Bloom’s: Knowledge

2.The current ratio and inventory turnover ratios both help us measure the firm's liquidity. The current ratio measures the relationship of a firm's current assets to its current liabilities, while the inventory turnover ratio gives us an indication of how long it takes the firm to convert its inventory into cash.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Liquidity ratiosKEY:Bloom’s: Knowledge

3.Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use measures of a firm's liquidity position.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Liquidity ratiosKEY:Bloom’s: Knowledge

4.High current and quick ratios always indicate that a firm is managing its liquidity position well.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 3-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Current ratioKEY:Bloom’s: Knowledge

5.The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its assets.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Asset management ratiosKEY:Bloom’s: Knowledge

6.A decline in a firm's inventory turnover ratio suggests that it is managing its inventory more efficiently and also that its liquidity position is improving, i.e., it is becoming more liquid.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 3-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Inventory turnover ratioKEY:Bloom’s: Knowledge

7.Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Debt management ratiosKEY:Bloom’s: Knowledge

8.The times-interest-earned ratio is one, but not the only, indication of a firm's ability to meet its long-term and short-term debt obligations.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:TIE ratioKEY:Bloom’s: Knowledge

9.Profitability ratios show the combined effects of liquidity, asset management, and debt management on operating results.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 3-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Profitability ratiosKEY:Bloom’s: Knowledge

10.Market value ratios provide management with an indication of how investors view the firm's past performance and especially its future prospects.

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11.Determining whether a firm's financial position is improving or deteriorating requires analyzing more than the ratios for a given year. Trend analysis is one method of measuring changes in a firm's performance over time.

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12.The "apparent," but not the "true," financial position of a company whose sales are seasonal can differ dramatically, depending on the time of year when the financial statements are constructed.

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13.Significant variations in accounting methods among firms make meaningful ratio comparisons between firms more difficult than if all firms used similar accounting methods.

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14.The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects.

ANS:F

15.The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.

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16.It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if and only if all the firms being compared have the same proportion of fixed assets to total assets.

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17.Since the ROA measures the firm's effective utilization of assets (without considering how these assets are financed), two firms with the same EBIT must have the same ROA.

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18.Suppose firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. Under these conditions, then firms that have high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios.

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19.Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than that of B.

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20.Firms A and B have the same current ratio, 0.75, the same amount of sales and cost of goods sold, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.

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21.Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.

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22.Suppose Firms A and B have the same amount of assets, pay the same interest rate on their debt, have the same basic earning power (BEP), and have the same tax rate. However, Firm A has a higher debt ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio.

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23.If a firm finances with only debt and common equity, and if its equity multiplier is 3.0, then its debt ratio must be 0.667.

ANS:24.One problem with ratio analysis is that relationships can be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to increase.

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25.One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.

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MULTIPLE CHOICE

26.Considered alone, which of the following would increase a company's current ratio?a.An increase in accounts payable.b.An increase in net fixed assets.c.An increase in accrued liabilities.d.An increase in notes payable.e.An increase in accounts receivable.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 3-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Current ratioKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

27.Which of the following would, generally, indicate an improvement in a company's financial position, holding other things constant?a.The total assets turnover decreases.b.The TIE declines.c.The DSO increases.d.The EBITDA coverage ratio increases.e.The current and quick ratios both decline.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 3-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Current ratioKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

28.A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?a.Use cash to increase inventory holdings.b.Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.c.Use cash to repurchase some of the company's own stock.d.Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.e.Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

29.Which of the following statements is CORRECT?a.If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.b.A reduction in inventories held would have no effect on the current ratio.c.An increase in inventories would have no effect on the current ratio.d.If a firm increases its sales and cost of goods sold while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.e.A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 3-3NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:InventoriesKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

30.Companies A and C each reported the same earnings per share (EPS), but Company A's stock trades at a higher price. Which of the following statements is CORRECT?a.Company A trades at a higher P/E ratio.b.Company A probably has fewer growth opportunities.c.Company A is probably judged by investors to be riskier.d.Company A must have a higher market-to-book ratio.e.Company A must pay a lower dividend.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 3-6NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Financial statement analysisKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

31.Which of the following statements is CORRECT?a.If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.b.If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.c.Other things held constant, the higher a firm's expected future growth rate, the lower its P/E ratio is likely to be.d.The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).e.If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 3-6NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Market value ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

32.Which of the following statements is CORRECT?a."Window dressing" is any action that improves a firm's fundamental, long-run position and thus increases its intrinsic value.b.Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing."c.Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."d.Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of "window dressing."e.Using some of the firm's cash to reduce long-term debt is an example of "window dressing."

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 3-1NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Window dressingKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

33.The Cavendish Company recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action?a.The company's debt ratio increased.b.The company's current ratio increased.c.The company's times interest earned ratio decreased.d.The company's basic earning power ratio increased.e.The company's equity multiplier increased.

ANS:BPTS:1DIF:Difficulty: EasyOBJ:LO: 3-6NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Miscellaneous ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

34.A firm's new president wants to strengthen the company's financial position. Which of the following actions would make it financially stronger?a.Increase inventories while holding sales and cost of goods sold constant.b.Increase accounts receivable while holding sales constant.c.Increase EBIT while holding sales constant.d.Increase accounts payable while holding sales constant.e.Increase notes payable while holding sales constant.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 3-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Miscellaneous ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

35.If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.a.The division's DSO (days' sales outstanding) is 40, whereas the average for its competitors is 30.b.The division's basic earning power ratio is above the average of other firms in its industry.c.The division's total assets turnover ratio is below the average for other firms in its industry.d.The division's debt ratio is above the average for other firms in the industry.e.The division's inventory turnover is 6, whereas the average for its competitors is 8.

ANS:BPTS:1DIF:Difficulty: EasyOBJ:LO: 3-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Miscellaneous ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

36.Which of the following would indicate an improvement in a company's financial position, holding other things constant?a.The current and quick ratios both increase.b.The inventory and total assets turnover ratios both decline.c.The debt ratio increases.d.The profit margin declines.e.The EBITDA coverage ratio declines.

ANS:APTS:1DIF:Difficulty: EasyOBJ:LO: 3-5NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Miscellaneous ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

37.If a bank loan officer were considering a company's request for a loan, which of the following statements would you consider to be CORRECT?a.Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.b.The lower the company's EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.c.Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.d.Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.e.The lower the company's TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 3-4NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Miscellaneous ratiosKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

38.Which of the following statements is CORRECT?a.All else equal, increasing the debt ratio will increase the ROA.b.The use of debt financing will tend to lower the basic earning power ratio, other things held constant.c.A firm that employs financial leverage will have a higher equity multiplier than an otherwise identical firm that has no debt in its capital structure.d.If two firms have identical sales, interest rates paid, operating costs, and assets, but differ in the way they are financed, the firm with less debt will generally have the higher expected ROE.e.Holding bonds is better than holding stock for investors because income from bonds is taxed on a more favorable basis than income from stock.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 3-8NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Effects of leverageKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

39.A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?a.Issue new common stock and use the proceeds to acquire additional fixed assets.b.Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.c.Issue new common stock and use the proceeds to increase inventories.d.Speed up the collection of receivables and use the cash generated to increase inventories.e.Use some of its cash to purchase additional inventories.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 3-2NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Quick ratioKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

40.Amram Company's current ratio is 1.9. Considered alone, which of the following actions would reduce the company's current ratio?a.Use cash to reduce accounts payable.b.Borrow using short-term notes payable and use the proceeds to reduce accruals.c.Borrow using short-term notes payable and use the proceeds to reduce long-term debt.d.Use cash to reduce accruals.e.Use cash to reduce short-term notes payable.

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41.Which of the following statements is CORRECT?a.If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding will decline.b.If a security analyst saw that a firm's days' sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.c.If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days' sales outstanding (DSO) will increase.d.There is no relationship between the days' sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.e.A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

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42.Which of the following statements is CORRECT?a.If two firms differ only in their use of debt⎯i.e., they have identical assets, sales, operating costs, and tax rates⎯but one firm has a higher debt ratio, the firm that uses more debt will have a higher profit margin on sales.b.If one firm has a higher debt ratio than another, we can be certain that the firm with the higher debt ratio will have the lower TIE ratio, as that ratio depends entirely on the amount of debt a firm uses.c.A firm's use of debt will have no effect on its profit margin on sales.d.If two firms differ only in their use of debt⎯i.e., they have identical assets, sales, operating costs, interest rates on their debt, and tax rates⎯but one firm has a higher debt ratio, the firm that uses more debt will have a lower profit margin on sales.e.The debt ratio as it is generally calculated makes an adjustment for the use of assets leased under operating leases, so the debt ratios of firms that lease different percentages of their assets are still comparable.

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43.Which of the following statements is CORRECT?a.If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.b.If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be the same.c.If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.d.If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price earnings ratio.e.If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and also to be expected to grow at a faster rate.

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44.Which of the following statements is CORRECT?a.Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will decrease.b.Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Under these conditions, the ROE will increase.c.Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. Without additional information, we cannot tell what will happen to the ROE.d.The modified DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE.e.Other things held constant, an increase in the debt ratio will result in an increase in the profit margin on sales.

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45.You observe that a firm's ROE is above the industry average, but its profit margin and debt ratio are both below the industry average. Which of the following statements is CORRECT?a.Its total assets turnover must equal the industry average.b.Its total assets turnover must be above the industry average.c.Its return on assets must equal the industry average.d.Its TIE ratio must be below the industry average.e.Its total assets turnover must be below the industry average.

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46.Companies Heidee and Leaudy are virtually identical in that they are both profitable, and they have the same total assets (TA), Sales (S), return on assets (ROA), and profit margin (PM). However, Company Heidee has the higher debt ratio. Which of the following statements is CORRECT?a.Company Heidee has a lower operating income (EBIT) than Company LD.b.Company Heidee has a lower total assets turnover than Company Leaudy.c.Company Heidee has a lower equity multiplier than Company Leaudy.d.Company Heidee has a higher fixed assets turnover than Company Leaudy.e.Company Heidee has a higher ROE than Company Leaudy.

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47.Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?a.The times interest earned ratio will decrease.b.The ROA will decline.c.Taxable income will decrease.d.The tax bill will increase.e.Net income will decrease.

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48.Which of the following statements is CORRECT?a.An increase in a firm's debt ratio, with no changes in its sales or operating costs, could be expected to lower the profit margin.b.The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.c.If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE.d.An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio.e.An increase in the DSO, other things held constant, could be expected to increase the ROE.

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49.Heidee Corp. and Leaudy Corp. have identical assets, sales, interest rates paid on their debt, tax rates, and EBIT. However, Heidee uses more debt than Leaudy. Which of the following statements is CORRECT?a.Heidee would have the higher net income as shown on the income statement.b.Without more information, we cannot tell if Heidee or Leaudy would have a higher or lower net income.c.Heidee would have the lower equity multiplier for use in the DuPont equation.d.Heidee would have to pay more in income taxes.e.Heidee would have the lower net income as shown on the income statement.

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50.Other things held constant, which of the following alternatives would increase a company's cash flow for the current year?a.Increase the number of years over which fixed assets are depreciated for tax purposes.b.Pay down the accounts payables.c.Reduce the days' sales outstanding (DSO) without affecting sales or operating costs.d.Pay workers more frequently to decrease the accrued wages balance.e.Reduce the inventory turnover ratio without affecting sales or operating costs.

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51.Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?a.Company Heidee has more net income.b.Company Heidee pays less in taxes.c.Company Heidee has a lower equity multiplier.d.Company Heidee has a higher ROA.e.Company Heidee has a higher times interest earned (TIE) ratio.

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52.Companies Heidee and Leaudy have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?a.Company Heidee has a lower times interest earned (TIE) ratio.b.Company Heidee has a lower equity multiplier.c.Company Heidee has more net income.d.Company Heidee pays more in taxes.e.Company Heidee has a lower ROE.

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53.Lincoln Industries' current ratio is 0.5. Considered alone, which of the following actions would increase the company's current ratio?a.Use cash to reduce long-term bonds outstanding.b.Borrow using short-term notes payable and use the cash to increase inventories.c.Use cash to reduce accruals.d.Use cash to reduce accounts payable.e.Use cash to reduce short-term notes payable.

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54.Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?a.The transaction would improve both firms' financial strength as measured by their current ratios.b.The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio.c.The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio.d.The transaction would have no effect on the firm' financial strength as measured by their current ratios.e.The transaction would lower both firm' financial strength as measured by their current ratios.

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55.Companies Heidee and Leaudy have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company Heidee has a higher debt ratio. Which of the following statements is CORRECT?a.If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company Heidee will have the higher ROE.b.Given this information, Leaudy must have the higher ROE.c.Company Leaudy has a higher basic earning power ratio (BEP).d.Company Heidee has a higher basic earning power ratio (BEP).e.If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company Heidee will have the higher ROE.

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56.Arshadi Corp.'s sales last year were $52,000, and its total assets were $22,000. What was its total assets turnover ratio (TATO)?a.2.03b.2.13c.2.25d.2.36e.2.48

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57.Hutchinson Corporation has zero debt⎯it is financed only with common equity. Its total assets are $410,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?a.$155,800b.$164,000c.$172,200d.$180,810e.$189,851

ANS:

58.Orono Corp.'s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm's times interest earned (TIE) ratio?a.4.72b.4.97c.5.23d.5.51e.5.80

ANS:

59.Rappaport Corp.'s sales last year were $320,000, and its net income after taxes was $23,000. What was its profit margin on sales?a.6.49%b.6.83%c.7.19%d.7.55%e.7.92%

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60.Branch Corp.'s total assets at the end of last year were $315,000 and its net income after taxes was $22,750. What was its return on total assets?a.7.22%b.7.58%c.7.96%d.8.36%e.8.78%

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61.Chambliss Corp.'s total assets at the end of last year were $305,000 and its EBIT was 62,500. What was its basic earning power (BEP)?a.18.49%b.19.47%c.20.49%d.21.52%e.22.59%

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62.Nikko Corp.'s total common equity at the end of last year was $305,000 and its net income after taxes was $60,000. What was its ROE?a.16.87%b.17.75%c.18.69%d.19.67%e.20.66%

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63.An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?a.$52,230b.$54,979c.$57,873d.$60,919e.$64,125

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64.Vang Corp.'s stock price at the end of last year was $33.50 and its earnings per share for the year were $2.30. What was its P/E ratio?a.13.84b.14.57c.15.29d.16.06e.16.86

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65.Lindley Corp.'s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?a.1.34b.1.41c.1.48d.1.55e.1.63

ANS:

66.Northwest Lumber had a profit margin of 5.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?a.12.79%b.13.47%c.14.18%d.14.88%e.15.63%

ANS:

67.Bostian, Inc. has total assets of $625,000. Its total debt outstanding is $185,000. The Board of Directors has directed the CFO to move towards a debt-to-assets ratio of 55%. How much debt must the company add or subtract to achieve the target debt ratio?a.$158,750b.$166,688c.$175,022d.$183,773e.$192,962

ANS:

68.Emerson Inc.'s would like to undertake a policy of paying out 45% of its income. Its latest net income was $1,250,000, and it had 225,000 shares outstanding. What dividend per share should it declare?a.$2.14b.$2.26c.$2.38d.$2.50e.$2.63

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69.Aziz Industries has sales of $100,000 and accounts receivable of $11,500, and it gives its customers 30 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?a.$267.34b.$281.41c.$296.22d.$311.81e.$328.22

ANS:

70.Heaton Corp. sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $425,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO − Credit period = days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.a.6.20b.6.53c.6.86d.7.20e.7.56

ANS:

71.Harper Corp.'s sales last year were $395,000, and its year-end receivables were $42,500. Harper sells on terms that call for customers to pay 30 days after the purchase, but many delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO − Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.a.7.95b.8.37c.8.81d.9.27e.9.74

ANS:

72.Bonner Corp.'s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner's new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?a.$164,330b.$172,979c.$182,083d.$191,188e.$200,747

ANS:

73.A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt-to-assets ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a.47.33%b.49.82%c.52.45%d.55.21%e.58.11%

ANS:

74.Ziebart Corp.'s EBITDA last year was $390,000 ( = EBIT + depreciation + amortization), its interest charges were $9,500, it had to repay $26,000 of long-term debt, and it had to make a payment of $17,400 under a long-term lease. The firm had no amortization charges. What was the EBITDA coverage ratio?a.7.32b.7.70c.8.09d.8.49e.8.92

ANS:

75.LeCompte Corp. has $312,900 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $620,000, and its net income after taxes was $24,655. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would LeCompte need in order to achieve the 15% ROE, holding everything else constant?a.7.57%b.7.95%c.8.35%d.8.76%e.9.20%

ANS:

76.Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?a.9.32%b.9.82%c.10.33%d.10.88%e.11.42%

ANS:

77.Stewart Inc.'s latest EPS was $3.50, its book value per share was $22.75, it had 215,000 shares outstanding, and its debt-to-assets ratio was 46%. How much debt was outstanding?a.$3,393,738b.$3,572,356c.$3,760,375d.$3,958,289e.$4,166,620

ANS:

78.Last year Vaughn Corp. had sales of $315,000 and a net income of $17,832, and its year-end assets were $210,000. The firm's total-debt-to-total-assets ratio was 42.5%. Based on the DuPont equation, what was Vaughn's ROE?a.14.77%b.15.51%c.16.28%d.17.10%e.17.95%

ANS:

79.Last year Central Chemicals had sales of $205,000, assets of $127,500, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $21,000 without affecting either sales or costs. Had it reduced its assets in this amount, and had the debt-to-assets ratio, sales, and costs remained constant, by how much would the ROE have changed?a.1.81%b.2.02%c.2.22%d.2.44%e.2.68%

ANS:

80.Last year Mason Inc. had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $195,000 and its net income was $10,549. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $5,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income in this amount, by how much would the ROE have changed?a.5.66%b.5.95%c.6.27%d.6.58%e.6.91%

ANS:

81.Last year Rosenberg Corp. had $195,000 of assets, $18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?a.4.36%b.4.57%c.4.80%d.5.04%e.5.30%

ANS:

82.Last year Altman Corp. had $205,000 of assets, $303,500 of sales, $18,250 of net income, and a debt-to-total-assets ratio of 41%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $152,500. Sales, costs, and net income would not be affected, and the firm would maintain the 41% debt ratio. By how much would the reduction in assets improve the ROE?a.4.69%b.4.93%c.5.19%d.5.45%e.5.73%

ANS:

83.Muscarella Inc. has the following balance sheet and income statement data:

Cash$ 14,000Accounts payable$ 42,000Receivables70,000Other current liabilities 28,000Inventories 210,000 Total CL$ 70,000 Total CA$294,000Long-term debt70,000Net fixed assets 126,000Common equity 280,000 Total assets$420,000 Total liab. and equity$420,000Sales$280,000Net income$ 21,000

The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?a.4.28%b.4.50%c.4.73%d.4.96%e.5.21%

ANS:

84.Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?a.2.08%b.2.32%c.2.57%d.2.86%e.3.14%

ANS:

85.For the coming year, Crane Inc. is considering two financial plans. Management expects sales to be $301,770, operating costs to be $266,545, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but the TIE ratio would have to be kept at 4.00 or more. Under Plan B the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?a.3.83%b.4.02%c.4.22%d.4.43%e.4.65%

ANS:

86.Refer to Exhibit 3.1. What is the firm's current ratio?a.0.97b.1.08c.1.20d.1.33e.1.47

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87.Refer to Exhibit 3.1. What is the firm's quick ratio?a.0.49b.0.61c.0.73d.0.87e.1.05

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88.Refer to Exhibit 3.1. What is the firm's days sales outstanding? Assume a 360-day year for this calculation.a.48.17b.50.71c.53.38d.56.19e.59.14

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89.Refer to Exhibit 3.1. What is the firm's total assets turnover?a.0.90b.1.12c.1.40d.1.68e.2.02

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90.Refer to Exhibit 3.1. What is the firm's inventory turnover ratio?a.4.17b.4.38c.4.59d.5.82e.5.07

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91.Refer to Exhibit 3.1. What is the firm's TIE?a.1.94b.2.15c.2.39d.2.66e.2.93

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92.Refer to Exhibit 3.1. What is the firm's EBITDA coverage?a.3.29b.3.46c.3.64d.3.82e.4.01

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93.Refer to Exhibit 3.1. What is the firm's debt-to-assets ratio?a.45.93%b.51.03%c.56.70%d.63.00%e.70.00%

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94.Refer to Exhibit 3.1. What is the firm's ROA?a.2.70%b.2.97%c.3.26%d.3.59%e.3.95%

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95.Refer to Exhibit 3.1. What is the firm's ROE?a.8.54%b.8.99%c.9.44%d.9.91%e.10.41%

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96.Refer to Exhibit 3.1. What is the firm's BEP?a.6.00%b.6.32%c.6.65%d.6.98%e.7.33%

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97.Refer to Exhibit 3.1. What is the firm's profit margin?a.1.40%b.1.56%c.1.73%d.1.93%e.2.12%

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98.Refer to Exhibit 3.1. What is the firm's dividends per share?a.$2.62b.$2.91c.$3.20d.$3.53e.$3.88

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99.Refer to Exhibit 3.1. What is the firm's cash flow per share?a.$10.06b.$10.59c.$11.15d.$11.74e.$12.35

100.Refer to Exhibit 3.1. What is the firm's EPS?a.$5.84b.$6.15c.$6.47d.$6.80e.$7.14

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101.Refer to Exhibit 3.1. What is the firm's P/E ratio?a.12.0b.12.6c.13.2d.13.9e.14.6

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102.Refer to Exhibit 3.1. What is the firm's book value per share?a.$61.73b.$64.98c.$68.40d.$72.00e.$75.60

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103.Refer to Exhibit 3.1. What is the firm's market-to-book ratio?a.0.56b.0.66c.0.78d.0.92e.1.08

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104.Refer to Exhibit 3.1. What is the firm's equity multiplier?a.3.33b.3.50c.3.68d.3.86e.4.05

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CHAPTER 4—TIME VALUE OF MONEY

TRUE/FALSE

1.Starting to invest early for retirement increases the benefits of compound interest.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

2.Starting to invest early for retirement reduces the benefits of compound interest.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

3.A time line is meaningful even if all cash flows do not occur annually.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

4.A time line is not meaningful unless all cash flows occur annually.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

5.Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

6.Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

7.Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

8.Time lines cannot be constructed for annuities unless all the payments occur at the end of the periods.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

9.Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

10.Some of the cash flows shown on a time line can be in the form of annuity payments but none can be uneven amounts.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Knowledge

11.If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV versus FVKEY:Bloom’s: Knowledge

12.If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV versus FVKEY:Bloom’s: Knowledge

13.Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV versus FVKEY:Bloom’s: Knowledge

14.Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV versus FVKEY:Bloom’s: Knowledge

15.If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Effective annual rateKEY:Bloom’s: Knowledge

16.If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Effective annual rateKEY:Bloom’s: Knowledge

17.A "growing annuity" is a cash flow stream that grows at a constant rate for a specified number of periods.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 4-18NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Growing annuityKEY:Bloom’s: Knowledge

18.A "growing annuity" is any cash flow stream that grows over time.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 4-18NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Growing annuityKEY:Bloom’s: Knowledge

19.The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-2NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Comprehension

20.The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the smaller the present value of a given lump sum to be received at some future date.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-2NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:CompoundingKEY:Bloom’s: Comprehension

21.Suppose Sally Smith plans to invest $1,000. She can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be more than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

ANS:

22.Suppose Randy Jones plans to invest $1,000. He can earn an effective annual rate of 5% on Security A, while Security B has an effective annual rate of 12%. After 11 years, the compounded value of Security B should be somewhat less than twice the compounded value of Security A. (Ignore risk, and assume that compounding occurs annually.)

ANS:23.The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV of a dollarKEY:Bloom’s: Comprehension

24.The present value of a future sum increases as either the discount rate or the number of periods per year increases, other things held constant.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV of a sumKEY:Bloom’s: Comprehension

25.All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

ANS:

PTS:1DIF:Difficulty: ModerateOBJ:LO: 4-9NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV of an annuityKEY:Bloom’s: Comprehension

26.All other things held constant, the present value of a given annual annuity increases as the number of periods per year increases.

ANS:PTS:1DIF:Difficulty: ModerateOBJ:LO: 4-9NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:PV of an annuityKEY:Bloom’s: Comprehension

27.If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Periodic and nominal ratesKEY:Bloom’s: Comprehension

28.If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Periodic and nominal ratesKEY:Bloom’s: Comprehension

29.As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Effective and nominal ratesKEY:Bloom’s: Comprehension

30.As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or less than the nominal rate on the deposit (or loan).

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Effective and nominal ratesKEY:Bloom’s: Comprehension

31.When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-17NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AmortizationKEY:Bloom’s: Comprehension

32.When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-17NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AmortizationKEY:Bloom’s: Comprehension

33.The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the greater the percentage of the payment that will be a repayment of principal.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-17NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AmortizationKEY:Bloom’s: Comprehension

34.The payment made each period on an amortized loan is constant, and it consists of some interest and some principal. The closer we are to the end of the loan's life, the smaller the percentage of the payment that will be a repayment of principal.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-17NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AmortizationKEY:Bloom’s: Comprehension

35.Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan.

ANS:

36.Midway through the life of an amortized loan, the percentage of the payment that represents interest could be equal to, less than, or greater than to the percentage that represents repayment of principal. The proportions depend on the original life of the loan and the interest rate.

ANS:

MULTIPLE CHOICE

37.Which of the following statements is CORRECT?a.Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.b.A time line is not meaningful unless all cash flows occur annually.c.Time lines are useful for visualizing complex problems prior to doing actual calculations.d.Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.e.Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:Time linesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

38.Which of the following statements is CORRECT?a.Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.b.A time line is not meaningful unless all cash flows occur annually.c.Time lines are not useful for visualizing complex problems prior to doing actual calculations.d.Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.e.Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:Time linesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

39.Which of the following statements is CORRECT?a.Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.b.A time line is not meaningful unless all cash flows occur annually.c.Time lines are not useful for visualizing complex problems prior to doing actual calculations.d.Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.e.Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:Time linesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

40.Which of the following statements is CORRECT?a.A time line is not meaningful unless all cash flows occur annually.b.Time lines are not useful for visualizing complex problems prior to doing actual calculations.c.Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.d.Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.e.Time lines can be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

41.You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?a.The discount rate decreases.b.The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.c.The discount rate increases.d.The riskiness of the investment's cash flows decreases.e.The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-3NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Effects of factors on PVsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

42.You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?a.The discount rate increases.b.The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.c.The discount rate decreases.d.The riskiness of the investment's cash flows increases.e.The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

43.Which of the following statements is CORRECT?a.If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.b.The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.c.If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.d.The cash flows for an annuity due must all occur at the ends of the periods.e.The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:AnnuitiesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

44.Which of the following statements is CORRECT?a.If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.b.The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.c.If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.d.The cash flows for an annuity due must all occur at the beginning of the periods.e.The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Time value of moneyLOC:TBATOP:AnnuitiesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

45.Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?a.The periodic rate of interest is 5% and the effective rate of interest is also 5%.b.The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.c.The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.d.The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.e.The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Quarterly compoundingKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

46.Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?a.The periodic rate of interest is 8% and the effective rate of interest is also 8%.b.The periodic rate of interest is 2% and the effective rate of interest is 4%.c.The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.d.The periodic rate of interest is 4% and the effective rate of interest is less than 8%.e.The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.

ANS:

47.A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?a.The proportion of interest versus principal repayment would be the same for each of the 8 payments.b.The annual payments would be larger if the interest rate were lower.c.If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.d.The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.e.The last payment would have a higher proportion of interest than the first payment.

ANS:

48.A $150,000 loan is to be amortized over 6 years, with annual end-of-year payments. Which of these statements is CORRECT?a.The proportion of interest versus principal repayment would be the same for each of the 7 payments.b.The annual payments would be larger if the interest rate were lower.c.If the loan were amortized over 10 years rather than 6 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 6-year amortization plan.d.The proportion of each payment that represents interest as opposed to repayment of principal would be higher if the interest rate were lower.e.The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.

ANS:

49.Which of the following statements regarding a 20-year (240-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)a.The outstanding balance declines at a slower rate in the later years of the loan's life.b.The remaining balance after three years will be $225,000 less one third of the interest paid during the first three years.c.Because it is a fixed-rate mortgage, the monthly loan payments (which include both interest and principal payments) are constant.d.Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.e.The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

ANS:

50.Which of the following statements regarding a 15-year (180-month) $225,000, fixed-rate mortgage is CORRECT? (Ignore taxes and transactions costs.)a.The outstanding balance declines at a faster rate in the later years of the loan's life.b.The remaining balance after three years will be $125,000 less one third of the interest paid during the first three years.c.Because the outstanding balance declines over time, the monthly payments will also decline over time.d.Interest payments on the mortgage will increase steadily over time, but the total amount of each payment will remain constant.e.The proportion of the monthly payment that goes towards repayment of principal will be lower 10 years from now than it will be the first year.

ANS:51.Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?a.Exactly 8% of the first monthly payment represents interest.b.The monthly payments will decline over time.c.A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.d.The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.e.The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

ANS:

52.Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?a.Exactly 10% of the first monthly payment represents interest.b.The monthly payments will increase over time.c.A larger proportion of the first monthly payment will be interest, and a smaller proportion will be principal, than for the last monthly payment.d.The total dollar amount of interest being paid off each month gets larger as the loan approaches maturity.e.The amount representing interest in the first payment would be higher if the nominal interest rate were 7% rather than 10%.

ANS:

53.At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.a.Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).b.Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).c.Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).d.Investment D pays $2,500 at the end of 10 years (just one payment).e.Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

ANS:

54.Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.a.Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).b.Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).c.Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).d.Investment D pays $2,500 at the end of 10 years (just one payment).e.Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

ANS:" section to see calculation requirements for this question.

55.A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?a.The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.b.The periodic interest rate is greater than 3%.c.The periodic rate is less than 3%.d.The present value would be greater if the lump sum were discounted back for more periods.e.The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Time value conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

56.A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?a.The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.b.The periodic interest rate is greater than 3%.c.The periodic rate is less than 3%.d.The present value would be greater if the lump sum were discounted back for more periods.e.The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Time value conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

57.Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?a.Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.b.The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.c.A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.d.A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.e.If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Time value conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

58.Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?a.Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.b.The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.c.A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.d.A bank loan's nominal interest rate will always be equal to or greater than its effective annual rate.e.If an investment pays 10% interest, compounded quarterly, its effective annual rate will be greater than 10%.

59.Which of the following statements is CORRECT?a.An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.b.The present value of a 3-year, $150 annuity due will exceed the present value of a 3-year, $150 ordinary annuity.c.If a loan has a nominal annual rate of 8%, then the effective rate can never be greater than 8%.d.If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.e.The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Time value conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

60.Which of the following statements is CORRECT?a.An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.b.The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.c.If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.d.If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.e.The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-15NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Time value conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

61.You are considering two equally risky annuities, each of which pays $15,000 per year for 20 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?a.If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.b.The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE.c.The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.d.The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.e.The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-9NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AnnuitiesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

62.You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?a.If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.b.A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.c.The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.d.The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.e.The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 4-9NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:AnnuitiesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

63.Which of the following statements is CORRECT?a.If CF0 is positive and all the other CFs are negative, then you cannot solve for I.b.If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.c.If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.d.To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.e.If you solve for I and get a negative number, then you must have made a mistake.

ANS:DPTS:1DIF:Difficulty: ChallengingOBJ:LO: 4-14NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Solving for I: uneven CFsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

64.Which of the following statements is CORRECT?a.If CF0 is positive and all the other CFs are negative, then you can still solve for I.b.If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.c.If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.d.To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.e.If you solve for I and get a negative number, then you must have made a mistake.

ANS:APTS:1DIF:Difficulty: ChallengingOBJ:LO: 4-14NAT:BUSPROG: AnalyticSTA:DISC: Time value of moneyLOC:TBATOP:Solving for I: uneven CFsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Students may be able to correctly determine the answer to this question without [many] calculations. Please see the "Answers & Solutions" section to see calculation requirements for this question.

65.Which of the following bank accounts has the highest effective annual return?a.An account that pays 8% nominal interest with daily (365-day) compounding.b.An account that pays 8% nominal interest with monthly compounding.c.An account that pays 8% nominal interest with annual compounding.d.An account that pays 7% nominal interest with daily (365-day) compounding.e.An account that pays 7% nominal interest with monthly compounding.

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66.Which of the following bank accounts has the lowest effective annual return?a.An account that pays 8% nominal interest with daily (365-day) compounding.b.An account that pays 8% nominal interest with monthly compounding.c.An account that pays 8% nominal interest with annual compounding.d.An account that pays 7% nominal interest with daily (365-day) compounding.e.An account that pays 7% nominal interest with monthly compounding.

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67.You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?a.Bank 1; 6.1% with annual compounding.b.Bank 2; 6.0% with monthly compounding.c.Bank 3; 6.0% with annual compounding.d.Bank 4; 6.0% with quarterly compounding.e.Bank 5; 6.0% with daily (365-day) compounding.

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68.Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?a.$205.83b.$216.67c.$228.07d.$240.08e.$252.08

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69.How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding?a.$591.09b.$622.20c.$654.95d.$689.42e.$723.89

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70.JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?a.$1,781.53b.$1,870.61c.$1,964.14d.$2,062.34e.$2,165.46

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71.Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures?a.$3,754.27b.$3,941.99c.$4,139.09d.$4,346.04e.$4,563.34

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72.Cyberhost Corporation's sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?a.$271.74b.$286.05c.$301.10d.$316.16e.$331.96

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73.Cochrane Associate's net sales last year were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?a.$845.03b.$889.51c.$936.33d.$983.14e.$1,032.30

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74.How much would $1, growing at 3.5% per year, be worth after 75 years?a.$12.54b.$13.20c.$13.86d.$14.55e.$15.28

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75.How much would $100, growing at 5% per year, be worth after 75 years?a.$3,689.11b.$3,883.27c.$4,077.43d.$4,281.30e.$4,495.37

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76.Your bank offers a savings account that pays 3.5% interest, compounded annually. If you invest $1,000 in the account, then how much will it be worth at the end of 25 years?a.$2,245.08b.$2,363.24c.$2,481.41d.$2,605.48e.$2,735.75

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77.Your bank offers a savings account that pays 3.5% interest, compounded annually. How much will $500 invested today be worth at the end of 25 years?a.$1,122.54b.$1,181.62c.$1,240.70d.$1,302.74e.$1,367.88

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78.Suppose a State of North Carolina bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?a.$585.43b.$614.70c.$645.44d.$677.71e.$711.59

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79.Suppose a State of New Mexico bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?a.$651.60b.$684.18c.$718.39d.$754.31e.$792.02

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80.How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?a.$438.03b.$461.08c.$485.35d.$510.89e.$537.78

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81.You expect to receive $5,000 in 25 years. How much is it worth today if the discount rate is 5.5%?a.$1,067.95b.$1,124.16c.$1,183.33d.$1,245.61e.$1,311.17

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82.The going rate of interest on a 5-year treasury bond is 4.25%. You have one that will pay $2,500 five years from now. How much is the bond worth today?a.$1,928.78b.$2,030.30c.$2,131.81d.$2,238.40e.$2,350.32

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83.Suppose a Google.com bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?a.$2,819.52b.$2,967.92c.$3,116.31d.$3,272.13e.$3,435.74

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84.You have just purchased a U.S. Treasury bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate will you earn on this bond?a.4.37%b.4.86%c.5.40%d.6.00%e.6.60%

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85.You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond?a.3.82%b.4.25%c.4.72%d.5.24%e.5.77%

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86.Ten years ago, Kronan Corporation earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?a.15.17%b.15.97%c.16.77%d.17.61%e.18.49%

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87.Wildwoods, Inc. earned $1.50 per share five years ago. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?a.15.54%b.16.36%c.17.18%d.18.04%e.18.94%

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88.You have $5,000 invested in a bank that pays 3.8% annually. How long will it take for your funds to triple?a.23.99b.25.26c.26.58d.27.98e.29.46

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89.Your bank pays 4% interest annually. You have $2,500 invested in the bank. How long will it take for your funds to double?a.14.39b.15.15c.15.95d.16.79e.17.67

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90.Brockman Corporation's earnings per share were $3.50 last year, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Brockman's EPS to triple?a.9.29b.10.33c.11.47d.12.75e.14.02

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91.Your investment account pays 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?a.5.14b.5.71c.6.35d.7.05e.7.84

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92.Your investment advisor has recommended your invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?a.12.37b.13.74c.15.27d.16.97e.18.85

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93.You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?a.$11,973b.$12,603c.$13,267d.$13,930e.$14,626

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94.You want to buy new kitchen appliances 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?a.$15,260b.$16,063c.$16,908d.$17,754e.$18,642

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95.You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?a.$18,369b.$19,287c.$20,251d.$21,264e.$22,327

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96.You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?a.$16,112b.$16,918c.$17,763d.$18,652e.$19,584

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97.You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?a.$20,993b.$22,098c.$23,261d.$24,424e.$25,645

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98.What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?a.$16,576b.$17,449c.$18,367d.$19,334e.$20,352

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99.What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?a.$16,806b.$17,690c.$18,621d.$19,601e.$20,633

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100.Your friend offers to pay you an annuity of $2,500 at the end of each year for 3 years in return for cash today. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a.$5,493.71b.$5,782.85c.$6,087.21d.$6,407.59e.$6,744.83

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101.After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a.$50,753b.$53,424c.$56,236d.$59,195e.$62,311

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102.An uncle of yours who is about to retire wants to sell some of his stock and buy an annuity that will provide him with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost him to buy such an annuity today?a.$574,924b.$605,183c.$635,442d.$667,214e.$700,575

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103.What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?a.$11,262.88b.$11,826.02c.$12,417.32d.$13,038.19e.$13,690.10

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104.What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?a.$4,750b.$5,000c.$5,250d.$5,513e.$5,788

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105.A perpetuity pays $85 per year and costs $950. What is the rate of return?a.8.95%b.9.39%c.9.86%d.10.36%e.10.88%

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106.A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a.$1,412.84b.$1,487.20c.$1,565.48d.$1,643.75e.$1,725.94

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107.Your father is considering purchasing an annuity that pays $5,000 at the beginning of each year for 5 years. He could earn 4.5% on his money in other investments with equal risk. What is the most he should pay for the annuity?a.20,701b.$21,791c.$22,938d.$24,085e.$25,289

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108.Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost her to buy the annuity today?a.$825,835b.$869,300c.$915,052d.$963,213e.$1,011,374

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109.Now that your uncle has decided to retire, he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?a.$1,063,968b.$1,119,966c.$1,178,912d.$1,240,960e.$1,303,008

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110.A salt mine you inherited will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the mine is 7.5%, how much should you ask for it if you decide to sell it?a.$284,595b.$299,574c.$314,553d.$330,281e.$346,795

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111.Geraldine was injured in a car accident, and the insurance company has offered her the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave her as well off financially as with the annuity?a.$225,367b.$237,229c.$249,090d.$261,545e.$274,622

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112.What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?a.$8,509b.$8,957c.$9,428d.$9,924e.$10,446

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113.Suppose you earned a $275,000 bonus this year and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?a.$28,532b.$29,959c.$31,457d.$33,030e.$34,681

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114.Your aunt wants to retire and has $375,000. She expects to live for another 25 years and to earn 7.5% on her invested funds. How much could she withdraw at the end of each of the next 25 years and end up with zero in the account?a.$28,843.38b.$30,361.46c.$31,959.43d.$33,641.50e.$35,323.58

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115.Your aunt wants to retire and has $375,000. She expects to live for another 25 years, and she also expects to earn 7.5% on her invested funds. How much could she withdraw at the beginning of each of the next 25 years and end up with zero in the account?a.$28,243.21b.$29,729.70c.$31,294.42d.$32,859.14e.$34,502.10

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116.You were left $100,000 in a trust fund set up by your grandfather. The fund pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?a.$24,736b.$26,038c.$27,409d.$28,779e.$30,218

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117.Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?a.$22,598.63b.$23,788.03c.$25,040.03d.$26,357.92e.$27,675.82

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118.Your uncle just won the weekly lottery, receiving $375,000, which he invested at a 7.5% annual rate. He now has decided to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)a.22b.23c.24d.25e.26

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119.Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, beginning at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. What is the maximum number of $35,000 withdrawals that he can make and still have at least $25,000 left in the account? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)a.12b.13c.14d.15e.16

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120.Your Aunt Elsa has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. What is the maximum number of whole payments that can be withdrawn before the account is exhausted, i.e., before the account balance would become negative? (Hint: Round down to the nearest whole number.)a.18b.19c.20d.21e.22

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121.Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. When she makes her last withdrawal (at the beginning of a year), she also wants to have enough left in the account so that you can make a final withdrawal of $50,000 at the end of that year (her last withdrawal is at the beginning of the year, your withdrawal is at the end of that same year). What is the maximum number of $45,000 withdrawals that she can make and still have enough in the account so that you can make a $50,000 withdrawal at the end of the year of her last withdrawal? (Hint: If your solution for N is not an integer, round down to the nearest whole number.)a.13b.14c.15d.16e.17

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122.Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.a.7.12%b.7.49%c.7.87%d.8.26%e.8.67%

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123.Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?a.3.44%b.3.79%c.4.17%d.4.58%e.5.04%

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124.Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to open a new restaurant, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?a.6.85%b.7.21%c.7.59%d.7.99%e.8.41%

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125.What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?a.$77.19b.$81.25c.$85.31d.$89.58e.$94.06

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126.What is the present value of the following cash flow stream at a rate of 6.25%?

a.$411.57b.$433.23c.$456.03d.$480.03e.$505.30

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127.What is the present value of the following cash flow stream at a rate of 12.0%?

a.$9,699b.$10,210c.$10,747d.$11,284e.$11,849

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128.What is the present value of the following cash flow stream at a rate of 8.0%?

a.$7,917b.$8,333c.$8,772d.$9,233e.$9,695

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129.You sold your motorcycle and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?

a.$5,987b.$6,286c.$6,600d.$6,930e.$7,277

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130.At a rate of 6.5%, what is the future value of the following cash flow stream?

a.$526.01b.$553.69c.$582.83d.$613.51e.$645.80

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131.Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?a.6.77%b.7.13%c.7.50%d.7.88%e.8.27%

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132.You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?a.4.93%b.5.19%c.5.46%d.5.75%e.6.05%

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133.What's the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?a.$1,819b.$1,915c.$2,016d.$2,117e.$2,223

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134.What's the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?a.$3,089b.$3,251c.$3,422d.$3,602e.$3,782

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135.What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?a.$1,537.69b.$1,618.62c.$1,699.55d.$1,784.53e.$1,873.76

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136.What's the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?a.$969b.$1,020c.$1,074d.$1,131e.$1,187

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137.American Express and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF%?a.18.58%b.19.56%c.20.54%d.21.57%e.22.65%

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138.Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Woodburn Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?a.0.52%b.0.44%c.0.36%d.0.30%e.0.24%

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139.Suppose United Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?a.8.24%b.8.45%c.8.66%d.8.88%e.9.10%

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140.Suppose People's bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?a.8.46%b.8.90%c.9.37%d.9.86%e.10.38%

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141.Pacific Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?a.3.72%b.4.13%c.4.59%d.5.05%e.5.56%

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142.Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?a.15.27%b.16.08%c.16.88%d.17.72%e.18.61%

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143.Billy Thornton borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Billy have to pay in a 30-day month?a.$120.83b.$126.88c.$133.22d.$139.88e.$146.87

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144.Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?a.$5,178.09b.$5,436.99c.$5,708.84d.$5,994.28e.$6,294.00

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145.Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?a.$3,704.02b.$3,889.23c.$4,083.69d.$4,287.87e.$4,502.26

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146.Suppose you are buying your first home for $145,000, and you have $15,000 for your down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?a.$741.57b.$780.60c.$821.69d.$862.77e.$905.91

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147.Your cousin will sell you his coffee shop for $250,000, with "seller financing," at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?a.$4,029.37b.$4,241.44c.$4,464.67d.$4,699.66e.$4,947.01

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148.Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?a.$1,200.33b.$1,263.50c.$1,330.00d.$1,400.00e.$1,470.00

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149.You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?a.$1,994.49b.$2,099.46c.$2,209.96d.$2,326.27e.$2,442.59

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150.Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?a.$7,531b.$7,927c.$8,323d.$8,740e.$9,177

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151.You are considering investing in a European bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.a.23b.27c.32d.38e.44

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152.You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?a.39.60b.44.00c.48.40d.53.24e.58.57

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153.The store where you bought new home furnishings offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?a.12.31%b.12.96%c.13.64%d.14.36%e.15.08%

ANS:

154.Your Green Investment Tips subscription is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?a.7.48b.8.80c.10.35d.12.18e.14.33

ANS:

155.You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?a.$15,234.08b.$16,035.88c.$16,837.67d.$17,679.55e.$18,563.53

ANS:

156.Partners Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. An offer to lend you the $50,000 also comes from Community Bank, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?a.1.56%b.1.30%c.1.09%d.0.91%e.0.72%

ANS:

157.Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?a.$2,404.91b.$2,531.49c.$2,658.06d.$2,790.96e.$2,930.51

ANS:

158.Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?a.$10,155.68b.$10,690.19c.$11,252.83d.$11,845.09e.$12,468.51

ANS:

159.Your older brother turned 35 today, and he is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. He will invest in a mutual fund that's expected to provide a return of 7.5% per year. He plans to retire 30 years from today, when he turns 65, and he expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can he spend each year after he retires? His first withdrawal will be made at the end of his first retirement year.a.$58,601b.$61,686c.$64,932d.$68,179e.$71,588

ANS:

160.You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?a.7.62%b.8.00%c.8.40%d.8.82%e.9.26%

ANS:

161.Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?a.73.67%b.77.55%c.81.63%d.85.93%e.90.45%

ANS:

162.On January 1, 2012, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2012?a.$17,419.55b.$17,593.75c.$17,769.68d.$17,947.38e.$18,126.85

ANS:

163.You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9 more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be to enable you to reach your $50,000 target?a.$3,008b.$3,342c.$3,676d.$4,044e.$4,448

ANS:

164.Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?a.$65,632b.$72,925c.$81,027d.$89,130e.$98,043

ANS:

165.Julian and Jonathan are twin brothers (and so were born on the same day). Today, both turned 25. Their grandfather began putting $2,500 per year into a trust fund for Julian on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Julian's 65th birthday. The grandfather set things up this way because he wants Julian to work, not be a "trust fund baby," but he also wants to ensure that Julian is provided for in his old age.

Until now, the grandfather has been disappointed with Jonathan and so has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Jonathan. He will make the first payment to a trust for Jonathan today, and he has instructed his trustee to make 40 additional equal annual payments until Jonathan turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Jonathan's trust today and each subsequent year to enable him to have the same retirement nest egg as Julian after the last payment is made on their 65th birthday?a.$3,726b.$3,912c.$4,107d.$4,313e.$4,528

ANS:

166.You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?a.$238,176b.$250,712c.$263,907d.$277,797e.$291,687

ANS:

167.You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation. To repay you, DeVille will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. You are confident the payments will be made, since DeVille is essentially riskless. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?a.$4,271.67b.$4,496.49c.$4,733.15d.$4,969.81e.$5,218.30

ANS:

168.Scott and Linda have been saving to pay for their daughter Casie's college education. Casie just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years⎯if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).

So far, Scott and Linda have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Casie's anticipated college costs?a.$1,965.21b.$2,068.64c.$2,177.51d.$2,292.12e.$2,412.76

ANS:

CHAPTER 5—BONDS, BOND VALUATION, AND INTEREST RATES

TRUE/FALSE

1.If a firm raises capital by selling new bonds, it is called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Issuing bondsKEY:Bloom’s: Knowledge

2.A call provision gives bondholders the right to demand, or "call for," repayment of a bond. Typically, calls are exercised if interest rates rise, because when rates rise the bondholder can get the principal amount back and reinvest it elsewhere at higher rates.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Call provisionKEY:Bloom’s: Knowledge

3.Sinking funds are devices used to force companies to retire bonds on a scheduled basis prior to their maturity. Many bond indentures allow the company to acquire bonds for a sinking fund by either purchasing bonds in the market or selecting the bonds to be acquired by a lottery administered by the trustee through a call at face value.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Sinking fundsKEY:Bloom’s: Knowledge

4.A zero coupon bond is a bond that pays no interest and is offered (and subsequently sells initially) at par. These bonds provide compensation to investors in the form of capital appreciation.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Zero coupon bondKEY:Bloom’s: Knowledge

5.The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Floating-rate debtKEY:Bloom’s: Knowledge

6.The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Discounted cash flowsKEY:Bloom’s: Knowledge

7.For bonds, price sensitivity to a given change in interest rates is generally greater the longer before the bond matures.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Bond prices and interest ratesKEY:Bloom’s: Knowledge

8.As a general rule, a company's debentures have higher required interest rates than its mortgage bonds because mortgage bonds are backed by specific assets while debentures are unsecured.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Mortgage bondKEY:Bloom’s: Knowledge

9.Other things equal, a firm will have to pay a higher coupon rate on its subordinated debentures than on its second mortgage bonds.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Debt coupon rateKEY:Bloom’s: Knowledge

10.There is an inverse relationship between bonds' quality ratings and their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Bond ratings and required returnsKEY:Bloom’s: Knowledge

11.A bond that had a 20-year original maturity with 1 year left to maturity has more interest rate price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 5-13NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: Knowledge

12.Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more interest rate price risk if you purchased a 30-day bond than if you bought a 30-year bond.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 5-13NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: Knowledge

13.Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 5-15NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Junk bondKEY:Bloom’s: Knowledge

14.A bond that is callable has a chance of being retired earlier than its stated term to maturity. Therefore, if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to maturity than an otherwise identical noncallable bond.

ANS:FThe callable bond will be called if rates fall far enough below the coupon rate, but it will not be called otherwise. Thus, the call provision can only harm bondholders. Therefore, callable bonds sell at higher yields than noncallable bonds, regardless of the slope of the yield curve.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Callable bondsKEY:Bloom’s: Comprehension

15.Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Income bondKEY:Bloom’s: Comprehension

16.You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

ANS:FThe sinking fund would give Bond SF a lower average maturity, and it would also lower its risk. Therefore, Bond SF should have a lower, not a higher, yield.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Sinking fundsKEY:Bloom’s: Comprehension

17.Floating-rate debt is advantageous to investors because the interest rate moves up if market rates rise. Since floating-rate debt shifts interest rate risk to companies, it offers no advantages to issuers.

ANS:FFloating rates can benefit issuers if rates decline, so a company that thinks rates are likely to fall would want to issue such bonds.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Floating-rate debtKEY:Bloom’s: Comprehension

18.A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Bond premiums and discountsKEY:Bloom’s: Comprehension

19.You have funds that you want to invest in bonds, and you just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. The coupon rate is 10% (with annual payments), and there are 10 years before the bond will mature and pay off its $1,000 par value. You should buy the bond if your required return on bonds with this risk is 12%.

ANS:TThe bonds expected return (YTM) is 13.81%, which exceeds the 12% required return, so buy the bond.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 5-3NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Bond value–annual paymentKEY:Bloom’s: Comprehension

20.If the required rate of return on a bond (rd) is greater than its coupon interest rate and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. (Accrued interest between interest payment dates should not be considered when answering this question.)

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Bond valueKEY:Bloom’s: Comprehension

21."Restrictive covenants" are designed primarily to protect bondholders by constraining the actions of managers. Such covenants are spelled out in bond indentures.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Restrictive covenantsKEY:Bloom’s: Comprehension

22.The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

ANS:TThe reason for this is that more of the cash flows of a low-coupon bond comes late in the bond's life (as the maturity payment), and later cash flows are impacted most heavily by changing market rates.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Prices and interest ratesKEY:Bloom’s: Comprehension

MULTIPLE CHOICE

23.Which of the following statements is CORRECT?a.The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.b.You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline.c.The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates.d.The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates.e.You hold two bonds. One is a 10-year, zero coupon, issue and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the larger percentage decline.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 5-4NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest ratesKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

24.Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?a.Market interest rates rise sharply.b.Market interest rates decline sharply.c.The company's financial situation deteriorates significantly.d.Inflation increases significantly.e.The company's bonds are downgraded.

ANS:BPTS:1DIF:Difficulty: EasyOBJ:LO: 5-4NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Callable bondsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

25.A 10-year bond with a 9% annual coupon has a yield to maturity of 8%. Which of the following statements is CORRECT?a.The bond is selling below its par value.b.The bond is selling at a discount.c.If the yield to maturity remains constant, the bond's price one year from now will be lower than its current price.d.The bond's current yield is greater than 9%.e.If the yield to maturity remains constant, the bond's price one year from now will be higher than its current price.

ANS:CPTS:1DIF:Difficulty: EasyOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

26.Which of the following statements is CORRECT?a.An indenture is a bond that is less risky than a mortgage bond.b.The expected return on a corporate bond will generally exceed the bond's yield to maturity.c.If a bond's coupon rate exceeds its yield to maturity, then its expected return to investors exceeds the yield to maturity.d.Under our bankruptcy laws, any firm that is in financial distress will be forced to declare bankruptcy and then be liquidated.e.All else equal, senior debt generally has a lower yield to maturity than subordinated debt.

ANS:EPTS:1DIF:Difficulty: EasyOBJ:LO: 5-16NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bonds, default riskKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

27.Ranger Inc. would like to issue new 20-year bonds. Initially, the plan was to make the bonds non-callable. If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?a.There is no reason to expect a change in the required rate of return.b.The required rate of return would decline because the bond would then be less risky to a bondholder.c.The required rate of return would increase because the bond would then be more risky to a bondholder.d.It is impossible to say without more information.e.Because of the call premium, the required rate of return would decline.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Call provisionKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

28.Under normal conditions, which of the following would be most likely to increase the coupon rate required to enable a bond to be issued at par?a.Adding a call provision.b.The rating agencies change the bond's rating from Baa to Aaa.c.Making the bond a first mortgage bond rather than a debenture.d.Adding a sinking fund.e.Adding additional restrictive covenants that limit management's actions.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 5-3NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond coupon rateKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

29.Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?a.20-year, 10% coupon bond.b.20-year, 5% coupon bond.c.1-year, 10% coupon bond.d.20-year, zero coupon bond.e.10-year, zero coupon bond.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

30.Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?a.A 1-year bond with a 15% coupon.b.A 3-year bond with a 10% coupon.c.A 10-year zero coupon bond.d.A 10-year bond with a 10% coupon.e.An 8-year bond with a 9% coupon.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: Conceptual

31.Which of the following bonds has the greatest interest rate price risk?a.A 10-year, $1,000 face value, zero coupon bond.b.A 10-year, $1,000 face value, 10% coupon bond with annual interest payments.c.All 10-year bonds have the same price risk since they have the same maturity.d.A 10-year, $1,000 face value, 10% coupon bond with semiannual interest payments.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

32.If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value?a.A 1-year bond with an 8% coupon.b.A 10-year bond with an 8% coupon.c.A 10-year bond with a 12% coupon.d.A 10-year zero coupon bond.e.A 1-year zero coupon bond.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

33.Which of the following statements is CORRECT?a.Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.b.A sinking fund provision makes a bond more risky to investors at the time of issuance.c.Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time.d.If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.e.Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Sinking fundsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

34.Nicholas Industries can issue a 20-year bond with a 6% annual coupon. This bond is not convertible, is not callable, and has no sinking fund. Alternatively, Nicholas could issue a 20-year bond that is convertible into common equity, may be called, and has a sinking fund. Which of the following most accurately describes the coupon rate that Nicholas would have to pay on the convertible, callable bond?a.It could be less than, equal to, or greater than 6%.b.Greater than 6%.c.Exactly equal to 8%.d.Less than 6%.e.Exactly equal to 6%.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 5-2NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Convertible, callable bondsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

35.The YTMs of three $1,000 face value bonds that mature in 10 years and have the same level of risk are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?a.Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity.b.Bond C sells at a premium (its price is greater than par), and its price is expected to increase over the next year.c.Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.d.Over the next year, Bond A's price is expected to decrease, Bond B's price is expected to stay the same, and Bond C's price is expected to increase.e.Bond A's current yield will increase each year.

ANS:

36.A 10-year corporate bond has an annual coupon of 9%. The bond is currently selling at par ($1,000). Which of the following statements is NOT CORRECT?a.The bond's yield to maturity is 9%.b.The bond's current yield is 9%.c.If the bond's yield to maturity remains constant, the bond will continue to sell at par.d.The bond's current yield exceeds its capital gains yield.e.The bond's expected capital gains yield is positive.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

37.Which of the following statements is CORRECT?a.If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.b.All else equal, if a bond's yield to maturity increases, its price will fall.c.If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.d.All else equal, if a bond's yield to maturity increases, its current yield will fall.e.A zero coupon bond's current yield is equal to its yield to maturity.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

38.Stephenson Co.'s 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?a.The bond's current yield exceeds its yield to maturity.b.The bond's yield to maturity is greater than its coupon rate.c.The bond's current yield is equal to its coupon rate.d.If the yield to maturity stays constant until the bond matures, the bond's price will remain at $850.e.The bond's coupon rate exceeds its current yield.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

39.A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT?a.If the yield to maturity remains at 8%, then the bond's price will decline over the next year.b.The bond's coupon rate is less than 8%.c.If the yield to maturity increases, then the bond's price will increase.d.If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.e.The bond's current yield is less than 8%.

ANS:

40.Which of the following statements is CORRECT?a.On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.b.On an expected yield basis, the expected current yield will always be positive because an investor would not purchase a bond that is not expected to pay any cash coupon interest.c.If a coupon bond is selling at par, its current yield equals its yield to maturity.d.The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.e.If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

41.A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is CORRECT?a.The bond is currently selling at a price below its par value.b.If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.c.The bond should currently be selling at its par value.d.If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.e.If market interest rates decline, the price of the bond will also decline.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-4NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rates and bond pricesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

42.An 8-year Treasury bond has a 10% coupon, and a 10-year Treasury bond has an 8% coupon. Both bonds have the same yield to maturity. If the yield to maturity of both bonds increases by the same amount, which of the following statements would be CORRECT?a.Both bonds would decline in price, but the 10-year bond would have the greater percentage decline in price.b.The prices of both bonds would increase by the same amount.c.One bond's price would increase, while the other bond's price would decrease.d.The prices of the two bonds would remain constant.e.The prices of both bonds will decrease by the same amount.

ANS:

43.Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?a.The prices of both bonds will remain unchanged.b.The price of Bond A will decrease over time, but the price of Bond B will increase over time.c.The prices of both bonds will increase by 7% per year.d.The prices of both bonds will increase over time, but the price of Bond A will increase by more.e.The price of Bond B will decrease over time, but the price of Bond A will increase over time.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-4NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yields and pricesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

44.Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:

T-bond = 7.72%A = 9.64%AAA = 8.72%BBB = 10.18%

The differences in rates among these issues were most probably caused primarily by:a.Tax effects.b.Default risk differences.c.Maturity risk differences.d.Inflation differences.e.Real risk-free rate differences.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-7NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest ratesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

45.Which of the following statements is CORRECT?a.All else equal, long-term bonds have less interest rate price risk than short-term bonds.b.All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.c.All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.d.All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.e.All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest vs. reinvestment rate riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

46.Which of the following statements is CORRECT?a.Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.b.If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.c.Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.d.Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.e.One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest vs. reinvestment rate riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

47.Which of the following statements is CORRECT?a.Liquidity premiums are generally higher on Treasury than corporate bonds.b.The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.c.Default risk premiums are generally lower on corporate than on Treasury bonds.d.Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.e.If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-14NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Term structure of interest ratesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

48.Which of the following statements is CORRECT?a.If a coupon bond is selling at a discount, its price will continue to decline until it reaches its par value at maturity.b.If interest rates increase, the price of a 10-year coupon bond will decline by a greater percentage than the price of a 10-year zero coupon bond.c.If a bond's yield to maturity exceeds its annual coupon, then the bond will trade at a premium.d.If a coupon bond is selling at a premium, its current yield equals its yield to maturity.e.If a coupon bond is selling at par, its current yield equals its yield to maturity.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

49.A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?a.The bond has a current yield greater than 8%.b.The bond sells at a discount.c.The bond's required rate of return is less than 7.5%.d.If the yield to maturity remains constant, the price of the bond will decline over time.e.The bond sells at a price below par.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

50.Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?a.One year from now, Bond A's price will be higher than it is today.b.Bond A's current yield is greater than 8%.c.Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.d.Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.e.Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

51.Which of the following statements is NOT CORRECT?a.All else equal, bonds with longer maturities have more interest rate (price) risk than bonds with shorter maturities.b.If a bond is selling at its par value, its current yield equals its yield to maturity.c.If a bond is selling at a premium, its current yield will be greater than its yield to maturity.d.All else equal, bonds with larger coupons have greater interest rate (price) risk than bonds with smaller coupons.e.If a bond is selling at a discount to par, its current yield will be less than its yield to maturity.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

52.Which of the following statements is CORRECT?a.If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.b.Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.c.Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.d.Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.e.If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

53.Which of the following statements is CORRECT?a.The total yield on a bond is derived from dividends plus changes in the price of the bond.b.Bonds are riskier than common stocks and therefore have higher required returns.c.Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.d.The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.e.If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

54.Which of the following statements is CORRECT?a.If rates fall after its issue, a zero coupon bond could trade at a price above its par value.b.If rates fall rapidly, a zero coupon bond's expected appreciation could become negative.c.If a firm moves from a position of strength toward financial distress, its bonds' yield to maturity would probably decline.d.If a bond is selling at a premium, this implies that its yield to maturity exceeds its coupon rate.e.If a coupon bond is selling at par, its current yield equals its yield to maturity.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

55.You are considering three different bonds for your portfolio. Each bond has a 10-year maturity and a yield to maturity of 10%. Bond X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon. Which of the following statements is CORRECT?a.Bond X has the greatest reinvestment rate risk.b.If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price.c.If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today.d.If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.e.If the bonds' market interest rates remain at 10%, Bond Z's price will be lower one year from now than it is today.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

56.Bonds A, B, and C all have a maturity of 15 years and a yield to maturity of 9%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. Which of the following statements is CORRECT?a.Bond A has the most interest rate risk.b.If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year.c.If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.d.Bond C sells at a premium over its par value.e.If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

57.Which of the following statements is CORRECT?a.A 10-year, 10% coupon bond has less reinvestment rate risk than a 10-year, 5% coupon bond (assuming all else equal).b.The total return on a bond during a given year is the sum of the coupon interest payments received during the year and the change in the value of the bond from the beginning to the end of the year.c.The price of a 20-year, 10% bond is less sensitive to changes in interest rates than the price of a 5-year, 10% bond.d.A $1,000 bond with $100 annual interest payments that has 5 years to maturity and is not expected to default would sell at a discount if interest rates were below 9% and at a premium if interest rates were greater than 11%.e.10-year, zero coupon bonds have higher reinvestment rate risk than 10-year, 10% coupon bonds.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

58.Which of the following statements is CORRECT?a.The market value of a bond will always approach its par value as its maturity date approaches. This holds true even if the firm has filed for bankruptcy.b.Rising inflation makes the actual yield to maturity on a bond greater than a quoted yield to maturity that is based on market prices.c.The yield to maturity on a coupon bond that sells at its par value consists entirely of a current interest yield; it has a zero expected capital gains yield.d.On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.e.The yield to maturity for a coupon bond that sells at a premium consists entirely of a positive capital gains yield; it has a zero current interest yield.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

59.Which of the following statements is CORRECT?a.If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative.b.If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity.c.The current yield on Bond A exceeds the current yield on Bond B. Therefore, Bond A must have a higher yield to maturity than Bond B.d.If a coupon bond is selling at par, its current yield equals its yield to maturity.e.If a coupon bond is selling at a premium, then the bond's current yield is zero.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yieldsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

60.Which of the following statements is CORRECT?a.If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.b.Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.c.If the maturity risk premium (MRP) equals zero, the yield curve must be flat.d.The yield curve can never be downward sloping.e.If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.

ANS:

61.Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure thata.The economy is not in a recession.b.Long-term bonds are a better buy than short-term bonds.c.Maturity risk premiums could help to explain the yield curve's upward slope.d.Long-term interest rates are more volatile than short-term rates.e.Inflation is expected to decline in the future.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-14NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Yield curveKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

62.Which of the following statements is CORRECT?a.The most likely explanation for an inverted yield curve is that investors expect inflation to increase.b.The most likely explanation for an inverted yield curve is that investors expect inflation to decrease.c.If the yield curve is inverted, short-term bonds have lower yields than long-term bonds.d.Inverted yield curves can exist for Treasury bonds, but because of default premiums, the corporate yield curve can never be inverted.e.The higher the maturity risk premium, the higher the probability that the yield curve will be inverted.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-14NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Yield curveKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

63.Bonds for two companies were just issued: Short Corp.'s bonds will mature in 5 years, and Long Corp.'s bonds will mature in 15 years. Both bonds promise to pay a semiannual coupon, they are not callable or convertible, and they are equally liquid. Further, assume that the Treasury yield curve is based only on expectations about future inflation, i.e., that the maturity risk premium is zero for T-bonds. Under these conditions, which of the following statements is correct?a.If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield.b.If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.c.If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds.d.If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal.e.If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have the lower yield.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-14NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Corporate yield curveKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

64.Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?a.Bond A trades at a discount, whereas Bond B trades at a premium.b.If the yield to maturity for both bonds remains at 8%, Bond A's price one year from now will be higher than it is today, but Bond B's price one year from now will be lower than it is today.c.If the yield to maturity for both bonds immediately decreases to 6%, Bond A's bond will have a larger percentage increase in value.d.Bond A's current yield is greater than that of Bond B.e.Bond A's capital gains yield is greater than Bond B's capital gains yield.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond rates and pricesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

65.Which of the following statements is CORRECT?a.A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond.b.Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used.c.Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate.d.The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.e.Two bonds have the same maturity and the same coupon rate. However, one is callable and the other is not. The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Callable bondsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

66.Cornwall Corporation is planning to raise $1,000,000 to finance a new plant. Which of the following statements is CORRECT?a.If debt is used to raise the million dollars, but $500,000 is raised as first mortgage bonds on the new plant and $500,000 as debentures, the interest rate on the first mortgage bonds would be lower than it would be if the entire $1 million were raised by selling first mortgage bonds.b.If two tiers of debt are used (with one senior and one subordinated debt class), the subordinated debt will carry a lower interest rate.c.If debt is used to raise the million dollars, the cost of the debt would be lower if the debt were in the form of a fixed-rate bond rather than a floating-rate bond.d.If debt is used to raise the million dollars, the cost of the debt would be higher if the debt were in the form of a mortgage bond rather than an unsecured term loan.e.The company would be especially eager to have a call provision included in the indenture if its management thinks that interest rates are almost certain to rise in the foreseeable future.

ANS:

67.Which of the following statements is CORRECT?a.Subordinated debt has less default risk than senior debt.b.Convertible bonds have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains.c.Junk bonds typically provide a lower yield to maturity than investment-grade bonds.d.A debenture is a secured bond that is backed by some or all of the firm's fixed assets.e.Junior debt is debt that has been more recently issued, and in bankruptcy it is paid off after senior debt because the senior debt was issued first.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-15NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Types of debtKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

68.Which of the following statements is CORRECT?a.Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.b.Once a firm declares bankruptcy, it must then be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and lawyer fees.c.Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.d.A firm with a sinking fund that gave it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.e.One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the debt until the bonds mature.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-16NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Miscellaneous conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

69.Which of the following statements is CORRECT?a.All else equal, a bond that has a coupon rate of 10% will sell at a discount if the required return for bonds of similar risk is 8%.b.The price of a discount bond will increase over time, assuming that the bond's yield to maturity remains constant.c.For a given firm, its debentures are likely to have a lower yield to maturity than its mortgage bonds.d.When large firms are in financial distress, they are almost always liquidated, whereas smaller firms are generally reorganized.e.The total return on a bond during a given year consists only of the coupon interest payments received.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-16NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Miscellaneous conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

70.Which of the following statements is NOT CORRECT?a.The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero.b.All else equal, senior debt has less default risk than subordinated debt.c.A company's bond rating is affected by its financial ratios and provisions in its indenture.d.Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.e.All else equal, secured debt is less risky than unsecured debt.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 5-16NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Default and bankruptcyKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

71.Which of the following statements is CORRECT?a.A bond is likely to be called if its market price is below its par value.b.Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.c.A bond is likely to be called if its market price is equal to its par value.d.A bond is likely to be called if it sells at a discount below par.e.A bond is likely to be called if its coupon rate is below its YTM.

ANS:

72.Which of the following statements is CORRECT?a.A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.b.If a bond sells at par, then its current yield will be less than its yield to maturity.c.If a bond sells for less than par, then its yield to maturity is less than its coupon rate.d.A discount bond's price declines each year until it matures, when its value equals its par value.e.Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

ANS:

73.Assume that a 10-year Treasury bond has a 12% annual coupon, while a 15-year T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT?a.If interest rates decline, the prices of both bonds will increase, but the 10-year bond would have a larger percentage increase in price.b.The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.c.The 10-year bond would sell at a premium, while the 15-year bond would sell at par.d.If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall.e.If interest rates decline, the prices of both bonds will increase, but the 15-year bond would have a larger percentage increase in price.

ANS:MSC:TYPE: Multiple Choice: Conceptual

74.Listed below are some provisions that are often contained in bond indentures. Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond?

1.Fixed assets are used as security for a bond.2.A given bond is subordinated to other classes of debt.3.The bond can be converted into the firm's common stock.4.The bond has a sinking fund.5.The bond has a call provision.6.The indenture contains covenants that prevent the use of additional debt.

a.1, 4, 6b.1, 2, 3, 4, 6c.1, 2, 3, 4, 5, 6d.1, 3, 4, 5, 6e.1, 3, 4, 6

ANS:EPTS:1DIF:Difficulty: ChallengingOBJ:LO: 5-11NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond indentureKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

75.Suppose International Digital Technologies decides to raise a total of $200 million, with $100 million as long-term debt and $100 million as common equity. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT?a.If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures.b.In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each of the two types of bonds would increase as the percentage of mortgage bonds used was increased, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.c.The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures.d.If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.e.The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be.

ANS:

PTS:1DIF:Difficulty: ChallengingOBJ:LO: 5-11NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Types of debt and their relative costsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

76.Which of the following statements is CORRECT?a.If their maturities and other characteristics were the same, a 5% coupon bond would have more interest rate price risk than a 10% coupon bond.b.A 10-year coupon bond would have more reinvestment rate risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment rate risk.c.A 10-year coupon bond would have more interest rate price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of interest rate price risk.d.If their maturities and other characteristics were the same, a 5% coupon bond would have less interest rate price risk than a 10% coupon bond.e.A zero coupon bond of any maturity will have more interest rate price risk than any coupon bond, even a perpetuity.

ANS:APTS:1DIF:Difficulty: ChallengingOBJ:LO: 5-13NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Interest rate and reinvestment rate riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

77.Which of the following statements is CORRECT?a.All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.b.All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.c.If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.d.If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must be less than its coupon rate.e.If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rates.

ANS:CPTS:1DIF:Difficulty: ChallengingOBJ:LO: 5-6NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Bond yields and pricesKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

78.Assuming all else is constant, which of the following statements is CORRECT?a.For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.b.From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.c.Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.d.For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.e.A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.

ANS:

79.Kessen Inc.'s bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?a.$923.22b.$946.30c.$969.96d.$994.21e.$1,019.06

ANS:

80.Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?a.$829.21b.$850.47c.$872.28d.$894.65e.$917.01

ANS:

81.Curtis Corporation's noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?a.6.20%b.6.53%c.6.87%d.7.24%e.7.62%

ANS:

82.Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?a.8.56%b.9.01%c.9.46%d.9.93%e.10.43%

ANS:

83.Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?a.5.56%b.5.85%c.6.14%d.6.45%e.6.77%

ANS:

84.Meacham Enterprises' bonds currently sell for $1,280 and have a par value of $1,000. They pay a $135 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,050. What is their yield to call (YTC)?a.6.39%b.6.72%c.7.08%d.7.45%e.7.82%

ANS:

85.Perry Inc.'s bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?a.7.39%b.7.76%c.8.15%d.8.56%e.8.98%

ANS:

86.Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?a.$891.00b.$913.27c.$936.10d.$959.51e.$983.49

ANS:

87.If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 8.5%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?a.1.90%b.2.09%c.2.30%d.2.53%e.2.78%

ANS:

88.One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?a.$1,077.01b.$1,104.62c.$1,132.95d.$1,162.00e.$1,191.79

ANS:

89.Currently, Bruner Inc.'s bonds sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)a.2.11%b.2.32%c.2.55%d.2.80%e.3.09%

ANS:

90.Gilligan Co.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, and are callable in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?a.3.92%b.4.12%c.4.34%d.4.57%e.4.81%

ANS:

91.Haswell Enterprises' bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?a.1,063.09b.1,090.35c.1,118.31d.1,146.27e.1,174.93

ANS:

92.CMS Corporation's balance sheet as of today is as follows:

Long-term debt (bonds, at par)$10,000,000Preferred stock2,000,000Common stock ($10 par)10,000,000Retained earnings 4,000,000Total debt and equity$26,000,000

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?a.$5,276,731b.$5,412,032c.$5,547,332d.$7,706,000e.$7,898,650

ANS:

93.5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?a.2.59%b.2.88%c.3.20%d.3.52%e.3.87%

ANS:

94.The Gergen Group's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Gergen's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Gergen's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) ⋅ 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?a.1.40%b.1.55%c.1.71%d.1.88%e.2.06%

ANS:

95.Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) ⋅ 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Chandler's bonds?a.0.99%b.1.10%c.1.21%d.1.33%e.1.46%

ANS:

96.Squire Inc.'s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Squire's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) ⋅ 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Squire's bonds?a.0.49%b.0.55%c.0.61%d.0.68%e.0.75%

ANS:

97.Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's nominal (annual) coupon interest rate?a.6.27%b.6.60%c.6.95%d.7.32%e.7.70%

ANS:

98.Jerome Corporation's bonds have 15 years to maturity, an 8.75% coupon paid semiannually, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,050. What is the bond's nominal yield to call?a.5.01%b.5.27%c.5.54%d.5.81%e.6.10%

ANS:

99.A 25-year, $1,000 par value bond has an 8.5% annual coupon. The bond currently sells for $875. If the yield to maturity remains at its current rate, what will the price be 5 years from now?a.$839.31b.$860.83c.$882.90d.$904.97e.$927.60

ANS:

100.McCurdy Co.'s Class Q bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. McCurdy's Class P bonds have the same risk, maturity, and par value, but the P bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?a.$943.98b.$968.18c.$993.01d.$1,017.83e.$1,043.28

ANS:

101.Reinegar Corporation is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Reinegar issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.a.4,228b.4,337c.4,448d.4,562e.4,676

ANS:

CHAPTER 6—RISK AND RETURN

TRUE/FALSE

1.The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 6-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Standard deviationKEY:Bloom’s: Knowledge

2.Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Risk aversionKEY:Bloom’s: Knowledge

3.When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Knowledge

4.Diversification will normally reduce the riskiness of a portfolio of stocks.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Knowledge

5.In portfolio analysis, we often use ex post (historical) returns and standard deviations, despite the fact that we are really interested in ex ante (future) data.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Knowledge

6.The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio returnKEY:Bloom’s: Knowledge

7.Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Market riskKEY:Bloom’s: Knowledge

8.An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Market riskKEY:Bloom’s: Knowledge

9.Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Risk and expected returnsKEY:Bloom’s: Knowledge

10.One key conclusion of the Capital Asset Pricing Model is that the value of an asset should be measured by considering both the risk and the expected return of the asset, assuming that the asset is held in a well-diversified portfolio. The risk of the asset held in isolation is not relevant under the CAPM.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:CAPM and riskKEY:Bloom’s: Knowledge

11.According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:CAPM and riskKEY:Bloom’s: Knowledge

12.If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SML and risk aversionKEY:Bloom’s: Knowledge

13.If a stock's expected return as seen by the marginal investor exceeds this investor's required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Stock market equilibriumKEY:Bloom’s: Knowledge

14.If a stock's market price exceeds its intrinsic value as seen by the marginal investor, then the investor will sell the stock until its price has fallen down to the level of the investor's estimate of the intrinsic value.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Stock market equilibriumKEY:Bloom’s: Knowledge

15.For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must equal this investor's required return.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Stock market equilibriumKEY:Bloom’s: Knowledge

16.Two conditions are used to determine whether or not a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal this investor's required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

ANS:FIf one condition holds, then the other must also hold.

PTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Stock market equilibriumKEY:Bloom’s: Knowledge

17.Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, its standard deviation.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:VarianceKEY:Bloom’s: Comprehension

18."Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Risk aversionKEY:Bloom’s: Comprehension

19.If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Risk aversionKEY:Bloom’s: Comprehension

20.Someone who is risk averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Risk prem. and risk aversionKEY:Bloom’s: Comprehension

21.A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

22.A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

23.If the returns of two firms are negatively correlated, then one of them must have a negative beta.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

24.A stock with a beta equal to −1.0 has zero systematic (or market) risk.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

25.It is possible for a firm to have a positive beta, even if the correlation between its returns and those of another firm is negative.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

26.Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Comprehension

27.Portfolio A has but one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Comprehension

28.A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: Comprehension

29.The distributions of rates of return for Companies AA and BB are given below:

State of theProbability ofEconomyThis State OccurringAABBBoom0.230%−10%Normal0.610% 5%Recession0.2−5% 50%

We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

ANS:FThe stocks have the same expected returns, but BB does badly in booms and well in recessions. Therefore, it would do more to reduce risk.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 6-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: Comprehension

30.Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Cor. coefficient and riskKEY:Bloom’s: Comprehension

31.Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Company-specific riskKEY:Bloom’s: Comprehension

32.We would generally find that the beta of a single security is more stable over time than the beta of a diversified portfolio.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio betaKEY:Bloom’s: Comprehension

33.We would almost always find that the beta of a diversified portfolio is less stable over time than the beta of a single security.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Portfolio betaKEY:Bloom’s: Comprehension

34.If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Diversification effectsKEY:Bloom’s: Comprehension

35.The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-11NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:CAPMKEY:Bloom’s: Comprehension

36.Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Required returnKEY:Bloom’s: Comprehension

37.A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Changes in betaKEY:Bloom’s: Comprehension

38.Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Changes in betaKEY:Bloom’s: Comprehension

39.The slope of the SML is determined by the value of beta.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

40.The slope of the SML is determined by investors' aversion to risk. The greater the average investor's risk aversion, the steeper the SML.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

41.If you plotted the returns of a company against those of the market and found that the slope of your line was negative, the CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue in the future.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

42.If you plotted the returns on a given stock against those of the market, and if you found that the slope of the regression line was negative, the CAPM would indicate that the required rate of return on the stock should be greater than the risk-free rate for a well-diversified investor, assuming that the observed relationship is expected to continue into the future.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

43.The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

44.The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by a manager's actions.

ANS:FThe slope and intercept of the SML are determined by the market, generally not the actions of a single firm. However, managers can influence their firms' beta, and thus their firms' required returns.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

45.The Y-axis intercept of the SML indicates the required return on an individual asset whenever the realized return on an average (b = 1) stock is zero.

ANS:FPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: Comprehension

46.If the price of money (e.g., interest rates and equity capital costs) increases due to an increase in anticipated inflation, the risk-free rate will also increase. If there is no change in investors' risk aversion, then the market risk premium (rM − rRF) will remain constant. Also, if there is no change in stocks' betas, then the required rate of return on each stock as measured by the CAPM will increase by the same amount as the increase in expected inflation.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:CAPM and inflationKEY:Bloom’s: Comprehension

47.Since the market return represents the expected return on an average stock, the market return reflects a certain amount of risk. As a result, there exists a market risk premium, which is the amount over and above the risk-free rate, that is required to compensate stock investors for assuming an average amount of risk.

ANS:TPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Market risk premiumKEY:Bloom’s: Comprehension

48.Assume that two investors each hold a portfolio, and that portfolio is their only asset. Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0. Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk. However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

ANS:TBoth portfolios would be twice as risky as a portfolio of average stocks. Their risks would decline if they added b = 1.0 stocks, as those stocks would move the portfolios' betas toward 1.0.

PTS:1DIF:Difficulty: ChallengingOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: Comprehension

49.The CAPM is a multi-period model that takes account of differences in securities' maturities, and it can be used to determine the required rate of return for any given level of systematic risk.

ANS:FThe CAPM is a single-period model, and it does not take account of securities' maturities.

PTS:1DIF:Difficulty: ChallengingOBJ:LO: 6-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Risk and returnLOC:TBATOP:CAPMKEY:Bloom’s: Comprehension

MULTIPLE CHOICE

50.If markets are in equilibrium, which of the following conditions will exist?a.Each stock's expected return should equal its required return as seen by the marginal investor.b.All stocks should have the same expected return as seen by the marginal investor.c.The expected and required returns on stocks and bonds should be equal.d.All stocks should have the same realized return during the coming year.e.Each stock's expected return should equal its realized return as seen by the marginal investor.

ANS:AStatement a is true, because if the expected return does not equal the required return, then markets are not in equilibrium.

PTS:1DIF:Difficulty: EasyOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Market equilibriumKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

51.You are considering investing in one of the these three stocks:

StockStandard DeviationBetaA20%0.59B10%0.61C12%1.29

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.a.A; B.b.B; A.c.C; A.d.C; B.e.A; A.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk aversionKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

52.Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?a.Stock A.b.Stock B.c.Neither A nor B, as neither has a return sufficient to compensate for risk.d.Add A, since its beta must be lower.e.Either A or B, i.e., the investor should be indifferent between the two.

ANS:BWith only 4 stocks in the portfolio, unsystematic risk matters, and B has less.

PTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Standard deviationKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

53.Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?a.Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.b.The beta of an "average stock," or "the market," can change over time, sometimes drastically.c.Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.d.All of the statements above are true.e.The fact that a security or project may not have a past history that can be used as the basis for calculating beta.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

54.Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)a.Stock B must be a more desirable addition to a portfolio than A.b.Stock A must be a more desirable addition to a portfolio than B.c.The expected return on Stock A should be greater than that on B.d.The expected return on Stock B should be greater than that on A.e.When held in isolation, Stock A has more risk than Stock B.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

55.Which of the following statements is CORRECT?a.If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio.b.The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future.c.The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks.d.It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF.e.The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

56.Which of the following statements is CORRECT?a.Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of −0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.b.Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.c.You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.d.If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.e.Paid-in-Full Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Paid-in-Full's revenues, profits, and stock price tend to rise during recessions. This suggests that Paid-in-Full Inc.'s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

57.Which of the following statements is CORRECT?a.Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.b.The beta of an "average stock," which is also "the market beta," can change over time, sometimes drastically.c.If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0. This is especially true if the company finances with more debt than the average firm.d.During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.e.If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

58.Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct.a.In equilibrium, the expected return on Stock B will be greater than that on Stock A.b.When held in isolation, Stock A has more risk than Stock B.c.Stock B would be a more desirable addition to a portfolio than A.d.In equilibrium, the expected return on Stock A will be greater than that on B.e.Stock A would be a more desirable addition to a portfolio then Stock B.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

59.Stock X has a beta of 0.7 and Stock Y has a beta of 1.7. Which of the following statements must be true, according to the CAPM?a.Stock Y's realized return during the coming year will be higher than Stock X's return.b.If the expected rate of inflation increases but the market risk premium is unchanged, the required returns on the two stocks should increase by the same amount.c.Stock Y's return has a higher standard deviation than Stock X.d.If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger decline in its required return than will Stock Y.e.If you invest $50,000 in Stock X and $50,000 in Stock Y, your 2-stock portfolio would have a beta significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Beta coefficientsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

60.Consider the following average annual returns for Stocks A and B and the Market. Which of the possible answers best describes the historical betas for A and B?

YearsMarketStock AStock B1 0.030.160.052−0.050.200.053 0.010.180.054−0.100.250.055 0.060.140.05

a.bA > +1; bB = 0.b.bA = 0; bB = −1.c.bA < 0; bB = 0.d.bA < −1; bB = 1.e.bA > 0; bB = 1.

ANS:

61.Which of the following statements is CORRECT?a.The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio.b.An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks.c.Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount.d.An investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks.e.An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

62.Which of the following statements is CORRECT?a.If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.b.If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.c.Market risk can be eliminated by forming a large portfolio, and if some Treasury bonds are held in the portfolio, the portfolio can be made to be completely riskless.d.A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.e.If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and betaKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

63.Recession, inflation, and high interest rates are economic events that are best characterized as beinga.company-specific risk factors that can be diversified away.b.among the factors that are responsible for market risk.c.risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.d.irrelevant except to governmental authorities like the Federal Reserve.e.systematic risk factors that can be diversified away.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Market riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

64.Which of the following statements is CORRECT?a.If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks, it would be essentially riskless.b.The required return on a firm's common stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return.c.Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.d.A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.e.A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk and port. divers.KEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

65.Which of the following statements is CORRECT?a.Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.b.A large portfolio of randomly selected stocks will have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.c.A large portfolio of stocks whose betas are greater than 1.0 will have less market risk than a single stock with a beta = 0.8.d.If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.e.A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk and port. divers.KEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

66.Which of the following statements is CORRECT?a.A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations.b.A two-stock portfolio will always have a lower beta than a one-stock portfolio.c.If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio.d.A stock with an above-average standard deviation must also have an above-average beta.e.A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-5NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Port. risk, return, and betaKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

67.Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1.

ExpectedStandardStockReturnDeviationBetaA10%20%1.0B10%10%1.0C12%12%1.4

Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?a.Portfolio AB's coefficient of variation is greater than 2.0.b.Portfolio AB's required return is greater than the required return on Stock A.c.Portfolio ABC's expected return is 10.66667%.d.Portfolio ABC has a standard deviation of 20%.e.Portfolio AB has a standard deviation of 20%.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

68.Which of the following statements is CORRECT?a.A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.b.If a stock has a negative beta, its expected return must be negative.c.A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5.d.According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns.e.If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Port. return, CAPM, and betaKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

69.Which of the following is most likely to be true for a portfolio of 40 randomly selected stocks?a.The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation.b.The beta of the portfolio is less than the average of the betas of the individual stocks.c.The beta of the portfolio is equal to the average of the betas of the individual stocks.d.The beta of the portfolio is larger than the average of the betas of the individual stocks.e.The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-6NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

70.If you randomly select stocks and add them to your portfolio, which of the following statements best describes what you should expect?a.Adding more such stocks will increase the portfolio's expected rate of return.b.Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk.c.Adding more such stocks will have no effect on the portfolio's risk.d.Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk.e.Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

71.Charlie and Lucinda each have $50,000 invested in stock portfolios. Charlie's has a beta of 1.2, an expected return of 10.8%, and a standard deviation of 25%. Lucinda's has a beta of 0.8, an expected return of 9.2%, and a standard deviation that is also 25%. The correlation coefficient, r, between Charlie's and Lucinda's portfolios is zero. If Charlie and Lucinda marry and combine their portfolios, which of the following best describes their combined $100,000 portfolio?a.The combined portfolio's beta will be equal to a simple weighted average of the betas of the two individual portfolios, 1.0; its expected return will be equal to a simple weighted average of the expected returns of the two individual portfolios, 10.0%; and its standard deviation will be less than the simple average of the two portfolios' standard deviations, 25%.b.The combined portfolio's expected return will be greater than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.c.The combined portfolio's standard deviation will be greater than the simple average of the two portfolios' standard deviations, 25%.d.The combined portfolio's standard deviation will be equal to a simple average of the two portfolios' standard deviations, 25%.e.The combined portfolio's expected return will be less than the simple weighted average of the expected returns of the two individual portfolios, 10.0%.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

72.The two stocks in your portfolio, X and Y, have independent returns, so the correlation between them, rXY is zero. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 1.6, and standard deviations of 30%. Which of the following statements best describes the characteristics of your 2-stock portfolio?a.Your portfolio has a standard deviation less than 30%, and its beta is greater than 1.6.b.Your portfolio has a beta equal to 1.6, and its expected return is 15%.c.Your portfolio has a beta greater than 1.6, and its expected return is greater than 15%.d.Your portfolio has a standard deviation greater than 30% and a beta equal to 1.6.e.Your portfolio has a standard deviation of 30%, and its expected return is 15%.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

73.Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?a.The expected return of your portfolio is likely to decline.b.The diversifiable risk will remain the same, but the market risk will likely decline.c.Both the diversifiable risk and the market risk of your portfolio are likely to decline.d.The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.e.The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

74.Ann has a portfolio of 20 average stocks, and Tom has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?a.The required return on Ann's portfolio will be lower than that on Tom's portfolio because Ann's portfolio will have less total risk.b.Tom's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Ann's portfolio, but the required (and expected) returns will be the same on both portfolios.c.If the two portfolios have the same beta, their required returns will be the same, but Ann's portfolio will have less market risk than Tom's.d.The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.e.Ann's portfolio will have less diversifiable risk and also less market risk than Tom's portfolio.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

75.Stocks A and B are quite similar: Each has an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock B. Which of the following statements is CORRECT?a.Portfolio P has a standard deviation that is greater than 25%.b.Portfolio P has an expected return that is less than 12%.c.Portfolio P has a standard deviation that is less than 25%.d.Portfolio P has a beta that is less than 1.2.e.Portfolio P has a beta that is greater than 1.2.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

76.Stocks A, B, and C are similar in some respects: Each has an expected return of 10% and a standard deviation of 25%. Stocks A and B have returns that are independent of one another; i.e., their correlation coefficient, r, equals zero. Stocks A and C have returns that are negatively correlated with one another; i.e., r is less than 0. Portfolio AB is a portfolio with half of its money invested in Stock A and half in Stock B. Portfolio AC is a portfolio with half of its money invested in Stock A and half invested in Stock C. Which of the following statements is CORRECT?a.Portfolio AC has an expected return that is greater than 25%.b.Portfolio AB has a standard deviation that is greater than 25%.c.Portfolio AB has a standard deviation that is equal to 25%.d.Portfolio AC has a standard deviation that is less than 25%.e.Portfolio AC has an expected return that is less than 10%.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

77.Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?a.The portfolio's expected return is 15%.b.The portfolio's standard deviation is greater than 20%.c.The portfolio's beta is greater than 1.2.d.The portfolio's standard deviation is 20%.e.The portfolio's beta is less than 1.2.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

78.Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT?a.Portfolio P's expected return is equal to the expected return on Stock A.b.Portfolio P's expected return is less than the expected return on Stock B.c.Portfolio P's expected return is equal to the expected return on Stock B.d.Portfolio P's expected return is greater than the expected return on Stock C.e.Portfolio P's expected return is greater than the expected return on Stock B.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

79.In a portfolio of three randomly selected stocks, which of the following could NOT be true; i.e., which statement is false?a.The standard deviation of the portfolio is greater than the standard deviation of one or two of the stocks.b.The beta of the portfolio is lower than the lowest of the three betas.c.The beta of the portfolio is equal to one of the three stock's betas.d.The beta of the portfolio is equal to 1.e.The standard deviation of the portfolio is less than the standard deviation of each of the stocks if they were held in isolation.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio risk and returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

80.Stock A has a beta = 0.8, while Stock B has a beta = 1.6. Which of the following statements is CORRECT?a.If the marginal investor becomes more risk averse, the required return on Stock B will increase by more than the required return on Stock A.b.An equally weighted portfolio of Stocks A and B will have a beta lower than 1.2.c.If the marginal investor becomes more risk averse, the required return on Stock A will increase by more than the required return on Stock B.d.If the risk-free rate increases but the market risk premium remains constant, the required return on Stock A will increase by more than that on Stock B.e.Stock B's required return is double that of Stock A's.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Port. risk & ret. relationshipsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

81.Stock A has an expected return of 12%, a beta of 1.2, and a standard deviation of 20%. Stock B also has a beta of 1.2, but its expected return is 10% and its standard deviation is 15%. Portfolio AB has $300,000 invested in Stock A and $100,000 invested in Stock B. The correlation between the two stocks' returns is zero (that is, rA,B = 0). Which of the following statements is CORRECT?a.The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is overvalued.b.The stocks are not in equilibrium based on the CAPM; if A is valued correctly, then B is undervalued.c.Portfolio AB's expected return is 11.0%.d.Portfolio AB's beta is less than 1.2.e.Portfolio AB's standard deviation is 17.5%.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Port. risk & ret. relationshipsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

82.You have a portfolio P that consists of 50% Stock X and 50% Stock Y. Stock X has a beta of 0.7 and Stock Y has a beta of 1.3. The standard deviation of each stock's returns is 20%. The stocks' returns are independent of each other, i.e., the correlation coefficient, r, between them is zero. Given this information, which of the following statements is CORRECT?a.The required return on Portfolio P is equal to the market risk premium (rM − rRF).b.Portfolio P has a beta of 0.7.c.Portfolio P has a beta of 1.0 and a required return that is equal to the riskless rate, rRF.d.Portfolio P has the same required return as the market (rM).e.Portfolio P has a standard deviation of 20%.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Port. risk & ret. relationshipsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

83.Which of the following statements is CORRECT? (Assume that the risk-free rate is a constant.)a.The effect of a change in the market risk premium depends on the slope of the yield curve.b.If the market risk premium increases by 1%, then the required return on all stocks will rise by 1%.c.If the market risk premium increases by 1%, then the required return will increase by 1% for a stock that has a beta of 1.0.d.The effect of a change in the market risk premium depends on the level of the risk-free rate.e.If the market risk premium increases by 1%, then the required return will increase for stocks that have a beta greater than 1.0, but it will decrease for stocks that have a beta less than 1.0.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Market risk premiumKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

84.In historical data, we see that investments with the highest average annual returns also tend to have the highest standard deviations of annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following answers correctly ranks investments from highest to lowest risk (and return), where the security with the highest risk is shown first, the one with the lowest risk last?a.Large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds.b.Small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.c.U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks.d.Large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills.e.Small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk & ret. relationshipsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

85.Suppose that during the coming year, the risk free rate, rRF, is expected to remain the same, while the market risk premium (rM − rRF), is expected to fall. Given this forecast, which of the following statements is CORRECT?a.The required return on all stocks will remain unchanged.b.The required return will fall for all stocks, but it will fall more for stocks with higher betas.c.The required return for all stocks will fall by the same amount.d.The required return will fall for all stocks, but it will fall less for stocks with higher betas.e.The required return will increase for stocks with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

86.The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM − rRF, is positive. Which of the following statements is CORRECT?a.Stock B's required rate of return is twice that of Stock A.b.If Stock A's required return is 11%, then the market risk premium is 5%.c.If Stock B's required return is 11%, then the market risk premium is 5%.d.If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's.e.If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPMKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

87.Assume that in recent years both expected inflation and the market risk premium (rM − rRF) have declined. Assume also that all stocks have positive betas. Which of the following would be most likely to have occurred as a result of these changes?a.The required returns on all stocks have fallen, but the fall has been greater for stocks with higher betas.b.The average required return on the market, rM, has remained constant, but the required returns have fallen for stocks that have betas greater than 1.0.c.Required returns have increased for stocks with betas greater than 1.0 but have declined for stocks with betas less than 1.0.d.The required returns on all stocks have fallen by the same amount.e.The required returns on all stocks have fallen, but the decline has been greater for stocks with lower betas.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM and required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

88.Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?a.If a stock's beta doubled, its required return under the CAPM would also double.b.If a stock's beta doubled, its required return under the CAPM would more than double.c.If a stock's beta were 1.0, its required return under the CAPM would be 5%.d.If a stock's beta were less than 1.0, its required return under the CAPM would be less than 5%.e.If a stock has a negative beta, its required return under the CAPM would be less than 5%.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM and required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

89.Stock LB has a beta of 0.5 and Stock HB has a beta of 1.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?a.If both expected inflation and the market risk premium (rM − rRF) increase, the required return on Stock HB will increase by more than that on Stock LB.b.If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks will increase by the same amount.c.Since the market is in equilibrium, the required returns of the two stocks should be the same.d.If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock HB will decline but the required return of Stock LB will increase.e.If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of Stock LB will decline but the required return of Stock HB will increase.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM and required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

90.Portfolio P has equal amounts invested in each of the three stocks, A, B, and C. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?a.The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.b.The required return on the average stock will remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.c.The required returns on all three stocks will increase by the amount of the increase in the market risk premium.d.The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease while the returns on safer stocks (such as Stock A) will increase.e.The required return of all stocks will remain unchanged since there was no change in their betas.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM and required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

91.Which of the following statements is CORRECT?a.Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, then the required returns on all stocks should increase.b.If a company's beta were cut in half, then its required rate of return would also be halved.c.If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will increase.d.If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.e.If a company's beta doubles, then its required rate of return will also double.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM and required returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

92.Assume that the risk-free rate is 6% and the market risk premium is 5%. Given this information, which of the following statements is CORRECT?a.If a stock has a negative beta, its required return must also be negative.b.An index fund with beta = 1.0 should have a required return less than 11%.c.If a stock's beta doubles, its required return must also double.d.An index fund with beta = 1.0 should have a required return greater than 11%.e.An index fund with beta = 1.0 should have a required return of 11%.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:CAPM, beta, and req. returnKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

93.Which of the following statements is CORRECT?a.Lower beta stocks have higher required returns.b.A stock's beta indicates its diversifiable risk.c.Diversifiable risk cannot be completely diversified away.d.Two securities with the same stand-alone risk must have the same betas.e.The slope of the security market line is equal to the market risk premium.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

94.Which of the following statements is CORRECT?a.If the risk-free rate rises, then the market risk premium must also rise.b.If a company's beta is halved, then its required return will also be halved.c.If a company's beta doubles, then its required return will also double.d.The slope of the security market line is equal to the market risk premium, (rM − rRF).e.Beta is measured by the slope of the security market line.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

95.Portfolio P has $200,000 consisting of $100,000 invested in Stock A and $100,000 in Stock B. Stock A has a beta of 1.2 and a standard deviation of 20%. Stock B has a beta of 0.8 and a standard deviation of 25%. Which of the following statements is CORRECT? (Assume that the stocks are in equilibrium.)a.Stock B has a higher required rate of return than Stock A.b.Portfolio P has a standard deviation of 22.5%.c.More information is needed to determine the portfolio's beta.d.Portfolio P has a beta of 1.0.e.Stock A's returns are less highly correlated with the returns on most other stocks than are B's returns.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

96.Dixon Food's stock has a beta of 1.4, while Clark Café's stock has a beta of 0.7. Assume that the risk-free rate, rRF, is 5.5% and the market risk premium, (rM − rRF), equals 4%. Which of the following statements is CORRECT?a.If the market risk premium increases but the risk-free rate remains unchanged, Dixon's required return will increase because it has a beta greater than 1.0 but Clark's required return will decline because it has a beta less than 1.0.b.Since Dixon's beta is twice that of Clark's, its required rate of return will also be twice that of Clark's.c.If the risk-free rate increases while the market risk premium remains constant, then the required return on an average stock will increase.d.If the market risk premium decreases but the risk-free rate remains unchanged, Dixon's required return will decrease because it has a beta greater than 1.0 and Clark's will also decrease, but by more than Dixon's because it has a beta less than 1.0.e.If the risk-free rate increases but the market risk premium remains unchanged, the required return will increase for both stocks but the increase will be larger for Dixon since it has a higher beta.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

97.Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?a.Stock Y must have a higher expected return and a higher standard deviation than Stock X.b.If expected inflation increases but the market risk premium is unchanged, then the required return on both stocks will fall by the same amount.c.If the market risk premium declines but expected inflation is unchanged, the required return on both stocks will decrease, but the decrease will be greater for Stock Y.d.If expected inflation declines but the market risk premium is unchanged, then the required return on both stocks will decrease but the decrease will be greater for Stock Y.e.A portfolio consisting of $50,000 invested in Stock X and $50,000 invested in Stock Y will have a required return that exceeds that of the overall market.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

98.Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM − rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?a.The required return would decrease by the same amount for both Stock A and Stock B.b.The required return would increase for Stock A but decrease for Stock B.c.The required return on Portfolio P would remain unchanged.d.The required return would increase for Stock B but decrease for Stock A.e.The required return would increase for both stocks but the increase would be greater for Stock B than for Stock A.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

99.Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?a.The required return on both stocks would increase by 1%.b.The required return on Portfolio P would remain unchanged.c.The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.d.The required return for Stock A would fall, but the required return for Stock B would increase.e.The required return on Portfolio P would increase by 1%.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

100.Assume that the risk-free rate remains constant, but the market risk premium declines. Which of the following is most likely to occur?a.The required return on a stock with beta > 1.0 will increase.b.The return on "the market" will remain constant.c.The return on "the market" will increase.d.The required return on a stock with beta < 1.0 will decline.e.The required return on a stock with beta = 1.0 will not change.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

101.Which of the following statements is CORRECT?a.The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers.b.Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future.c.If investors become less risk averse, the slope of the Security Market Line will increase.d.If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock.e.The slope of the SML is determined by the value of beta.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

102.How would the Security Market Line be affected, other things held constant, if the expected inflation rate decreases and investors also become more risk averse?a.The x-axis intercept would decline, and the slope would increase.b.The y-axis intercept would increase, and the slope would decline.c.The SML would be affected only if betas changed.d.Both the y-axis intercept and the slope would increase, leading to higher required returns.e.The y-axis intercept would decline, and the slope would increase.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

103.Assume that the risk-free rate, rRF, increases but the market risk premium, (rM − rRF), declines, with the net effect being that the overall required return on the market, rM, remains constant. Which of the following statements is CORRECT?a.The required return will decline for stocks that have a beta less than 1.0 but will increase for stocks that have a beta greater than 1.0.b.Since the overall return on the market stays constant, the required return on each individual stock will also remain constant.c.The required return will increase for stocks that have a beta less than 1.0 but decline for stocks that have a beta greater than 1.0.d.The required return of all stocks will fall by the amount of the decline in the market risk premium.e.The required return of all stocks will increase by the amount of the increase in the risk-free rate.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

104.Suppose that Federal Reserve actions have caused an increase in the risk-free rate, rRF. Meanwhile, investors are afraid of a recession, so the market risk premium, (rM − rRF), has increased. Under these conditions, with other things held constant, which of the following statements is most correct?a.The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0.b.Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices.c.The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.d.The prices of all stocks would increase, but the increase would be greatest for high-beta stocks.e.The required return on all stocks would increase by the same amount.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SMLKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

105.Which of the following statements is CORRECT?a.The slope of the Security Market Line is beta.b.Any stock with a negative beta must in theory have a negative required rate of return, provided rRF is positive.c.If a stock's beta doubles, its required rate of return must also double.d.If a stock's returns are negatively correlated with returns on most other stocks, the stock's beta will be negative.e.If a stock has a beta of to 1.0, its required rate of return will be unaffected by changes in the market risk premium.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SML, CAPM, and betaKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

106.Assume that investors have recently become more risk averse, so the market risk premium has increased. Also, assume that the risk-free rate and expected inflation have not changed. Which of the following is most likely to occur?a.The required rate of return will decline for stocks whose betas are less than 1.0.b.The required rate of return on the market, rM, will not change as a result of these changes.c.The required rate of return for each individual stock in the market will increase by an amount equal to the increase in the market riskd.The required rate of return on a riskless bond will decline.e.The required rate of return for an average stock will increase by an amount equal to the increase in the market risk premium.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SML and risk aversionKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

107.Which of the following statements is CORRECT?a.The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt.b.If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations.c.If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.d.An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.e.A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.

ANS:DPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:SML, CAPM, and port. riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

108.For markets to be in equilibrium, that is, for there to be no strong pressure for prices to depart from their current levels,a.The past realized rate of return must be equal to the expected future rate of return; that is, .b.The required rate of return must equal the past realized rate of return; that is, r = .c.The expected rate of return must be equal to the required rate of return; that is, = r.d.All of the above statements must hold for equilibrium to exist; that is = r = .e.None of the above statements is correct.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Market equilibriumKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

109.Which of the following statements is CORRECT?a.Portfolio diversification reduces the variability of returns on an individual stock.b.Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.c.The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs.d.A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio.e.When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

110.You observe the following information regarding Companies X and Y:

�Company X has a higher expected return than Company Y.�Company X has a lower standard deviation of returns than Company Y.�Company X has a higher beta than Company Y.

Given this information, which of the following statements is CORRECT?a.Company X has a lower coefficient of variation than Company Y.b.Company X has less market risk than Company Y.c.Company X's returns will be negative when Y's returns are positive.d.Company X's stock is a better buy than Company Y's stock.e.Company X has more diversifiable risk than Company Y.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Risk measuresKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

111.Stocks A and B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P has 50% invested in Stock A and 50% invested in B. Which of the following statements is CORRECT?a.Based on the information we are given, and assuming those are the views of the marginal investor, it is apparent that the two stocks are in equilibrium.b.Portfolio P has more market risk than Stock A but less market risk than B.c.Stock A should have a higher expected return than Stock B as viewed by the marginal investor.d.Portfolio P has a coefficient of variation equal to 2.5.e.Portfolio P has a standard deviation of 25% and a beta of 1.0.

ANS:BPTS:1DIF:Difficulty: ModerateOBJ:LO: 6-7NAT:BUSPROG: AnalyticSTA:DISC: Risk and returnLOC:TBATOP:Portfolio riskKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

112.For a stock to be in equilibrium, that is, for there to be no long-term pressure for its price to depart from its current level, thena.the past realized return must be equal to the expected return during the same period.b.the required return must equal the realized return in all periods.c.the expected return must be equal to both the required future return and the past realized return.d.the expected future returns must be equal to the required return.e.the expected future return must be less than the most recent past realized return.

ANS:

113.Which of the following are the factors for the Fama-French model?a.The excess market return, a debt factor, and a book-to-market factor.b.The excess market return, a size factor, and a debt.c.A debt factor, a size factor, and a book-to-market factor.d.The excess market return, an industrial production factor, and a book-to-market factor.e.The excess market return, a size factor, and a book-to-market factor.

ANS:

114.Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.2 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT?a.The required return on the market is 10%.b.The portfolio's required return is less than 11%.c.If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than 2%.d.If the market risk premium remains unchanged but expected inflation increases by 2%, Gretta's portfolio's required return will increase by more than 2%.e.If the stock market is efficient, Gretta's portfolio's expected return should equal the expected return on the market, which is 11%.

ANS:

115.Assume that the market is in equilibrium and that Portfolio AB has 50% invested in Stock A and 50% invested in Stock B. Stock A has an expected return of 10% and a standard deviation of 20%. Stock B has an expected return of 13% and a standard deviation of 30%. The risk-free rate is 5% and the market risk premium, rM − rRF, is 6%. The returns of Stock A and Stock B are independent of one another, i.e., the correlation coefficient between them is zero. Which of the following statements is CORRECT?a.Since the two stocks have zero correlation, Portfolio AB is riskless.b.Stock B's beta is 1.0000.c.Portfolio AB's required return is 11%.d.Portfolio AB's standard deviation is 25%.e.Stock A's beta is 0.8333.

ANS:

116.Portfolio AB was created by investing in a combination of Stocks A and B. Stock A has a beta of 1.2 and a standard deviation of 25%. Stock B has a beta of 1.4 and a standard deviation of 20%. Portfolio AB has a beta of 1.25 and a standard deviation of 18%. Which of the following statements is CORRECT?a.Stock A has more market risk than Stock B but less stand-alone risk.b.Portfolio AB has more money invested in Stock A than in Stock B.c.Portfolio AB has the same amount of money invested in each of the two stocks.d.Portfolio AB has more money invested in Stock B than in Stock A.e.Stock A has more market risk than Portfolio AB.

ANS:

117.Which of the following statements is CORRECT?a.If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.b.An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.c.There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML.d.Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF.e.If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.

ANS:

118.Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and a 20% chance of producing a −28% return. What is the firm's expected rate of return?a.9.41%b.9.65%c.9.90%d.10.15%e.10.40%

ANS:

119.Bloome Co.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a −18% return. What is the firm's expected rate of return?a.7.72%b.8.12%c.8.55%d.9.00%e.9.50%

ANS:

120.Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?a.0.65b.0.72c.0.80d.0.89e.0.98

ANS:

121.Shirley Paul's 2-stock portfolio has a total value of $100,000. $37,500 is invested in Stock A with a beta of 0.75 and the remainder is invested in Stock B with a beta of 1.42. What is her portfolio's beta?a.1.17b.1.23c.1.29d.1.35e.1.42

ANS:

122.Ivan Knobel holds a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. He is in the process of buying 1,000 shares of Syngine Corp at $10 a share and adding it to his portfolio. Syngine has an expected return of 13.0% and a beta of 1.50. The total value of Ivan's current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Syngine stock?a.10.64%; 1.17b.11.20%; 1.23c.11.76%; 1.29d.12.35%; 1.36e.12.97%; 1.42

ANS:

123.Calculate the required rate of return for Everest Expeditions Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.a.10.29%b.10.83%c.11.40%d.12.00%e.12.60%

ANS:

124.Zacher Co.'s stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return?a.11.36%b.11.65%c.11.95%d.12.25%e.12.55%

ANS:

125.Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the market risk premium?a.5.80%b.5.95%c.6.09%d.6.25%e.6.40%

ANS:

126.Martin Ortner holds a $200,000 portfolio consisting of the following stocks:

StockInvestmentBetaA $50,0000.95B 50,0000.80C 50,0001.00D 50,0001.20Total$200,000

What is the portfolio's beta?a.0.938b.0.988c.1.037d.1.089e.1.143

ANS:

127.Sherrie Hymes holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875.

StockInvestmentBetaA $50,0000.50B 50,0000.80C 50,0001.00D 50,0001.20Total$200,000

If Sherrie replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?a.1.07b.1.13c.1.18d.1.24e.1.30

ANS:

128.Megan Ross holds the following portfolio:

StockInvestmentBetaA$150,0001.40B 50,0000.80C 100,0001.00D 75,0001.20Total$375,000

What is the portfolio's beta?a.1.06b.1.17c.1.29d.1.42e.1.56

ANS:

129.Paul McLaren holds the following portfolio:

StockInvestmentBetaA$150,0001.40B 50,0000.80C 100,0001.00D 75,0001.20Total$375,000

Paul plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?a.−0.190b.−0.211c.−0.234d.−0.260e.−0.286

ANS:

130.Jenna holds a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. Jenna plans to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.80. What will the portfolio's new beta be?a.1.286b.1.255c.1.224d.1.194e.1.165

ANS:

131.Porter Plumbing's stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)a.14.38%b.14.74%c.15.11%d.15.49%e.15.87%

ANS:

132.Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)a.2.75%b.2.89%c.3.05%d.3.21%e.3.38%

ANS:

133.Stock A's stock has a beta of 1.30, and its required return is 12.00%. Stock B's beta is 0.80. If the risk-free rate is 4.75%, what is the required rate of return on B's stock? (Hint: First find the market risk premium.)a.8.76%b.8.98%c.9.21%d.9.44%e.9.68%

ANS:

134.Barker Corp. has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Barker's required rate of return?a.9.43%b.9.67%c.9.92%d.10.17%e.10.42%

ANS:

135.Brodkey Shoes has a beta of 1.30, the T-bill rate is 3.00%, and the T-bond rate is 6.5%. The annual return on the stock market during the past 3 years was 15.00%, but investors expect the annual future stock market return to be 13.00%. Based on the SML, what is the firm's required return?a.13.51%b.13.86%c.14.21%d.14.58%e.14.95%

ANS:

136.Gardner Electric has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 12.50%. Using the SML, what is the firm's required rate of return?a.11.34%b.11.63%c.11.92%d.12.22%e.12.52%

ANS:

137.Consider the following information and then calculate the required rate of return for the Universal Investment Fund, which holds 4 stocks. The market's required rate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:

StockInvestmentBetaA$ 200,000 1.50B$ 300,000−0.50C$ 500,000 1.25D$1,000,000 0.75

a.9.58%b.10.09%c.10.62%d.11.18%e.11.77%

ANS:

138.Data for Atwill Corporation is shown below. Now Atwill acquires some risky assets that cause its beta to increase by 30%. In addition, expected inflation increases by 2.00%. What is the stock's new required rate of return?

Initial beta1.00Initial required return (rs)10.20%Market risk premium, RPM6.00%Percentage increase in beta30.00%Increase in inflation premium, IP2.00%

a.14.00%b.14.70%c.15.44%d.16.21%e.17.02%

ANS:

139.Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)a.10.36%b.10.62%c.10.88%d.11.15%e.11.43%

ANS:

140.Suppose Stan holds a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose Stan decided to sell one of his stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?a.1.17b.1.23c.1.29d.1.36e.1.43

ANS:

141.Returns for the Alcoff Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)

YearReturn2010 21.00%2009−12.50%2008 25.00%

a.20.08%b.20.59%c.21.11%d.21.64%e.22.18%

ANS:

142.Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.)

EconomicConditionsProb.ReturnStrong30% 32.0%Normal40% 10.0%Weak30%−16.0%

a.17.69%b.18.62%c.19.55%d.20.52%e.21.55%

ANS:

143.Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations and Buildings (WCB). Both companies have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your cousin's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)

YearECBWCB2007 40.00% 40.00%2008−10.00% 15.00%2009 35.00% −5.00%2010 −5.00%−10.00%2011 15.00% 35.00%Average return = 15.00% 15.00%Standard deviation = 22.64% 22.64%

a.3.29%b.3.46%c.3.65%d.3.84%e.4.03%

ANS:

144.The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. Henry now receives another $5.00 million, which he invests in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)a.8.83%b.9.05%c.9.27%d.9.51%e.9.74%

ANS:

145.Hazel Morrison, a mutual fund manager, has a $40 million portfolio with a beta of 1.00. The risk-free rate is 4.25%, and the market risk premium is 6.00%. Hazel expects to receive an additional $60 million, which she plans to invest in additional stocks. After investing the additional funds, she wants the fund's required and expected return to be 13.00%. What must the average beta of the new stocks be to achieve the target required rate of return?a.1.68b.1.76c.1.85d.1.94e.2.04

ANS:

146.Joel Foster is the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 5.00%. What rate of return should investors expect (and require) on this fund?

StockAmountBetaA$1,075,0001.20B 675,0000.50C 750,0001.40D 500,0000.75$3,000,000

a.10.56%b.10.83%c.11.11%d.11.38%e.11.67%

ANS:

147.DHF Company has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 30.0% (not percentage points). Neither betas nor the risk-free rate change. What would DHF's new required return be?a.14.89%b.15.68%c.16.50%d.17.33%e.18.19%

ANS:

CHAPTER 7—VALUATION OF STOCKS AND CORPORATIONS

TRUE/FALSE

1.A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:ProxyKEY:Bloom’s: Knowledge

2.The preemptive right gives current stockholders the right to purchase, on a pro rata basis, any new shares issued by the firm. This right helps protect current stockholders against both dilution of control and dilution of value.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Preemptive rightKEY:Bloom’s: Knowledge

3.If a firm's stockholders are given the preemptive right, this means that stockholders have the right to call for a meeting to vote to replace the management. Without the preemptive right, dissident stockholders would have to seek a change in management through a proxy fight.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 7-1NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Preemptive rightKEY:Bloom’s: Knowledge

4.Classified stock differentiates various classes of common stock, and using it is one way companies can meet special needs such as when owners of a start-up firm need additional equity capital but don't want to relinquish voting control.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Classified stockKEY:Bloom’s: Knowledge

5.Founders' shares are a type of classified stock where the shares are owned by the firm's founders, and they generally have more votes per share than the other classes of common stock.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-2NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Founders' sharesKEY:Bloom’s: Knowledge

6.The total return on a share of stock refers to the dividend yield less any commissions paid when the stock is purchased and sold.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 7-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Total stock returnsKEY:Bloom’s: Knowledge

7.The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Common stock cash flowsKEY:Bloom’s: Knowledge

8.According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 7-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Value: investment horizonKEY:Bloom’s: Knowledge

9.When a new issue of stock is brought to market, it is the marginal investor who determines the price at which the stock will trade.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-4NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Marginal investor and priceKEY:Bloom’s: Knowledge

10.The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-5NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Constant growth modelKEY:Bloom’s: Knowledge

11.According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-6NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Nonconstant growth modelKEY:Bloom’s: Knowledge

12.Projected free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Free cash flows and valuationKEY:Bloom’s: Knowledge

13.The corporate valuation model cannot be used unless a company doesn't pay dividends.

ANS:FPTS:1DIF:Difficulty: EasyOBJ:LO: 7-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Corporate valuation modelKEY:Bloom’s: Knowledge

14.Free cash flows should be discounted at the firm's weighted average cost of capital to find the value of its operations.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-7NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Free cash flows and valuationKEY:Bloom’s: Knowledge

15.Preferred stock is a hybrid⎯a sort of cross between a common stock and a bond⎯in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.

ANS:FPreferred dividends don't normally grow, and they are not guaranteed.

PTS:1DIF:Difficulty: EasyOBJ:LO: 7-9NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Preferred stockKEY:Bloom’s: Knowledge

16.From an investor's perspective, a firm's preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer's standpoint, these risk relationships are reversed: Bonds are the most risky for the firm, preferred is next, and common is least risky.

ANS:TPTS:1DIF:Difficulty: EasyOBJ:LO: 7-9NAT:BUSPROG: Reflective ThinkingSTA:DISC: Stocks and bondsLOC:TBATOP:Preferred stockKEY:Bloom’s: Knowledge

MULTIPLE CHOICE

17.Which of the following statements is CORRECT?a.If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.b.The stock valuation model, P0 = D1/(rs − g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.c.The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.d.The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.e.The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

ANS:BPTS:1DIF:Difficulty: EasyOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Constant growth modelKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

18.If a firm's expected growth rate increased then its required rate of return woulda.decrease.b.fluctuate less than before.c.fluctuate more than before.d.possibly increase, possibly decrease, or possibly remain constant.e.increase.

ANS:DPTS:1DIF:Difficulty: EasyOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Required returnKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

19.You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you thinka.the stock should be sold.b.the stock is a good buy.c.management is probably not trying to maximize the price per share.d.dividends are not likely to be declared.e.the stock is experiencing supernormal growth.

ANS:BPTS:1DIF:Difficulty: EasyOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Required returnKEY:Bloom’s: ComprehensionMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

20.The preemptive right is important to shareholders because ita.will result in higher dividends per share.b.is included in every corporate charter.c.protects the current shareholders against a dilution of their ownership interests.d.protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.e.allows managers to buy additional shares below the current market price.

ANS:CPTS:1DIF:Difficulty: ModerateOBJ:LO: 7-1NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Preemptive rightKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

21.Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?a.All common stocks, regardless of class, must have the same voting rights.b.All firms have several classes of common stock.c.All common stock, regardless of class, must pay the same dividend.d.Some class or classes of common stock are entitled to more votes per share than other classes.e.All common stocks fall into one of three classes: A, B, and C.

ANS:

22.Which of the following statements is CORRECT?a.Two firms with the same expected dividend and growth rates must also have the same stock price.b.It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.c.If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.d.The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.e.The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

ANS:

23.A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = −5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?a.The company's dividend yield 5 years from now is expected to be 10%.b.The constant growth model cannot be used because the growth rate is negative.c.The company's expected capital gains yield is 5%.d.The company's expected stock price at the beginning of next year is $9.50.e.The company's current stock price is $20.

ANS:

24.If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.a.The stock's dividend yield is 5%.b.The price of the stock is expected to decline in the future.c.The stock's required return must be equal to or less than 5%.d.The stock's price one year from now is expected to be 5% above the current price.e.The expected return on the stock is 5% a year.

ANS:

25.Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

ABRequired return10%12%Market price$25$40Expected growth7%9%

a.These two stocks must have the same dividend yield.b.These two stocks should have the same expected return.c.These two stocks must have the same expected capital gains yield.d.These two stocks must have the same expected year-end dividend.e.These two stocks should have the same price.

ANS:

26.Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

ABPrice$25$40Expected growth7%9%Expected return10%12%

a.The two stocks could not be in equilibrium with the numbers given in the question.b.A's expected dividend is $0.50.c.B's expected dividend is $0.75.d.A's expected dividend is $0.75 and B's expected dividend is $1.20.e.The two stocks should have the same expected dividend.

ANS:

27.Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

ABPrice$25$25Expected growth (constant)10%5%Required return15%15%

a.Stock A has a higher dividend yield than Stock B.b.Currently the two stocks have the same price, but over time Stock B's price will pass that of A.c.Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's.d.The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.e.Stock A's expected dividend at t = 1 is only half that of Stock B.

ANS:

28.Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

XYPrice$30$30Expected growth (constant)6%4%Required return12%10%

a.Stock Y has a higher dividend yield than Stock X.b.One year from now, Stock X's price is expected to be higher than Stock Y's price.c.Stock X has the higher expected year-end dividend.d.Stock Y has a higher capital gains yield.e.Stock X has a higher dividend yield than Stock Y.

ANS:

29.Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?

Expected dividend, D1$3.00Current Price, P0$50Expected constant growth rate6.0%

a.The stock's expected dividend yield and growth rate are equal.b.The stock's expected dividend yield is 5%.c.The stock's expected capital gains yield is 5%.d.The stock's expected price 10 years from now is $100.00.e.The stock's required return is 10%.

ANS:

30.Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

XYPrice$25$25Expected dividend yield5%3%Required return12%10%

a.Stock X pays a higher dividend per share than Stock Y.b.One year from now, Stock X should have the higher price.c.Stock Y has a lower expected growth rate than Stock X.d.Stock Y has the higher expected capital gains yield.e.Stock Y pays a higher dividend per share than Stock X.

ANS:A

31.Merrell Enterprises' stock has an expected return of 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?a.The stock's dividend yield is 8%.b.The current dividend per share is $4.00.c.The stock price is expected to be $54 a share one year from now.d.The stock price is expected to be $57 a share one year from now.e.The stock's dividend yield is 7%.

ANS:

32.Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?a.Stock B must have a higher dividend yield than Stock A.b.Stock A must have a higher dividend yield than Stock B.c.If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.d.Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.e.If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

ANS:E

PTS:1DIF:Difficulty: ModerateOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Dividend yield and gKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

33.Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?a.If one stock has a higher dividend yield, it must also have a lower dividend growth rate.b.If one stock has a higher dividend yield, it must also have a higher dividend growth rate.c.The two stocks must have the same dividend growth rate.d.The two stocks must have the same dividend yield.e.The two stocks must have the same dividend per share.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Dividend yield and gKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

34.Which of the following statements is CORRECT, assuming stocks are in equilibrium?a.Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.b.A stock's dividend yield can never exceed its expected growth rate.c.A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.d.Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.e.The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.

ANS:EPTS:1DIF:Difficulty: ModerateOBJ:LO: 7-5NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Dividend yield and gKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

35.Which of the following statements is NOT CORRECT?a.The corporate valuation model discounts free cash flows by the required return on equity.b.The corporate valuation model can be used to find the value of a division.c.An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.d.Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or terminal, value.e.The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 7-7NAT:BUSPROG: AnalyticSTA:DISC: Financial statements, analysis, forecasting, and cash flowsLOC:TBATOP:Corporate valuation modelKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: Conceptual

36.Which of the following statements is CORRECT?a.The preferred stock of a given firm is generally less risky to investors than the same firm's common stock.b.Corporations cannot buy the preferred stocks of other corporations.c.Preferred dividends are not generally cumulative.d.A big advantage of preferred stock is that dividends on preferred stocks are tax deductible by the issuing corporation.e.Preferred stockholders have a priority over bondholders in the event of bankruptcy to the income, but not to the proceeds in a liquidation.

ANS:APTS:1DIF:Difficulty: ModerateOBJ:LO: 7-9NAT:BUSPROG: AnalyticSTA:DISC: Stocks and bondsLOC:TBATOP:Preferred stock conceptsKEY:Bloom’s: AnalysisMSC:TYPE: Multiple Choice: ConceptualNOT:Question may require calculations to find the correct answer.

37.Which of the following statements is CORRECT?a.Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.b.The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.c.One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.d.One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.e.A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

ANS:

38.Which of the following statements is CORRECT?a.The preemptive right gives stockholders the right to approve or disapprove of a merger between their company and some other company.b.The preemptive right is a provision in the corporate charter that gives common stockholders the right to purchase (on a pro rata basis) new issues of the firm's common stock.c.The stock valuation model, P0 = D1/(rs − g), cannot be used for firms that have negative growth rates.d.The stock valuation model, P0 = D1/(rs − g), can be used only for firms whose growth rates exceed their required returns.e.If a company has two classes of common stock, Class A and Class B, the stocks may pay different dividends, but under all state charters the two classes must have the same voting rights.

ANS:

39.The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?a.If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.b.If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.c.The stocks must sell for the same price.d.Stock Y must have a higher dividend yield than Stock X.e.If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.

ANS:

40.Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

ABBeta1.100.90Constant growth rate7.00%7.00%

a.Stock A must have a higher dividend yield than Stock B.b.Stock B's dividend yield equals its expected dividend growth rate.c.Stock B must have the higher required return.d.Stock B could have the higher expected return.e.Stock A must have a higher stock price than Stock B.

ANS:

41.A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock's current price?a.$17.39b.$17.84c.$18.29d.$18.75e.$19.22

ANS:

42.A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g = 4.0%. What is the current stock price?a.$23.11b.$23.70c.$24.31d.$24.93e.$25.57

ANS:

43.A share of Lash Inc.'s common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?a.$16.28b.$16.70c.$17.13d.$17.57e.$18.01

ANS:

44.Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?a.6.01%b.6.17%c.6.33%d.6.49%e.6.65%

ANS:

45.$35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from today?a.$37.86b.$38.83c.$39.83d.$40.85e.$41.69

ANS:

46.Kelly Enterprises' stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 4.75% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now?a.$40.17b.$41.20c.$42.26d.$43.34e.$44.46

ANS:

47.If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the coming year?a.4.12%b.4.34%c.4.57%d.4.81%e.5.05%

ANS:

48.If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?a.4.42%b.4.66%c.4.89%d.5.13%e.5.39%

ANS:

49.If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the coming year?a.6.50%b.6.83%c.7.17%d.7.52%e.7.90%

ANS:

50.If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming year?a.7.54%b.7.73%c.7.93%d.8.13%e.8.34%

ANS:

51.If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $32.00, what is the stock's expected total return for the coming year?a.8.37%b.8.59%c.8.81%d.9.03%e.9.27%

ANS:

52.Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring. However, FCF is expected to be $50 million in Year 5, i.e., FCF at t = 5 equals $50 million, and the FCF growth rate is expected to be constant at 6% beyond that point. If the weighted average cost of capital is 12%, what is the horizon value (in millions) at t = 5?a.$719b.$757c.$797d.$839e.$883

ANS:

53.Gere Furniture forecasts a free cash flow of $40 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a constant rate of 5% thereafter. If the weighted average cost of capital is 10% and the cost of equity is 15%, what is the horizon value, in millions at t = 3?a.$840b.$882c.$926d.$972e.$1,021

ANS:

54.Young & Liu Inc.'s free cash flow during the just-ended year (t = 0) was $100 million, and FCF is expected to grow at a constant rate of 5% in the future. If the weighted average cost of capital is 15%, what is the firm's value of operations, in millions?a.$948b.$998c.$1,050d.$1,103e.$1,158

ANS:

55.The projected cash flow for the next year for Minesuah Inc. is $100,000, and FCF is expected to grow at a constant rate of 6%. If the company's weighted average cost of capital is 11%, what is the value of its operations?a.$1,714,750b.$1,805,000c.$1,900,000d.$2,000,000e.$2,100,000

ANS:

56.Carby Hardware has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell?a.$104.27b.$106.95c.$109.69d.$112.50e.$115.38

ANS:

57.Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?a.$28.90b.$29.62c.$30.36d.$31.12e.$31.90

ANS:

58.The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0?a.$18.62b.$19.08c.$19.56d.$20.05e.$20.55

ANS:

59.National Advertising just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?a.$14.52b.$14.89c.$15.26d.$15.64e.$16.03

ANS:

60.Kellner Motor Co.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Kellner's dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?a.$0.95b.$1.05c.$1.16d.$1.27e.$1.40

ANS:

61.Hirshfeld Corporation's stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?a.$2.20b.$2.44c.$2.69d.$2.96e.$3.25

ANS:

62.Connolly Co.'s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 7 years, i.e., what is ?a.$37.52b.$39.40c.$41.37d.$43.44e.$45.61

ANS:

63.Alcott's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?a.8.03%b.8.24%c.8.45%d.8.67%e.8.89%

ANS:

64.Connor Publishing's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its effective annual (not nominal) rate of return?a.6.62%b.6.82%c.7.03%d.7.25%e.7.47%

ANS:

65.Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?a.$41.59b.$42.65c.$43.75d.$44.87e.$45.99

ANS:

66.Kinkead Inc. forecasts that its free cash flow in the coming year, i.e., at t = 1, will be −$10 million, but its FCF at t = 2 will be $20 million. After Year 2, FCF is expected to grow at a constant rate of 4% forever. If the weighted average cost of capital is 14%, what is the firm's value of operations, in millions?a.$158b.$167c.$175d.$184e.$193

ANS:

67.The free cash flows (in millions) shown below are forecast by Parker & Sons. If the weighted average cost of capital is 11% and FCF is expected to grow at a rate of 5% after Year 2, what is the Year 0 value of operations, in millions? Assume that the ROIC is expected to remain constant in Year 2 and beyond (and do not make any half-year adjustments).

Year:12Free cash flow:−$50$100

a.$1,456b.$1,529c.$1,606d.$1,686e.$1,770

ANS:

68.Heath and Logan Inc. forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13%, and the FCFs are expected to continue growing at a 5% rate after Year 3. Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the Year 0 value of operations, in millions?

Year:123Free cash flow:−$15$10$40

a.$315b.$331c.$348d.$367e.$386

ANS:

69.Reynolds Construction's value of operations is $750 million based on the corporate valuation model. Its balance sheet shows $50 million of short-term investments that are unrelated to operations, $100 million of accounts payable, $100 million of notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity, in millions?a.$429b.$451c.$475d.$500e.$525

ANS:

70.Based on the corporate valuation model, the value of Weidner Co.'s operations is $1,200 million. The company's balance sheet shows $80 million in accounts receivable, $60 million in inventory, and $100 million in short-term investments that are unrelated to operations. The balance sheet also shows $90 million in accounts payable, $120 million in notes payable, $300 million in long-term debt, $50 million in preferred stock, $180 million in retained earnings, and $800 million in total common equity. If Weidner has 30 million shares of stock outstanding, what is the best estimate of the stock's price per share?a.$24.90b.$27.67c.$30.43d.$33.48e.$36.82

ANS:

71.The value of Broadway-Brooks Inc.'s operations is $900 million, based on the corporate valuation model. Its balance sheet shows $70 million in accounts receivable, $50 million in inventory, $30 million in short-term investments that are unrelated to operations, $20 million in accounts payable, $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140 million in retained earnings, and $280 million in total common equity. If the company has 25 million shares of stock outstanding, what is the best estimate of the stock's price per share?a.$23.00b.$25.56c.$28.40d.$31.24e.$34.36

ANS:

72.Based on the corporate valuation model, Bizzaro Co.'s value of operations is $300 million. The balance sheet shows $20 million of short-term investments that are unrelated to operations, $50 million of accounts payable, $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. Bizzaro has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share?a.$13.72b.$14.44c.$15.20d.$16.00e.$16.80

ANS:

73.McGaha Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?a.$26.77b.$27.89c.$29.05d.$30.21e.$31.42

ANS:

74.Orwell Building Supplies' last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price?a.$41.58b.$42.64c.$43.71d.$44.80e.$45.92

ANS:

75.The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price?a.$37.05b.$38.16c.$39.30d.$40.48e.$41.70

ANS:

76.The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?a.$30.57b.$31.52c.$32.49d.$33.50e.$34.50

ANS:

77.Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value?

Year0123456Growth rateNANANANA50.00%25.00%8.00%Dividends$0.000$0.000$0.000$0.250$0.375$0.469$0.506

a.$9.94b.$10.19c.$10.45d.$10.72e.$10.99

ANS:

78.The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions?

Year:123Free cash flow:−$20$42$45

a.$586b.$617c.$648d.$680e.$714

ANS:

79.The required return for Williamson Heating's stock is 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = $1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?a.5.17%b.5.44%c.5.72%d.6.02%e.6.34%

ANS:

80.Julia Saunders is your boss and the treasurer of Foster Carter Enterprises (FCE). She asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00 per share. Julia asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Julia asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis:

Julia told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated TV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process would be quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?a.11.84%b.12.21%c.12.58%d.12.97%e.13.36%

ANS:

#FIN 534 Week 5 Midterm Exam – Strayer New

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FIN 534 Homework Set 5 – Strayer

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Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 3:

Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 million. However, in 2014 earnings are expected to jump to $12.6 million, and Boehm plans to invest $7.3 million in a plant expansion. This one-time unusual earnings growth won’t be maintained, though, and after 2014 Boehm will return to its previous 8% earnings growth rate. Its target debt ratio is 35%.

Calculate Boehm’s total dividends for 2014 under each of the following policies:

1. Its 2014 dividend payment is set to force dividends to grow at the long-run growth rate in earnings.

2. It continues the 2013 dividend payout ratio.

3. It uses a pure residual policy with all distributions in the form of dividends (35% of the $7.3 million investment is financed with debt).

4. It employs a regular-dividend-plus-extras policy, with the regular dividend being based on the long-run growth rate and the extra dividend being set according to the residual policy.

Use the following information for Questions 5 and 6:

Schweser Satellites Inc. produces satellite earth stations that sell for $100,000 each. The firm’s fixed costs, F, are $2 million, 50 earth stations are produced and sold each year, profits total $500,000, and the firm’s assets (all equity financed) are $5 million. The firm estimates that it can change its production process, adding $4 million to investment and $500,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $10,000 and (2) increase output by 20 units, but (3) the sales price on all units will have to be lowered to $95,000 to permit sales of the additional output. The firm has tax loss carry forwards that render its tax rate zero, its cost of equity is 16%, and it uses no debt.

5. What is the incremental profit? To get a rough idea of the project’s profitability, what is the project’s expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment? Why or why not?

6. Would the firm’s break-even point increase or decrease if it made the change?

Use the following information for Questions 7 and 8:

Suppose you are provided the following balance sheet information for two firms, Firm A and Firm B (in thousands of dollars).

Firm A Firm B

Current assets $150,000 $120,000

Fixed assets (net) 150,000 180,000

Total assets $300,000 $300,000

Current liabilities $20,000 $80,000

Long-term debt 80,000 20,000

Common stock 100,000 100,000

Retained earnings 100,000 100,000

Total liabilities and equity $300,000 $300,000

Earnings before interest and taxes for both firms are $30 million, and the effective federal plus-state tax rate is 35%.

7. What is the return on equity for each firm if the interest rate on current liabilities is12% and the rate on long-term debt is 15%?

8. Assume that the short-term rate rises to 20%, that the rate on new long-term debt rises to 16%, and that the rate on existing long-term debt remains unchanged. What would be the return on equity for Firm A and Firm B under these conditions?

9. In 1983 the Japanese yen-U.S. dollar exchange rate was 250 yen per dollar, and the dollar cost of a compact Japanese-manufactured car was $10,000. Suppose that now the exchange rate is 120 yen per dollar. Assume there has been no inflation in the yen cost of an automobile so that all price changes are due to exchange rate changes. What would the dollar price of the car be now, assuming the car’s price changes only with exchange rates?

#FIN 534 Homework Set 5 – Strayer

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FIN 350 Week 5 Quiz – Strayer

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Week 5 Quiz 4 Chapter 7 and 8

Chapter 7—Bond Markets

1. ____ require the owner to clip coupons attached to the bonds and send them to the issuer to receive coupon payments.

Bearer

Registered

Treasury

Corporate

2. The yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.

a. True

b. False

3. Note maturities are usually ____, while bond maturities are ____.

less than 10 years; 10 years or more

10 years or more; less than 10 years

less than 5 years; 5 years or more

5 years or more; less than 5 years

4. Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.

annual

semiannual

quarterly

monthly

5. The Treasury has relied heavily on ____-year bonds to finance the U.S. budget deficit.

6. Interest earned from Treasury bonds is

exempt from all income tax.

exempt from federal income tax.

exempt from state and local taxes.

subject to all income taxes.

7. Treasury bond auctions are normally conducted only at the beginning of each year.

a. True

b. False

8. ____ bids for Treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased.

Competitive

Noncompetitive

Negotiable

Non-negotiable

9. Treasury bond dealers

quote an ask price for customers who want to sell existing Treasury bonds to the dealers.

profit from a very wide spread between bid and ask prices in the Treasury securities market.

may trade Treasury bonds among themselves.

make a primary market for Treasury bonds.

10. Under the STRIP program created by the Treasury, stripped securities are created and sold by the Treasury.

a. True

b. False

11. A ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5 percent. During the first six months since the bond was issued, the inflation rate was 2 percent. Based on this information, the coupon payment after six months will be $____.

250

255

500

510

12. Bonds issued by ____ are backed by the federal government.

the Treasury

AAA-rated corporations

state governments

city governments

13. Municipal general obligation bonds are ____. Municipal revenue bonds are ____.

supported by the municipal government's ability to tax; supported by the municipal government's ability to tax

supported by the municipal government's ability to tax; supported by revenue generated from the project

always subject to federal taxes; always exempt from state and local taxes

typically zero-coupon bonds; typically zero-coupon bonds

14. In general, variable-rate municipal bonds are desirable to investors who expect that interest rates will ____.

remain unchanged

fall

rise

none of the above

15. Which of the following statements is not true regarding zero-coupon bonds?

They are issued at a deep discount from par value.

Investors are taxed on the total amount of interest earned at maturity.

The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest until maturity.

Zero-coupon bonds are purchased mainly for tax-exempt investment accounts, such as pension funds and individual retirement accounts.

All of the above are true.

16. A variable rate bond allows

investors to benefit from declining rates over time.

issuers to benefit from rising market interest rates over time.

investors to benefit from rising market interest rates over time.

none of the above.

17. Corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yields.

higher; lower

lower; lower

higher; higher

none of the above

18. A private bond placement has to be registered with the SEC.

a. True

b. False

19. Which of the following institutions is most likely to purchase a private bond placement?

commercial bank

mutual fund

insurance company

savings institution

20. A protective covenant may

specify all the rights and obligations of the issuing firm and the bondholders.

require the firm to retire a certain amount of the bond issue each year.

restrict the amount of additional debt the firm can issue.

none of the above

21. A call provision on bonds normally

allows the firm to sell new bonds at par value.

gives the firm to sell new bonds above market value.

allows the firm to sell bonds to the Treasury.

allows the firm to buy back bonds that it previously issued.

22. When would a firm most likely call bonds?

after interest rates have declined

if interest rates do not change

after interest rates increase

just before the time at which interest rates are expected to decline

23. Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate, without exchange rate risk by denominating the bonds in

dollars.

euros and making payments from U.S. headquarters.

euros and making payments from its German subsidiary.

dollars and making payments from its German subsidiary.

24. Many bonds have different call prices: a higher price for calling the bonds to meet sinking-fund requirements and a lower price if the bonds are called for any other reason.

a. True

b. False

25. Bonds that are not secured by specific property are called

a chattel mortgage.

open-end mortgage bonds.

debentures.

blanket mortgage bonds.

26. Bonds that are secured by personal property are called

chattel mortgage bonds.

first mortgage bonds.

second mortgage bonds.

debentures.

27. The coupon rate of most variable-rate bonds is tied to

the prime rate.

the discount rate.

LIBOR.

the federal funds rate.

28. Assume that you purchased corporate bonds one year ago that have no protective covenants. Today, it is announced that the firm that issued the bonds plans a leveraged buyout. The market value of your bonds will likely ____ as a result.

rise

decline

be zero

be unaffected

29. During weak economic periods, newly issued junk bonds require lower risk premiums than in strong economic periods.

a. True

b. False

30. ____ bonds have the most active secondary market.

Treasury

Zero-coupon corporate

Junk

Municipal

31. Some bonds are "stripped," which means that

they have defaulted.

the call provision has been eliminated.

they are transferred into principal-only and interest-only securities.

their maturities have been reduced.

32. ____ are not primary purchasers of bonds.

Insurance companies

Finance companies

Mutual funds

Pension funds

33. Leveraged buyouts are commonly financed by the issuance of:

money market securities.

Treasury bonds.

corporate bonds.

municipal bonds.

34. When firms issue ____, the amount of interest and principal to be paid is based on specified market conditions. The amount of the repayment may be tied to a Treasury bond price index or even to a stock index.

auction-rate securities

structured notes

leveraged notes

stripped securities

35. Which of the following statements is true regarding STRIPS?

they are issued by the Treasury

they are created and sold by various financial institutions

they are not backed by the U.S. government

they have to be held until maturity

all of the above are true regarding STRIPS

36. (Financial calculator required.) Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9 percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent.

9.33

7.84

9.00

none of the above

37. (Financial calculator required.) Erin is, a private investor, who can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Erin's yield to maturity is ____ percent.

9.96

10.00

10.33

10.24

none of the above

38. Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

10.5

more information is needed to answer this question

39. Which of the following is not true regarding zero-coupon bonds?

They are issued at a deep discount from par value.

Investors are taxed annually on the amount of interest earned, even though the interest will not be received until maturity.

The issuing firm is permitted to deduct the amortized discount as interest expense for federal income tax purposes, even though it does not pay interest.

Zero-coupon bonds are purchased mainly for tax-exempt investment account, such as pension funds and individual retirement accounts.

all of the above are true

40. Which of the following is not true regarding the call provision?

It typically requires a firm to pay a price above par value when it calls its bonds.

The difference between the market value of the bond and the par value is called the call premium.

A principal use of the call provision is to lower future interest payments.

A principal use of the call provision is to retire bonds as required by a sinking-fund provision.

A call provision is normally viewed as a disadvantage to bondholders.

41. If interest rates suddenly ____, those existing bonds that have a call feature are ____ likely to be called.

decline; more

decline; less

increase; more

none of the above

42. Which of the following would not be a likely example of a protective covenant provision?

a limit on the amount of dividends a firm can pay

a limit on the corporate officers' salaries a firm can pay

the amount of additional debt a firm can issue

a call feature

43. Bonds are issued in the primary market through a telecommunications network.

a. True

b. False

44. Corporate bonds can be placed with investors through a public offering or a private placement.

a. True

b. False

45. When a corporation issues bonds, it normally hires a securities firm that targets large institutional investors such as pension funds, bond mutual funds, and insurance companies.

a. True

b. False

46. Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC.

a. True

b. False

47. Rule 144A creates liquidity for securities that are privately placed.

a. True

b. False

48. Corporate bonds are more standardized than stocks.

a. True

b. False

49. Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions.

a. True

b. False

50. Bonds issued by large well-known corporations in large volume are illiquid because most buyers hold these bonds until maturity.

a. True

b. False

51. The bond market is served by bond dealers, who can play a broker role by matching up buyers and sellers.

a. True

b. False

52. Bond dealers do not have an inventory of bonds.

a. True

b. False

53. Bond dealers specialize in small transactions (less than $100,000) in order to enable small investors to trade bonds.

a. True

b. False

54. Many bonds are listed on the New York Stock Exchange (NYSE).

a. True

b. False

55. The primary investors in bond markets are institutional investors such as commercial banks, bond mutual funds, pension funds, and insurance companies.

a. True

b. False

56. The key difference between a note and a bond is that note maturities are usually less than one year, while bond maturities are one year or more.

a. True

b. False

57. Treasury bonds are issued by state and local governments.

a. True

b. False

58. Stripped bonds are bonds whose cash flows have been transformed into a security representing the principal payment only and a security representing interest payments only.

a. True

b. False

59. Inflation-indexed Treasury bonds are intended for investors who wish to ensure that the returns on their investments keep up with the increase in prices over time.

a. True

b. False

60. Savings bonds are bonds issued by the Federal Reserve.

a. True

b. False

61. Corporate bonds usually pay interest on an annual basis.

a. True

b. False

62. The bond debenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders.

a. True

b. False

63. A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.

a. True

b. False

64. Subordinated indentures are debentures that have claims against the firm's assets that are junior to the claims of both mortgage bonds and regular debentures.

a. True

b. False

65. High-risk bonds are called trash bonds.

a. True

b. False

66. Zero-coupon bonds do not pay interest. Instead, they are issued at a discount from par value.

a. True

b. False

67. If interest rates suddenly decline, those existing bonds that have a call feature are less likely to be called.

a. True

b. False

68. Which of the following statements is not true regarding STRIPS?

They are not issued by the Treasury.

They are created and sold by various financial institutions.

They are backed by the U.S. government.

They have to be held until maturity.

All of the above are true regarding STRIPS.

69. (Financial calculator required.) Paul can purchase bonds with 15 years remaining until maturity, a par value of $1,000, and a 9 percent annual coupon rate for $1,100. Paul's yield to maturity is ____ percent.

9.33

7.84

9.00

none of the above

70. (Financial calculator required.) Steven, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10 percent coupon rate, pay interest annually, and have 20 years remaining until maturity. Steven's yield to maturity is ____ percent.

9.96

10.00

10.33

10.24

none of the above

71. Jim purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Jim will hold the bonds until maturity. Thus, he will earn a return of ____ percent.

12.00

9.00

10.50

More information is needed to answer this question.

72. Which of the following is not an example of a municipal bond?

general obligation bond

revenue bond

Treasury bond

All of the above are examples of municipal bonds.

73. Which of the following statements is incorrect?

The municipal bond must pay a risk premium to compensate for the possibility of default risk.

The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.

The income earned from municipal bonds is exempt from federal taxes.

All of the above are true.

74. Which of the following is not mentioned in your text as a protective covenant?

a limit on the amount of dividends a firm can pay

a limit on the corporate officers' salaries a firm can pay

the amount of additional debt a firm can issue

the appointment of a trustee in all bond indentures

All of the above are mentioned in the text as protective covenants.

75. Everything else being equal, which of the following bond ratings is associated with the highest yield?

Baa

Aaa

76. A ____ has first claim on specified assets, while a ____ is a debenture that has claims against a firm's assets that are junior to the claims of mortgage bonds and regular debentures.

first mortgage bond; second mortgage bond

first mortgage bond; debenture

first mortgage bond; subordinated debenture

chattel mortgage bond; subordinated debenture

none of the above

77. If a firm believes that it will have sufficient cash flows to cover interest payments, it may consider using ____ debt and ____ equity, which implies a ____ degree of financial leverage.

more; less; lower

more; less; higher

less; more; higher

none of the above

78. The yield to investors on Treasury bonds reflects the risk-free rate because these bonds are virtually free from credit (default) risk.

a. True

b. False

79. The issuance of municipal securities is regulated by:

the Securities and Exchange Commission.

the Consumer Financial Protection Bureau.

their respective state governments.

the Federal Reserve.

80. For bonds issued under a _______ arrangement, the underwriter guarantees the issuer that the bonds will be sold at a specified price.

specific value

fixed proceeds

best efforts

firm commitment

81. For bonds issued under a _______ arrangement, the underwriter attempts to sell the bonds at a specified price but makes no guarantee to the issuer.

floating value

variable proceeds

best efforts

firm commitment

82. Which of the following eurozone countries has not recently experienced debt repayment problems?

Finland

Greece

Portugal

Spain

83. The Financial Reform Act of 2010 established the __________ to provide oversight for credit rating agencies.

Federal Ratings Bureau

Office of Credit Ratings

Office of Agency Supervision

Ratings Oversight Commission

84. A credit rating agency is paid by:

the purchasers of the bonds that the agency rates.

the issuers of the bonds that the agency rates.

the taxpayers, because the rating agencies are government agencies.

the New York Stock Exchange or the over-the-counter market where the bonds are listed.

85. All of the bonds issued by a particular company will have the same maturity, price, and credit rating.

a. True

b. False

86. When purchasing bonds, individual investors can use a ________ to specify the maximum price they are willing to pay for a bond.

limit order

market order

stop order

price order

87. Online bond brokerage services offer several advantages including:

pricing is more transparent because investors can easily compare bid and ask spreads.

some services charge commissions, which may be more easily understood than bid and ask spreads.

some brokers have narrowed their spreads so that they do not lose business to competitors.

all of the above

Chapter 8—Bond Valuation and Risk

1. The appropriate discount rate for valuing any bond is the

bond's coupon rate.

bond's coupon rate adjusted for the expected inflation rate over the life of the bond.

Treasury bill rate with an adjustment to include a risk premium if one exists.

yield that could be earned on alternative investments with similar risk and maturity.

2. The valuation of bonds is generally perceived to be ____ the valuation of equity securities.

more difficult than

easier than

just as difficult as

none of the above

3. A bond with a $1,000 par value has an 8 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 6 percent. What should be the current price?

$1,069.31

$1,000.00

$9712

$927.66

none of the above

4. A bond with a ten percent coupon rate bond pays interest semi-annually. Par value is $1,000. The bond has three years to maturity. The investors' required rate of return is 12 percent. What is the present value of the bond?

$1,021

$1,000

$981

$951

none of the above

5. A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.

1,302

763

761

1,299

6. From the perspective of investing institutions, the most attractive foreign bonds offer a ____ and are denominated in a currency that ____ over the investment horizon.

high yield; appreciates

high yield; remains stable

low yield; appreciates

low yield; depreciates

7. The value of ____-risk securities will be relatively ____.

high; high

high; low

low; low

none of the above

8. The larger the investor's ____ relative to the ____, the larger the ____ of a bond with a particular par value.

discount rate; required rate of return; discount

required rate of return; discount rate; discount

required rate of return; discount rate; premium

none of the above

9. If the coupon rate equals the required rate of return, the price of the bond

should be above its par value.

should be below its par value.

should be equal to its par value.

is negligible.

10. When financial institutions expect interest rates to ____, they may ____.

increase; sell bonds and buy short-term securities

increase; sell short-term securities and buy bonds

decrease; sell bonds and buy short-term securities

B and C

11. For a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the

greater is the premium on the price.

greater is the discount on the price.

smaller is the premium on the price.

smaller is the discount on the price.

12. Zero coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9 percent. What is the current price?

$363,212

$385,500

$422,400

$424,100

none of the above

13. If the coupon rate ____ the required rate of return, the price of a bond ____ par value.

equals; equals

exceeds; is less than

is less than; is greater than

B and C

none of the above

14. As interest rates increase, long-term bond prices

increase by a greater degree than short-term bond prices.

increase by an equal degree as short-term bond prices.

decrease by a greater degree than short-term bond prices.

decrease by an equal degree as short-term bond prices.

decrease by a smaller degree than short-term bond prices.

15. The prices of bonds with ____ are most sensitive to interest rate movements.

high coupon payments

zero coupon payments

small coupon payments

none of the above (The size of the coupon payment does not affect sensitivity of bond prices to interest rate movements.)

16. A(n) ____ in the expected level of inflation results in ____ pressure on bond prices.

increase; upward

increase; downward

decrease; downward

none of the above

17. Other things held constant, bond prices should increase when inflationary expectations rise.

a. True

b. False

18. An expected ____ in economic growth places ____ pressure on bond prices.

increase; downward

increase; upward

decrease; downward

none of the above

19. Assume that the price of a $1,000 zero coupon bond with five years to maturity is $567 when the required rate of return is 12 percent. If the required rate of return suddenly changes to 15 percent, what is the price elasticity of the bond?

−.980

+.980

−.494

+.494

none of the above

20. If a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.

high coupon bonds; more favorably affected by declining interest rates

zero or low coupon bonds; more favorably affected by declining interest rates

zero or low coupon bonds; more favorably affected by rising interest rates

high coupon bonds; completely insulated from rising interest rates

21. The prices of ____-coupon and ____ maturities are most sensitive to changes in the required rate of return.

low; short

low; long

high; short

high; long

22. An insurance company purchases corporate bonds in the secondary market with six years to maturity. Total par value is $55 million. The coupon rate is 11 percent, with annual interest payments. If the expected required rate of return in 4 years is 9 percent, what will the market value of the bonds be then?

$52,115,093

$55,341,216

$55,000,000

$56,935,022

23. A $1,000 par bond with five years to maturity is currently priced at $892. Annual interest payments are $90. What is the yield to maturity?

13 percent

12 percent

11 percent

10 percent

24. A bank buys bonds with a par value of $25 million for $24,040,000. The coupon rate is 10 percent, and the bonds pay annual payments. The bonds mature in four years. The bank wants to sell them in two years, and estimates the required rate of return in two years will be 8 percent. What will the market value of the bonds be in two years?

$24,113,418

$24,667,230

$25,000,000

$25,891,632

25. The price of short-term bonds are commonly ____ those of long-term bonds.

more volatile than

equally volatile as

less volatile than

A and C occur with about equal frequency

26. Assume that the value of liabilities equals that of earning assets. If asset portfolio durations are ____ than liability portfolio durations, then the market value of assets are ____ interest-rate sensitive than the market value of liabilities.

greater; more

greater; equally

greater; less

less; equally

B and D

27. As interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

consistently increase

consistently decrease

remain unchanged

change in a direction that cannot be determined with the above information

28. As interest rates consistently decline over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's default risk.)

consistently increase

consistently decrease

remain unchanged

change in a direction that cannot be determined with the above information

29. If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

increase; increase

increase; decrease

decrease; decrease

decrease; increase

30. If analysts expect that the demand for loanable funds will decrease, and the supply of loanable funds will increase, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

increase; increase

increase; decrease

decrease; decrease

decrease; increase

31. Consider a coupon bond that sold at par value two years ago. If interest rates are much lower now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

above; above

above; below

below; below

below; above

32. Consider a coupon bond that sold at par value two years ago. If interest rates are much higher now than when this bond was issued, the coupon rate of that bond will likely be ____ the prevailing interest rates, and the present value of the bonds will be ____ its par value.

above; above

above; below

below; below

below; above

33. If bond portfolio managers expect interest rates to increase in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

increase; increase

increase; decrease

decrease; decrease

decrease; increase

34. If bond portfolio managers expect interest rates to decrease in the future, they would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions.

increase; increase

increase; decrease

decrease; decrease

decrease; increase

35. Which of the following will most likely cause bond prices to increase? (Assume no possibility of higher inflation in the future.)

reduced Treasury borrowing along with anticipation that money supply growth will decrease

reduced Treasury borrowing along with anticipation that money supply growth will increase

an anticipated drop in money supply growth along with increasing Treasury borrowing

higher levels of Treasury borrowing and corporate borrowing

36. If the United States announces that it will borrow an additional $10 billion, this announcement will normally cause the bond traders to expect

higher interest rates in the future, and will buy bonds now.

higher interest rates in the future, and will sell bonds now.

stable interest rates in the future, and will buy bonds now.

lower interest rates in the future, and will buy bonds now.

lower interest rates in the future, and will sell bonds now.

37. The market value of long-term bonds is ____ sensitive to interest rate movements; as interest rates fall, the market value of long-term bonds ____.

slightly; rises

very; rises

very; declines

slightly; declines

38. The bonds that are most sensitive to interest rate movements have

no coupon and a short-term maturity.

high coupons and a short-term maturity.

high coupons and a long-term maturity.

no coupon and a long-term maturity.

39. When two securities have the same expected cash flows, the value of the ____ security will be higher than the value of the ____ security.

high-risk; low-risk

low-risk; high-risk

high-risk; high-risk

low-risk; low-risk

none of the above

40. Morgan would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has 10 years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Morgan pay for the bond?

$1,000.00

$1,147.20

$856.80

none of the above

41. Sioux Financial Corp. has forecasted its bond portfolio value for one year ahead to be $105 million. In one year, it expects to receive $10,000,000 in coupon payments. The bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio?

10 percent

8.82 percent

4.32 percent

13.86 percent

none of the above

42. Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Bullock intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?

$9.33 million

$11.00 million

$10.64 million

$9.82 million

none of the above

43. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is

1.90 years.

1.50 years.

1.92 years.

none of the above

44. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The modified duration of this bond is

1.73 years.

1.71 years.

1.90 years.

none of the above

45. The relationship reflecting the actual response of a bond's price to a change in bond yields is

concave.

convex.

linear.

quadratic.

46. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

increase; upward; downward

decrease; upward; downward

decrease; upward; upward

increase; downward; upward

increase; upward; upward

47. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

matching

laddered

barbell

interest rate

none of the above

48. With a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. Thus, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.

matching

laddered

barbell

interest rate

none of the above

49. Which of the following bonds is most susceptible to interest rate risk from an investor's perspective?

short-term, high-coupon

short-term, low-coupon

long-term, high-coupon

long-term, zero-coupon

50. Which of the following is most likely to cause a decrease in bond prices?

a decrease in money supply growth and an increase in the demand for loanable funds

a forecast of decreasing oil prices

a forecast of a stronger dollar

an increase in money supply growth and no change in the demand for loanable funds

51. If the Treasury issues an unusually large amount of bonds in the primary market, it places ____ on bond prices, and ____ on yields to be earned by investors that purchase bonds and plan to hold them to maturity.

downward pressure; downward pressure

downward pressure; upward pressure

upward pressure; upward pressure

upward pressure; downward pressure

52. Assume bond portfolio managers actively manage their portfolios. If they expect interest rates to ____, they would shift toward ____.

increase; long-maturity bonds with zero-coupon rates

decrease; short-maturity bonds with high-coupon rates

increase; high-coupon bonds with long maturities

decrease; long-maturity bonds with zero-coupon rates

53. The market price of a bond is partly determined by the timing of the payments made to bondholders.

a. True

b. False

54. The appropriate price of a bond is simply the sum of the cash flows to be received.

a. True

b. False

55. The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.

a. True

b. False

56. Bonds that sell below their par value are called premium bonds.

a. True

b. False

57. A zero-coupon bond makes no coupon payments.

a. True

b. False

58. If the coupon rate of a bond is above the investor's required rate of return, the price of the bond should be below its par value.

a. True

b. False

59. An increase in either the risk-free rate or the general level of the risk premium on bonds results in a higher required rate of return and therefore causes bond prices to increase.

a. True

b. False

60. The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.

a. True

b. False

61. If the level of inflation is expected to decrease, there will be upward pressure on interest rates and on the required rate of return on bonds.

a. True

b. False

62. Foreign investors anticipating dollar depreciation are less willing to hold U.S. bonds because the coupon payments will convert to less of their home currency.

a. True

b. False

63. Any announcement that signals stronger than expected economic growth tends to increase bond prices.

a. True

b. False

64. Bond price elasticity is the percentage change in bond prices divided by the percentage change in the required rate of return.

a. True

b. False

65. As interest rates increase, prices of short-term bonds will decline by a greater degree than prices on long-term bonds.

a. True

b. False

66. Duration is a measure of bond price sensitivity.

a. True

b. False

67. A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.

a. True

b. False

68. International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.

a. True

b. False

69. In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.

a. True

b. False

70. Which of the following formulas best describes the value of a bond?

none of the above

71. Stephanie would like to purchase a bond that has a par value of $1,000, pays $80 at the end of each year in coupon payments, and has ten years remaining until maturity. If the prevailing annualized yield on other bonds with similar characteristics is 6 percent, how much will Stephanie pay for the bond?

$1,000.00

$1,147.20

$856.80

none of the above

72. Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of twenty years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?

$1,063.40

$1,000

$939.25

none of the above

73. To determine the present value of a bond that pays semiannual interest, which of the following adjustments should not be made to compute the price of the bond?

The annualized coupon should be split in half.

The annual discount rate should be divided by 2.

The number of annual periods should be doubled.

The par value should be split in half.

All of the above adjustments have to be made.

74. A $1,000 par value bond, paying $50 semiannually, with an 8 percent yield to maturity and five years remaining to maturity should sell for

$1,000.00.

$1,081.11.

$798.70.

$880.22.

none of the above.

75. If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.

increase; upward; downward

decrease; upward; downward

decrease; upward; upward

increase; upward; upward

increase; downward; upward

76. An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.

weak; decrease

strong; increase

weak; increase

strong; decrease

Answers C and D are correct.

77. Because of a change in the required rate of return from 11 percent to 13 percent, the bond price of a zero-coupon bond will fall from $1,000 to $860. Thus, the bond price elasticity for this bond is

0.77.

−0.77.

−0.90.

−1.06.

none of the above.

78. The required rate of return on a certain bond changes from 12 percent to 8 percent, causing the price of the bond to change from $900 to $1,100. The bond price elasticity of this bond is

−0.36.

−0.44.

−0.55.

−0.67.

0.67.

79. Assume a bond with a $1,000 par value and an 11 percent coupon rate, two years remaining to maturity, and a 10 percent yield to maturity. The duration of this bond is ____ years.

1.92

1.50

1.90

none of the above

80. A bond has a $1,000 par value and an 8 percent coupon rate. The bond has four years remaining to maturity and a 10 percent yield to maturity. This bond's modified duration is ____ years.

1.33

1.27

3.24

1.31

none of the above

81. If investors rely strictly on modified duration to estimate the percentage change in the price of a bond, they will tend to ____ the price decline associated with an increase in rates and ____ the price increase associated with a decrease in rates.

underestimate; underestimate

overestimate; overestimate

underestimate; overestimate

overestimate; underestimate

82. In the ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity.

matching

laddered

barbell

interest rate

none of the above

83. Using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes.

matching

laddered

barbell

interest rate

none of the above

84. Which of the following is not a factor affecting the market price of a foreign bond held by a U.S. investor?

foreign interest rate movements

credit risk

exchange rate fluctuations

All of the above are factors affecting the market price of a foreign bond.

85. When holding other factors constant, increased borrowing by the Treasury can result in a _______ required return and therefore _______ prices on existing bonds.

higher; lower

higher; higher

lower; higher

lower; lower

86. Holding other factors constant, a higher budget deficit leads to ______ interest rates, and higher inflationary expectations lead to _______ interest rates.

higher; lower

higher; higher

lower; higher

lower; lower

87. The credit risk premium tends to be larger for bonds that have longer terms to maturity.

a. True

b. False

88. The ____________ was recently established to identify risks in the U.S. financial system and make regulatory recommendations that could reduce such risks.

Financial Risk Assessment Commission

Financial Markets Protection Agency

Financial Stability Oversight Council

Federal Bureau of Financial Markets

89. When the European Central Bank provides credit to a country that is experiencing debt repayment problems, the ECB commonly:

allows the country’s government to conduct its own monetary policy.

recommends that the country withdraw from the eurozone.

urges the country’s government to increase spending and lower taxes to stimulate the economy.

imposes austerity conditions to enable the government to reduce its budget deficit.

90. Although the European debt crisis has had substantial effects on European financial markets, the crisis has been contained and has not affected markets and financial institutions outside Europe.

a. True

b. False

#FIN 350 Week 5 Quiz – Strayer

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FIN 320 Week 5 Mid-Term Exam – Strayer

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Chapters 1 Through 8

Chapter 1: ___________________________________________________________________________

Financial assets represent _____ of total assets of U.S. households.

over 60%

over 90%

under 10%

about 30%

Real assets in the economy include all but which one of the following?

Land

Buildings

Consumer durables

Common stock

Net worth represents _____ of the liabilities and net worth of commercial banks.

about 51%

about 91%

about 11%

about 31%

According to the Flow of Funds Accounts of the United States, the largest single asset of U.S. households is ___.

mutual fund shares

real estate

pension reserves

corporate equity

According to the Flow of Funds Accounts of the United States, the largest liability of U.S. households is ________.

mortgages

consumer credit

bank loans

gambling debts

____ is not a derivative security.

A share of common stock

A call option

A futures contract

None of these options (All of the answers are derivative securities.)

According to the Flow of Funds Accounts of the United States, the largest financial asset of U.S. households is ____.

mutual fund shares

corporate equity

pension reserves

personal trusts

Active trading in markets and competition among securities analysts helps ensure that: I. Security prices approach informational efficiency II. Riskier securities are priced to offer higher potential returns III. Investors are unlikely to be able to consistently find under- or overvalued securities

I only

I and II only

II and III only

I, II, and III

The material wealth of society is determined by the economy's _________, which is a function of the economy's _________.

investment bankers; financial assets

investment bankers; real assets

productive capacity; financial assets

productive capacity; real assets

10.

Which of the following is not a money market security?

U.S. Treasury bill

6-month maturity certificate of deposit

Common stock

Bankers' acceptance

11.

__________ assets generate net income to the economy, and __________ assets define allocation of income among investors.

Financial, financial

Financial, real

Real, financial

Real, real

12.

Which of the following are financial assets? I. Debt securities II. Equity securities III. Derivative securities

I only

I and II only

II and III only

I, II, and III

13.

__________ are examples of financial intermediaries.

Commercial banks

Insurance companies

Investment companies

All of these options

14.

Asset allocation refers to _________.

the allocation of the investment portfolio across broad asset classes

the analysis of the value of securities

the choice of specific assets within each asset class

none of these options

15.

Which one of the following best describes the purpose of derivatives markets?

Transferring risk from one party to another

Investing for a short time period to earn a small rate of return

Investing for retirement

Earning interest income

16.

More than _____________ of currency is traded each day in the market for foreign exchange.

$300 million

$1 billion

$30 billion

$1 trillion

17.

Security selection refers to the ________.

allocation of the investment portfolio across broad asset classes

analysis of the value of securities

choice of specific securities within each asset class

top-down method of investing

18.

Which of the following is an example of an agency problem?

Managers engage in empire building.

Managers protect their jobs by avoiding risky projects.

Managers over consume luxuries such as corporate jets.

All of these options are examples of agency problems.

19.

_____ is a mechanism for mitigating potential agency problems.

Tying income of managers to success of the firm

Directors defending top management

Antitakeover strategies

The straight voting method of electing the board of directors

20.

__________ is (are) real assets.

Bonds

Production equipment

Stocks

Commercial paper

21.

__________ portfolio construction starts with selecting attractively priced securities.

Bottom-up

Top-down

Upside-down

Side-to-side

22.

In a market economy, capital resources are primarily allocated by ____________.

governments

the SEC

financial markets

investment bankers

23.

__________ represents an ownership share in a corporation.

A call option

Common stock

A fixed-income security

Preferred stock

24.

The value of a derivative security _________.

depends on the value of another related security

affects the value of a related security

is unrelated to the value of a related security

can be integrated only by calculus professors

25.

Commodity and derivative markets allow firms to adjust their _________.

management styles

focus from their main line of business to their investment portfolios

ways of doing business so that they'll always have positive returns

exposure to various business risks

26.

__________ portfolio management calls for holding diversified portfolios without spending effort or resources attempting to improve investment performance through security analysis.

Active

Momentum

Passive

Market-timing

27.

Financial markets allow for all but which one of the following?

Shift consumption through time from higher-income periods to lower

Price securities according to their riskiness

Channel funds from lenders of funds to borrowers of funds

Allow most participants to routinely earn high returns with low risk

28.

Financial intermediaries exist because small investors cannot efficiently _________.

diversify their portfolios

gather information

monitor their portfolios

all of these options

29.

Methods of encouraging managers to act in shareholders' best interest include: I. Threat of takeover II. Proxy fights for control of the board of directors III. Tying managers' compensation to stock price performance

I only

I and II only

II and III only

I, II, and III

30.

Firms that specialize in helping companies raise capital by selling securities to the public are called _________.

pension funds

investment banks

savings banks

REITs

31.

In securities markets, there should be a risk-return trade-off with higher-risk assets having _________ expected returns than lower-risk assets.

higher

lower

the same

The answer cannot be determined from the information given.

32.

When the market is more optimistic about a firm, its share price will ______; as a result, it will need to issue _______ shares to raise funds that are needed.

rise; fewer

fall; fewer

rise; more

fall; more

33.

Security selection refers to _________.

choosing specific securities within each asset class

deciding how much to invest in each asset class

deciding how much to invest in the market portfolio versus the riskless asset

deciding how much to hedge

34.

An example of a derivative security is _________.

a common share of General Motors

a call option on Intel stock

a Ford bond

a U.S. Treasury bond

35.

__________ portfolio construction starts with asset allocation.

Bottom-up

Top-down

Upside-down

Side-to-side

36.

Which one of the following firms falsely claimed to have a $4.8 billion bank account at Bank of America and vastly understated its debts, eventually resulting in the firm's bankruptcy?

WorldCom

Enron

Parmalat

Global Crossing

37.

Debt securities promise: I. A fixed stream of income II. A stream of income that is determined according to a specific formula III. A share in the profits of the issuing entity

I only

I or II only

I and III only

II or III only

38.

The Sarbanes-Oxley Act tightened corporate governance rules by requiring all but which one of the following?

Required that corporations have more independent directors

Required that the CFO personally vouch for the corporation's financial statements

Required that firms could no longer employ investment bankers to sell securities to the public

Required the creation of a new board to oversee the auditing of public companies

39.

The success of common stock investments depends on the success of _________.

derivative securities

fixed-income securities

the firm and its real assets

government methods of allocating capital

40.

The historical average rate of return on large company stocks since 1926 has been _____.

12%

20%

41.

The average rate of return on U.S. Treasury bills since 1926 was _________.

less than 1%

less than 3%

less than 4%

less than 7%

42.

An example of a real asset is: I. A college education II. Customer goodwill III. A patent

I only

II only

I and III only

I, II, and III

43.

The 2002 law designed to improve corporate governance is titled the _____.

Pension Reform Act

ERISA

Financial Services Modernization Act

Sarbanes-Oxley Act

44.

Which of the following is not a financial intermediary?

a mutual fund

an insurance company

a real estate brokerage firm

a savings and loan company

45.

The combined liabilities of American households represent approximately __________ of combined assets.

11%

19%

25%

33%

46.

In 2011 real assets represented approximately __________ of the total asset holdings of American households.

32%

42%

48%

55%

47.

In 2011 mortgages represented approximately __________ of total liabilities and net worth of American households.

12%

14%

28%

42%

48.

Liabilities equal approximately _____ of total assets for nonfinancial U.S. businesses.

10%

25%

48%

75%

49.

Which of the following is not an example of a financial intermediary?

Goldman Sachs

Allstate Insurance

First Interstate Bank

IBM

50.

Real assets represent about ____ of total assets for commercial banks.

15%

25%

40%

51.

Money market securities are characterized by: I. Maturity less than 1 year II. Safety of the principal investment III. Low rates of return

I only

I and II only

I and III only

I, II, and III

52.

After much investigation, an investor finds that Intel stock is currently underpriced. This is an example of ______.

asset allocation

security analysis

top-down portfolio management

passive management

53.

After considering current market conditions, an investor decides to place 60% of her funds in equities and the rest in bonds. This is an example of _____.

asset allocation

security analysis

top-down portfolio management

passive management

54.

Suppose an investor is considering one of two investments that are identical in all respects except for risk. If the investor anticipates a fair return for the risk of the security he invests in, he can expect to _____.

earn no more than the Treasury-bill rate on either security.

pay less for the security that has higher risk.

pay less for the security that has lower risk.

earn more if interest rates are lower.

55.

The efficient market hypothesis suggests that _______.

active portfolio management strategies are the most appropriate investment strategies

passive portfolio management strategies are the most appropriate investment strategies

either active or passive strategies may be appropriate, depending on the expected direction of the market

a bottom-up approach is the most appropriate investment strategy

56.

In a perfectly efficient market the best investment strategy is probably _____.

an active strategy.

a passive strategy.

asset allocation.

market timing.

57.

Market signals will help to allocate capital efficiently only if investors are acting _____.

on the basis of their individual hunches.

as directed by financial experts.

as dominant forces in the economy.

on accurate information.

58.

Which of the following is (are) true about hedge funds? I. They are open to institutional investors. II. They are open to wealthy individuals. III. They are more likely than mutual funds to pursue simple strategies.

I and II only

I and III only

II and III only

I, II, and III

59.

Venture capital is _________.

frequently used to expand the businesses of well-established companies

supplied by venture capital funds and individuals to start-up companies

illegal under current U.S. laws

most frequently issued with the help of investment bankers

60.

Individuals may find it more advantageous to purchase claims from a financial intermediary rather than directly purchasing claims in capital markets because: I. Intermediaries are better diversified than most individuals II. Intermediaries can exploit economies of scale in investing that individual investors cannot III. Intermediated investments usually offer higher rates of return than direct capital market claims

I only

I and II only

II and III only

I, II, and III

61.

Surf City Software Company develops new surf forecasting software. It sells the software to Microsoft in exchange for 1,000 shares of Microsoft common stock. Surf City Software has exchanged a _____ asset for a _____ asset in this transaction.

real; real

financial; financial

real; financial

financial; real

62.

Stone Harbor Products takes out a bank loan. It receives $100,000 and signs a promissory note to pay back the loan over 5 years. In this transaction, _____.

a new financial asset was created

a financial asset was traded for a real asset

a financial asset was destroyed

a real asset was created

63.

Which of the following firms was not engaged in a major accounting scandal between 2000 and 2005?

General Electric

Parmalat

Enron

WorldCom

64.

Accounting scandals can often be attributed to a particular concept in the study of finance known as the _____.

agency problem

risk-return trade-off

allocation of risk

securitization

65.

An intermediary that pools and manages funds for many investors is called ______.

an investment company

a savings and loan

an investment banker

a commercial bank

66.

Financial institutions that specialize in assisting corporations in primary market transactions are called _______.

mutual funds

investment bankers

pension funds

globalization specialists

67.

When a pass-through mortgage security is issued, what does the issuing agency expect to receive?

The amount of the original loan plus a servicing fee

The principal and interest that are paid by the homeowner

The principal and interest that are paid by the homeowner, minus a servicing fee

The interest paid by the homeowner, plus a servicing fee

68.

In 2008 the largest corporate bankruptcy in U.S. history involved the investment banking firm of ______.

Goldman Sachs

Lehman Brothers

Morgan Stanley

Merrill Lynch

69.

The inability of shareholders to influence the decisions of managers, despite overwhelming shareholder support, is a breakdown in what process or mechanism?

Auditing

Public finance

Corporate governance

Public reporting

70.

Real assets are ______.

assets used to produce goods and services

always the same as financial assets

always equal to liabilities

claims on a company's income

71.

A major cause of mortgage market meltdown in 2007 and 2008 was linked to ________.

private equity investments

securitization

negative analyst recommendations

online trading

72.

In recent years the greatest dollar amount of securitization occurred for which type of loan?

Home mortgages

Credit card debt

Automobile loans

Equipment leasing

73.

Which of the following is (are) true about nonconforming mortgage loans?

They are also known as subprime loans.

They have higher default risk than conforming loans.

They were able to be offered without due diligence.

All of these options are true.

74.

The systemic risk that led to the financial crisis of 2008 was increased by _____.

collateralized debt obligations

subprime mortgages

credit default swaps

all of the options

75.

An investment adviser has decided to purchase gold, real estate, stocks, and bonds in equal amounts. This decision reflects which part of the investment process?

Asset allocation

Investment analysis

Portfolio analysis

Security selection

Chapter 2: ___________________________________________________________________________

Which of the following is not a money market instrument?

Treasury bill

Commercial paper

Preferred stock

Bankers' acceptance

T-bills are issued with initial maturities of: I. 4 weeks II. 16 weeks III. 26 weeks IV. 32 weeks

I and II only

I and III only

I, II, and III only

I, II, III, and IV

When computing the bank discount yield, you would use ____ days in the year.

260

360

365

366

A dollar-denominated deposit at a London bank is called _____.

eurodollars

LIBOR

fed funds

bankers' acceptance

Money market securities are sometimes referred to as cash equivalents because _____.

they are safe and marketable

they are not liquid

they are high-risk

they are low-denomination

The most marketable money market security is _____.

Treasury bills

bankers' acceptances

certificates of deposit

common stock

The minimum tick size, or spread between prices in the Treasury bond market, is

1/8 of a point.

1/16 of a point.

1/32 of a point.

1/64 of a point.

An investor in a T-bill earns interest by _________.

receiving interest payments every 90 days

receiving dividend payments every 30 days

converting the T-bill at maturity into a higher-valued T-note

buying the bill at a discount from the face value to be received at maturity

______ would not be included in the EAFE index.

Australia

Canada

France

Japan

10.

_____ is considered to be an emerging market country.

France

Norway

Brazil

Canada

11.

Which one of the following is a true statement?

Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors.

Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock.

Preferred stockholders have voting power.

Investors can sue managers for nonpayment of preferred dividends.

12.

The bid price of a Treasury bill is _________.

the price at which the dealer in Treasury bills is willing to sell the bill

the price at which the dealer in Treasury bills is willing to buy the bill

greater than the ask price of the Treasury bill expressed in dollar terms

the price at which the investor can buy the Treasury bill

13.

The German stock market is measured by which market index?

FTSE

Dow Jones 30

DAX

Nikkei

14.

Deposits of commercial banks at the Federal Reserve are called _____.

bankers' acceptances

federal funds

repurchase agreements

time deposits

15.

Which of the following is not a true statement regarding municipal bonds?

A municipal bond is a debt obligation issued by state or local governments.

A municipal bond is a debt obligation issued by the federal government.

The interest income from a municipal bond is exempt from federal income taxation.

The interest income from a municipal bond is exempt from state and local taxation in the issuing state.

16.

Which of the following is not a characteristic of a money market instrument?

Liquidity

Marketability

Low risk

Maturity greater than 1 year

17.

An individual who goes short in a futures position _____.

commits to delivering the underlying commodity at contract maturity

commits to purchasing the underlying commodity at contract maturity

has the right to deliver the underlying commodity at contract maturity

has the right to purchase the underlying commodity at contract maturity

18.

Which of the following is not a nickname for an agency associated with the mortgage markets?

Fannie Mae

Freddie Mac

Sallie Mae

Ginnie Mae

19.

Commercial paper is a short-term security issued by __________ to raise funds.

the Federal Reserve

the New York Stock Exchange

large well-known companies

all of these options

20.

The maximum maturity on commercial paper is _____.

270 days

180 days

90 days

30 days

21.

Which one of the following is a true statement regarding the Dow Jones Industrial Average?

It is a value-weighted average of 30 large industrial stocks.

It is a price-weighted average of 30 large industrial stocks.

It is a price-weighted average of 100 large stocks traded on the New York Stock Exchange.

It is a value-weighted average of all stocks traded on the New York Stock Exchange.

22.

Treasury bills are financial instruments issued by __________ to raise funds.

commercial banks

the federal government

large corporations

state and city governments

23.

Which of the following are true statements about T-bills? I. T-bills typically sell in denominations of $10,000. II. Income earned on T-bills is exempt from all federal taxes. III. Income earned on T-bills is exempt from state and local taxes.

I only

I and II only

I and III only

I, II, and III

24.

A bond that has no collateral is called a _________.

callable bond

debenture

junk bond

mortgage

25.

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

call option

futures contract

put option

interest rate swap

26.

A T-bill quote sheet has 90-day T-bill quotes with a 4.92 bid and a 4.86 ask. If the bill has a $10,000 face value, an investor could buy this bill for _____.

$10,000

$9,878.50

$9,877

$9,880.16

27.

Which one of the following is a true statement regarding corporate bonds?

A corporate callable bond gives its holder the right to exchange it for a specified number of the company's common shares.

A corporate debenture is a secured bond.

A corporate convertible bond gives its holder the right to exchange it for a specified number of the company's common shares.

Holders of corporate bonds have voting rights in the company.

28.

The yield on tax-exempt bonds is ______.

usually less than 50% of the yield on taxable bonds

normally about 90% of the yield on taxable bonds

greater than the yield on taxable bonds

less than the yield on taxable bonds

29.

__________ is not a money market instrument.

A certificate of deposit

A Treasury bill

A Treasury bond

Commercial paper

30.

An investor buys a T-bill at a bank discount quote of 4.80 with 150 days to maturity. The investor's actual annual rate of return on this investment is _____.

4.8%

4.97%

5.47%

5.74%

31.

The U.K. stock index is the _________.

DAX

FTSE

GSE

TSE

32.

A __________ gives its holder the right to buy an asset for a specified exercise price on or before a specified expiration date.

call option

futures contract

put option

interest rate swap

33.

Which one of the following provides the best example of securitization?

Convertible bond

Call option

Mortgage pass-through security

Preferred stock

34.

Which of the following indexes are market value-weighted? I. The NYSE Composite II. The S&P 500 III. The Wilshire 5000

I and II only

II and III only

I and III only

I, II, and III

35.

The interest rate charged by large banks in London to lend money among themselves is called _________.

the prime rate

the discount rate

the federal funds rate

LIBOR

36.

A firm that has large securities holdings and wishes to raise money for a short length of time may be able to find the cheapest financing from which of the following?

Reverse repurchase agreement

Bankers' acceptance

Commercial paper

Repurchase agreement

37.

Currently, the Dow Jones Industrial Average is computed by _________.

adding the prices of 30 large "blue-chip" stocks and dividing by 30

calculating the total market value of the 30 firms in the index and dividing by 30

measuring the current total market value of the 30 stocks in the index relative to the total value on the previous day

adding the prices of 30 large "blue-chip" stocks and dividing by a divisor adjusted for stock splits and large stock dividends

38.

An investor purchases one municipal bond and one corporate bond that pay rates of return of 5% and 6.4%, respectively. If the investor is in the 15% tax bracket, his after-tax rates of return on the municipal and corporate bonds would be, respectively, _____.

5% and 6.4%

5% and 5.44%

4.25% and 6.4%

5.75% and 5.44%

39.

If a Treasury note has a bid price of $996.25, the quoted bid price in the Wall Street Journal would be _________.

99:25

99:63

99:20

99:08

40.

TIPS are ______.

Treasury bonds that pay no interest and are sold at a discount

U.K. bonds that protect investors from default risk

securities that trade on the Toronto stock index

Treasury bonds that protect investors from inflation

41.

The price quotations of Treasury bonds in the Wall Street Journal show a bid price of 102:12 and an ask price of 102:14. If you sell a Treasury bond, you expect to receive _________.

$1,024.75

$1,024.38

$1,023.75

$1,022.50

42.

The Dow Jones Industrial Average is _________.

a price-weighted average

a value weight and average

an equally weighted average

an unweighted average

43.

Investors will earn higher rates of returns on TIPS than on equivalent default-risk standard bonds if _______________.

inflation is lower than anticipated over the investment period

inflation is higher than anticipated over the investment period

the U.S. dollar increases in value against the euro

the spread between commercial paper and Treasury securities remains low

44.

Preferred stock is like long-term debt in that ___________.

it gives the holder voting power regarding the firm's management

it promises to pay to its holder a fixed stream of income each year

the preferred dividend is a tax-deductible expense for the firm

in the event of bankruptcy preferred stock has equal status with debt

45.

Which of the following does not approximate the performance of a buy-and-hold portfolio strategy?

An equally weighted index

A price-weighted index

A value-weighted index

All of these options (Weights are not a factor in this situation.)

46.

In calculating the Dow Jones Industrial Average, the adjustment for a stock split occurs _________.

automatically

by adjusting the divisor

by adjusting the numerator

by adjusting the market value weights

47.

Suppose the market prices of the 30 stocks in the Dow Jones Industrial Average all change by the same dollar amount on a given day. Assuming there are no stock splits, which stock will have the greatest impact on the average?

The one with the highest price

The one with the lowest price

All 30 stocks will have the same impact.

The answer cannot be determined from the information given.

48.

A bond issued by the state of Alabama is priced to yield 6.25%. If you are in the 28% tax bracket, this bond would provide you with an equivalent taxable yield of _________.

4.5%

7.25%

8.68%

none of these options

49.

The purchase of a futures contract gives the buyer _________.

the right to buy an item at a specified price

the right to sell an item at a specified price

the obligation to buy an item at a specified price

the obligation to sell an item at a specified price

50.

Ownership of a put option entitles the owner to the __________ to ___________ a specific stock, on or before a specific date, at a specific price.

right; buy

right; sell

obligation; buy

obligation; sell

51.

An investor in a 28% tax bracket is trying to decide whether to invest in a municipal bond or a corporate bond. She looks up municipal bond yields (rm) but wishes to calculate the taxable equivalent yield r. The formula she should use is given by ______.

r = rm × (1 - 28%)

r = rm/(1 - 72%)

r = rm × (1 - 72%)

r = rm/(1 - 28%)

52.

June call and put options on King Books Inc. are available with exercise prices of $30, $35, and $40. Among the different exercise prices, the call option with the _____ exercise price and the put option with the _____ exercise price will have the greatest value.

$40; $30

$30; $40

$35; $35

$40; $40

53.

Ownership of a call option entitles the owner to the __________ to __________ a specific stock, on or before a specific date, at a specific price.

right; buy

right; sell

obligation; buy

obligation; sell

54.

The ________ the ratio of municipal bond yields to corporate bond yields, the _________ the cutoff tax bracket at which more individuals will prefer to hold municipal debt.

higher; lower

lower; lower

higher; higher

The answer cannot be determined without more information.

55.

Which of the following types of bonds are excluded from most bond indexes?

Corporate bonds

Junk bonds

Municipal bonds

None of these options

56.

The Hang Seng index reflects market performance on which of the following major stock markets?

Japan

Singapore

Taiwan

Hong Kong

57.

The Standard & Poor's 500 is __________ weighted index.

an equally

a price-

a value-

a share-

58.

A firm that fails to pay dividends on its preferred stock is said to be _________.

insolvent

in arrears

insufferable

delinquent

59.

Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _________.

certificates of deposit

repurchase agreements

bankers' acceptances

commercial paper

60.

Which of the following is most like a short-term collateralized loan?

Certificate of deposit

Repurchase agreement

Bankers' acceptance

Commercial paper

61.

Eurodollars are _________.

dollar-denominated deposits at any foreign bank or foreign branch of an American bank

dollar-denominated bonds issued by firms outside their home market

currency issued by Euro Disney and traded in France

dollars that wind up in banks as a result of money-laundering activities

62.

Which of the following is used to back international sales of goods and services?

Certificate of deposit

Bankers' acceptance

Eurodollar deposits

Commercial paper

63.

Treasury notes have initial maturities between ________ years.

2 and 4

5 and 10

10 and 30

1 and 10

64.

Which of the following is not a characteristic of common stock ownership?

Residual claimant

Unlimited liability

Voting rights

Limited life of the security

65.

If you thought prices of stock would be rising over the next few months, you might want to __________________ on the stock.

purchase a call option

purchase a put option

sell a futures contract

place a short-sale order

66.

A typical bond price quote includes all but which one of the following?

Daily high price for the bond

Closing bond price

Yield to maturity

Dividend yield

67.

What are business firms most likely to use derivative securities for?

Hedging

Speculating

Doing calculus problems

Market making

68.

What would you expect to have happened to the spread between yields on commercial paper and Treasury bills immediately after September 11, 2001?

No change, as both yields will remain the same

Increase, as the spread usually increases in response to a crisis

Decrease, as the spread usually decreases in response to a crisis

No change, as both yields will move in the same direction

69.

A stock quote indicates a stock price of $60 and a dividend yield of 3%. The latest quarterly dividend received by stock investors must have been ______ per share.

$0.55

$1.80

$0.45

$1.25

70.

Three stocks have share prices of $12, $75, and $30 with total market values of $400 million, $350 million, and $150 million, respectively. If you were to construct a price-weighted index of the three stocks, what would be the index value?

300

71.

Which of the following is not considered a money market investment?

Bankers' acceptance

Eurodollar

Repurchase agreement

Treasury note

72.

The Federal Reserve Board of Governors directly controls which of the following interest rates?

Bankers' acceptances

Brokers' calls

Federal funds

LIBOR

73.

You decide to purchase an equal number of shares of stocks of firms to create a portfolio. If you wanted to construct an index to track your portfolio performance, your best match for your portfolio would be to construct ______.

a value-weighted index

an equally weighted index

a price-weighted index

a bond price index

74.

In a ___________ index, changes in the value of the stock with the greatest market value will move the index value the most, everything else equal.

value-weighted index

equally weighted index

price-weighted index

bond price index

75.

A corporation in a 34% tax bracket invests in the preferred stock of another company and earns a 6% pretax rate of return. An individual investor in a 15% tax bracket invests in the same preferred stock and earns the same pretax return. The after-tax return to the corporation is _______, and the after-tax return to the individual investor is _______.

3.96%; 5.1%

5.39%; 5.1%

6%; 6%

3.96%; 6%

76.

All but which one of the following indices is value weighted?

NASDAQ Composite

S&P 500

Wilshire 5000

DJIA

77.

What is the tax exempt equivalent yield on a 9% bond yield given a marginal tax rate of 28%?

6.48%

7.25%

8.02%

78.

A tax free municipal bond provides a yield of 3.2%. What is the equivalent taxable yield on the bond given a 35% tax bracket?

3.2%

3.68%

4.92%

79.

An index computed from a simple average of returns is a/an _____.

equal weighted index

value weighted index

price weighted index

share weighted index

80.

A tax free municipal bond provides a yield of 2.34%. What is the equivalent taxable yield on the bond given a 28% tax bracket?

2.34%

2.68%

3.25%

4.92%

81.

The Chompers Index is a price weighted stock index based on the 3 largest fast food chains. The stock prices for the three stocks are $54, $23, and $44. What is the price weighted index value of the Chompers Index?

23.43

35.36

40.33

49.58

82.

The Hydro Index is a price weighted stock index based on the 5 largest boat manufacturers in the nation. The stock prices for the five stocks are $10, $20, $80, $50 and $40. The price of the last stock was just split 2 for 1 and the stock price was halved from $40 to $20. What is the new divisor for a price weighted index?

5.00

4.85

4.50

4.75

83.

A benchmark index has three stocks priced at $23, $43, and $56. The number of outstanding shares for each is 350,000 shares, 405,000 shares, and 553,000 shares, respectively. If the market value weighted index was 970 yesterday and the prices changed to $23, $41, and $58, what is the new index value?

960

970

975

985

84.

A benchmark market value index is comprised of three stocks. Yesterday the three stocks were priced at $12, $20, and $60. The number of outstanding shares for each is 600,000 shares, 500,000 shares, and 200,000 shares, respectively. If the stock prices changed to $16, $18, and $62 today respectively, what is the 1-day rate of return on the index?

5.78%

4.35%

6.16%

7.42%

85.

Which of the following mortgage scenarios will benefit the homeowner the most?

Adjustable rate mortgage when interest rate increases.

Fixed rate mortgage when interest rates falls.

Fixed rate mortgage when interest rate rises.

None of these options, as the banker's interest will always be protected.

86.

The TED spread refers to

the difference between the Treasury bond rate and the Treasury bill rate.

the difference between the Treasury note rate and the Treasury bill rate.

the difference between the LIBOR rate and the Treasury bill rate.

the difference between the LIBOR rate and the Treasury bond rate.

Chapter 3: ___________________________________________________________________________

Underwriting is one of the services provided by _____.

the SEC

investment bankers

publicly traded companies

FDIC

Under firm-commitment underwriting, the ______ assumes the full risk that the shares cannot be sold to the public at the stipulated offering price.

red herring

issuing company

initial stockholder

underwriter

Explicit costs of an IPO tend to be around ______ of the funds raised.

15%

25%

Barnegat Light sold 200,000 shares in an initial public offering. The underwriter's explicit fees were $90,000. The offering price for the shares was $35, but immediately upon issue, the share price jumped to $43. What is the best estimate of the total cost to Barnegat Light of the equity issue?

$90,000

$1,290,000

$2,390,000

$1,690,000

A red herring becomes a prospectus when ____.

the preliminary registration statement is approved by the SEC

the IPO is complete

the offering is seasoned

the lockup period expires

Private placements can be advantageous, compared to public issue, because: I. Private placements are cheaper to market than public issues. II. Private placements may still be sold to the general public under SEC Rule 144A. III. Privately placed securities trade on secondary markets.

I only

I and III only

II and III only

I, II, and III

A level _____ subscriber to the NASDAQ system may enter bid and ask prices.

Which one of the following statements about IPOs is not true?

IPOs generally underperform in the short run.

IPOs often provide very good initial returns to investors.

IPOs generally provide superior long-term performance as compared to other stocks.

Shares in IPOs are often primarily allocated to institutional investors.

The margin requirement on a stock purchase is 25%. You fully use the margin allowed to purchase 100 shares of MSFT at $25. If the price drops to $22, what is your percentage loss?

15%

48%

57%

10.

The NYSE acquired the ECN _______, and NASDAQ recently acquired the ECN ________.

Archipelago; Instinet

Instinet; Archipelago

Island; Instinet

LSE; Euronext

11.

Rank the following types of markets from least integrated and organized to most integrated and organized: I. Brokered markets II. Continuous auction markets III. Dealer markets IV. Direct search markets

IV, II, I, III

I, III, IV, II

II, III, IV, I

IV, I, III, II

12.

As a result of flash crashes, the SEC is trying circuit breakers that will halt trading for 5 minutes if large stocks' prices change by more than _____ in a 5-minute period.

10%

20%

30%

40%

13.

Which one of the following is not an example of a brokered market?

Residential real estate market

Market for large block security transactions

Primary market for securities

NASDAQ

14.

More than ______ of all trading is believed to be initiated by computer algorithms.

25%

40%

50%

75%

15.

Purchases of new issues of stock take place _________.

at the desk of the Fed

in the primary market

in the secondary market

in the money markets

16.

Initial margin requirements on stocks are set by _________.

the Federal Deposit Insurance Corporation

the Federal Reserve

the New York Stock Exchange

the Securities and Exchange Commission

17.

Which one of the following types of markets requires the greatest level of trading activity to be cost-effective?

Broker market

Dealer market

Continuous auction market

Direct search market

18.

Which one of the following is a false statement regarding NYSE specialists?

On a stock exchange most buy or sell orders are executed via an electronic system rather than through specialists.

Specialists cannot trade for their own accounts.

Specialists maintain limit order books, which contain the outstanding unexecuted limit orders.

Specialists stand ready to trade at narrower bid-ask spreads in cases where the spread has become too wide.

19.

Restrictions on trading involving insider information apply to: I. Corporate officers and directors II. Major stockholders III. Relatives of corporate directors and officers

I only

I and II only

II and III only

I, II, and III

20.

An order to buy or sell a security at the current price is a ______________.

limit order

market order

stop-loss order

stop-buy order

21.

The term insidequotes refers to _____.

the difference between the lowest bid price and the highest ask price in the limit order book.

the difference between the highest bid price and the lowest ask price in the limit order book.

the difference between the lowest bid price and the lowest ask price in the limit order book.

the difference between the highest bid price and the highest ask price in the limit order book.

22.

The term latency refers to _____.

the lag between when an order is placed on the NYSE and when it is executed.

the amount of time it takes to accept, process, and deliver a trading order.

the time it takes to implement new rules and procedures for stock exchanges and computer trading systems.

the lag between when an order is executed and when the investor takes possession of the securities.

23.

If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

stop-buy; stop-loss

market; limit

stop-loss; stop-buy

limit; market

24.

On a given day a stock dealer maintains a bid price of $1,000.50 for a bond and an ask price of $1003.25. The dealer made 10 trades that totaled 500 bonds traded that day. What was the dealer's gross trading profit for this security?

$1,375

$500

$275

$1,450

25.

Advantages of ECNs over traditional markets include all but which one of the following?

Lower transactions costs

Anonymity of the participants

Small amount of time needed to execute and order

Ability to handle very large orders

26.

The __________ was established to protect investors from losses if their brokerage firms fail.

CFTC

SEC

SIPC

AIMR

27.

When matching orders from the public, a specialist is required to use the _______.

lowest outstanding bid price and highest outstanding ask price

highest outstanding bid price and highest outstanding ask price

lowest outstanding bid price and lowest outstanding ask price

highest outstanding bid price and lowest outstanding ask price

28.

The process of polling potential investors regarding their interest in a forthcoming initial public offering (IPO) is called ________.

interest building

book building

market analysis

customer identification

29.

The bulk of most initial public offerings (IPOs) of equity securities goes to ___________.

institutional investors

individual investors

the firm's current shareholders

day traders

30.

Initial public offerings (IPOs) are usually ___________ relative to the levels at which their prices stabilize after they begin trading in the secondary market.

overpriced

correctly priced

underpriced

mispriced, but without any particular bias

31.

According to multiple studies by Ritter, initial public offerings tend to exhibit __________ performance initially and __________ performance over the long term.

bad; good

bad; bad

good; good

good; bad

32.

Specialists try to maintain a narrow bid-ask spread because: I. If the spread is too large, they will not participate in as many trades, losing commission income. II. The exchange requires specialists to maintain price continuity. III. Specialists are nonprofit entities designed to facilitate market transactions rather than make a profit.

I only

I and II only

II and III only

I, II, and III

33.

In a __________ underwriting arrangement, the underwriter assumes the full risk that shares may not be sold to the public at the stipulated offering price.

best-efforts

firm-commitment

private placement

none of these options

34.

The ______________ is the most important dealer market in the United States, and the ______________ is the most important auction market.

NYSE; NASDAQ

NASDAQ; NYSE

CME; OTC

AMEX; NYSE

35.

The inside quotes on a limit order book can be found ______.

at the top of the list

at the bottom of the list

by taking the averages of the bid and ask prices on the list

only by direct contact with the specialist who maintains the book

36.

The __________ system enables exchange members to send orders directly to a specialist over computer lines.

FAX

Direct Plus

NASDAQ

SUPERDOT

37.

The fully automated trade-execution system installed on the NYSE is called _____.

FAX

Direct +

NASDAQ

SUPERDOT

38.

The NYSE Hybrid Market allows _____.

individuals to send orders directly to a specialist

individuals to send orders directly to an electronic system

brokers to send orders directly to a specialist

brokers to send orders either to an electronic system or to a specialist

39.

Approximately __________ of trades involving shares issued by firms listed on the New York Stock Exchange actually take place on the New York Stock Exchange.

50%

25%

60%

75%

40.

The _________ price is the price at which a dealer is willing to purchase a security.

bid

ask

clearing

settlement

41.

The _________ price is the price at which a dealer is willing to sell a security.

bid

ask

clearing

settlement

42.

The difference between the price at which a dealer is willing to buy and the price at which a dealer is willing to sell is called the _________.

market spread

bid-ask spread

bid-ask gap

market variation

43.

The bid-ask spread exists because of _______________.

market inefficiencies

discontinuities in the markets

the need for dealers to cover expenses and make a profit

lack of trading in thin markets

44.

The NYSE has lost market share to ECNs in recent years. Part of the NYSE's response to the growth of ECNs has been to: I. Purchase Archipelago, a major ECN, and rename it NYSE Arca II. Enable automatic trade execution through its new Market Center III. Impose a tighter limit on bid-ask spreads

I only

II and III only

I and II only

I, II, and III

45.

The cost of buying and selling a stock includes: I. Broker's commissions II. Dealer's bid-asked spread III. Price concessions that investors may be forced to make

I and II only

II and III only

I and III only

I, II, and III

46.

Which of the following is (are) true about dark pools? I. They allow anonymity in trading. II. They often involve large blocks of stocks. III. Trades made through them might not be reported.

I and II only

II and III only

I and III only

I, II, and III

47.

You purchased XYZ stock at $50 per share. The stock is currently selling at $65. Your gains could be protected by placing a _________.

limit buy order

limit sell order

market order

stop-loss order

48.

Consider the following limit order book of a specialist. The last trade in the stock occurred at a price of $40. If a market buy order for 100 shares comes in, at what price will it be filled?

$39.75

$40.25

$40.375

$40.25 or less

49.

You find that the bid and ask prices for a stock are $10.25 and $10.30, respectively. If you purchase or sell the stock, you must pay a flat commission of $25. If you buy 100 shares of the stock and immediately sell them, what is your total implied and actual transaction cost in dollars?

$50

$25

$30

$55

50.

According to SEC Rule 415 regarding shelf registration, firms can gradually sell securities to the public for __________ following initial registration.

1 year

2 years

3 years

4 years

51.

What happened to the effective spread on trades when the SEC allowed the minimum tick size to move from one-eighth of a dollar to one-sixteenth of a dollar in 1997 and from one-sixteenth of a dollar to one cent in 2001?

The tick size increased in 1997 but decreased in 2001.

The tick size increased in both cases.

The tick size decreased in 1997 but increased in 2001.

The tick size decreased in both cases.

52.

Assume you purchased 500 shares of XYZ common stock on margin at $40 per share from your broker. If the initial margin is 60%, the amount you borrowed from the broker is _________.

$20,000

$12,000

$8,000

$15,000

53.

You sold short 300 shares of common stock at $30 per share. The initial margin is 50%. You must put up _________.

$4,500

$6,000

$9,000

$10,000

54.

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible loss?

$50

$150

$10,000

Unlimited

55.

You short-sell 200 shares of Tuckerton Trading Co., now selling for $50 per share. What is your maximum possible gain, ignoring transactions cost?

$50

$150

$10,000

Unlimited

56.

You short-sell 200 shares of Rock Creek Fly Fishing Co., now selling for $50 per share. If you want to limit your loss to $2,500, you should place a stop-buy order at ____.

$37.50

$62.50

$56.25

$59.75

57.

You purchased 200 shares of ABC common stock on margin at $50 per share. Assume the initial margin is 50% and the maintenance margin is 30%. You will get a margin call if the stock drops below ________. (Assume the stock pays no dividends, and ignore interest on the margin loan.)

$26.55

$35.71

$28.95

$30.77

58.

You purchased 250 shares of common stock on margin for $25 per share. The initial margin is 65%, and the stock pays no dividend. Your rate of return would be __________ if you sell the stock at $32 per share. Ignore interest on margin.

35%

39%

43%

28%

59.

You sell short 200 shares of Doggie Treats Inc. that are currently selling at $25 per share. You post the 50% margin required on the short sale. If your broker requires a 30% maintenance margin, at what stock price will you get a margin call? (You earn no interest on the funds in your margin account, and the firm does not pay any dividends.)

$28.85

$35.71

$31.50

$32.25

60.

Transactions that do not involve the original issue of securities take place in _________.

primary markets

secondary markets

over-the-counter markets

institutional markets

61.

What was the result of high-frequency traders' leaving the market during the flash crash of 2010?

Market liquidity decreased.

Market liquidity increased.

Market volatility decreased.

Trading frequency increased.

62.

__________ often accompany short sales and are used to limit potential losses from the short position.

Limit orders

Restricted orders

Limit loss orders

Stop-buy orders

63.

The market share held by the NYSE Arca system in February 2011 was approximately ____.

65%

45%

25%

10%

64.

Regulation NMS: I. Supports the goal of integrating financial markets II. Requires the use of specialists to execute trades III. Requires that exchanges honor quotes of other exchanges when they can be executed automatically

I only

I and II only

I and III only

I, II, and III

65.

The commission structure on a stock purchase is $50 plus $.03 per share. If you purchase 600 shares of a stock selling for $65, what is your commission?

$35

$45

$53

$68

66.

All major stock markets today are effectively _______________.

specialist trading systems

electronic trading systems

continuous auction markets

direct search markets

67.

In 2008, the NASDAQ stock market merged with _____.

Euronext

OMX, which operates seven Nordic and Baltic stock exchanges

the International Securities Exchange (ISE)

BATS

68.

You hold 5,000 shares of the 1 million outstanding shares of Wealthy Wranglers common stock. You've just learned that the company plans to issue more shares, so that 2 million shares will be outstanding. This is called _____.

an advanced equity offering

a weathered equity offering

a seasoned equity offering

a veteran equity offering

69.

If an investor uses the full amount of margin available, the equity in a margin account used for a stock purchase can be found as ________.

market value of the stock - amount owed on the margin loan

market value of the stock + amount owed on the margin loan

market value of the stock ÷ margin loan

margin loan × market value of the stock

70.

The average depth of the limit order book is _____.

lower for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

higher for the large stocks in the S&P 500 Index than for the smaller stocks in the Russell 2000 Index

about the same for both the large stocks in the S&P 500 Index and the smaller stocks in the Russell 2000 Index

unrelated to the sizes of the stocks in the indexes

71.

The CFA Institute Standards of Professional Conduct require that members _____.

place their clients' interests before their own

disclose conflicts of interest to clients

inform their employers that they are obligated to comply with the Standards of Professional Conduct

all of these options

72.

Trading on inside information is: I. Prohibited by federal law II. Prohibited by the CFA Institute Standards of Professional Conduct III. Monitored by the SEC

I and II only

II and III only

I and III only

I, II, and III

73.

The ____ requires full disclosure of relevant information relating to the issue of new securities.

Insider Trading Act of 1931

Securities Act of 1933

Securities Exchange Act of 1934

Investment Company Act of 1940

74.

The SIPC was established by the ____.

Insider Trading Act of 1931

Securities Act of 1933

Securities Exchange Act of 1934

none of these options

75.

Maintenance requirements for margin accounts are set by ____.

brokerage firms

the SEC

the Federal Reserve System's Board of Governors

the Supreme Court

76.

Which of the following are true concerning short sales of exchange-listed stocks? I. Proceeds from the short sale must be kept on deposit with the broker. II. Short-sellers must post margin with their broker to cover potential losses on the position. III. The short-seller earns interest on any cash deposited with the broker that is used to meet the margin requirement.

I only

I and III only

I and II only

I, II, and III

77.

The largest nongovernmental regulator of securities firms in the United States is ________.

the CFA Institute

the Public Company Accounting Oversight Board

the Financial Industry Regulatory Authority

the Board of Directors of NYSE Euronext

78.

In ________ markets, participants post bid and ask prices at which they are willing to trade, but orders are not automatically executed by computer. ____________ execute trades for people other than themselves, and in _______________ markets a computer matches orders with an existing limit order book and executes the trades automatically.

electronic; Dealers; brokers

dealer; Brokers; electronic

direct search; Brokers; electronic

brokered; Dealers; direct search

79.

An investor puts up $5,000 but borrows an equal amount of money from his broker to double the amount invested to $10,000. The broker charges 7% on the loan. The stock was originally purchased at $25 per share, and in 1 year the investor sells the stock for $28. The investor's rate of return was ____.

17%

12%

14%

19%

80.

An investor buys $8,000 worth of a stock priced at $40 per share using 50% initial margin. The broker charges 6% on the margin loan and requires a 30% maintenance margin. In 1 year the investor has interest payable and gets a margin call. At the time of the margin call the stock's price must have been ____.

$20

$29.77

$30.29

$32.45

81.

The New York Stock Exchange is a good example of _________.

an auction market

a brokered market

a dealer market

a direct search market

82.

The primary market where new security issues are offered to the public is a good example of _________.

an auction market

a brokered market

a dealer market

a direct search market

83.

The over-the-counter securities market is a good example of _________.

an auction market

a brokered market

a dealer market

a direct search market

84.

An investor buys $16,000 worth of a stock priced at $20 per share using 60% initial margin. The broker charges 8% on the margin loan and requires a 35% maintenance margin. The stock pays a $.50-per-share dividend in 1 year, and then the stock is sold at $23 per share. What was the investor's rate of return?

17.5%

19.67%

23.83%

25.75%

85.

Level 3 NASDAQ subscribers _____.

are registered market makers.

can post bid and ask prices.

have the fastest execution of trades.

all of these options.

86.

You sell short 300 shares of Microsoft that are currently selling at $30 per share. You post the 50% margin required on the short sale. If you earn no interest on the funds in your margin account, what will be your rate of return after 1 year if Microsoft is selling at $27? (Ignore any dividends.)

10%

20%

6.67%

15%

87.

The commission structure on a stock purchase is $20 plus $.02 per share. If you purchase four round lots of a stock selling for $56, what is your commission?

$20

$22

$26

$28

Chapter 4: ___________________________________________________________________________

Which one of the following invests in a portfolio that is fixed for the life of the fund?

Mutual fund

Money market fund

Managed investment company

Unit investment trust

______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

Commingled funds

Closed-end funds

REITs

Mutual funds

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

Advantages of investment companies to investors include all but which one of the following?

Record keeping and administration

Low-cost diversification

Professional management

Guaranteed rates of return

Which of the following typically employ significant amounts of leverage? I. Hedge funds II. REITs III. Money market funds IV. Equity mutual funds

I and II only

II and III only

III and IV only

I, II, and III only

The NAV of which funds is fixed at $1 per share?

Equity funds

Money market funds

Fixed-income funds

Commingled funds

The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.

invest directly in real estate; invest in mortgage and construction loans

invest in mortgage and construction loans; invest directly in real estate

use extensive leverage; distribute less than 95% of income to shareholders

distribute less than 95% of income to shareholders; use extensive leverage

A contingent deferred sales charge is commonly called a ____.

front-end load

back-end load

12b-1 charge

top-end sales commission

In the United States in 2011, there were approximately _______ mutual funds offered by fewer than _______ fund families.

12,000; 600

7,000; 100

8,000; 700

9,000; 300

10.

Part B of a mutual fund prospectus contains information about: I. Fund holdings by directors and officers II. Front-end and back-end loads III. Securities held by the fund at the end of the fiscal year

I only

I and II only

I and III only

I, II, and III

11.

Mutual funds provide the following for their shareholders:

Diversification

Professional management

Record keeping and administration

All of these options

12.

The average maturity of fund investments in a money market mutual fund is _______.

slightly more than 1 month

slightly more than 1 year

about 9 months

between 2 and 3 years

13.

Rank the following fund categories from most risky to least risky: I. Equity growth fund II. Balanced fund III. Sector fund IV. Money market fund

IV, I, III, II

III, II, IV, I

I, II, III, IV

III, I, II, IV

14.

Which of the following result in a taxable event for investors? I. Short-term capital gain distributions from the fund II. Dividend distributions from the fund III. Long-term capital gain distributions from the fund

I only

II only

I and II only

I, II, and III

15.

The type of mutual fund that primarily engages in market timing is called _______.

a sector fund

an index fund

an ETF

an asset allocation fund

16.

As of 2011, approximately _____ of mutual fund assets were invested in equity funds.

54%

30%

12%

17.

As of 2011, approximately _____ of mutual fund assets were invested in bond funds.

14%

19%

37%

47%

18.

As of 2011, approximately _____ of mutual fund assets were invested in money market funds.

26%

44%

66%

19.

Management fees for open-end and closed-end funds typically range between _____ and _____.

.2%; 1.5%

.5%; 5%

2%; 5%

3%; 8%

20.

The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.

net asset value

average asset value

gross asset value

total asset value

21.

Net asset value is defined as ________________________.

book value of assets divided by shares outstanding

book value of assets minus liabilities divided by shares outstanding

market value of assets divided by shares outstanding

market value of assets minus liabilities divided by shares outstanding

22.

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

$12

$10

23.

Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

$25.50

$22.50

$19.50

$1.95

24.

The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.

in proportion to the market value weight of the firm's equity in the S&P 500

in proportion to the price weight of the stock in the S&P 500

by purchasing an equal number of shares of each stock in the S&P 500

by purchasing an equal dollar amount of shares of each stock in the S&P 500

25.

Which of the following is not a type of managed investment company?

Unit investment trusts

Closed-end funds

Open-end funds

Hedge funds

26.

Which of the following funds invest specifically in stocks of fast-growing companies?

Balanced funds

Growth equity funds

REITs

Equity income funds

27.

A fund that invests in securities worldwide, including the United States, is called ______.

an international fund

an emerging market fund

a global fund

a regional fund

28.

The greatest percentage of mutual fund assets are invested in ________.

bond funds

equity funds

hybrid funds

money market funds

29.

Sponsors of unit investment trusts earn a profit by ___________________.

deducting management fees from fund assets

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

30.

Investors who want to liquidate their holdings in a unit investment trust may ___________________.

sell their shares back to the trustee at a discount

sell their shares back to the trustee at net asset value

sell their shares on the open market

sell their shares at a premium to net asset value

31.

Investors who want to liquidate their holdings in a closed-end fund may ___________________.

sell their shares back to the fund at a discount if they wish

sell their shares back to the fund at net asset value

sell their shares on the open market

sell their shares at a premium to net asset value if they wish

32.

__________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A load

A no-load

An index

A specialized-sector

33.

Which of the following is a false statement regarding open-end mutual funds?

They offer investors a guaranteed rate of return.

They offer investors a well-diversified portfolio.

They redeem shares at their net asset value.

They offer low-cost diversification.

34.

__________ funds stand ready to redeem or issue shares at their net asset value.

Closed-end

Index

Open-end

Hedge

35.

Revenue sharing with respect to mutual funds refers to _________.

fund companies paying brokers if the broker recommends the fund to investors

allowing certain classes of investors to engage in market timing

charging loads to new investors in a mutual fund

directly marketing funds over the Internet

36.

Higher portfolio turnover: I. Results in greater tax liability for investors II. Results in greater trading costs for the fund, which investors have to pay for III. Is a characteristic of asset allocation funds

I only

II only

I and II only

I, II, and III

37.

Low-load mutual funds have front-end loads of no more than _____.

38.

Most real estate investment trusts (REITs) have a debt ratio of around _________.

10%

30%

50%

70%

39.

Measured by assets, about _____ of funds are money market funds.

15%

25%

40%

60%

40.

Which of the following is not a type of real estate investment trust? I. Equity trust II. Debt trust III. Mortgage trust IV. Unit trust

I and II only

II only

II and IV only

I, II, and III

41.

______________________ are often called mutual funds.

Unit investment trusts

Open-end investment companies

Closed-end investment companies

REITs

42.

Mutual funds account for roughly ______ of investment company assets.

30%

50%

70%

90%

43.

An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.

prospectus

indenture

investment statement

12b-1 forms

44.

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.

income funds

balanced funds

asset allocation funds

index funds

45.

______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.

asset allocation funds

balanced funds

index funds

income funds

46.

Specialized-sector funds concentrate their investments in _________________.

bonds of a particular maturity

geographic segments of the real estate market

government securities

securities issued by firms in a particular industry

47.

If a mutual fund has multiple-class shares, which class typically has a front-end load?

Class A

Class B

Class C

Class D

48.

The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.

3.5%

8.5%

10%

49.

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

12b-1 fee; front-end load

front-end load; 12b-1 fee

back-end load; front-end load

12b-1 fee; back-end load

50.

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.

direct operating expenses

back-end loads

12b-1 charges

front-end loads

51.

The SEC requires funds to disclose: I. After-tax returns for the past year II. After-tax returns for the last 5-year period III. The tax impact of portfolio turnover

I only

I and II only

I and III only

I, II, and III

52.

SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed __________ of the fund's average net assets per year.

marketing; 1%

marketing; 5%

administrative; .5%

administrative; 2%

53.

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

15.64%

16%

17.25%

17.5%

54.

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

11.19%

23.75%

24.64%

The answer cannot be determined from the information given.

55.

Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?

12.09%

12.99%

8.25%

The answer cannot be determined from the information given.

56.

Mutual fund returns may be granted pass-through status if _________________.

virtually all income is distributed to shareholders

the fund qualifies for pass-through status according to the U.S. tax code

the fund is sufficiently diversified

All of these options (All of the answers must be true for pass-through status to be granted.)

57.

_____ is an example of an exchange-traded fund.

An SPDR or spider

A samurai

A Vanguard

An open-end fund

58.

If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.

the NAV calculated at the market close at 4 pm New York time

the real time NAV

the NAV delayed 15 minutes

the NAV calculated at the opening of the next day's trading

59.

According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds.

35%; 14%

12.3%; 75%

22%; 3.9%

5%; 47%

60.

In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.

33%

52%

65%

85%

61.

In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.

grew stronger

remained about the same

became slightly weaker

virtually disappeared

62.

The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.

reinvestment ratio

trading rate

portfolio turnover

tax yield

63.

Which of the following ETFs tracks the S&P 500 Index?

Qubes

Diamonds

Vipers

Spiders

64.

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

9.26% premium

8.47% premium

9.26% discount

8.47% discount

65.

The difference between balanced funds and asset allocation funds is that _____.

balanced funds invest in bonds while asset allocation funds do not

asset allocation funds invest in bonds while balanced funds do not

balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

66.

The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.

Class A.

Class B.

There is no difference.

The answer cannot be determined from the information given.

67.

A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____.

25%

28.5%

18.63%

33.4%

68.

Which type of investment fund is commonly known to invest in options and futures in large scale?

Commingled funds

Hedge funds

ETFs

REITs

69.

Advantages of ETFs over mutual funds include all but which one of the following?

ETFs trade continuously, so investors can trade throughout the day.

ETFs can be sold short or purchased on margin, unlike fund shares.

ETF providers do not have to sell holdings to fund redemptions.

ETF values can diverge from NAV.

70.

Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?

Commingled funds

Hedge funds

ETF

REITs

71.

Which of the following funds is most likely to have a debt ratio of 70% or higher?

Bond fund

Commingled fund

Mortgage-backed securities

REIT

72.

_______ have become the main way for investors to speculate in precious metals.

Strategic income funds

Balanced funds

Specialized-sector funds

Exchange-traded funds

73.

From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.

identical to

.8% higher than

.8% lower than

1.3% higher than

74.

An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?

$14.57

$15.95

$17.55

$16.49

75.

The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?

$18.74

$17.10

$15.40

$16.57

76.

A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?

$50

$55.44

$56.12

$54.55

77.

The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

10%

15%

20%

78.

Which of the following funds are usually most tax-efficient?

Equity funds

Bond Funds

ETFs

Specialized-sector funds

79.

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?

$103

$219

$553

$635

80.

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

$658

$794

$885

$902

81.

$596

$794

$885

$902

82.

You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% 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?

4.35%

4.23%

6.45%

5.63%

83.

Which one of the following statements about returns reported by mutual funds is not correct?

Reported returns are net of management expenses.

Reported returns are net of 12b-1 fees.

Reported returns are net of brokerage fees paid on the fund's trading activity.

None of these options. (All of the items are included in reported returns.)

84.

The top Morningstar mutual fund performance rating is ________.

five stars

four stars

three stars

two stars

85.

You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

7.1%

7.45%

7.25%

7.85%

Chapter 5: ___________________________________________________________________________

You put up $50 at the beginning of the year for an investment. The value of the investment grows 4% and you earn a dividend of $3.50. Your HPR was ____.

3.5%

11%

The ______ measure of returns ignores compounding.

geometric average

arithmetic average

IRR

dollar-weighted

If you want to measure the performance of your investment in a fund, including the timing of your purchases and redemptions, you should calculate the __________.

geometric average return

arithmetic average return

dollar-weighted return

index return

Which one of the following measures time-weighted returns and allows for compounding?

Geometric average return

Arithmetic average return

Dollar-weighted return

Historical average return

Rank the following from highest average historical return to lowest average historical return from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, II, III, IV

III, IV, II, I

I, III, II, IV

III, I, II, IV

Rank the following from highest average historical standard deviation to lowest average historical standard deviation from 1926 to 2010. I. Small stocks II. Long-term bonds III. Large stocks IV. T-bills

I, II, III, IV

III, IV, II, I

I, III, II, IV

III, I, II, IV

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. If you desire to forecast performance for next year, the best forecast will be given by the ________.

dollar-weighted return

geometric average return

arithmetic average return

index return

The complete portfolio refers to the investment in _________.

the risk-free asset

the risky portfolio

the risk-free asset and the risky portfolio combined

the risky portfolio and the index

You have calculated the historical dollar-weighted return, annual geometric average return, and annual arithmetic average return. You always reinvest your dividends and interest earned on the portfolio. Which method provides the best measure of the actual average historical performance of the investments you have chosen?

Dollar-weighted return

Geometric average return

Arithmetic average return

Index return

10.

The holding period return on a stock is equal to _________.

the capital gain yield over the period plus the inflation rate

the capital gain yield over the period plus the dividend yield

the current yield plus the dividend yield

the dividend yield plus the risk premium

11.

Your timing was good last year. You invested more in your portfolio right before prices went up, and you sold right before prices went down. In calculating historical performance measures, which one of the following will be the largest?

Dollar-weighted return

Geometric average return

Arithmetic average return

Mean holding-period return

12.

Published data on past returns earned by mutual funds are required to be ______.

dollar-weighted returns

geometric returns

excess returns

index returns

13.

The arithmetic average of -11%, 15%, and 20% is ________.

15.67%

11.22%

6.45%

14.

The geometric average of -12%, 20%, and 25% is _________.

8.42%

11%

9.7%

18.88%

15.

The dollar-weighted return is the _________.

difference between cash inflows and cash outflows

arithmetic average return

geometric average return

internal rate of return

16.

An investment earns 10% the first year, earns 15% the second year, and loses 12% the third year. The total compound return over the 3 years was ______.

41.68%

11.32%

3.64%

13%

17.

Annual percentage rates can be converted to effective annual rates by means of the following formula:

[1 + (APR/n)]n - 1

(APR)(n)

(APR/n)

(periodic rate)(n)

18.

Suppose you pay $9,700 for a $10,000 par Treasury bill maturing in 3 months. What is the holding-period return for this investment?

3.01%

3.09%

12.42%

16.71%

19.

Suppose you pay $9,800 for a $10,000 par Treasury bill maturing in 2 months. What is the annual percentage rate of return for this investment?

2.04%

12 %

12.24%

12.89%

20.

Suppose you pay $9,400 for a $10,000 par Treasury bill maturing in 6 months. What is the effective annual rate of return for this investment?

6.38%

12.77%

13.17%

14.25%

21.

You have an APR of 7.5% with continuous compounding. The EAR is _____.

7.5%

7.65%

7.79 %

8.25%

22.

You have an EAR of 9%. The equivalent APR with continuous compounding is _____.

8.47%

8.62%

8.88%

9.42%

23.

The market risk premium is defined as __________.

the difference between the return on an index fund and the return on Treasury bills

the difference between the return on a small-firm mutual fund and the return on the Standard & Poor's 500 Index

the difference between the return on the risky asset with the lowest returns and the return on Treasury bills

the difference between the return on the highest-yielding asset and the return on the lowest-yielding asset

24.

The excess return is the _________.

rate of return that can be earned with certainty

rate of return in excess of the Treasury-bill rate

rate of return to risk aversion

index return

25.

The rate of return on _____ is known at the beginning of the holding period, while the rate of return on ____ is not known until the end of the holding period.

risky assets; Treasury bills

Treasury bills; risky assets

excess returns; risky assets

index assets; bonds

26.

The reward-to-volatility ratio is given by _________.

the slope of the capital allocation line

the second derivative of the capital allocation line

the point at which the second derivative of the investor's indifference curve reaches zero

the portfolio's excess return

27.

Your investment has a 20% chance of earning a 30% rate of return, a 50% chance of earning a 10% rate of return, and a 30% chance of losing 6%. What is your expected return on this investment?

12.8%

11%

8.9%

9.2%

28.

Your investment has a 40% chance of earning a 15% rate of return, a 50% chance of earning a 10% rate of return, and a 10% chance of losing 3%. What is the standard deviation of this investment?

5.14%

7.59%

9.29%

8.43%

29.

During the 1926-2010 period the geometric mean return on small-firm stocks was ______.

5.31%

5.56%

9.34%

11.80%

30.

During the 1926-2010 period the geometric mean return on Treasury bonds was _________.

5.12%

5.56%

9.34%

11.43%

31.

During the 1926-2010 period the Sharpe ratio was greatest for which of the following asset classes?

Small U.S. stocks

Large U.S. stocks

Long-term U.S. Treasury bonds

Bond world portfolio return in U.S. dollars

32.

During the 1985-2010 period the Sharpe ratio was lowest for which of the following asset classes?

Small U.S. stocks

Large U.S. stocks

Long-term U.S. Treasury bonds

Equity world portfolio in U.S. dollars

33.

During the 1926-2010 period which one of the following asset classes provided the lowest real return?

Small U.S. stocks

Large U.S. stocks

Long-term U.S. Treasury bonds

Equity world portfolio in U.S. dollars

34.

Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor _______.

is normally risk neutral

requires a risk premium to take on the risk

knows he or she will not lose money

knows the outcomes at the beginning of the holding period

35.

Historical returns have generally been __________ for stocks of small firms as (than) for stocks of large firms.

the same

lower

higher

none of these options (There is no evidence of a systematic relationship between returns on small-firm stocks and returns on large-firm stocks.)

36.

Historically, small-firm stocks have earned higher returns than large-firm stocks. When viewed in the context of an efficient market, this suggests that ___________.

small firms are better run than large firms

government subsidies available to small firms produce effects that are discernible in stock market statistics

small firms are riskier than large firms

small firms are not being accurately represented in the data

37.

In calculating the variance of a portfolio's returns, squaring the deviations from the mean results in: I. Preventing the sum of the deviations from always equaling zero II. Exaggerating the effects of large positive and negative deviations III. A number for which the unit is percentage of returns

I only

I and II only

I and III only

I, II, and III

38.

If you are promised a nominal return of 12% on a 1-year investment, and you expect the rate of inflation to be 3%, what real rate do you expect to earn?

5.48%

8.74%

12%

39.

If you require a real growth in the purchasing power of your investment of 8%, and you expect the rate of inflation over the next year to be 3%, what is the lowest nominal return that you would be satisfied with?

11%

11.24%

40.

One method of forecasting the risk premium is to use the _______.

coefficient of variation of analysts' earnings forecasts

variations in the risk-free rate over time

average historical excess returns for the asset under consideration

average abnormal return on the index portfolio

41.

Treasury bills are paying a 4% rate of return. A risk-averse investor with a risk aversion of A = 3 should invest entirely in a risky portfolio with a standard deviation of 24% only if the risky portfolio's expected return is at least ______.

8.67%

9.84%

21.28%

14.68%

42.

In the mean standard deviation graph, the line that connects the risk-free rate and the optimal risky portfolio, P, is called the _________.

capital allocation line

indifference curve

investor's utility line

security market line

43.

Most studies indicate that investors' risk aversion is in the range _____.

1-3

1.5-4

3-5.2

4-6

44.

Two assets have the following expected returns and standard deviations when the risk-free rate is 5%: An investor with a risk aversion of A = 3 would find that _________________ on a risk-return basis.

only asset A is acceptable

only asset B is acceptable

neither asset A nor asset B is acceptable

both asset A and asset B are acceptable

45.

Historically, the best asset for the long-term investor wanting to fend off the threats of inflation and taxes while making his money grow has been ____.

Stocks

Bonds

Money market funds

Treasury bills

46.

The formula is used to calculate the _____________.

Sharpe ratio

Treynor measure

Coefficient of variation

Real rate of return

47.

A portfolio with a 25% standard deviation generated a return of 15% last year when T-bills were paying 4.5%. This portfolio had a Sharpe ratio of ____.

.22

.60

.42

.25

48.

Consider a Treasury bill with a rate of return of 5% and the following risky securities: Security A: E(r) = .15; variance = .0400 Security B: E(r) = .10; variance = .0225 Security C: E(r) = .12; variance = .1000 Security D: E(r) = .13; variance = .0625 The investor must develop a complete portfolio by combining the risk-free asset with one of the securities mentioned above. The security the investor should choose as part of her complete portfolio to achieve the best CAL would be _________.

security A

security B

security C

security D

49.

You purchased a share of stock for $29. One year later you received $2.25 as dividend and sold the share for $28. Your holding-period return was _________.

-3.57%

-3.45%

4.31%

8.03%

50.

Security A has a higher standard deviation of returns than security B. We would expect that: I. Security A would have a higher risk premium than security B. II. The likely range of returns for security A in any given year would be higher than the likely range of returns for security B. III. The Sharpe ratio of A will be higher than the Sharpe ratio of B.

I only

I and II only

II and III only

I, II, and III

51.

The holding-period return on a stock was 25%. Its ending price was $18, and its beginning price was $16. Its cash dividend must have been _________.

$.25

52.

An investor invests 70% of her wealth in a risky asset with an expected rate of return of 15% and a variance of 5%, and she puts 30% in a Treasury bill that pays 5%. Her portfolio's expected rate of return and standard deviation are __________ and __________ respectively.

10%; 6.7%

12%; 22.4%

12%; 15.7%

10%; 35%

53.

The holding-period return on a stock was 32%. Its beginning price was $25, and its cash dividend was $1.50. Its ending price must have been _________.

$28.50

$33.20

$31.50

$29.75

54.

Consider the following two investment alternatives: First, a risky portfolio that pays a 15% rate of return with a probability of 40% or a 5% rate of return with a probability of 60%. Second, a Treasury bill that pays 6%. The risk premium on the risky investment is _________.

55.

Consider the following two investment alternatives: First, a risky portfolio that pays a 20% rate of return with a probability of 60% or a 5% rate of return with a probability of 40%. Second, a Treasury bill that pays 6%. If you invest $50,000 in the risky portfolio, your expected profit would be _________.

$3,000

$7,000

$7,500

$10,000

56.

You invest $10,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 15% and a standard deviation of 21% and a Treasury bill with a rate of return of 5%. How much money should be invested in the risky asset to form a portfolio with an expected return of 11%?

$6,000

$4,000

$7,000

$3,000

57.

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. __________ of your complete portfolio should be invested in the risky portfolio if you want your complete portfolio to have a standard deviation of 9%.

100%

90%

45%

10%

58.

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. A portfolio that has an expected value in 1 year of $1,100 could be formed if you _________.

place 40% of your money in the risky portfolio and the rest in the risk-free asset

place 55% of your money in the risky portfolio and the rest in the risk-free asset

place 60% of your money in the risky portfolio and the rest in the risk-free asset

place 75% of your money in the risky portfolio and the rest in the risk-free asset

59.

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.

1.040

.80

.50

.25

60.

You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________.

invest $125,000 in the risk-free asset

invest $375,000 in the risk-free asset

borrow $125,000

borrow $375,000

61.

The return on the risky portfolio is 15%. The risk-free rate, as well as the investor's borrowing rate, is 10%. The standard deviation of return on the risky portfolio is 20%. If the standard deviation on the complete portfolio is 25%, the expected return on the complete portfolio is _________.

8.75 %

10%

16.25%

62.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 11%, you should invest __________ of your complete portfolio in Treasury bills.

19%

25%

36%

50%

63.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40% respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. To form a complete portfolio with an expected rate of return of 8%, you should invest approximately __________ in the risky portfolio. This will mean you will also invest approximately __________ and __________ of your complete portfolio in security X and Y, respectively.

0%; 60%; 40%

25%; 45%; 30%

40%; 24%; 16%

50%; 30%; 20%

64.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. If you decide to hold 25% of your complete portfolio in the risky portfolio and 75% in the Treasury bills, then the dollar values of your positions in X and Y, respectively, would be __________ and _________.

$300; $450

$150; $100

$100; $150

$450; $300

65.

You are considering investing $1,000 in a complete portfolio. The complete portfolio is composed of Treasury bills that pay 5% and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 60% and 40%, respectively. X has an expected rate of return of 14%, and Y has an expected rate of return of 10%. The dollar values of your positions in X, Y, and Treasury bills would be _________, __________, and __________, respectively, if you decide to hold a complete portfolio that has an expected return of 8%.

$162; $595; $243

$243; $162; $595

$595; $162; $243

$595; $243; $162

66.

You have the following rates of return for a risky portfolio for several recent years: If you invested $1,000 at the beginning of 2008, your investment at the end of 2011 would be worth ___________.

$2,176.60

$1,785.56

$1,645.53

$1,247.87

67.

You have the following rates of return for a risky portfolio for several recent years: The annualized (geometric) average return on this investment is _____.

16.15%

16.87%

21.32%

15.60%

68.

A security with normally distributed returns has an annual expected return of 18% and standard deviation of 23%. The probability of getting a return between -28% and 64% in any one year is _____.

68.26%

95.44%

99.74%

100%

69.

The Manhawkin Fund has an expected return of 16% and a standard deviation of 20%. The risk-free rate is 4%. What is the reward-to-volatility ratio for the Manhawkin Fund?

70.

From 1926 to 2010 the world stock portfolio offered _____ return and _____ volatility than the portfolio of large U.S. stocks.

lower; higher

lower; lower

higher; lower

higher; higher

71.

The price of a stock is $55 at the beginning of the year and $50 at the end of the year. If the stock paid a $3 dividend and inflation was 3%, what is the real holding-period return for the year?

-3.64%

-6.36%

-6.44%

-11.74%

72.

The price of a stock is $38 at the beginning of the year and $41 at the end of the year. If the stock paid a $2.50 dividend, what is the holding-period return for the year?

6.58%

8.86%

14.47%

18.66%

73.

You invest all of your money in 1-year T-bills. Which of the following statements is (are) correct? I. Your nominal return on the T-bills is riskless. II. Your real return on the T-bills is riskless. III. Your nominal Sharpe ratio is zero.

I only

I and III only

II only

I, II, and III

74.

Which one of the following would be considered a risk-free asset in real terms as opposed to nominal?

Money market fund

U.S. T-bill

Short-term corporate bonds

U.S. T-bill whose return was indexed to inflation

75.

What is the geometric average return of the following quarterly returns: 3%, 5%, 4%, and 7%?

3.72%

4.23%

4.74%

4.90%

76.

What is the geometric average return over 1 year if the quarterly returns are 8%, 9%, 5%, and 12%?

8.33 %

8.47%

8.5 %

77.

If the nominal rate of return on investment is 6% and inflation is 2% over a holding period, what is the real rate of return on this investment?

3.92%

4.12%

78.

According to historical data, over the long run which of the following assets has the best chance to provide the best after-inflation, after-tax rate of return?

Long-term Treasury bonds

Corporate bonds

Common stocks

Preferred stocks

79.

The buyer of a new home is quoted a mortgage rate of .5% per month. What is the APR on the loan?

.50%

6.5%

80.

A loan for a new car costs the borrower .8% per month. What is the EAR?

.80%

6.87%

9.6%

10.03%

81.

The CAL provided by combinations of 1-month T-bills and a broad index of common stocks is called the ______.

SML

CAPM

CML

total return line

82.

Which of the following arguments supporting passive investment strategies is (are) correct? I. Active trading strategies may not guarantee higher returns but guarantee higher costs. II. Passive investors can free-ride on the activity of knowledge investors whose trades force prices to reflect currently available information. III. Passive investors are guaranteed to earn higher rates of return than active investors over sufficiently long time horizons.

I only

I and II only

II and III only

I, II, and III

83.

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. What is the geometric average return for the period?

2.87%

.74%

2.6%

2.21%

84.

You have the following rates of return for a risky portfolio for several recent years. Assume that the stock pays no dividends. What is the dollar-weighted return over the entire time period?

2.87%

.74%

2.6%

2.21%

Chapter 6: ___________________________________________________________________________

Risk that can be eliminated through diversification is called ______ risk.

unique

firm-specific

diversifiable

all of these options

The _______ decision should take precedence over the _____ decision.

asset allocation; stock selection

bond selection; mutual fund selection

stock selection; asset allocation

stock selection; mutual fund selection

Many current and retired Enron Corp. employees had their 401k retirement accounts wiped out when Enron collapsed because ________.

they had to pay huge fines for obstruction of justice

their 401k accounts were held outside the company

their 401k accounts were not well diversified

none of these options

Based on the outcomes in the following table, choose which of the statements below is (are) correct? I. The covariance of security A and security B is zero. II. The correlation coefficient between securities A and C is negative. III. The correlation coefficient between securities B and C is positive.

I only

I and II only

II and III only

I, II, and III

Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ______.

asset A

asset B

no risky asset

The answer cannot be determined from the data given.

Adding additional risky assets to the investment opportunity set will generally move the efficient frontier _____ and to the ______.

up; right

up; left

down; right

down; left

An investor's degree of risk aversion will determine his or her ______.

optimal risky portfolio

risk-free rate

optimal mix of the risk-free asset and risky asset

capital allocation line

The ________ is equal to the square root of the systematic variance divided by the total variance.

covariance

correlation coefficient

standard deviation

reward-to-variability ratio

Which of the following statistics cannot be negative?

Covariance

Variance

E(r)

Correlation coefficient

10.

Asset A has an expected return of 20% and a standard deviation of 25%. The risk-free rate is 10%. What is the reward-to-variability ratio?

.40

.50

.75

.80

11.

The correlation coefficient between two assets equals _________.

their covariance divided by the product of their variances

the product of their variances divided by their covariance

the sum of their expected returns divided by their covariance

their covariance divided by the product of their standard deviations

12.

Diversification is most effective when security returns are _________.

high

negatively correlated

positively correlated

uncorrelated

13.

The expected rate of return of a portfolio of risky securities is _________.

the sum of the securities' covariances

the sum of the securities' variances

the weighted sum of the securities' expected returns

the weighted sum of the securities' variances

14.

Beta is a measure of security responsiveness to _________.

firm-specific risk

diversifiable risk

market risk

unique risk

15.

The risk that can be diversified away is __________.

beta

firm-specific risk

market risk

systematic risk

16.

Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio?

17.

Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always _________.

equal to the sum of the securities' standard deviations

equal to -1

equal to 0

greater than 0

18.

Market risk is also called __________ and _________.

systematic risk; diversifiable risk

systematic risk; nondiversifiable risk

unique risk; nondiversifiable risk

unique risk; diversifiable risk

19.

Firm-specific risk is also called __________ and __________.

systematic risk; diversifiable risk

systematic risk; nondiversifiable risk

unique risk; nondiversifiable risk

unique risk; diversifiable risk

20.

Which one of the following stock return statistics fluctuates the most over time?

Covariance of returns

Variance of returns

Average return

Correlation coefficient

21.

Harry Markowitz is best known for his Nobel Prize-winning work on _____________.

strategies for active securities trading

techniques used to identify efficient portfolios of risky assets

techniques used to measure the systematic risk of securities

techniques used in valuing securities options

22.

Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.

the returns on the stock and bond portfolios tend to move inversely

the returns on the stock and bond portfolios tend to vary independently of each other

the returns on the stock and bond portfolios tend to move together

the covariance of the stock and bond portfolios will be positive

23.

You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be ________________.

more than 18% but less than 24%

equal to 18%

more than 12% but less than 18%

equal to 12%

24.

On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the _____________ of the current investment opportunity set.

left and above

left and below

right and above

right and below

25.

The term complete portfolio refers to a portfolio consisting of _________________.

the risk-free asset combined with at least one risky asset

the market portfolio combined with the minimum-variance portfolio

securities from domestic markets combined with securities from foreign markets

common stocks combined with bonds

26.

Rational risk-averse investors will always prefer portfolios _____________.

located on the efficient frontier to those located on the capital market line

located on the capital market line to those located on the efficient frontier

at or near the minimum-variance point on the efficient frontier

that are risk-free to all other asset choices

27.

The optimal risky portfolio can be identified by finding: I. The minimum-variance point on the efficient frontier II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier III. The tangency point of the capital market line and the efficient frontier IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier

I and II only

II and III only

III and IV only

I and IV only

28.

The _________ reward-to-variability ratio is found on the ________ capital market line.

lowest; steepest

highest; flattest

highest; steepest

lowest; flattest

29.

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 24%, while stock B has a standard deviation of return of 18%. Stock A comprises 60% of the portfolio, while stock B comprises 40% of the portfolio. If the variance of return on the portfolio is .0380, the correlation coefficient between the returns on A and B is _________.

.583

.225

.327

.128

30.

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient between the returns on A and B is _________.

.12

.36

.60

.77

31.

A portfolio is composed of two stocks, A and B. Stock A has a standard deviation of return of 35%, while stock B has a standard deviation of return of 15%. The correlation coefficient between the returns on A and B is .45. Stock A comprises 40% of the portfolio, while stock B comprises 60% of the portfolio. The standard deviation of the return on this portfolio is _________.

23%

19.76%

18.45%

17.67%

32.

The standard deviation of return on investment A is .10, while the standard deviation of return on investment B is .04. If the correlation coefficient between the returns on A and B is -.50, the covariance of returns on A and B is _________.

-.0447

-.0020

.0020

.0447

33.

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is _________.

10%

20%

40%

60%

34.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The proportion of the optimal risky portfolio that should be invested in stock A is _________.

40%

60%

100%

35.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The expected return on the optimal risky portfolio is _________.

14%

15.6%

16.4%

18%

36.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 18% and a standard deviation of return of 20%. Stock B has an expected return of 14% and a standard deviation of return of 5%. The correlation coefficient between the returns of A and B is .50. The risk-free rate of return is 10%. The standard deviation of return on the optimal risky portfolio is _________.

20%

37.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The proportion of the optimal risky portfolio that should be invested in stock B is approximately _________.

29%

44%

56%

71%

38.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The expected return on the optimal risky portfolio is approximately _________. (Hint: Find weights first.)

14%

16%

18%

19%

39.

An investor can design a risky portfolio based on two stocks, A and B. Stock A has an expected return of 21% and a standard deviation of return of 39%. Stock B has an expected return of 14% and a standard deviation of return of 20%. The correlation coefficient between the returns of A and B is .4. The risk-free rate of return is 5%. The standard deviation of the returns on the optimal risky portfolio is _________.

25.5%

22.3%

21.4%

20.7%

40.

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 24%, while the standard deviation on stock B is 14%. The correlation coefficient between the returns on A and B is .35. The expected return on stock A is 25%, while on stock B it is 11%. The proportion of the minimum-variance portfolio that would be invested in stock B is approximately _________.

45%

67%

85%

92%

41.

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The expected return on the minimum-variance portfolio is approximately _________.

10%

13.6%

15%

19.41%

42.

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20%, while the standard deviation on stock B is 15%. The correlation coefficient between the returns on A and B is 0%. The standard deviation of return on the minimum-variance portfolio is _________.

12%

17%

43.

A measure of the riskiness of an asset held in isolation is ____________.

beta

standard deviation

covariance

alpha

44.

Semitool Corp. has an expected excess return of 6% for next year. However, for every unexpected 1% change in the market, Semitool's return responds by a factor of 1.2. Suppose it turns out that the economy and the stock market do better than expected by 1.5% and Semitool's products experience more rapid growth than anticipated, pushing up the stock price by another 1%. Based on this information, what was Semitool's actual excess return?

8.5%

8.8%

9.25%

45.

The part of a stock's return that is systematic is a function of which of the following variables? I. Volatility in excess returns of the stock market II. The sensitivity of the stock's returns to changes in the stock market III. The variance in the stock's returns that is unrelated to the overall stock market

I only

I and II only

II and III only

I, II, and III

46.

Stock A has a beta of 1.2, and stock B has a beta of 1. The returns of stock A are ______ sensitive to changes in the market than are the returns of stock B.

20% more

slightly more

20% less

slightly less

47.

Which risk can be partially or fully diversified away as additional securities are added to a portfolio? I. Total risk II. Systematic risk III. Firm-specific risk

I only

I and II only

I, II, and III

I and III

48.

According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of __________ and __________.

identifying all investor imposed constraints; identifying the set of securities that conform to the investor's constraints and offer the best risk-return trade-offs

identifying the investor's degree of risk aversion; choosing securities from industry groups that are consistent with the investor's risk profile

identifying the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion

choosing which risky assets an investor prefers according to the investor's risk-aversion level; minimizing the CAL by lending at the risk-free rate

49.

You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___________ and the line of best fit has a ______________.

all fall on the line of best fit; positive slope

all fall on the line of best fit; negative slope

are widely scattered around the line; positive slope

are widely scattered around the line; negative slope

50.

The term excess return refers to ______________.

returns earned illegally by means of insider trading

the difference between the rate of return earned and the risk-free rate

the difference between the rate of return earned on a particular security and the rate of return earned on other securities of equivalent risk

the portion of the return on a security that represents tax liability and therefore cannot be reinvested

51.

You are recalculating the risk of ACE stock in relation to the market index, and you find that the ratio of the systematic variance to the total variance has risen. You must also find that the ____________.

covariance between ACE and the market has fallen

correlation coefficient between ACE and the market has fallen

correlation coefficient between ACE and the market has risen

unsystematic risk of ACE has risen

52.

A stock has a correlation with the market of .45. The standard deviation of the market is 21%, and the standard deviation of the stock is 35%. What is the stock's beta?

.75

.60

.55

53.

The values of beta coefficients of securities are __________.

always positive

always negative

always between positive 1 and negative 1

usually positive but are not restricted in any particular way

54.

A security's beta coefficient will be negative if ____________.

its returns are negatively correlated with market-index returns

its returns are positively correlated with market-index returns

its stock price has historically been very stable

market demand for the firm's shares is very low

55.

The market value weighted-average beta of firms included in the market index will always be _____________.

between 0 and 1

none of these options (There is no particular rule concerning the average beta of firms included in the market index.)

56.

Diversification can reduce or eliminate __________ risk.

all

systematic

nonsystematic

only an insignificant

57.

To construct a riskless portfolio using two risky stocks, one would need to find two stocks with a correlation coefficient of ________.

-1

58.

Some diversification benefits can be achieved by combining securities in a portfolio as long as the correlation between the securities is _____________.

less than 1

between 0 and 1

less than or equal to 0

59.

If an investor does not diversify his portfolio and instead puts all of his money in one stock, the appropriate measure of security risk for that investor is the ________.

stock's standard deviation

variance of the market

stock's beta

covariance with the market index

60.

Which of the following provides the best example of a systematic-risk event?

A strike by union workers hurts a firm's quarterly earnings.

Mad Cow disease in Montana hurts local ranchers and buyers of beef.

The Federal Reserve increases interest rates 50 basis points.

A senior executive at a firm embezzles $10 million and escapes to South America.

61.

Which of the following statements is (are) true regarding time diversification? I. The standard deviation of the average annual rate of return over several years will be smaller than the 1-year standard deviation. II. For a longer time horizon, uncertainty compounds over a greater number of years. III. Time diversification does not reduce risk.

I only

II only

II and III only

I, II, and III

62.

You find that the annual Sharpe ratio for stock A returns is equal to 1.8. For a 3-year holding period, the Sharpe ratio would equal _______.

1.8

2.48

3.12

5.49

63.

The beta of this stock is ____.

.12

.35

1.32

4.05

64.

This stock has greater systematic risk than a stock with a beta of ___.

.50

1.5

65.

The characteristic line for this stock is Rstock = ___ + ___ Rmarket.

.35; .12

4.05; 1.32

15.44; .97

.26; 1.36

66.

_______________ percent of the variance is explained by this regression.

4.05

67.

The stock is ______ riskier than the typical stock.

32%

15.44%

12%

38%

68.

Decreasing the number of stocks in a portfolio from 50 to 10 would likely ________________.

increase the systematic risk of the portfolio

increase the unsystematic risk of the portfolio

increase the return of the portfolio

decrease the variation in returns the investor faces in any one year

69.

If you want to know the portfolio standard deviation for a three-stock portfolio, you will have to ______.

calculate two covariances and one trivariance

calculate only two covariances

calculate three covariances

average the variances of the individual stocks

70.

Which of the following correlation coefficients will produce the least diversification benefit?

-.6

-.3

71.

Which of the following correlation coefficients will produce the most diversification benefits?

-.6

-.9

72.

What is the most likely correlation coefficient between a stock-index mutual fund and the S&P 500?

-1

73.

Investing in two assets with a correlation coefficient of -.5 will reduce what kind of risk?

Market risk

Nondiversifiable risk

Systematic risk

Unique risk

74.

Investing in two assets with a correlation coefficient of 1 will reduce which kind of risk?

Market risk

Unique risk

Unsystematic risk

None of these options (With a correlation of 1, no risk will be reduced.)

75.

A portfolio of stocks fluctuates when the Treasury yields change. Since this risk cannot be eliminated through diversification, it is called __________.

firm-specific risk

systematic risk

unique risk

none of the options

76.

As you lengthen the time horizon of your investment period and decide to invest for multiple years, you will find that: I. The average risk per year may be smaller over longer investment horizons. II. The overall risk of your investment will compound over time. III. Your overall risk on the investment will fall.

I only

I and II only

III only

I, II, and III

77.

You are considering adding a new security to your portfolio. To decide whether you should add the security, you need to know the security's: I. Expected return II. Standard deviation III. Correlation with your portfolio

I only

I and II only

I and III only

I, II, and III

78.

Which of the following is a correct expression concerning the formula for the standard deviation of returns of a two-asset portfolio where the correlation coefficient is positive?

σ2rp< (W12σ12 + W22σ22)

σ2rp = (W12σ12 + W22σ22)

σ2rp = (W12σ12 - W22σ22)

σ2rp> (W12σ12 + W22σ22)

79.

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.

9.7%

12.2%

14%

15.6%

80.

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 30%. Stock B has a standard deviation of 18%. The portfolio contains 60% of stock A, and the correlation coefficient between the two stocks is -1.

10.8%

18%

24%

81.

The expected return of a portfolio is 8.9%, and the risk-free rate is 3.5%. If the portfolio standard deviation is 12%, what is the reward-to-variability ratio of the portfolio?

.45

.74

1.35

82.

A project has a 60% chance of doubling your investment in 1 year and a 40% chance of losing half your money. What is the standard deviation of this investment?

25%

50%

62%

73%

83.

A project has a 50% chance of doubling your investment in 1 year and a 50% chance of losing half your money. What is the expected return on this investment project?

25%

50%

75%

84.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is likely to further reduce risk for an investor currently holding her portfolio in a well-diversified portfolio of common stock?

Stock A

Stock B

There is no difference between A or B.

The answer cannot be determined from the information given.

85.

The figures below show plots of monthly excess returns for two stocks plotted against excess returns for a market index. Which stock is riskier to a nondiversified investor who puts all his money in only one of these stocks?

Stock A is riskier.

Stock B is riskier.

Both stocks are equally risky.

The answer cannot be determined from the information given.

Chapter 7: ___________________________________________________________________________

An adjusted beta will be ______ than the unadjusted beta.

lower

higher

closer to 1

closer to 0

Fama and French claim that after controlling for firm size and the ratio of the firm's book value to market value, beta is: I. Highly significant in predicting future stock returns II. Relatively useless in predicting future stock returns III. A good predictor of the firm's specific risk

I only

II only

I and III only

I, II, and III

Which of the following are assumptions of the simple CAPM model? I. Individual trades of investors do not affect a stock's price. II. All investors plan for one identical holding period. III. All investors analyze securities in the same way and share the same economic view of the world. IV. All investors have the same level of risk aversion.

I, II, and IV only

I, II, and III only

II, III, and IV only

I, II, III, and IV

When all investors analyze securities in the same way and share the same economic view of the world, we say they have ____________________.

heterogeneous expectations

equal risk aversion

asymmetric information

homogeneous expectations

In a simple CAPM world which of the following statements is (are) correct? I. All investors will choose to hold the market portfolio, which includes all risky assets in the world. II. Investors' complete portfolio will vary depending on their risk aversion. III. The return per unit of risk will be identical for all individual assets. IV. The market portfolio will be on the efficient frontier, and it will be the optimal risky portfolio.

I, II, and III only

II, III, and IV only

I, III, and IV only

I, II, III, and IV

Consider the CAPM. The risk-free rate is 6%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.3?

15.6%

18%

21.6%

Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%?

1.2

Consider the CAPM. The expected return on the market is 18%. The expected return on a stock with a beta of 1.2 is 20%. What is the risk-free rate?

12%

The arbitrage pricing theory was developed by _________.

Henry Markowitz

Stephen Ross

William Sharpe

Eugene Fama

10.

In the context of the capital asset pricing model, the systematic measure of risk is captured by _________.

unique risk

beta

the standard deviation of returns

the variance of returns

11.

Empirical results estimated from historical data indicate that betas _________.

are always close to zero

are constant over time

of all securities are always between zero and 1

seem to regress toward 1 over time

12.

If enough investors decide to purchase stocks, they are likely to drive up stock prices, thereby causing _____________ and ___________.

expected returns to fall; risk premiums to fall

expected returns to rise; risk premiums to fall

expected returns to rise; risk premiums to rise

expected returns to fall; risk premiums to rise

13.

The market portfolio has a beta of _________.

-1

14.

In a well-diversified portfolio, __________ risk is negligible.

nondiversifiable

market

systematic

unsystematic

15.

The capital asset pricing model was developed by _________.

Kenneth French

Stephen Ross

William Sharpe

Eugene Fama

16.

If all investors become more risk averse, the SML will _______________ and stock prices will _______________.

shift upward; rise

shift downward; fall

have the same intercept with a steeper slope; fall

have the same intercept with a flatter slope; rise

17.

According to the capital asset pricing model, a security with a _________.

negative alpha is considered a good buy

positive alpha is considered overpriced

positive alpha is considered underpriced

zero alpha is considered a good buy

18.

Arbitrage is based on the idea that _________.

assets with identical risks must have the same expected rate of return

securities with similar risk should sell at different prices

the expected returns from equally risky assets are different

markets are perfectly efficient

19.

Investors require a risk premium as compensation for bearing ______________.

unsystematic risk

alpha risk

residual risk

systematic risk

20.

According to the capital asset pricing model, a fairly priced security will plot _________.

above the security market line

along the security market line

below the security market line

at no relation to the security market line

21.

According to the capital asset pricing model, fairly priced securities have _________.

negative betas

positive alphas

positive betas

zero alphas

22.

You have a $50,000 portfolio consisting of Intel, GE, and Con Edison. You put $20,000 in Intel, $12,000 in GE, and the rest in Con Edison. Intel, GE, and Con Edison have betas of 1.3, 1, and .8, respectively. What is your portfolio beta?

1.048

1.033

1.037

23.

The graph of the relationship between expected return and beta in the CAPM context is called the _________.

CML

CAL

SML

SCL

24.

Research has revealed that regardless of what the current estimate of a firm's beta is, beta will tend to move closer to ______ over time.

-1

25.

The beta of a security is equal to _________.

the covariance between the security and market returns divided by the variance of the market's returns

the covariance between the security and market returns divided by the standard deviation of the market's returns

the variance of the security's returns divided by the covariance between the security and market returns

the variance of the security's returns divided by the variance of the market's returns

26.

According to the capital asset pricing model, in equilibrium _________.

all securities' returns must lie below the capital market line

all securities' returns must lie on the security market line

the slope of the security market line must be less than the market risk premium

any security with a beta of 1 must have an excess return of zero

27.

According to the CAPM, which of the following is not a true statement regarding the market portfolio.

All securities in the market portfolio are held in proportion to their market values.

It includes all risky assets in the world, including human capital.

It is always the minimum-variance portfolio on the efficient frontier.

It lies on the efficient frontier.

28.

In a world where the CAPM holds, which one of the following is not a true statement regarding the capital market line?

The capital market line always has a positive slope.

The capital market line is also called the security market line.

The capital market line is the best-attainable capital allocation line.

The capital market line is the line from the risk-free rate through the market portfolio.

29.

Consider the single factor APT. 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 8%. If you wanted 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

30.

Consider the single factor APT. Portfolio A has a beta of .2 and an expected return of 13%. Portfolio B has a beta of .4 and an expected return of 15%. The risk-free rate of return is 10%. If you wanted 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

31.

Consider the multifactor APT with two factors. Portfolio A has a beta of .5 on factor 1 and a beta of 1.25 on factor 2. The risk premiums on the factor 1 and 2 portfolios are 1% and 7%, respectively. The risk-free rate of return is 7%. The expected return on portfolio A is __________ if no arbitrage opportunities exist.

13.5%

15%

16.25%

23%

32.

Consider the one-factor APT. The variance of the return on the factor portfolio is .08. The beta of a well-diversified portfolio on the factor is 1.2. The variance of the return on the well-diversified portfolio is approximately _________.

.1152

.1270

.1521

.1342

33.

Security X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is _________.

fairly priced

overpriced

underpriced

none of these answers

34.

The possibility of arbitrage arises when ____________.

there is no consensus among investors regarding the future direction of the market, and thus trades are made arbitrarily

mispricing among securities creates opportunities for riskless profits

two identically risky securities carry the same expected returns

investors do not diversify

35.

Building a zero-investment portfolio will always involve _____________.

an unknown mixture of short and long positions

only short positions

only long positions

equal investments in a short and a long position

36.

An important characteristic of market equilibrium is _______________.

the presence of many opportunities for creating zero-investment portfolios

all investors exhibit the same degree of risk aversion

the absence of arbitrage opportunities

the lack of liquidity in the market

37.

Consider the capital asset pricing model. The market degree of risk aversion, A, is 3. The variance of return on the market portfolio is .0225. If the risk-free rate of return is 4%, the expected return on the market portfolio is _________.

6.75%

10.75%

12%

38.

You invest $600 in security A with a beta of 1.5 and $400 in security B with a beta of .90. The beta of this portfolio is _________.

1.14

1.2

1.26

1.5

39.

In a single-factor market model the beta of a stock ________.

measures the stock's contribution to the standard deviation of the market portfolio

measures the stock's unsystematic risk

changes with the variance of the residuals

measures the stock's contribution to the standard deviation of the stock

40.

Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is _________.

-1.7%

3.7%

5.5%

8.7%

41.

The variance of the return on the market portfolio is .04 and the expected return on the market portfolio is 20%. If the risk-free rate of return is 10%, the market degree of risk aversion, A, is _________.

2.5

3.5

42.

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should _________.

buy stock X because it is overpriced

buy stock X because it is underpriced

sell short stock X because it is overpriced

sell short stock X because it is underpriced

43.

Consider the one-factor APT. The standard deviation of return on a well-diversified portfolio is 20%. The standard deviation on the factor portfolio is 12%. The beta of the well-diversified portfolio is approximately _________.

.60

1.67

3.20

44.

The risk-free rate and the expected market rate of return are 6% and 16%, respectively. According to the capital asset pricing model, the expected rate of return on security X with a beta of 1.2 is equal to _________.

12%

17%

18%

23%

45.

Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.2. Stock B has an expected return of 14% and a beta of 1.8. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered the better buy because _________.

A; it offers an expected excess return of .2%

A; it offers an expected excess return of 2.2%

B; it offers an expected excess return of 1.8%

B; it offers an expected return of 2.4%

46.

According to the CAPM, the risk premium an investor expects to receive on any stock or portfolio is _______________.

directly related to the risk aversion of the particular investor

inversely related to the risk aversion of the particular investor

directly related to the beta of the stock

inversely related to the alpha of the stock

47.

In his famous critique of the CAPM, Roll argued that the CAPM ______________.

is not testable because the true market portfolio can never be observed

is of limited use because systematic risk can never be entirely eliminated

should be replaced by the APT

should be replaced by the Fama-French three-factor model

48.

Which of the following variables do Fama and French claim do a better job explaining stock returns than beta? I. Book-to-market ratio II. Unexpected change in industrial production III. Firm size

I only

I and II only

I and III only

I, II, and III

49.

In a study conducted by Jagannathan and Wang, it was found that the performance of beta in explaining security returns could be considerably enhanced by: I. Including the unsystematic risk of a stock II. Including human capital in the market portfolio III. Allowing for changes in beta over time

I and II only

II and III only

I and III only

I, II, and III

50.

The SML is valid for _______________, and the CML is valid for ______________.

only individual assets; well-diversified portfolios only

only well-diversified portfolios; only individual assets

both well-diversified portfolios and individual assets; both well-diversified portfolios and individual assets

both well-diversified portfolios and individual assets; well-diversified portfolios only

51.

Liquidity is a risk factor that __________.

has yet to be accurately measured and incorporated into portfolio management

is unaffected by trading mechanisms on various stock exchanges

has no effect on the market value of an asset

affects bond prices but not stock prices

52.

Beta is a measure of ______________.

total risk

relative systematic risk

relative nonsystematic risk

relative business risk

53.

According to capital asset pricing theory, the key determinant of portfolio returns is _________.

the degree of diversification

the systematic risk of the portfolio

the firm-specific risk of the portfolio

economic factors

54.

The expected return of the risky-asset portfolio with minimum variance is _________.

the market rate of return

zero

the risk-free rate

The answer cannot be determined from the information given.

55.

According to the CAPM, investors are compensated for all but which of the following?

Expected inflation

Systematic risk

Time value of money

Residual risk

56.

The most significant conceptual difference between the arbitrage pricing theory (APT) and the capital asset pricing model (CAPM) is that the CAPM _____________.

places less emphasis on market risk

recognizes multiple unsystematic risk factors

recognizes only one systematic risk factor

recognizes multiple systematic risk factors

57.

Arbitrage is __________________________.

an example of the law of one price

the creation of riskless profits made possible by relative mispricing among securities

a common opportunity in modern markets

an example of a risky trading strategy based on market forecasting

58.

A stock's alpha measures the stock's ____________________.

expected return

abnormal return

excess return

residual return

59.

The measure of unsystematic risk can be found from an index model as _________.

residual standard deviation

R-square

degrees of freedom

sum of squares of the regression

60.

Standard deviation of portfolio returns is a measure of ___________.

total risk

relative systematic risk

relative nonsystematic risk

relative business risk

61.

One of the main problems with the arbitrage pricing theory is __________.

its use of several factors instead of a single market index to explain the risk-return relationship

the introduction of nonsystematic risk as a key factor in the risk-return relationship

that the APT requires an even larger number of unrealistic assumptions than does the CAPM

the model fails to identify the key macroeconomic variables in the risk-return relationship

62.

You run a regression of a stock's returns versus a market index and find the following: Based on the data, you know that the stock _____.

earned a positive alpha that is statistically significantly different from zero

has a beta precisely equal to .890

has a beta that is likely to be anything between .6541 and 1.465 inclusive

has no systematic risk

63.

The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, _________.

SDA Corp. stock is underpriced

SDA Corp. stock is fairly priced

SDA Corp. stock's alpha is -.75%

SDA Corp. stock alpha is .75%

64.

Assume that both X and Y are well-diversified portfolios and the risk-free rate is 8%. Portfolio X has an expected return of 14% and a beta of 1. Portfolio Y has an expected return of 9.5% and a beta of .25. In this situation, you would conclude that portfolios X and Y _________.

are in equilibrium

offer an arbitrage opportunity

are both underpriced

are both fairly priced

65.

What is the expected return on the market?

10%

15%

66.

What is the beta for a portfolio with an expected return of 12.5%?

1.5

67.

What is the expected return for a portfolio with a beta of .5?

7.5%

12.5%

15%

68.

What is the alpha of a portfolio with a beta of 2 and actual return of 15%?

13%

15%

17%

69.

If the simple CAPM is valid and all portfolios are priced correctly, which of the situations below is possible? Consider each situation independently, and assume the risk-free rate is 5%.

Option A

Option B

Option C

Option D

70.

Two investment advisers are comparing performance. Adviser A averaged a 20% return with a portfolio beta of 1.5, and adviser B averaged a 15% return with a portfolio beta of 1.2. If the T-bill rate was 5% and the market return during the period was 13%, which adviser was the better stock picker?

Advisor A was better because he generated a larger alpha.

Advisor B was better because she generated a larger alpha.

Advisor A was better because he generated a higher return.

Advisor B was better because she achieved a good return with a lower beta.

71.

The expected return on the market is the risk-free rate plus the _____________.

diversified returns

equilibrium risk premium

historical market return

unsystematic return

72.

You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $28. The stock's beta is 1.1, rf is 6%, and E[rm] = 16%. What is the stock's abnormal return?

-1%

-2%

73.

If the beta of the market index is 1 and the standard deviation of the market index increases from 12% to 18%, what is the new beta of the market index?

1.2

1.5

74.

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

4.8%

6.6%

75.

According to the CAPM, what is the expected market return given an expected return on a security of 15.8%, a stock beta of 1.2, and a risk-free interest rate of 5%?

13%

14%

76.

What is the expected return on a stock with a beta of .8, given a risk-free rate of 3.5% and an expected market return of 15.5%?

3.8%

13.1%

15.6%

19.1%

77.

Research has identified two systematic factors that affect U.S. stock returns. The factors are growth in industrial production and changes in long-term interest rates. Industrial production growth is expected to be 3%, and long-term interest rates are expected to increase by 1%. You are analyzing a stock that has a beta of 1.2 on the industrial production factor and .5 on the interest rate factor. It currently has an expected return of 12%. However, if industrial production actually grows 5% and interest rates drop 2%, what is your best guess of the stock's return?

15.9%

12.9%

13.2%

12%

78.

A stock has a beta of 1.3. The systematic risk of this stock is ____________ the stock market as a whole.

higher than

lower than

equal to

indeterminable compared to

79.

There are two independent economic factors, M1 and M2. The risk-free rate is 5%, and all stocks have independent firm-specific components with a standard deviation of 25%. Portfolios A and B are well diversified. Given the data below, which equation provides the correct pricing model?

E(rP) = 5 + 1.12βP1 + 11.86βP2

E(rP) = 5 + 4.96βP1 + 13.26βP2

E(rP) = 5 + 3.23βP1 + 8.46βP2

E(rP) = 5 + 8.71βP1 + 9.68βP2

80.

Using the index model, the alpha of a stock is 3%, the beta is 1.1, and the market return is 10%. What is the residual given an actual return of 15%?

.0%

81.

The risk premium for exposure to aluminum commodity prices is 4%, and the firm has a beta relative to aluminum commodity prices of .6. The risk premium for exposure to GDP changes is 6%, and the firm has a beta relative to GDP of 1.2. If the risk-free rate is 4%, what is the expected return on this stock?

10%

11.5%

13.6%

14%

82.

The two-factor model on a stock provides a risk premium for exposure to market risk of 9%, a risk premium for exposure to interest rate risk of (-1.3%), and a risk-free rate of 3.5%. The beta for exposure to market risk is 1, and the beta for exposure to interest rate risk is also 1. What is the expected return on the stock?

8.7%

11.2%

13.8%

15.2%

83.

The risk premium for exposure to exchange rates is 5%, and the firm has a beta relative to exchange rates of .4. The risk premium for exposure to the consumer price index is -6%, and the firm has a beta relative to the CPI of .8. If the risk-free rate is 3%, what is the expected return on this stock?

.2%

1.5%

3.6%

84.

The two-factor model on a stock provides a risk premium for exposure to market risk of 12%, a risk premium for exposure to silver commodity prices of 3.5%, and a risk-free rate of 4%. The beta for exposure to market risk is 1, and the beta for exposure to commodity prices is also 1. What is the expected return on the stock?

11.6%

13%

15.3%

19.5%

85.

The measure of risk used in the capital asset pricing model is ___________.

specific risk

the standard deviation of returns

reinvestment risk

beta

Chapter 8: ___________________________________________________________________________

Which of the following beliefs would not preclude charting as a method of portfolio management?

The market is strong-form efficient.

The market is semistrong-form efficient.

The market is weak-form efficient.

Stock prices follow recurring patterns.

In a 1953 study of stock prices, Maurice Kendall found that ________.

there were no predictable patterns in stock prices

stock prices exhibited strong serial autocorrelation

day-to-day stock prices followed consistent trends

fundamental analysis could be used to generate abnormal returns

The weak form of the EMH states that ________ must be reflected in the current stock price.

all past information, including security price and volume data

all publicly available information

all information, including inside information

all costless information

The semistrong form of the EMH states that ________ must be reflected in the current stock price.

all security price and volume data

all publicly available information

all information, including inside information

all costless information

The strong form of the EMH states that ________ must be reflected in the current stock price.

all security price and volume data

all publicly available information

all information, including inside information

all costless information

Random price movements indicate ________.

irrational markets

that prices cannot equal fundamental values

that technical analysis to uncover trends can be quite useful

that markets are functioning efficiently

When the market risk premium rises, stock prices will ________.

rise

fall

recover

have excess volatility

The small-firm-in-January effect is strongest ________.

early in the month

in the middle of the month

late in the month

in even-numbered years

Evidence suggests that there may be _______ momentum and ________ reversal patterns in stock price behavior.

short-run; short-run

long-run; long-run

long-run; short-run

short-run; long run

10.

Proponents of the EMH typically advocate __________.

a conservative investment strategy

a liberal investment strategy

a passive investment strategy

an aggressive investment strategy

11.

Stock prices that are stable over time _______.

indicate that prices are useful indicators of true economic value

indicate that the market is not incorporating new information into current stock prices

ensure that an economy allocates its resources efficiently

indicates that returns follow a random-walk process

12.

The tendency when the ______ performing stocks in one period are the best performers in the next and the current ________ performers are lagging the market later is called the reversal effect.

worst; best

worst; worst

best; worst

best; best

13.

Which of the following is not a method employed by followers of technical analysis?

Charting

Relative strength analysis

Earnings forecasting

Trading around support and resistance levels

14.

Which of the following is not a method employed by fundamental analysts?

Analyzing the Fed's next interest rate move

Relative strength analysis

Earnings forecasting

Estimating the economic growth rate

15.

The primary objective of fundamental analysis is to identify __________.

well-run firms

poorly run firms

mispriced stocks

high P/E stocks

16.

If you believe in the __________ form of the EMH, you believe that stock prices reflect all publicly available information but not information that is available only to insiders.

semistrong

strong

weak

perfect

17.

If you believe in the __________ form of the EMH, you believe that stock prices reflect all relevant information, including information that is available only to insiders.

semistrong

strong

weak

perfect

18.

Most of the stock price response to a corporate earnings or dividend announcement occurs within ________________.

about 30 seconds

about 10 minutes

6 months

2 years

19.

__________ is the return on a stock beyond what would be predicted from market movements alone.

A normal return

A subliminal return

An abnormal return

None of these options

20.

You believe that stock prices reflect all information that can be derived by examining market trading data such as the history of past stock prices, trading volume, or short interest, but you do not believe stock prices reflect all publicly available and inside information. You are a proponent of the ____________ form of the EMH.

semistrong

strong

weak

perfect

21.

You are an investment manager who is currently managing assets worth $6 billion. You believe that active management of your fund could generate an additional one-tenth of 1% return on the portfolio. If you want to make sure your active strategy adds value, how much can you spend on security analysis?

$12,000,000

$6,000,000

$3,000,000

22.

A mutual fund that attempts to hold quantities of shares in proportion to their representation in the market is called a __________ fund.

stock

index

hedge

money market

23.

Choosing stocks by searching for predictable patterns in stock prices is called ________.

fundamental analysis

technical analysis

index management

random-walk investing

24.

Which of the following is not an issue that is central to the debate regarding market efficiency?

The magnitude issue

The tax-loss selling issue

The lucky event issue

The selection bias issue

25.

Most people would readily agree that the stock market is not _________.

weak-form efficient

semistrong-form efficient

strong-form efficient

efficient at all

26.

Small firms have tended to earn abnormal returns primarily in __________.

the month of January

the month July

the trough of the business cycle

the peak of the business cycle

27.

Fama and French have suggested that many market anomalies can be explained as manifestations of ____________.

regulatory effects

high trading costs

information asymmetry

varying risk premiums

28.

Proponents of the EMH think technical analysts __________.

should focus on relative strength

should focus on resistance levels

should focus on support levels

are wasting their time

29.

Evidence supporting semistrong-form market efficiency suggests that investors should _________________________.

rely on technical analysis to select securities

rely on fundamental analysis to select securities

use a passive trading strategy such as purchasing an index fund or an ETF

select securities by throwing darts at the financial pages of the newspaper

30.

"Buy a stock if its price moves up by 2% more than the Dow Average" is an example of a _________________.

trading rule

market anomaly

fundamental approach

passive trading strategy

31.

Jaffe found that stock prices __________ after insiders intensively bought shares and __________ after insiders intensively sold shares.

decreased; decreased

decreased; increased

increased; decreased

increased; increased

32.

In a 1988 study, Fama and French found that the return on the aggregate stock market was __________ when the dividend yield was higher.

higher

lower

unaffected

more skewed

33.

In their 2010 study, Fama and French used a four-factor model to analyze excess returns on equity mutual funds. They found that the funds ______.

had negative alphas before fees were considered.

had positive alphas after fees were considered.

had negative alphas after fees were considered.

had negative alphas before fees were considered and had negative alphas after fees were considered.

34.

Joe bought a stock at $57 per share. The price promptly fell to $55. Joe held on to the stock until it again reached $57, and then he sold it once he had eliminated his loss. If other investors do the same to establish a trading pattern, this would contradict _______.

the strong-form EMH

the weak-form EMH

technical analysis

the semistrong-form EMH

35.

According to 1968 research by Ball and Brown, securities markets fully adjust to earnings announcements _______.

instantly

in 1 day

in 1 week

gradually over time

36.

When stock returns exhibit positive serial correlation, this means that __________ returns tend to follow ___________ returns.

positive; positive

positive; negative

negative; positive

positive; zero

37.

Basu found that firms with high P/E ratios __________.

earned higher average returns than firms with low P/E ratios

earned the same average returns as firms with low P/E ratios

earned lower average returns than firms with low P/E ratios

had higher dividend yields than firms with low P/E ratios

38.

Fundamental analysis is likely to yield best results for _______.

NYSE stocks

neglected stocks

stocks that are frequently in the news

fast-growing companies

39.

You are looking to invest in one of three stocks. All other things being equal, Stock A has high expected earnings growth, stock B has only modest expected earnings growth, and stock C is expected to generate poor earnings growth. According to LaPorta's 1996 study, which stock is likely to generate the greatest alpha for you?

Stock A

Stock B

Stock C

The answer cannot be determined from the information given.

40.

You believe that you can earn 2% more on your portfolio if you engage in full-time stock research. However, the additional trading costs and tax liability from active management will cost you about .5%. You have an $800,000 stock portfolio. What is the most you can afford to spend on your research?

$4,000

$8,000

$12,000

$16,000

41.

Even if the markets are efficient, professional portfolio management is still important because it provides investors with: I. Low-cost diversification II. A portfolio with a specified risk level III. Better risk-adjusted returns than an index

I only

I and II only

II and III only

I, II, and III

42.

Banz found that, on average, the risk-adjusted returns of small firms __________.

were higher than the risk-adjusted returns of large firms

were the same as the risk-adjusted returns of large firms

were lower than the risk-adjusted returns of large firms

were negative

43.

If the U.S. capital markets are not informationally efficient, ______.

the markets cannot be allocationally efficient

systematic risk does not matter

no type of analysis can be used to generate abnormal returns

returns must follow a random walk

44.

"Active investment management may at times generate additional returns of about .1%. However, the standard deviation of the typical well-diversified portfolio is about 20%, so it is very difficult to statistically identify any increase in performance." Even if true, this statement is an example of the _________ problem in deciding how efficient the markets are.

magnitude

selection bias

lucky event

allocation

45.

DeBondt and Thaler (1985) found that the poorest-performing stocks in one time period experienced __________ performance in the following period and that the best-performing stocks in one time period experienced __________ performance in the following time period.

good; good

good; poor

poor; good

poor; poor

46.

J. M. Keyes put all his money in one stock, and the stock doubled in value in a matter of months. He did this three times in a row with three different stocks. J. M. got his picture on the front page of the Wall Street Journal. However, the paper never mentioned the thousands of investors who made similar bets on other stocks and lost most of their money. This is an example of the ________ problem in deciding how efficient the markets are.

magnitude

selection bias

lucky event

small firm

47.

Most tests of semistrong efficiency are _________.

designed to test whether inside information can be used to generate abnormal returns

based on technical trading rules

unable to generate any evidence of market anomalies

joint tests of market efficiency and the risk-adjustment measure

48.

The _________ effect may explain much of the small-firm anomaly. I. January II. neglected III. liquidity

I only

II only

II and III only

I, II, and III

49.

The effect of liquidity on stock returns might be related to: I. The small-firm effect II The book-to-market effect III The neglected-firm effect IV. The P/E effect

I and II only

I and III only

II and IV only

I, II, and III only

50.

The broadest information set is included in the _____.

weak-form efficiency argument

semistrong-form efficiency argument

strong-form efficiency argument

technical analysis trading method

51.

The Fama and French evidence that high book-to-market firms outperform low book-to-market firms even after adjusting for beta means that _________.

high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a unique risk factor

low book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

either high book-to-market firms are underpriced or the book-to-market ratio is a proxy for a systematic risk factor

high book-to-market firms have more post-earnings drift

52.

According to results by Seyhun, __________.

investors cannot usually earn abnormal returns by following inside trades after knowledge of the trades are made public

investors can usually earn abnormal returns by following inside trades after knowledge of the trades are made public

investors cannot earn abnormal returns by following inside trades before knowledge of the trades are made public

investors cannot earn abnormal returns by trading before insiders

53.

If the daily returns on the stock market are normally distributed with a mean of .05% and a standard deviation of 1%, the probability that the stock market would have a return of -23% or worse on one particular day (as it did on Black Monday) is approximately __________.

.0%

.1%

10%

54.

According to the semistrong form of the efficient markets hypothesis, ____________.

stock prices do not rapidly adjust to new information

future changes in stock prices cannot be predicted from any information that is publicly available

corporate insiders should have no better investment performance than other investors even if allowed to trade freely

arbitrage between futures and cash markets should not produce extraordinary profits

55.

The term random walk is used in investments to refer to ______________.

stock price changes that are random but predictable

stock prices that respond slowly to both old and new information

stock price changes that are random and unpredictable

stock prices changes that follow the pattern of past price changes

56.

Among the important characteristics of market efficiency is (are) that: I. There are no arbitrage opportunities. II. Security prices react quickly to new information. III. Active trading strategies will not consistently outperform passive strategies.

I only

II only

I and III only

I, II, and III

57.

Stock market analysts have tended to be ___________ in their recommendations to investors.

slightly overly optimistic

overwhelmingly optimistic

slightly overly pessimistic

overwhelmingly pessimistic

58.

Assume that a company announces unexpectedly high earnings in a particular quarter. In an efficient market one might expect _____________.

an abnormal price change immediately after the announcement

an abnormal price increase before the announcement

an abnormal price decrease after the announcement

no abnormal price change before or after the announcement

59.

Market anomaly refers to _______.

an exogenous shock to the market that is sharp but not persistent

a price or volume event that is inconsistent with historical price or volume trends

a trading or pricing structure that interferes with efficient buying and selling of securities

price behavior that differs from the behavior predicted by the efficient market hypothesis

60.

Which of the following contradicts the proposition that the stock market is weakly efficient?

Over 25% of mutual funds outperform the market on average.

Insiders earn abnormal trading profits.

Every January, the stock market earns above-normal returns.

Applications of technical trading rules fail to earn abnormal returns.

61.

Which of the following would violate the efficient market hypothesis?

Intel has consistently generated large profits for years.

Prices for stocks before stock splits show, on average, consistently positive abnormal returns.

Investors earn abnormal returns months after a firm announces surprise earnings.

High-earnings growth stocks fail to generate higher returns for investors than do low earnings growth stocks.

62.

Which of the following stock price observations would appear to contradict the weak form of the efficient market hypothesis?

The average rate of return is significantly greater than zero.

The correlation between the market return one week and the return the following week is zero.

You could have consistently made superior returns by buying stock after a 10% rise in price and selling after a 10% fall.

You could have consistently made superior returns by forecasting future earnings performance with your new Crystal Ball forecast methodology.

63.

The semistrong form of the efficient market hypothesis implies that ____________ generate abnormal returns and ____________ generate abnormal returns.

technical analysis cannot; fundamental analysis can

technical analysis can; fundamental analysis can

technical analysis can; fundamental analysis cannot

technical analysis cannot; fundamental analysis cannot

64.

An implication of the efficient market hypothesis is that __________.

high-beta stocks are consistently overpriced

low-beta stocks are consistently overpriced

nonzero alphas will quickly disappear

growth stocks are better buys than value stocks

65.

One type of passive portfolio management is ________.

investing in a well-diversified portfolio without attempting to search out mispriced securities

investing in a well-diversified portfolio while only seeking out passively mispriced securities

investing an equal dollar amount in index stocks

investing in an equal amount of shares in each of the index stocks

66.

The four-factor model used to construct performance benchmarks for mutual funds uses the three Fama and French factors and one additional factor related to _________.

the tenure of the fund manager

momentum

fees

the age of the fund manager

67.

Value stocks may provide investors with better returns than growth stocks if: I. Value stocks are out of favor with investors. II. Prices of growth stocks include premiums for overly optimistic growth levels. III. Value stocks are likely to generate positive-earnings surprises.

I only

II only

I and III only

I, II, and III

68.

Value stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

low; low

low; high

high; low

high; high

69.

Growth stocks usually exhibit ______ price-to-book ratios and ______ price-to-earnings ratios.

low; low

low; high

high; low

high; high

70.

A day trade with an average stock holding period of under 8 minutes might be most closely associated with which trading philosophy?

EMH

Fundamental analysis

Strong-form market efficiency

Technical analysis

71.

A technical analyst is most likely to be affiliated with which investment philosophy?

Active management

Buy and hold

Passive investment

Index funds

72.

Someone who invests in the Vanguard Index 500 mutual fund could most accurately be described as using which approach?

Active management

Arbitrage

Fundamental analysis

Passive investment

73.

Evidence by Blake, Elton, and Gruber indicates that, on average, actively managed bond funds ______.

outperform passive fixed-income indexes

underperform passive fixed-income indexes by a wide margin

perform as well as passive fixed-income indexes

underperform passive fixed-income indexes by an amount equal to fund expenses

74.

Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is a violation of which form of efficiency?

Weak-form efficiency

Semistrong-form efficiency

Strong-form efficiency

Technical analysis

75.

In an efficient market and for an investor who believes in a passive approach to investing, what is the primary duty of a portfolio manager?

Accounting for results

Diversification

Identifying undervalued stocks

No need for a portfolio manager

76.

Which of the following is not a topic related to the debate over market efficiency?

IPO results

Lucky event issue

Magnitude issue

Selection bias

77.

Which Fidelity Magellan portfolio manager is often referenced as an exception to the general conclusion of efficient markets?

Jeff Vinik

Peter Lynch

Robert Stansky

William Hayes

78.

The tendency of poorly performing stocks and well-performing stocks in one period to continue their performance into the next period is called the ________________.

fad effect

martingale effect

momentum effect

reversal effect

79.

Which of the following is not a concept related to explaining abnormal excess stock returns?

January effect

Neglected-firm effect

P/E effect

Preferred stock effect

80.

The lack of adequate trading volume in stock that may ultimately lead to its ability to produce excess returns is referred to as the ____________________.

January effect

liquidity effect

neglected-firm effect

P/E effect

81.

Fundamental analysis determines that the price of a firm's stock is too low, given its intrinsic value. The information used in the analysis is available to all market participants, yet the price does not seem to react. The stock does not trade on a major exchange. What concept might explain the ability to produce excess returns on this stock?

January effect

Neglected-firm effect

P/E effect

Reversal effect

82.

When testing mutual fund performance over time, one must be careful of ___________, which means that a certain percentage of poorer-performing funds fail over time, making the performance of remaining funds seem more consistent over time.

survivorship bias

lucky event bias

magnitude bias

mean reversion bias

83.

Most evidence indicates that U.S. stock markets are _______________________.

reasonably weak-form and semistrong-form efficient

strong-form efficient

reasonably weak-form but not semistrong- or strong-form efficient

neither weak-, semistrong-, nor strong-form efficient

84.

Which of the following statements is (are) correct?

If a market is weak-form efficient, it is also semistrong- and strong-form efficient.

If a market is semistrong-form efficient, it is also strong-form efficient.

If a market is strong-form efficient, it is also semistrong- but not weak-form efficient.

If a market is strong-form efficient, it is also semistrong- and weak-form efficient.

85.

According to Markowitz and other proponents of modern portfolio theory, which of the following activities would not be expected to produce any benefits?

Diversifying

Investing in Treasury bills

Investing in stocks of utility companies

Engaging in active portfolio management to enhance returns

86.

According to results by Seyhun, the main reason that investors cannot earn excess returns by following inside trades after they become public is that ______________.

the information isn't available for at least 2 weeks

transaction costs offset abnormal returns

the SEC late-disclosure rule doesn't apply to insiders

insiders don't have to disclose their trades

#FIN 320 Week 5 Mid-Term Exam – Strayer

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