Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Exam Preparation

Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Questions & Answers

• Question 1:

  Investment managers develop portfolios of different investments to combine, offset, and thereby reduce overall risk. Not all risks can be eliminated by development of a portfolio. Risks that cannot be eliminated through a portfolio are called:

  A. Non-market risks.
  B. Unsystematic risks.
  C. Firm-specific risks.
  D. Systematic risks.
  D. Systematic risks.

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  Rule: Portfolio theory is concerned with construction of an investment portfolio that efficiently balances its risk with its rate of return. Risk is often reduced by diversification, the process of mixing investments of different or offsetting risks. The

  broad categories of risk are summarized in the following mnemonic to get us DUNS.

  Diversifiable

  Unsystematic (non market/firm-specific)

  Non-diversifiable

  Systematic (market)

  Choice "d" is correct. Non-diversifiable risk cannot be eliminated by the application of portfolio theory. Non-diversifiable risk is also referred to as systematic risk. (DUNS) Choice "a" is incorrect. Diversifiable risk can be eliminated through

  effective application of portfolio theory. Diversifiable risks are also termed non-market risk. Choice "b" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio theory. Diversifiable risks are also termed

  unsystematic risk. Choice "c" is incorrect. Diversifiable risk can be eliminated through effective application of portfolio theory. Diversifiable risks are also termed firm-specific risk.

• Question 2:

  An increase (shift right) in aggregate demand causes:

  A. An increase in the price level and a decrease in real GDP.
  B. A decrease in the price level and an increase in real GDP.
  C. An increase in the price level and an increase in real GDP.
  D. A decrease in the price level and a decrease in real GDP.
  A. An increase in the price level and a decrease in real GDP.

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  Choice "c" is correct. As shown above, an increase in aggregate demand causes the equilibrium price level to rise and equilibrium output (real GDP) to increase.

  Choice "a" is incorrect. As shown above, equilibrium output increases, not decreases.

  Choice "b" is incorrect. As shown above, the equilibrium price level increases, not decreases.

  Choice "d" is incorrect. As shown above, the equilibrium price level increases, not decreases.

• Question 3:

  Price owns 2,000 shares of Universal Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paid. If Universal is dissolved, which of the following statements is correct?

  A. Universal will be liable to Price as an unsecured creditor for $10,000.
  B. Universal will be liable to Price as a secured creditor for $20,000.
  C. Price will have priority over the claims of Universal's bond owners.
  D. Price will have priority over the claims of Universal's unsecured judgment creditors.
  A. Universal will be liable to Price as an unsecured creditor for $10,000.

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  Choice "a" is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other "unsecured" debts. Choice "b" is incorrect. The unpaid dividend ranks as an "unsecured" not a "secured" debt

  and Price has no right to a dividend for the second year because no dividend was declared that year.

  Choice "c" is incorrect. As an "unsecured" creditor, Price does not have priority over the company's bondholders.

  Choice "d" is incorrect. The "unsecured" creditors will share in the "unsecured" category as a whole and not with any priority within the class.

• Question 4:

  A company has unlimited capital funds to invest. The decision rule for the company to follow in order to maximize shareholders' wealth is to invest in all projects having a (n):

  A. Present value greater than zero.
  B. Net present value greater than zero.
  C. Internal rate of return greater than zero.
  D. Accounting rate of return greater than the hurdle rate used in capital budgeting analyses.
  B. Net present value greater than zero.

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  Choice "b" is correct.

  Rule: If the net present value is positive (greater than zero), a project should be accepted, unless there is a better project. If, however, a company has unlimited funds, all projects with a net present value greater than zero should be accepted

  in order to maximize shareholder wealth.

  Choice "a" is incorrect. Considering only present value greater than zero accounts for future net cash inflows, but it ignores cash outflows from the initial capital investment. Choice "c" is incorrect. Considering only internal rate of return greater

  than zero may result in the acceptance of a project with an internal rate of return less than the company's minimum desired rate of return.

  Choice "d" is incorrect. Considering only accounting rate of return greater than hurdle rate ignores the time value of money.

• Question 5:

  Green Trees, LP is a limited partnership. Dave is a limited partner. Seeds Today, InC. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of Green Trees, LP will be distributed to pay:

  A. Seeds Today, Inc., first.
  B. Dave first.
  C. Seeds Today, Inc. and Dave.
  D. The general partners first.
  A. Seeds Today, Inc., first.

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  Choice "a" is correct.

  Rule: Upon dissolution, the assets of a limited partnership are first used to pay off the outside creditors. Limited partners such as Dave are next in line.

  Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 6:

  RLF Corporation had income before taxes of $60,000 for the year 1991. Included in this amount was depreciation of $5,000, a charge of $6,000 for the amortization of bond discounts, and $4,000 for interest expense. The estimated cash flow for the period is:

  A. $66,000
  B. $49,000
  C. $71,000
  D. $65,000
  C. $71,000

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  Choice "c" is correct. Cash flow is computed from net income by adding back non-cash expenses like depreciation and amortization. Presumably, interest expense has been paid (i.e., is not "accrued" interest) and should not be added back.

  

  Choices "a", "b", and "d" are incorrect, per above.

• Question 7:

  The treasury analyst for Garth Manufacturing has estimated the cash flows for the first half of next year (ignoring any short-term borrowings) as follows:

  

  Garth has a line of credit of up to $4 million on which it pays interest monthly at a rate of 1 percent of the amount utilized. Garth is expected to have a cash balance of $2 million on January 1 and no amount utilized on its line of credit. Assuming all cash flows occur at the end of the month, approximately how much will Garth pay in interest during the first half of the year?

  A. $61,000
  B. $80,000
  C. $132,000
  D. $240,000
  A. $61,000

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  Choice "a" is correct. First, determine the amount and timing of cash needs:

  

  Comments 1 Given 2 Computed balance, positive cash flows 3 Computed balance, negative cash flows 4 Borrow from LOC 5 Computed balance, negative cash flows + interest 6 Cumulative LOC Balance 7 Computed positive cash flows 8 Computed balance, positive cash flows - interest 9 Immediate pay down of LOC Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 8:

  A natural monopoly exists because:

  A. The firm owns natural resources.
  B. Economic and technical conditions permit only one efficient supplier.
  C. The government is the only supplier.
  D. Other firms are unable to enter the industry.
  B. Economic and technical conditions permit only one efficient supplier.

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  Choice "b" is correct. A natural monopoly exists when economic and technical conditions permit only one efficient supplier.

  Choice "a" is incorrect. Owning natural resources, even if they are unique, would not create a monopoly.

  Substitutes for the resource may be available.

  Choice "c" is incorrect. Government control may create a monopoly, but not a natural monopoly. This is a regulated monopoly.

  Choice "d" is incorrect. Barriers to entry help create a monopoly, but the product must be unique.

• Question 9:

  When the supply of and demand for a good both increase:

  A. Equilibrium price will increase.
  B. Equilibrium price will decrease.
  C. Equilibrium price may increase, decrease, or remain unchanged.
  D. Equilibrium quantity may increase, decrease, or remain unchanged.
  C. Equilibrium price may increase, decrease, or remain unchanged.

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  Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged

  (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease.

  Choices "a" and "b" are incorrect, since the impact on price is indeterminate.

  Choice "d" is incorrect, since equilibrium quantity will increase.

• Question 10:

  To decrease the money supply, the Fed might:

  A. Sell government securities on the open market.
  B. Buy government securities on the open market.
  C. Decrease the required reserve ratio.
  D. Lower the discount rate.
  A. Sell government securities on the open market.

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  Choice "a" is correct. To decrease the money supply, the Fed can: (1) sell government securities in the open market, (2) increase the discount rate, and (3) increase the required reserve ratio.

  Choice "b" is incorrect. The Fed should sell (not buy) securities on the open market.

  Choice "c" is incorrect. The Fed should increase (not decrease) the required reserve ratio.

  Choice "d" is incorrect. The Fed should increase (not decrease) the discount rate.