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MKT 515 Week 11 Final Exam – Strayer University New

MKT/515 Week 11 Final Exam – Strayer New

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Chapter 9 Through 19

Chapter 9

Multiple Choice

1. In global market entry, all of the following are entry decisions that must be made by
management before entering an international market EXCEPT:

a. decide on the time of entry.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the target budget.

2. When marketers are making the decision to enter an international market or not, the
first step is generally to:

a. decide on the target budget.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the time of entry.

3. When marketers are making the decision to enter an international market or not, the
final step in the decision process is generally to:

a. decide on a control system to monitor the performance of the entered market.
b. decide on the target product/market.
c. decide on the goals of the target markets.
d. decide on the mode of entry.
e. decide on the time of entry.

4. Which of the following most accurately describes the first step in the market entry
decision process?

a. Decide on the goals of the target markets.
b. Decide on the mode of entry.
c. Decide on the time of entry.
d. Decide on the target product/market.
e. Decide on the marketing mix plan.

5. Which of the following is a step in the market entry decision process?

a. Forecast a corporate budget.
b. Conduct a marketing audit.
c. Decide on a mode of entry.
d. Review transportation strengths.
e. Analyze domestic demand.

6. To identify market opportunities for a given product or service, the international
marketer usually starts off with a large pool of candidate countries. To narrow down
this pool, the company will typically do a(n) _______________________.

a. internal audit.
b. external audit.
c. cross-border budget.
d. preliminary screen.
e. econometric analysis.

7. The goals of a preliminary screen to determine market opportunities are to minimize
mistakes of ignoring countries that offer viable opportunities for the product and:

a. offending local governments.
b. offending local cultures.
c. offending local merchants.
d. violating local advertising laws.
e. not wasting time on countries that offer little or no potential.

8. The four-step procedure that can be employed for the initial screening process
includes all of the following EXCEPT:

a. select indicators and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute the overall scores for each country.

9. When Colgate-Palmolive sees prospects in countries with purchasing power as a
major driver behind market opportunities and Coca-Cola looks at per capita income
and the number of minutes that it would take someone to work to be able to afford a
Coca-Cola product, they are following which of the following steps of the initial
screening process for market entry?

a. indicator and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute overall scores for each country.

10. A four-step procedure that can be employed for the initial screening process includes
the following EXCEPT:

a. select indicators and collect data.
b. determine importance of country indicators.
c. hire outside consultants to do a marketing audit.
d. rate the countries in the pool on each indicator.
e. compute overall score for each country.

11. When Coca-Cola looks at per capita income and the number of minutes that it would
take for somebody to work to be able to afford a Coca-Cola product, the company is
following which of the following steps of the initial screening process for
market entry?

a. indicator and data selection.
b. analyze parallel strengths and weaknesses of the market.
c. determine the importances of country indicators.
d. rate the countries in the pool on each indicator.
e. compute overall scores for each country.

12. Wrigley, the U.S. chewing gum manufacturer, has not been interested in most Latin
American markets because many of the local governments imposed ownership
restrictions. This would be an example of ________________ in markets.

a. finding opportunities
b. “weeding out”
c. cross-fertilization
d. demand conflict
e. unfairness

13. One method of assessing whether a company should enter a foreign market or not is
to use an opportunity matrix. To use such a matrix, the marketer should assess high,
moderate, and low opportunities as measured on business and political risk and
___________________ scales or cells.

a. demand
b. financial constraints
c. market opportunities
d. market sensitivity
e. distance from home market

14. All of the following are major external criteria for making a decision as to a mode of
entry into a foreign market EXCEPT:

a. company leadership.
b. market size and growth.
c. need for control.
d. government regulations.
e. local infrastructure.

15. The key determinant in the market entry choice decisions is the:

a. risk.
b. local infrastructure.
c. flexibility.
d. internal resources and assets.
e. market size and growth potential.

16. In the mode of entry, many companies see liaison office as a low-cost
___________________.

a. joint venture
b. export management company
c. listening post
d. contract exporter
e. alliance post

17. The ____________________ of a market refers to the country’s distribution system,
transportation network, and communication system.

a. demographic environment
b. infrastructure
c. logistical
d. physical distribution
e. physical infrastructure

18. Markets can be classified in four types of countries based on their respective market
attractiveness. All of the following are part of the classification scheme EXCEPT:

a. platform countries.
b. emerging countries.
c. low-tech countries.
d. growth countries.
e. maturing and established countries.

19. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following of those types can be used to gather
intelligence and establish a network?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

20. Markets can be classified in four types of countries based on their respective market
attractiveness. Hong Kong and Singapore would fall into which of the types listed
below (where the purpose would be to gather intelligence and establish a network)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

21. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following of those types can be used to build up an
initial presence (such as through a liaison office)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above

22. Markets can be classified in four types of countries based on their respective market
attractiveness. Vietnam and the Philippines would fall into which of the types listed
below (where the purpose would be to build up an initial presence such as through a
liaison office)?

a. platform countries.
b. emerging countries.
c. maturing and established countries.
d. growth countries.
e. none of the above.

23. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as a
maturing/established market?

a. China.
b. Burma.
c. India.
d. Taiwan.
e. China.

24. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as an
established/maturing market?

a. China.
b. the Philippines.
c. India.
d. Vietnam.
e. Japan.

25. Markets can be classified in four types of countries based on their respective market
attractiveness. Which of the following countries would most likely be listed as
a growth country?

a. Hong Kong.
b. Vietnam.
c. China.
d. Taiwan.
e. Japan.

26. A _________________________ perspective argues that the desirable governance
structure (high- versus low-control mode) will depend on the comparative transaction
costs (the costs of running an operation).

a. demand-delivery
b. just-in-time management
c. management-by-objectives
d. quantity-cost allocation
e. transaction-cost analysis

27. From a transaction-cost analysis perspective, market failure typically happens when
transaction-specific assets become _________________ and therefore more high-
control situations are needed.

a. optional
b. valuable
c. expendable
d. less-valuable
e. weaker

28. Most companies start their international expansion with _________________.

a. exporting
b. joint ventures
c. licensing
d. franchising.
e. contract manufacturing.

29. In the area of exporting, a middleman could be an __________________________.

a. export outsourcing company
b. export management company
c. export production company
d. export specialist company
e. export manufacturing company

30. Companies that plan to engage in exporting have a choice between indirect,
_________________, and direct exporting.

a. licensing
b. parallel
c. cooperative
d. venture
e. summation

31. _______________________ means that the firm uses a middleman based in its home
market to do the exporting.

a. Licensing
b. Contract manufacturing
c. Cooperative exporting
d. Venture exporting
e. Indirect exporting

32. ___________________ offers several advantages. Chief among these
are the firm gets instant foreign market expertise, very little risk is involved, and
no major resource commitments are required.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

33. ___________________ has disadvantages. Chief among these are that the company
has little or no control over the way their product is marketed in a foreign country,
lack of adequate sales support (among other support variables) can lead to poor sales,
and bad decisions made by an intermediary can damage the corporate image.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

34. ______________________ means that the firm enters into an agreement
with another firm (local or foreign) where the partner will use its distribution network
to sell the exporter’s goods.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Venture exporting
e. Indirect exporting

35. ______________________ means that the company sets up its own
export organization within the company and relies on a middleman based in a
foreign market (foreign distributor).

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

36. Cooperative exporting is also called:

a. specialist exporting.
b. lean exporting.
c. long-range exporting.
d. backward exporting.
e. piggyback exporting.

37. One of the most popular forms of cooperative exporting is _________________.
With this method, the company uses the overseas distribution network of another
company (local or foreign) for selling its goods in the foreign market.

a. parallel exporting.
b. venture exporting.
c. piggyback exporting.
d. make-or-buy exporting.
e. foreign export management exporting.

38. One of the main advantages of direct exporting over indirect exporting is that the
exporter has more:

a. leverage.
b. risk.
c. control over its operations.
d. budget.
e. leadership.

39. ___________________ is a contractual strategy where the firm offers some
proprietary assets to a foreign company in exchange for royalty fees.

a. Licensing
b. Parallel exporting
c. Cooperative exporting
d. Direct exporting
e. Indirect exporting

40. The Oriental Land Company in Japan owns Tokyo Disneyland. This would be
an example of an international _________________ agreement between the
Oriental Land Company (owner) and Disneyland (receives royalties).

a. licensing
b. parallel exporting
c. cooperative exporting
d. direct exporting
e. indirect exporting

41. Benefits of licensing include:

a. not very demanding on company resources.
b. always protected against copying or technical theft.
c. always a strong partner relationship.
d. low profits, therefore, low taxes.
e. licensee is always enthusiastic.

42. Nurturing a future competitor is the biggest danger in ___________________.

a. licensing
b. parallel exporting
c. cooperative exporting
d. direct exporting
e. indirect exporting

43. One of the most popular entry modes in the international marketplace for service
firms is:

a. licensing.
b. franchising.
c. cooperative exporting.
d. direct exporting.
e. indirect exporting.

44. According to the textbook, in franchising, companies can capitalize on a _______________________________.

a. cheap business formula.
b. expensive business formula.
c. winning business formula.
d. parallel business formula.
e. hybrid business formula.

45. One of the most popular franchise plans used in international marketing is
____________________ where the franchiser gives the franchise to a local
entrepreneur who in turn sells local franchises within a territory.

a. sales franchise
b. master franchise
c. strategic franchise
d. cross-country franchise
e. border-territory franchise

46. In ____________________, the company arranges with a local manufacturer to
manufacture parts of the product or even the entire product. The marketing of the
product, however, is still the responsibility of the international firm.

a. licensing
b. franchising
c. cooperative exporting
d. contract manufacturing
e. indirect exporting

47. ___________________ are(is) the prime motivation behind contract manufacturing.

a. Advertising cooperation
b. Leadership
c. Cost savings
d. Profit expansion
e. Desire to be part of a cartel

48. Like licensing and franchising, nurturing a future competitor is one of the biggest
dangers in ___________________.

a. contract manufacturing.
b. parallel exporting.
c. cooperative exporting.
d. using an export management company.
e. indirect exporting.

49. In contract manufacturing, because of “nurture-a-future competitor” threat, many
companies prefer to make ___________________ or products that involve
proprietary design features in-house.

a. just-in-time items
b. under-value items
c. low-value items
d. high-value items
e. none of the bove

50. With a __________________, the foreign company agrees to share equity and other
resources with other partners to establish a new entity in the target country.

a. contract manufacturing agreement
b. parallel exporting agreement
c. cooperative exporting agreement
d. export management company
e. joint venture

51. A major advantage of joint ventures, as compared to lesser forms of resource
commitment such as licensing, is:

a. the return potential.
b. infrastructure enhancement.
c. expansion of stockholders.
d. division of leadership.
e. an increase in ethical standards.

52. All of the following are considered benefits of forming joint ventures EXCEPT:

a. greater return potential.
b. shared profits instead of shared royalties.
c. more control over operations.
d. increased cost controls.
e. synergies.

53. With respect to joint ventures, the ________________ argument is illustrated by
not only shared capital and risk but possible contributions brought in by the local
partner in land, raw materials, expertise on the local environment, and access to
local distribution networks.

a. demand
b. parallel management
c. consensus management
d. domestication
e. synergy

54. Lack of trust and mutual conflicts can often turn ______________ into partnerships
doomed to failure.

a. contract manufacturing agreements
b. parallel exporting agreements
c. cooperative exporting agreements
d. export management companies
e. joint ventures

55. One of the problems with joint ventures is ________________ between partners. An
example would be when one partner wants to stress reduction of political and
economic controls on decision-making and the other partner wants to accept
technology and capital but precludes foreign authority infringement on sovereignty
and ideology.

a. conflicting purchasing objectives
b. conflicting process objectives
c. control objectives
d. budget objectives
e. staffing objectives

56. There are no magic ingredients to foster the stability of joint ventures, however, all
of the following are good guidelines EXCEPT:

a. pick a partner with which control can be maintained.
b. pick the right partner.
c. establish clear objectives from the beginning.
d. bridge cultural gaps.
e. get top management commitment and respect.

57. _____________________ come about when multinational companies prefer to enter
new markets with 100 percent ownership.

a. Contract manufacturing agreements
b. Parallel exporting agreements
c. Cooperative exporting agreements
d. Wholly owned subsidiaries
e. Joint ventures

58. When a multinational company chooses to invest in foreign markets with wholly
owned subsidiaries, these subsidiaries may be acquisitions or _______________
operations.

a. joint venture
b. strategic alliance
c. greenfield
d. franchise
e. piggyback

59. A _________________ operation (with respect to wholly owned subsidiaries) is one
which is started from scratch.

a. joint venture
b. strategic alliance
c. greenfield
d. franchise
e. piggyback

60. Wholly owned subsidiaries give MNCs _______________ of their operations.

a. almost no control
b. partial control
c. moderate control
d. full control
e. strategic control only

61. Advantages of wholly owned subsidiaries include all of the following EXCEPT:

a. full control.
b. control of profits.
c. own processes.
d. control government relationships.
e. can often be set quicker that other forms of investment.

62. One of the chief disadvantages of a wholly owned subsidiary is that:

a. it is often perceived as a threat to cultural or economic sovereignty.
b. it is often perceived as generating low profits.
c. it is often perceived as having problems in supply lines.
d. it is often perceived as being more expensive
e. it is often perceived as a threat to the local media for promotion.

63. One way to address hostility to foreign acquisitions in the host country is by
______________ the firm’s presence in the foreign market by hiring local managers,
sourcing locally, and developing local brands.

a. regionalizing
b. localizing
c. socializing
d. acculturating
e. emphasizing the self-reference criterion (SRC)

64. Companies that enter via wholly owned subsidiaries are sometimes perceived as a
threat to the culture and/or economic sovereignty of the____________________.

a. host country.
b. home country.
c. buffer country.
d. greenfield country.
e. high-tech country.

65. The chief reason that some firms choose acquisitions (or mergers) to enter a foreign
market is that they can:

a. receive greater tax relief.
b. receive greater profits.
c. reduce debt.
d. increase stock price.
e. enter the market more quickly.

66. When contrasted with greenfield operations, _________________ provide(s) a rapid
means to get access to the local market.

a. licensing
b. exporting
c. contract manufacturing
d. acquisitions
e. joint ventures

67. __________________ are described as a coalition of two or more organizations to
achieve strategically significant goals that are mutually beneficial.

a. Joint ventures
b. Strategic alliances
c. Greenfield operations
d. Franchises
e. Piggyback arrangements

68. The partnership established by Coca-Cola and Nestle to market ready-to-drink coffees
and teas under the Nescafe and Nestea brand names is an example of which of the
following:

a. strategic alliance.
b. contract manufacturing.
c. licensing.
d. wholly owned subsidiary.
e. exporting.

69. All of the following are illustrations of the four generic reasons for forming
strategic alliances EXCEPT:

a. offense.
b. defense.
c. catch-up.
d. remain.
e. restructure.

70. The underlying goal of _________________ in creating a strategic alliance is to
sustain the firm’s leadership position by learning new skills, getting access to new
markets and developing new technologies.

a. offense
b. defense
c. catch-up
d. remain
e. restructure

71. The strategic alliance strategy of ______________ might be enacted when the firm
has an established leadership position but that only plays a peripheral role in the
company’s business portfolio.

a. offense
b. defense
c. catch-up
d. remain
e. restructure

72. When a firm uses a strategic alliance as a vehicle to rejuvenate a business that is
not core and in which it has no leadership position, it is probably using a
________________ strategy.

a. defend
b. catch up
c. restructure
d. remain
e. none of the above

73. Decisions to exit or divest a foreign market may have all the following reasons
EXCEPT:

a. sustained losses.
b. volatility.
c. premature entry.
d. ethical reasons.
e. new market.

74. Risks of exiting a foreign market may lead to all the following EXCEPT:

a. fixed costs of exit.
b. disposition of assets.
c. short-term opportunities.
d. signal to other markets.
e. long-term opportunities.

True/False Short Answer

75. The first step in the process of entering a foreign market is to decide on the
_____________________.

76. Preliminary screening is an accepted method of reducing the number of candidates
for market entry.

77. As an example of a preliminary screening process in assessing international market
opportunities, Colgate-Palmolive uses assessments of whether people bath regularly
or not as a critical factor in deciding whether to enter a market or not.

78. To identify market opportunities for a given product (or service), the international
marketer usually starts off with a large pool of candidate cities.

79. Colgate-Palmolive views per capita purchasing power as a major driver
behind market opportunities.

80. _________________ countries (with respect to market attractiveness) can be used to
gather intelligence and establish a network.

81. An example of a platform country is India.

82. An example of a growth country is China.

83. An example of an emerging country (with respect to market attractiveness) is
the Philippines.

84. Corporate objectives have no influence in choosing entry modes.

85. From the transaction cost analysis, market failure typically happens when
transaction-specific assets become valuable.

86. When going abroad most companies start their international expansion with
_______________.

87. Piggyback exporting is when two different transportation modes (such as truck and
rail) are combined.

88. Under ___________ exporting, a firm sets up its own export department and sells its
products via a middleman located in the foreign market.

89. In a master franchise, the franchiser gives a master franchise to a local entrepreneur,
who will, in turn, sell local franchises within a territory.

90. Contract manufacturing is also known as outsourcing.

91. In a cooperative joint venture, the partners agree to raise capital in proportion to the equity stakes agreed upon.

92. Ownership strategies in foreign markets can take two forms: acquisitions and
____________________.

93. There four generic reasons for forming strategic alliances are defense, catch-up,
remain, and __________________.

94. Strategic alliances between strong and weak partners often work because of the
synergy and learning that can take place between mentor and subordinate.

95. Stable alliances have the commitment and support of the top of the parents’
organizations.

96. Exiting a country often involves substantial fixed cost.

Essay

97. List the steps in the global market entry decision process. Which of the steps is probably the most important in the overall success of the foreign venture? Justify your answer.

98. Explain what is meant by the concept of a liaison office and why some firms prefer to use this technique to enter markets.

99. Briefly, explain the concept of licensing in a foreign market. In addition, cite the benefits and drawbacks of licensing. Be specific in your responses.

100. Briefly explain the concept of joint venture. Additionally, give the benefits and drawbacks of entering into a joint venture.

101. Provide an assessment of strategic alliances. What are they used for, what are the characteristics of those that generally succeed, and what are the general types? Be sure to be specific in your answers.

Chapter 10

Multiple Choice

1. Ikea, the Swedish furniture chain, insists that all its stores carry the basic product
line with little room for adaptation to local tastes. If research of the U.S. market
showed that Americans preferred larger beds than their Swedish counterparts, which
of the following strategies would be advisable to Ikea?

a. standardization.
b. new product development.
c. adaptation.
d. withdraw from market.
e. lower prices to encourage attitude change.

2. In the Australian market, rather than manufacturing disposable diapers, Procter & Gamble decided to import them since the size of the market did not warrant local
manufacturing according to P&G. Unfortunately, by using packaging designed for the Asian region with non-English labeling, P&G alienated its customers in Australia. This is an example of improper:

a. global policy decisions.
b. pricing decisions.
c. brand policy decisions.
d. product policy decisions.
e. company policy decisions.

3. Even though other combination alternatives can be devised, companies generally can
pursue three global product strategies to penetrate foreign markets. These strategies
are to extend the home-grown product/communication strategies, adapt their strategy
to the local marketplace, and:

a. invent new products for foreign customers.
b. concentrate on services.
c. apply for permission to copy domestic products.
d. concentrate on image adjustment.
e. focus on secondary issues (such as warranties).

4. In the area of global product policy, companies can pursue three strategies to penetrate
foreign markets. The strategies include:

a. extension, adaptation, and invention.
b. extension, adaptation, and prevention.
c. extension, adaptation, and creation.
d. extension, adaptation, and placement.
e. extension, adaptation, and balancing.

5. Which of the following is NOT one of the strategic options available to the marketing
planner, considering various product policies that could be devised for the
international marketplace?

a. product and communication extension–dual extension.
b. communication extension–mono extension.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

6. If a company were to follow a strategy of product and communication extension
(dual extension) in a foreign market, an example of a product category that would
fit this strategy would be _________________________.

a. personal care items
b. motorscooters
c. gasoline
d. clothing
e. hand-powered washing machines

7. If a company were to follow a strategy of product adaptation-communications
extension in a foreign market, an example of a product category that would
fit this strategy would be __________________.

a. soft drinks
b. motorscooters
c. shampoo
d. clothing
e. hand-powered washing machines

8. If a company were to follow a strategy of product extension-communications
adaptation in a foreign market, an example of a product category that would
fit this strategy would be __________________.

a. soft drinks
b. gum
c. shampoo
d. clothing
e. hand-powered washing machines

9. If a company were to follow a strategy of product and communications
adaptation (dual adaptation) in a foreign market, an example of a product category that
would fit this strategy would be __________________.

a. soft drinks
b. motorscooters
c. gasoline
d. diet aids
e. hand-powered washing machines

10. If a company is an early entrant in the global arena and possesses little
in the way of resources, they will probably chose _____________________ as a
method of entry.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

11. As a strategy, ____________________ will work when the company targets a
“global” segment with similar needs.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

12. The biggest advantage of a product and communication extension–dual extension
policy is:

a. it is easy for management to understand.
b. it offers substantial savings because of economies of scale.
c. it passes most legal tests.
d. it is service oriented.
e. it will usually not violate cultural taboos.

13. Due to differences in the cultural or competitive environment, a company may choose
the _______________________ strategy if it wishes to keep its product economies
scale intact but customize its communications.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

14. When the Wrigley chewing gum company markets its basic products abroad, it keeps
its well-known brands but customizes promotional approaches in individual
countries. Which of the following strategies best describes the strategy that
Wrigley is following?

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

15. Many companies add brands to their portfolio via acquisitions of local companies.
When the local brand is retained but incorporated into the existing communications
strategy, the strategy can be described as being one of:

a. product and communication extension–dual extension.
b. product invention.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

16. Differences in both the cultural and physical environment across countries call for a
_________________________ strategy.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

17. Because of differences in preferences in flavors and government regulations
regarding the marketing of diet products, Slim-Fast normally uses which of the
following strategies?

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

18. Genuinely global marketers try to figure out how to create products with a global
scope rather than just for a single country. The mindset is to zero in on global
opportunities. The strategy that best describes this approach is called:

a. product and communication extension–dual extension.
b. product invention.
c. product extension–communications adaptation.
d. product adaptation–communications extension.
e. product and communications adaptation–dual adaptation.

19. Black & Decker is a good example of a company that adopts the _______________
approach to global expansion. The company aims to bring out new products that
cater to common needs and opportunities around the world.

a. product and communication extension–dual extension
b. product invention
c. product extension–communications adaptation
d. product adaptation–communications extension
e. product and communications adaptation–dual adaptation

20. __________________ means offering a uniform product on a regional or
worldwide basis (only minor alterations are made to meet local standards).

a. Customization
b. Standardization
c. Miniaturization
d. Assimilation
e. Marginalization

21. The primary advantage to using a standardization approach to marketing a product
in the international arena is:

a. minimization of costs (which can be passed on to customers).
b. more profit.
c. less service complaints.
d. less product returns.
e. standard budgets.

22. Standardization of product has a __________________ orientation (lower costs via
mass production).

a. market-driven
b. service-driven
c. budget-driven
d. promotion-driven
e. product-driven

23. ____________________ is leveraging cross-border differences in needs and wants
of the firm’s target customers.

a. Customization
b. Standardization
c. Proliferation
d. Expansion
e. Synthesizing

24. Customization of product has a ______________________ orientation (increase
customer satisfaction by adapting products to the local needs).

a. market-driven
b. service-driven
c. budget-driven
d. promotion-driven
e. product-driven

25. All of the following are factors that favor a globalized product strategy EXCEPT:

a. common customer needs.
b. global customers.
c. scale economies.
d. time-to-market.
e. rising strength of the Latin American markets.

26. Many product categories show a gradual but steady ____________________
in consumer preferences.

a. slowdown.
b. difficulties
c. convergence.
d. divergence.
e. rising strength of the Latin American markets.

27. During the last decade, car buyers in the Triad markets (Japan, the United States, and
Europe) have increasingly begun to have the same outlook and preferences in cars.
Which of the following factors that favor globalization of product, would most
accurately be associated with this trend?

a. common customer needs.
b. global customers.
c. scale economies.
d. time-to-market.
e. Europe 1992 and other Regional Market Agreements.

28. _____________________ means shortening the time to bring new product projects to
the market.

a. Delivery-to-market
b. Orientation-to-market
c. Time-to-market
d. Extension-to-market
e. Perfection-to-market

29. One attempt to combine the strengths of standardization and customization of
products is to deal with both issues as functions of product design. The
_______________ approach consists of developing a range of product parts that
can be used worldwide. The parts can be assembled into numerous product
configurations.

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. Nexus

30. In a ______________________, scale economies flow from the mass production of
more-or-less standard product components at a few manufacturing sites.

a. convergence approach
b. divergence
c. linear approach
d. forecasting approach
e. modular approach

31. One attempt to combine the strengths of standardization and customization of
products is to deal with both issues as functions of product design. The
_______________ approach consists of developing a mostly uniform core-
product/platform and then adding attachments that match local market needs.

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. PRIZM

32. With respect to product design strategies, the ___________________ approach is
very popular with the French carmaker Renault. They use common core-products
but customize them in each market (such as making stronger heaters for the Nordic
market).

a. core-product
b. uniform commercial code
c. die-casting
d. modular
e. PRIZM

33. One of the disadvantages that a global marketer may have is ___________________.
This would occur when too much standardization stifles initiative and experimentation
at the local level.

a. overcustomization
b. micro-managing
c. technocracy
d. group think
e. overstandardization

34. One of the pitfalls that a global marketer can run into is _____________. This
would occur when too much adaptation to the local market occurs and the brand
becomes vulnerable to losing its unique foreigness.

a. overcustomization
b. micro-managing
c. technocracy
d. group think
e. overstandardization

35. Adoption rates of new products are affected by:
a. population homogeneity
b. proportion of women in the labor force
c. cosmopolitanism
d. mobility
e. all of the above

36. In general, the rate of adoption of new products (in foreign markets) is driven by
individual differences, personal influences, and:

a. fashion.
b. trends.
c. cash on hand.
d. product characteristics.
e. promotion characteristics.

37. In general, the adoption of new products is driven by factors such as:

a. individual differences.
b. personal influences.
c. product characteristics.
d. all of the above.
e. none of the above.

38. ___________________ are always eager to experiment with new ideas and products.

a. Early adopters.
b. Early majority.
c. Late majority.
d. Laggards.
e. Prior adopters.

39. Which of the following would NOT be one of the five key product characteristics
that contribute to its acceptance?

a. low service maintenance.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

40. To what extent does the new product offer more perceived value to potential adopters
than exiting alternatives, would be a question that best fits with which of the following
key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

41. Is the product consistent with exiting values and attitudes of the individuals in the
social system, would be a question that best fits with which of the following
key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

42. Is the product easy to understand or use, would be a question that best fits with which
of the following key product characteristics acceptance categories?

a. observability.
b. relative advantage.
c. compatibility.
d. complexity.
e. trialability.

43. The adoption rate for new products in countries with a ________________
population is usually faster than in countries with a highly diverse culture.

a. heterogeneous
b. complex
c. diverse
d. homogeneous
e. polycentric

44. The adoption rate for a new product in countries with a homogeneous population
is usually faster than in countries with a highly diverse culture. Which of the
following countries would probably have the fastest adoption based on the
information provided above?

a. Ireland.
b. United States.
c. Japan.
d. United Kingdom.
e. France.

45. With respect to adoption rates in the international marketplace, it appears to be
generally true that adoption rates are higher in ______________ countries than in
____________ countries.

a. lead/lag
b. lag/lead
c. lead/middle adopters
d. lag/middle adopters
e. lead/opinion-lead

46. A _________________ country is where a product is first introduced.

a. lag
b. low-profile
c. lead
d. high-profile
e. fast

47. A _________________ country is where a product is entered after initial introduction
has taken place.

a. lag
b. low-profile
c. lead
d. high-profile
e. fast

48. _______________________ are people who look beyond their immediate social
surroundings and are not local in their opinions.

a. Domestics
b. Introverts
c. Negotiators
d. Cosmopolitans
e. Regionalists

49. All of the following are factors that affect product penetration in the European market
(according to a recent survey), EXCEPT:

a. cosmopolitanism.
b. number of locals in the market.
c. mobility.
d. percentage of children in the labor force.
e. percentage of women in the labor force.

50. A recent study examined the difference of six products in 31 developing and
developed countries across the world. A key finding was that ___________________
tend to experience a far slower adoption rate than developed countries.

a. European countries
b. global countries
c. advanced countries
d. developed countries
e. emerging market countries

51. All of the following are steps in the new product development process EXCEPT:

a. identification of new product ideas.
b. budget development.
c. screening.
d. concept testing.
e. test marketing.

52. Which of the following are among the best sources for finding new product ideas?

a. company, customers, competition, and collaborators.
b. trade magazines, television, and the internet.
c. government statistics, demographic charts, and psychological profiles.
d. reverse engineering, industrial spying, and out-of-date patents.
e. rumors, stories, and intuition.

53. Once new product ideas have been identified, the next logical step is to have
the ideas _______________.

a. modeled
b. budgeted
c. screened
d. concept tested
e. test marketed

54. ______________ is part of a formal scoring model in screening new products.

a. New Prod
b. ExProd
c. YProd
d. ZProd
e. none of the above

55. Conjoint analysis is also referred to as _____________________.

a. geometric analysis
b. trade-off analysis
c. meta analysis
d. longitudinal analysis
e. metric analysis

56. A sophisticated method (sometimes called trade-off analysis) for measuring
consumer preferences for product concepts is called:

a. chi-square.
b. correlation analysis.
c. focus groups.
d. regression analysis.
e. conjoint analysis.

57. The starting premise of _______________ is that people make trade-offs between
the different product attributes when they evaluate alternatives (or brands) from
which they pick a choice.

a. chi-square
b. correlation analysis
c. focus groups
d. regression analysis
e. conjoint analysis

58. If a consumer considered four attributes to be important in the purchase of a TV, by
using ________________ the researcher might be able to determine the trade-offs
between the different product attributes (such as purchase price or number of channels
that could be received) when the consumer evaluated the alternatives for eventual
purchase.

a. chi-square
b. correlation analysis
c. focus groups
d. regression analysis
e. conjoint analysis

59. A(n) ________________ is essentially a field experiment where the new product is
marketed in a select set of cities to assess its sales potential and scores of other
performance measures.

a. attitude screen
b. product model
c. product concept
d. test market
e. focus concept

60. Testing objectives, testing marketing mixes, making projections of sales volume,
and analyzing potential competitive marketing mixes are all reasons to conduct:

a. attitude screens.
b. product models.
c. product concepts.
d. test markets.
e. focus concepts.

61. One alternative to the test market is the _____________________.

a. thought panel
b. laboratory test market
c. internet exposure technique
d. preferred patron experiment
e. use of break-even analysis

62. If prospective customers are contacted and shown commercials for the new
product and existing brands (then asked to state attitudes and preferences of what
they have seen), then the marketing research entity will probably have conducted
a(n) __________________ instead of a full test market.

a. thought panel
b. laboratory test market
c. internet exposure technique
d. preferred patron experiment
e. break-even analysis

63. A common technique to avoid a global test market is to make global sales projections
based on product performance in a ________________ market.

a. lag
b. middle adopter
c. lead
d. opinionated
e. innovative

64. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________ where there is a phased rollout. In this
approach the product uses a trickle down approach.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

65. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________. This method often involves introducing
the new product in the company’s home market and then moving to other advanced
markets. Finally, less advanced markets are exposed to the product.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

66. The prime motive for the waterfall model (in introducing new products on a global
scale) is that the customization of the product for the foreign market is:
a. impractical.
b. very expensive.
c. time consuming.
d. promotionally limited.
e. not supported by top management.

67. Timing is a very important element in any new product launch. One of the strategies
is described as being the ________________ where there is a simultaneous
introduction of products in other markets of the world.

a. sprinkler method
b. shotgun method
c. rifle method
d. dribble method
e. waterfall method

68. A phased rollout is less demanding on the company resources whereas
____________________ are not always acceptable.

a. sprinkler rollouts
b. shotgun rollouts
c. staggered rollouts
d. dribble rollouts
e. waterfall rollouts

69. The chief reason for a company choosing the sprinkler method of new product
introduction is to off-set:

a. rising costs.
b. unstable labor.
c. competitive preemption.
d. government control.
e. shoddy promotions.

70. The waterfall strategy of sequential entry is preferable over the sprinkler model
when all of the following conditions exist EXCEPT:

a. the lifecycle of the product is relatively long.
b. high costs of entry are present.
c. very weak local competitors.
d. anticipation of fast growth.
e. no real competitors.

71. The waterfall strategy of sequential entry is preferable over the sprinkler model
when:

a. the lifecycle of the product is relatively short.
b. there are low costs of entry into the market.
c. there are many competitors.
d. there are weak local competitors.
e. fast growth is anticipated.

72. The sprinkler strategy of one to two entries (globally) is preferable over the
waterfall model when all of the following conditions exist EXCEPT:

a. the lifecycle of the product is relatively short.
b. there are low costs of entry into the market.
c. there are many competitors.
d. very weak local competitors.
e. anticipation of fast growth.

73. The sprinkler strategy of one to two entries (globally) is preferable over the
waterfall model when:

a. the lifecycle of the product is relatively long.
b. high costs of entry are present.
c. very weak local competitors exist.
d. fast growth is anticipated.
e. no real competitors exist.

74. Truly global innovators are called:

a. metanational innovators.
b. delta innovators.
c. beta innovators.
d. gamma innovators.
e. none of the above.

75. To harvest the benefits of metanational innovators, a company must pursue three
things:

a. Prospecting, assessing, and mobilizing.
b. Prospecting, assessing, and delivering.
c. Prospecting, assessing, and running.
d. Prospecting, assessing, and planning.
e. none of the above.

True/False Short Answer

76. Companies can pursue three global strategies to penetrate foreign markets. The
strategies are: extension, adaptation, and___________________.

77. Early market entrants often choose dual extension (product and communication
extension) as a strategy to enter markets with new products.

78. The biggest savings to the company when following a strategy of dual extension
is in economies of scale.

79. Because of their universally known products, the Wrigley chewing gum company can
use product adaptation-communications extension strategies effectively.

80. Local market circumstances do not favor the case of product adaptation.

81. Many companies add brands to their product portfolio via acquisitions of local brands.

82. Differences in both the cultural and physical environment across countries call for
a ________________________ strategy.

83. _________________ means offering a uniform product on a regional or worldwide
basis.

84. The goal of standardization is to minimize competition.

85. ____________________ leverages cross-border differences in needs and wants of
the firm’s target customers.

86. Five forces favor a globalized product strategy. These include: common customer
needs, global customers, scale economies, time to market, and__________________.

87. Overstandardization is a risk of the core-product approach to introducing new
products in the world market.

88. In general, the adoption of new products is driven by individual differences, personal
influences, and product characteristics.

89. With respect to categories of consumers that adopt new products, the __________
category is eager to experiment with new ideas or products.

90. The lead country is where the product is introduced first.

91. In marketing, new product ideas do not come from the company, customers,
competition, and collaborators.

92. In these days, many MNCs create organizational structures to foster global product
development.

93. Conjoint analysis is also called tradeoff analysis.

94. In the area of a global product launch strategy, two strategic options available are:
waterfall strategy and _________________________.

95. The waterfall model is also called staggered roll-out.

96. A truly global innovators are called metanational innovators.

Essay

97. List the strategic options available to the firm considering global expansion in the product area. Detail the conditions that make the strategic option favorable. Be sure to detail your answer.

98. List the forces that now favor a globalized product design strategy.

99. There are strategic options that allow firms to modify their product while keeping most of the benefits of following a uniform product policy. Explain the differences between the modular and core-product approaches.

100. Test marketing is considered a critical step in new product development in most Western countries. Comment on test marketing. Also, outline some of the shortcomings of test marketing?

101. In marketing, timing is crucial. In new product development it might be even more crucial given the risk of the venture. Explain the waterfall and sprinkler approaches to introducing a new product to the market. When is the waterfall method preferred over the sprinkler method? Be sure to be specific as to your comments on these two strategic options.

Chapter 11

Multiple Choice

1. The German company Henkel is always customizing its brand portfolio, positioning, and product formulations. The two main challenges that the company faces are:

a. global brand and beta line management.
b. global brand and quality line management.
c. global brand and modular line management.
d. global brand and hybrid line management.
e. global brand and product line management.

Difficulty: (3) Knowledge: (A) Page: 361

2. A ____________ is a name, term, sign, symbol, or combination of them which is
intended to identify the goods and services of one seller or group of sellers and to
differentiate them from those of competitors.

a. trademark
b. patent
c. signature
d. figure
e. brand

Difficulty: (1) Knowledge: (F) Page: 362

3. Linked to the brand name is a collection of assets and liabilities called ____________.

a. the trademark
b. the patent
c. knowledge
d. proprietary investments
e. brand equity

Difficulty: (2) Knowledge: (F) Page: 362

4. Brand-name awareness, perceived quality, and other associations invoked by the
brand name in the customer’s mind are all illustrations of the concept called
_______________.

a. brand color
b. brand equity
c. brand warranty
d. local brand value
e. brand mark

Difficulty: (3) Knowledge: (F) Page: 362

5. “How do we strike a balance between a global brand that shuns cultural barriers and
one that allows for local requirements” is an illustration of a question that needs to be
asked when building up and managing _________________ in a multinational setting.

a. proprietary investments
b. brand equity
c. brand warranty
d. local brand name
e. brand mark

Difficulty: (3) Knowledge: (A) Page: 362

6. All of the following are questions that must be asked when building up and managing
brand equity in a multinational setting EXCEPT:

a. How do we strike a balance between a global brand that shuns cultural barriers and
one that allows for local requirements?
b. What aspects of service are too expensive to be included in the brand warranty?
c. What aspects of brand policy can be adapted to global use?
d. Which brands are destined to become “global” mega-brands?
e. How do you execute the changeover from a local to a global brand?

Difficulty: (3) Knowledge: (F) Page: 362

7. A key strategic issue that appears on international marketers’ agendas is whether there should be a ________________________.

a. national brand
b. country brand
c. regional brand
d. local brand
e. global brand

Difficulty: (1) Knowledge: (F) Page: 362

8. A truly ________________ is one that has a consistent identity with consumers across
the world.

a. private brand
b. public brand
c. global brand
d. local brand
e. government brand

Difficulty: (2) Knowledge: (A) Page: 362

9. The most obvious reason for having a global brand would be to take advantage of:

a. power promotions.
b. a large labor and selling force.
c. economies of scale.
d. coordinated logistics.
e. corporate vision.

Difficulty: (1) Knowledge: (F) Page: 363

10. In 2008, which of the following brands was ranked the number one brand in the
world?

a. Disney
b. Coca-Cola
c. GE
d. Nokia
e. IBM

Difficulty: (2) Knowledge: (A) Page: 363, Exhibit 11-1

11. In 2008, which of the following auto brands was ranked number one in the global
auto industry?

a. BMW
b. Mercedes
c. GM
d. Ford
e. Toyota

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1

12. In 2008, which of the following brands was ranked number one in the world among
the high-tech companies?

a. Microsoft.
b. IBM.
c. Intel.
d. Hewlett Packard.
e. Dell.

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1
13. Marlboro quickly became the leading cigarette brand in Hong Kong when it
positioned itself as being the leading brand in the United States. This strategy is
attributed to Marlboro as being a:

a. global brand.
b. geo brand.
c. regional brand.
d. country brand.
e. local brand.

Difficulty: (1) Knowledge: (A) Page: 364

14. A desire to reflect its American roots motivated Disney to change the name for its
Paris themepark from Euro Disney to __________________.

a. Disneyland Village
b. Disneyland Park
c. Disneyland Paris
d. Disneyland Europe
e. Disneyland France

Difficulty: (2) Knowledge: (F) Page: 364

15. Brand equity for global brands varies greatly from country to country. All of the
following factors contribute to the variation EXCEPT:

a. competitive climate.
b. marketing support.
c. cultural receptivity to brands.
d. literacy.
e. product category penetration.

Difficulty: (2) Knowledge: (F) Pages: 365-66

16. Brand equity for global brands varies greatly from country to country. All of the
following factors contribute to the variation EXCEPT:

a. history.
b. competitive climate.
c. marketing support.
d. cultural receptivity to brands.
e. brand equity scale.

Difficulty: (3) Knowledge: (F) Pages: 365-66

17. ____________________ often justify(ies) local branding instead of global branding.

a. Domestic barriers
b. Regulatory barriers
c. Cultural barriers
d. Social barriers
e. Religious barriers

Difficulty: (3) Knowledge: (A) Page: 366

18. Mecca Cola is a new soft drink that was launched by a ____________________
entrepreneur to cash in on anti-America sentiments in Europe.

a. Irish
b. English
c. Dutch
d. German
e. French

Difficulty: (3) Knowledge: (F) Page: 367

19. The following four branding strategies are available to markets EXCEPT:

a. solo branding.
b. hallmark branding.
c. family(umbrella) branding.
d. Extension branding.
e. horizontal branding.

Difficulty: (2) Knowledge: (A) Pages: 367-68

20. In international marketing, a firm’s global brand structure is shaped by the following
three types of factors:

a. firm-based drivers, product-market derivers, and the manufacturing dynamics.
b. firm-based drivers, hi-tech derivers, and Web dynamics.
c. firm-based drivers, product-market derivers, and market dynamics.
d. firm-based drivers, product-market derivers, Internet dynamics.
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 368

21. Brand architecture guides the dynamics of the firm’s brand __________________:

a. portfolio.
b. color.
c. basket.
d. Web
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 368

22. According to Nestle’s Branding Tree, the company has four types of brands in its
global operations EXCEPT:

a. plain brands.
b. local brands.
c. regional brands.
d. worldwide strategic brands.
e. worldwide corporate brands.

Difficulty: (3) Knowledge: (A) Page: 370, Exhibit 11-4

23. With respect to a brand name changeover strategy, the _________________ strategy
ties the new global brand name to the existing local brand name. After a transition
period, the old name is dropped.

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (1) Knowledge: (F) Page: 371

24. Euro Disney eventually becoming Disneyland is an example:

a. transparent forewarning.
b. summary axing.
c. fade-in/fade-out.
d. pyramid focusing.
e. parallel dimension.

Difficulty: (2) Knowledge: (A) Page: 371

25. With respect to a brand name changeover strategy, the _________________ strategy
alerts customers about the brand name change (via communications such as in-store
displays).

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (2) Knowledge: (F) Page: 371

26. When Mars candy company took over Raider candy products and used the theme
line “Now Raider becomes Twix, for it is Twix everywhere in the world,” the
company used the ________________________ strategy for changing brand names.

a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (3) Knowledge: (A) Page: 372

27. With respect to a brand name changeover strategy, the __________________ strategy
where the company simply drops the old brand name and immediately replaces it
with the global name.
a. transparent forewarning
b. summary axing
c. fade-in/fade-out
d. pyramid focusing
e. parallel dimension

Difficulty: (2) Knowledge: (F) Page: 372

28. Global product line mix options could be:

a. an extension of the home country product line
b. a subset of the home country product line
c. a mix of local and home country
d. localized only
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 374

29. _________________ is a system where a single banner brand is used worldwide,
often with a sub-brand name, for almost the entire product mix of the company.

a. Domestic branding
b. National branding
c. Manufacturer’s branding
d. Store branding or private labeling
e. Umbrella (corporate) branding

Difficulty: (2) Knowledge: (F) Page: 367

30. All of the following are brand areas that might need protection EXCEPT:

a. the name itself.
b. the slogan.
c. the jingle.
d. visual imagery.
e. the size of the logo.

Difficulty: (1) Knowledge: (F) Page: 378

31. McDonald’s golden arches are part of the famous brand. Which of the following
elements best describes that element of the brand that should be protected (according
to the example provided)?

a. the name itself.
b. the slogan.
c. the jingle.
d. visual imagery.
e. the size of the logo.

Difficulty: (1) Knowledge: (A) Page: 378

32. Most companies sell a wide assortment of products. The assortment is usually
described on the dimensions of ______________________ of the product mix.

a. width and scale
b. width and timing
c. width and ingredients
d. width and length
e. scale and length

Difficulty: (1) Knowledge: (F) Page: 374

33. The ______________ of the product assortment refers to the collection of different
product lines marketed by the firm.

a. length
b. width
c. horizontal scale
d. vertical scale
e. consistency

Difficulty: (2) Knowledge: (F) Page: 374

34. The ______________ of the product assortment refers to the number of items that
the company sells within a given product line.

a. length
b. width
c. horizontal scale
d. vertical scale
e. consistency

Difficulty: (2) Knowledge: (F) Page: 374

35. When comparing the product mix in the company’s host and home markets, all of
the following are possible scenarios EXCEPT:

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (2) Knowledge: (F) Page: 374

36. Small firms with narrow product assortment will normally choose which of the
following strategies when attempting to enter an international market?

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (2) Knowledge: (A) Page: 374

37. Blistex, a tiny U.S. company that makes primarily lip-care products, has a very
limited range of product lines that are marketed to foreign markets. Blistex would
probably choose which of the following strategies for entering foreign markets?

a. an extension of the domestic line.
b. an extension of a joint venture or strategic alliance.
c. a subset of the home market’s product line.
d. a mixture of local and nonlocal product lines.
e. a completely localized product line.

Difficulty: (3) Knowledge: (A) Page: 374

38. All of the following are drivers that impact the composition of a firm’s international
product line EXCEPT:

a. customer service and warranty requirements.
b. customer preferences.
c. competitive climate.
d. organizational structure.
e. history.

Difficulty: (3) Knowledge: (F) Pages: 374-77

39. The __________________ procedure uses a product line as a listening post for the
new foreign market to see what product items work best.

a. drop/add matrix
b. ship and shop approach
c. probing and learning approach
d. seal and deal approach
e. push down approach

Difficulty: (2) Knowledge: (F) Page: 378

40. Product lines can be categorized as:

a. Core product, niche items, seasonal products, and filler products
b. Core product, niche items, seasonal products, and filter products
c. Core product, niche items, seasonal products, and final products
d. Core product, niche items, seasonal products, and flimsy products
e. None of the above

Difficulty: (3) Knowledge: (F) Page: 378

41. A good place to start is to analyze each individual country’s product portfolio on the
basis of a sales turnover basis. Product lines can be categorized by all the following
ways EXCEPT:

a. core products.
b. cultural products.
c. niche items.
d. seasonal products.
e. filler products.

Difficulty: (2) Knowledge: (F) Page: 378

42. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the item represents the bulk of the subsidiary’s
sales volume.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

43. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product appeals to a small segment of the
population (which might grow in time).

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (2) Knowledge: (F) Page: 378

44. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product has most of its sales during limited
times during the year.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

45. With respect to product categories analyzed on the basis of sales turnover, a
_____________ product is one where the product is only a small portion of the
subsidiary’s overall sales. These even might be “dead-weight” items.

a. core product
b. cultural product
c. niche item
d. seasonal product
e. filler product

Difficulty: (1) Knowledge: (F) Page: 378

46. Brand piracy might cause which outcomes?

a. revenue losses to the company
b. price increases by the MNC to identify the goods as genuine
c. better diffusion of the brand
d. consumer danger from poor quality fakes
e. both A and D

Difficulty: (2) Knowledge: (F) Pages: 378-79

47. All of the following are strategic options available to international marketers to stop
product piracy EXCEPT:

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (F) Pages: 380-82

48. Pirated products tend to be of ______________ quality.

a. good
b. poor
c. high
d. special
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 379

49. Trying to obtain sanctions against countries that tolerate product piracy would be an
example of which of the following strategic options available to international
marketers trying to stop product piracy?

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 380

50. Intellectual property rights violations have been a major problem in China.
Which of the following strategic options could be available to international marketers
in the area of product piracy?

a. customs.
b. lobbying activities.
c. legal action.
d. product policy options.
e. all of the above.

Difficulty: (3) Knowledge: (A) Page: 380

51. LVMH, the owner of wide variety of upscale liquor brands, redesigned its bottles to
make it more difficult for copycatters to reuse LVMH bottles for their own brews.
This would be an example of which of the following strategic options in product
piracy:

a. product policy options.
b. lobbying activities.
c. legal action.
d. hybrid options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 381

52. Yamaha decided to combat China’s counterfeiters by launching new motorcycle
models at a similar price as fake products. This would be an example of which of the
following strategic options in product piracy:

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (2) Knowledge: (A) Page: 381

53. When international marketers warn consumers about the ramifications of accepting or
buying counterfeit merchandise, this would be an example of which of the following
strategic options available to international marketers trying to stop product piracy?

a. joint ventures.
b. lobbying activities.
c. legal action.
d. product policy options.
e. communication options.

Difficulty: (1) Knowledge: (A) Page: 382

54. Holding cultural stereotypes about countries as an important source in assessing the
value of a product is an example of:

a. the country of origin (COO) effect.
b. nationalism.
c. racial bias.
d. social sensitivity.
e. xenophobia.

Difficulty: (3) Knowledge: (A) Page: 383

55. The “Made In” label as an important source of assessing the value of a product is an
example of:

a. regionalism
b. nationalism.
c. materialism
d. social sensitivity.
e. the country of origin (COO) effect.

Difficulty: (1) Knowledge: (A) Page: 383

56. Find the general statement about the country of origin (COO) effect listed below that
is NOT true.

a. COO effects are not flexible.
b. consumers prefer domestic products over imports.
c. the critical factor appears to be the place of manufacture rather than the location of
the company’s headquarters.
d. COO effects do not change very much over time.
e. demographics make a difference.

Difficulty: (2) Knowledge: (F) Pages: 383-84

57. All of the following statements about the country of origin effect (COO) are true
EXCEPT:

a. COO effects are restricted to Europe.
b. Asian consumers prefer domestic products over imports.
c. the critical factor appears to be the place of manufacture rather than the location of
the company’s headquarters.
d. COO effects do not change very much over time.
e. psychographics make a difference.

Difficulty: (2) Knowledge: (F) Pages: 383-84

58. If the country of origin (COO) effect is anticipated to be negative, a company can
follow all of the following strategies to offset the effect EXCEPT:

a. select a brand name that disguises the country of origin.
b. select a local brand name.
c. select a high prestigious price.
d. try to explain any negative government policy that might influence buyers.
e. select a relatively low price.
385-86-48

59. One of the major challenges faced by international marketers of services is:

a. protectionism.
b. high costs.
c. patent infringement.
d. piracy.
e. low profits.

Difficulty: (2) Knowledge: (F) Page: 386

60. The need for direct customer interface in providing services means that service
providers must often have ____________________.

a. a warranty
b. a command of the local language
c. a local presence
d. low profit expectation
e. an inside government contact

Difficulty: (2) Knowledge: (F) Page: 386

61. Regarding opportunities in the global service industries, some of the _________
rules have been extended to the international services trade under the new WTO regime.

a. World Bank
b. International Monetary Fund
c. United Nations
d. GATT (General Agreements on Tariffs and Trade)
e. none of the above

Difficulty: (3) Knowledge: (A) Page: 386

62. A major strength of global service firms is that their _________________.

a. local know-how
b. global know-how
c. regional know-how
d. high-tech know-how
e. political know-how

Difficulty: (1) Knowledge: (A) Page: 388

63. Global service firms often benefits from:

a. scale economies.
b. weight economies.
c. hybrid economies.
d. perfect economies.
e. visible economies.

Difficulty: (2) Knowledge: (A) Page: 388

64. To bridge cultural gaps between the home and host market, service companies often
customize the product to the local market. This can be done by spotting
_________________________.

a. environmental opportunities
b. funding opportunities
c. regional opportunities
d. cultural opportunities
e. political opportunities

Difficulty: (3) Knowledge: (A) Page: 388

True/False Short Answer

65. A ______________ is a name, term, sign, symbol, or combination of them which is
intended to identify the goods and services of one seller or group of sellers and to
differentiate them from those of competitors.

66. Brand name awareness, perceived quality, and other associations invoked by the
brand name in the customer’s mind can be described as being part of brand
equity.

67. A good example of a global brand name is Microsoft.

68. One of the chief reasons for having a global brand is economies of scale.

69. The number one brand in the world in market value is IBM.

Difficulty: (1) Knowledge: (A) Page: 363, Exhibit 11-1

70. Interbrand’s most valuable brands list is dominated by American brands.

Difficulty: (2) Knowledge: (F) Page: 363, Exhibit 11-1

71. One of the reasons for pursuing a global brand as part of product policy is what might be called a prestige factor.

Difficulty: (1) Knowledge: (F) Page: 364

72. Euro Disney changed its name to Disneyland Europe.

Difficulty: (2) Knowledge: (A) Page: 364

73. Brand equity is usually consistent from country to country.

Difficulty: (2) Knowledge: (F) Page: 365

74. In solo branding, each brand stands on its own with a product or brand manager
running it.

Difficulty: (1) Knowledge: (A) Page: 367

75. Family (umbrella) branding is a not hierarchy of brands that may use the company’s
corporate brand.

Difficulty: (2) Knowledge: (F) Page: 367

76. With respect to brand name changeover strategies, a ____________ strategy consists
of somehow tying the global brand name to the local name. Eventually, the local
brand is phased out.

77. With respect to brand name changeover strategies, a ________________ strategy
consists of alerting the consumer about an impending brand name change and then
changing the brand name to the global brand name.

78. If a company simply drops the old brand name and immediately replaces it with the
global name, it is called summary axing.

79. Companies should monitor the marketplace’s response to the brand-name change
with marketing research.

Difficulty: (2) Knowledge: (F) Page: 372

80. Pirated products tend to be of high quality.

Difficulty: (1) Knowledge: (A) Page: 379

81. Country of origin (COO) effects have been shown to be unstable over time.

Difficulty: (2) Knowledge: (F) Page: 383

82. Country of origin (COO) influences are particularly strong among the elderly.

Difficulty: (3) Knowledge: (F) Page: 383

83. Country of origin (COO) effects depend on the product category.

Difficulty: (1) Knowledge: (A) Page: 383

84. Country-image stereotypes cannot hurt a company.

Difficulty: (1) Knowledge: (A) Page: 385

85. In international marketing, trade barriers to service marketers tend to be much more
cumbersome than physical products.

Difficulty: (2) Knowledge: (A) Page: 386

86. Demand for premium quality services expands with increases in consumers’ age.

Difficulty: (2) Knowledge: (A) Page: 387

Essay

87. Deciding to move toward global branding is a difficult decision. This must often be considered with respect to the globalization versus localization issue. What are the questions that might be useful in reaching a decision as to pursue globalization over localization?

88. When the case for a transition from a local to a global (or regional) brand name is made, the firm needs to decide on how to implement the changeover in practice. Comment on the strategies that might be available for doing this and the considerations that might steer the manager toward one of the strategies.

89. Describe the strategies that might be used by multinational corporations to cope with the growing threat of product piracy. What are your feelings about purchasing pirated products? Give a brief illustration.

90. Comment on how you perceive the marketing of services on a global basis to be different from marketing tangible goods. Think about the difficulties that might be present with marketing services.

Chapter 12

Multiple Choice

1. ________________ is the only marketing mix instrument that creates revenues.

a. Product
b. Price
c. Place
d. Promotion
e. People

Difficulty: (1) Knowledge: (F) Page: 395

2. A company’s pricing policy is a highly ____________________ process based on
inputs from various departments.

a. under-functional
b. low-functional
c. geo-functional
d. bi-functional
e. cross-functional

Difficulty: (2) Knowledge: (F) Page: 395

3. All of the following are drivers that govern global pricing decisions EXCEPT:

a. company
b. customers
c. controls
d. competition
e. channels

Difficulty: (1) Knowledge: (F) Page: 396

4. In many countries, multinationals’ pricing decisions are impacted by:

a. break-even analysis
b. regression functions
c. supply and service curves
d. government policies
e. business ethics

Difficulty: (2) Knowledge: (F) Page: 396

5. When developing a pricing strategy for its global markets, one of the first steps that
a company must go through is to decide:

a. what the actual price should be.
b. how high or low to price.
c. how much money will the price bring in.
d. what it wants to accomplish with its strategy.
e. what form of controls will regulate price.

Difficulty: (3) Knowledge: (F) Page: 396

6. The most important pricing objectives of companies doing business in the United
States (including foreign-based firms) are(is) to:

a. achieve a satisfactory return on investment.
b. maintain market share.
c. meet a specified profit goal.
d. all of the above.
e. none of the above.

Difficulty: (3) Knowledge: (F) Page: 397

7. According to a recent research, all of the following are examples of important pricing
objectives EXCEPT:

a. drive competition out of business.
b. to achieve a satisfactory return on investment.
c. maintain market share.
d. expand market share.
e. to meet a specified profit goal.

Difficulty: (2) Knowledge: (A) Page: 397

8. When New Balance, the U.S.-based maker of high-tech running shoes, sells its shoes
in France as haute couture items rather than simply athletic shoes, this is an
example of:

a. country objectives.
b. company objectives.
c. consumer objectives.
d. monopoly objectives.
e. none of the above.

Difficulty: (2) Knowledge: (A) Page: 397

9. When making pricing decisions, ______________ set(s) the floor.

a. profits
b. costs
c. demand
d. supply
e. service

Difficulty: (1) Knowledge: (F) Page: 397

10. ______________ costs change with sales volume.

a. Demand
b. Supply
c. Derived
d. Fixed
e. Variable

Difficulty: (1) Knowledge: (F) Page: 397

11. _________________ costs do not vary with sales volume changes.

a. Demand
b. Supply
c. Derived
d. Fixed
e. Variable

Difficulty: (1) Knowledge: (F) Page: 397

12. In the international marketplace, _________________ pricing adds international
costs and a mark-up to the domestic manufacturing cost.

a. dynamic incremental pricing
b. export price
c. import price
d. cost-plus price
e. target-return price

Difficulty: (3) Knowledge: (F) Page: 397

13. In the international marketplace, ________________ pricing arrives at a price after
removing domestic fixed costs. Only variable export costs generated by the exporting
effort and a portion of the overhead load should be recuperated by the pricing effort
(according to this method).

a. dynamic incremental pricing
b. export price
c. import price
d. cost-plus price
e. target-return price

Difficulty: (3) Knowledge: (F) Page: 397

14. Examples of exporting-related ____________________ include manufacturing costs,
shipping expenses, insurance, and overseas promotional costs.

a. incremental costs
b. demand costs
c. fixed costs
d. target costs
e. service costs

Difficulty: (2) Knowledge: (F) Page: 397

15. One of the risks of dynamic incremental pricing (in the case where the export list
price is far below the domestic price) that ______________ can be triggered in the
export market.

a. high profit potential
b. dumping charges or accusations
c. falling profits
d. falling quality
e. falling service

Difficulty: (2) Knowledge: (A) Page: 397

16. When demand is highly price sensitive, the company needs to consider how it can
_________________ from a global perspective.

a. raise prices
b. lower prices
c. lower service
d. raise quality
e. reduce costs

Difficulty: (1) Knowledge: (F) Page: 397

17. Customers’ _________________ is a key consideration in pricing decisions.

a. location
b. buying power
c. decision power
d. thinking power
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 398

18. Countries with low per-capita income are more __________________ than in
developed countries.

a. promotion sensitive
b. price sensitive
c. need sensitive
d. demand sensitive
e. service sensitive

Difficulty: (3) Knowledge: (F) Page: 398

19. One alternative for successful marketing to the price sensitive low per-capita income
market is to produce a ________________ product or lower product quality.

a. downsized
b. upgraded
c. synthetic
d. copy
e. parallel

Difficulty: (2) Knowledge: (F) Page: 398

20. According to textbook, ________________ by and large charges the same price
worldwide.

a. Starbucks
b. IBM
c. Coca-Cola
d. Toyota
e. BMW

Difficulty: (2) Knowledge: (A) Page: 398

21. According to the text, once brand loyalty has been established, _____________ will
play less of a role as a purchase criterion.

a. promotion
b. service
c. product
d. price
e. place

Difficulty: (3) Knowledge: (F) Page: 398

22. Differences in the competitive situation across countries will usually lead to:

a. cross-border price differentials.
b. local price differentials.
c. domestic price differentials.
d. intra-company price differentials.
e. company-based price differentials.

Difficulty: (1) Knowledge: (F) Page: 398

23. Once brand loyalty has been established, price will play less of a role as a
purchase criterion, and the firm may be able to institute a ________________
strategy.

a. demand-based
b. premium pricing
c. elastic pricing
d. promotion-related pricing
e. sensitivity-based

Difficulty: (2) Knowledge: (A) Page: 398

24. All of the following are reasons that competitive situations vary from country to
country (with respect to the competitive environment) EXCEPT:

a. the number of competitors varies from country to country.
b. the nature of competition changes.
c. the presence of counterfeit products.
d. the presence of gray markets.
e. the competitive position of a firm changes from one country to another.

Difficulty: (3) Knowledge: (A) Pages: 398-99

25. An example of nonprice competition that is faced in some markets is:

a. retailer sales.
b. discounts.
c. coupons.
d. advertising.
e. cents-off deals.

Difficulty: (2) Knowledge: (A) Page: 400

26. Wide gaps in the price sensitivity between countries for the same product may
create conditions that promote _________________ markets.

a. backward
b. gray
c. white
d. demand
e. forward

Difficulty: (3) Knowledge: (A) Page: 401

27. Large cross-country price gaps open up arbitrage opportunities that lead to
_________________ imports from low-price countries to high-price ones.

a. black market
b. white market
c. zero market
d. smuggled
e. parallel

Difficulty: (2) Knowledge: (F) Page: 401

28. Sales tax rates, tariffs, and price controls are all examples of _______________ that
can have a direct or indirect impact on the pricing policies of a firm in the
international marketplace.

a. sales volume policies
b. price policies
c. government policies
d. restrictions
e. punishments

Difficulty: (2) Knowledge: (A) Page: 402

29. Huge government deficits are examples of a(n) ________________ impact on
pricing decisions.

a. direct
b. indirect
c. artificial
d. planned
e. uncontrollable

Difficulty: (2) Knowledge: (A) Page: 402

30. Inflation in an economy is an example of a(n) ________________ impact on pricing
decisions.

a. direct
b. indirect
c. artificial
d. planned
e. uncontrollable

Difficulty: (2) Knowledge: (F) Page: 402

31. To cover the incremental costs (such as shipping), the final foreign retail price will
often be much higher than the domestic retail price. This phenomenon is known as
______________________.

a. inflation.
b. the price deflator.
c. price escalation.
d. price sensitivity.
e. global arbitrage.

Difficulty: (2) Knowledge: (F) Page: 402

32. There are two ways to deal with the price escalation phenomenon. One of these
methods is to cut the export price. The other is to:

a. change the promotion strategy.
b. position the product as a (super) premium brand.
c. position the product as a lower quality brand.
d. reduce retailer margins.
e. reduce distances that the good must be shipped.

Difficulty: (3) Knowledge: (A) Page: 402

33. Which of the following would be a good option to follow if lowering the export price
were the firm’s objective?

a. rearrange the distribution channel.
b. change the promotion.
c. change the warranty provisions.
d. give more of the product in the package as an incentive to purchase.
e. study the demand curve.

Difficulty: (3) Knowledge: (A) Page: 402-3

34. All of the following are options that might be followed if the firm wished to lower
its export price on a product EXCEPT:

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. expand the warranty categories to give incentive for higher quality.
e. assemble or manufacture the product in foreign markets.

Difficulty: (2) Knowledge: (F) Pages: 402-3

35. If a firm decide to penetrate the Japanese consumer market through direct marketing
(such as catalog or telemarketing sales). Which of the following strategies best
describes this option for lowering the price of an exported product?

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. expand the warranty categories to give incentive for higher quality.
e. assemble or manufacture the product in foreign markets.

Difficulty: (2) Knowledge: (A) Pages: 402-3

36. When the U.S. levied a 10 percent tax on plus-$30,000 luxury cars, Land Rover
changed the weight of Range Rover models so they could be classed as a truck and
thereby avoid the luxury status, the company was attempting to follow which of the
price strategies listed below for lowering the price of an exported product?

a. rearrange the distribution channel.
b. eliminate costly features (or make them optional).
c. downsize the product.
d. adapt the product to escape tariffs or tax levies.
e. assemble or manufacture the product in foreign markets.

Difficulty: (1) Knowledge: (A) Page: 403

37. LEGO, the Danish toymaker, rather than worrying about finding ways to lower the
price of its product in foreign markets has chosen (most LEGO sets are sold from
$6-$223) to adopt a __________________ strategy position.

a. demand-based
b. premium pricing
c. elastic pricing
d. promotion-related pricing
e. sensitivity-based

Difficulty: (1) Knowledge: (A) Page: 403

38. When McDonald’s first opened their restaurants in Russia in 1990, the Big Mac meal
cost 6 rubles. Three years later, the same meal cost 1,100 rubles. This would be an
example of how:

a. demand can change.
b. how premium pricing can damage a product.
c. price elasticity works.
d. inflation can damage a market.
e. service is what matter the most to the average customer.

Difficulty: (1) Knowledge: (A) Page: 403

39. All of the alternatives listed below are ways to safeguard against inflation EXCEPT:

a. modify components, ingredients, parts and/or packaging materials.
b. source materials from low-cost suppliers.
c. lengthen credit terms.
d. include escalator clauses in long-term contracts.
e. quote prices in a stable currency.

Difficulty: (3) Knowledge: (F) Page: 404

40. ___________ inflation also mandates rapid inventory turnarounds.

a. High
b. Low
c. Visible
d. Hyper
e. Slow

Difficulty: (2) Knowledge: (F) Page: 404

41. To combat hyperinflation, many governments occasionally impose ______________
controls.

a. commodity
b. inflation
c. margin
d. discount
e. price

Difficulty: (1) Knowledge: (F) Page: 404

42. According to lessons learned in Brazil’s hyperinflationary economy, McDonald’s
will deal with Russia’s runaway inflation by using all of the following tools
EXCEPT:

a. emphasize cash flow management.
b. control of raw materials.
c. institute sales and price setting strategies.
d. hedge for potentially substantial distortions in the exchange rate.
e. make loans to local franchise investors to bring them past hard times.

Difficulty: (2) Knowledge: (A) Page: 404

43. Firms faced with price controls can take any of the following strategies EXCEPT:

a. shift the target segment or markets.
b. launch new products or variants of existing products.
c. negotiate with the government.
d. predict the incidence of price controls.
e. have the home government bring pressure on the host government.

Difficulty: (3) Knowledge: (F) Pages: 404-5

44. When a manufacturer of breakfast cereals for humans shifts production to a
chicken feed product to overcome the effects of price controls, the firm would be
following which of the strategies outlined below?

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. predict the incidence of price controls.

Difficulty: (2) Knowledge: (A) Page: 405

45. If a company that is threatened with price controls diversifies into product lines that
are relatively free of price controls, the firm would be following which of the
following strategies?

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. predict the incidence of price controls.

Difficulty: (2) Knowledge: (A) Page: 405

46. The most drastic reaction to government-imposed price controls is to:

a. adapt the product line.
b. shift target segments or market.
c. negotiate with the government.
d. launch a variant of an existing product.
e. leave the country.

Difficulty: (1) Knowledge: (A) Page: 405

47. One of the main reasons for staying in a country that has government-imposed
price controls to deal with hyperinflation is:

a. the government might not let you out.
b. when the danger is over you cannot get back in.
c. you gain experience for other markets with similar problems.
d. you do not want to loose face.
e. you do not want to show weakness to your competition.

Difficulty: (2) Knowledge: (A) Page: 405

48. ___________________ reflect how much one currency is worth in terms of
another currency.

a. Interest rates
b. Credit rates
c. Bond rates
d. Inflation rates
e. Exchange rates

Difficulty: (2) Knowledge: (F) Page: 405

49. All of the following are exporter strategies when the domestic currency is weak
EXCEPT:
a. stress price benefits.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. expand the product line and add more.
d. shift sourcing and manufacturing to domestic market.
e. exploit export opportunities in all markets.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

50. Which of the following are exporter strategies when the domestic currency is
strong?

a. stress price benefits.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. expand the product line and add more.
d. shift sourcing and manufacturing to domestic market.
e. exploit export opportunities in all markets.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

51. All of the following are considered to be exporter strategies when the domestic
currency is strong EXCEPT:

a. conduct conventional cash-for-goods trade.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. improve productivity and engage in vigorous cost reduction.
d. shift sourcing and manufacturing overseas.
e. give priority to exports to relatively strong-currency countries.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

52. Which of the following are considered to be exporter strategies when the domestic
currency is weak?

a. conduct conventional cash-for-goods trade.
b. engage in nonprice competition by improving quality, delivery, and aftersale
service.
c. improve productivity and engage in vigorous cost reduction.
d. shift sourcing and manufacturing overseas.
e. give priority to exports to relatively strong-currency countries.

Difficulty: (3) Knowledge: (F) Page: 406, Exhibit 12-4

53. Two major issues confronting international marketers result from currency
movement. The first of these is in which currency do we quote our prices? The
second is:

a. how much of the loss or gain (because of pass through) should be passed to
consumers?
b. how much should we invest in the local currency?
c. how much should we invest in our own currency?
d. what role should the central bank play in currency movement?
e. should we trust international arbitrage as a means of settling currency value?

Difficulty: (3) Knowledge: (A) Page: 406

54. A weakening of the U.S. dollar relative to the Japanese yen has the effect of:

a. strengthening the Japanese position in the United States.
b. strengthening the U.S. position in Japan.
c. weakening the dollar in Europe.
d. strengthening the yen in Europe.
e. all positions remain unchanged.

Difficulty: (2) Knowledge: (A) Page: 406

55. A strengthening of the U.S. dollar relative to the Japanese yen has the effect of:

a. strengthening the Japanese position in the United States.
b. strengthening the U.S. position in Japan.
c. weakening the dollar in Europe.
d. strengthening the yen in Europe.
e. all positions remain unchanged.

Difficulty: (2) Knowledge: (A) Page: 406

56. One of the ways that a weakening of the U.S. dollar relative to the Japanese yen
may not necessarily be a benefit to a U.S. firm is that:

a. the government may not allow the pass through.
b. the government might erect tariff barriers.
c. Japanese parts might become more expensive and when imported for inclusion into
an exported product, prices might actually rise.
d. other currencies might be the ones actually traded.
e. costs can be cut in other ways.

Difficulty: (2) Knowledge: (A) Page: 406

57. When considering the currency pass-through phenomenon, all of the following
factors give an indication as to the appropriate action EXCEPT:

a. the customer’s price sensitivity.
b. government actions.
c. the impact of dollar appreciation on the firm’s cost structure.
d. the impact of dollar depreciation on the firm’s cost structure.
e. the amount of competition in the export market.

Difficulty: (2) Knowledge: (A) Page: 407

58. When exporters lower their mark-ups in a more price-conscious export market than
in a price-sensitive market, with respect to exchange rate movements this is called
______________________.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (3) Knowledge: (F) Page: 408

59. When an exporter uses the _______________________ method, the effect can be
negative. Frequent adjustments of prices in response to currency movements will
distress local channels and customers.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (3) Knowledge: (A) Page: 408

60. _____________________ is a special form of pricing where mark-ups are adjusted
to stabilize prices in the buyer’s currency. This method helps to create stability in the
local currency.

a. Local-currency price stability (LCPS)
b. Pricing-to-market (PTM)
c. Transfer pricing
d. Countertrade pricing
e. Demand mark-up pricing

Difficulty: (1) Knowledge: (A) Page: 408

61. With respect to currency quotation when preparing for buying and selling
transactions, buyers and sellers generally prefer to quote in:
a. a world currency.
b. the seller’s currency.
c. the buyer’s currency.
d. their own currency.
e. the dollar.

Difficulty: (2) Knowledge: (A) Page: 409

62. When sales take place between related entities of the same company, ___________
is often used.

a. local-currency price stability (LCPS)
b. pricing-to-market (PTM)
c. transfer pricing
d. countertrade pricing
e. demand mark-up pricing

Difficulty: (2) Knowledge: (A) Page: 409

63. Transfer pricing decisions in an international context need to balance off the
interests of a broad range of stakeholders. All of the following would be examples
of those stakeholders EXCEPT:

a. the parent company.
b. the competition.
c. local country managers.
d. host government(s).
e. the domestic government.

Difficulty: (2) Knowledge: (F) Page: 409

64. There are a series of key drivers behind transfer pricing decisions. The most
important of these drivers is thought to be:

a. competition in the foreign country.
b. economic conditions in the foreign country.
c. price controls.
d. exchange controls.
e. market conditions in the foreign country.

Difficulty: (3) Knowledge: (F) Page: 409

65. __________________ uses the market mechanism as a cue for setting transfer prices.

a. Local-currency price stability (LCPS) pricing
b. Pricing-to-market (PTM)
c. Market-based pricing
d. Countertrade pricing
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 410

66. __________________ (as a form of market-based pricing) basically dictates that
the company charges the price that any buyer outside the company would pay (as
if the transaction occurred between two unrelated entities).

a. Local-currency price stability (LCPS) pricing
b. Pricing-to-market (PTM)
c. Arm’s length pricing
d. Countertrade pricing
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 410

67. ___________________ simply adds a mark-up to the cost of the goods.

a. Demand-based pricing
b. Negotiated pricing
c. Cost-based pricing
d. Markup-based pricing
e. Target return pricing

Difficulty: (2) Knowledge: (F) Page: 411

68. To conduct ________________, conflicts between country affiliates are resolved
through mutual discussion of the transfer pricing problems.

a. demand-based pricing
b. negotiated pricing
c. cost-based pricing
d. markup-based pricing
e. target return pricing

Difficulty: (1) Knowledge: (F) Page: 411

69. In the area of transfer pricing, experts suggest to set transfer prices that are as close as
possible to the _________________________________.

a. Balanced Arm’s Length Standard
b. Building Arm’s Length Standard
c. Best Arm’s Length Standard
d. Branding Arm’s Length Standard
e. Basic Arm’s Length Standard

Difficulty: (3) Knowledge: (F) Page: 411

70. ______________ occurs when imports are being sold at an “unfair” price.

a. Price fixing
b. Dumping
c. Gray marketing
d. Countertrade
e. Predatory pricing

Difficulty: (1) Knowledge: (F) Page: 412

71. To reduce exposure and risk of antidumping actions, the exporter can follow any of
the following marketing strategies EXCEPT:

a. trading-up
b. service enhancement
c. distribution
d. government intervention
e. communications

Difficulty: (2) Knowledge: (F) Page: 413

72. In the area of price coordination, the following considerations matter EXCEPT:

a. nature of customer.
b. amount of product differentiation.
c. nature of channels.
d. nature of competition.
e. role of the World Bank.

Difficulty: (1) Knowledge: (F) Pages: 414-15

73. In international marketing, purchasers often demand _____________________ from
their suppliers.

a. uniform-pricing contracts
b. diverse-pricing contracts
c. bilateral-pricing contracts
d. global-pricing contracts
e. local-pricing contracts

Difficulty: (3) Knowledge: (F) Page: 415

74. ___________________ is an umbrella term used to describe unconventional trade-
financing transactions that involve some form of noncash compensation.

a. Local-currency price stability (LCPS)
b. Pricing-to-market (PTM)
c. Arm’s length pricing
d. Countertrade
e. Nonmarket-based pricing

Difficulty: (2) Knowledge: (F) Page: 418

75. Countertrade transactions include the following options EXCEPT:

a. simple barter.
b. switch trading.
c. geo trading.
d. countertrade pricing.
e. clearing agreements.

Difficulty: (2) Knowledge: (A) Page: 419

76. In a(n) _______________, no third party is involved to carry out the transaction.

a. clearing agreement
b. offset
c. buyback arrangement
d. switch trading
e. simple barter

Difficulty: (1) Knowledge: (F) Page: 419

True/False Short Answer

77. According to the textbook, factors that impact global pricing decisions include
company, customers, competition, technology.

Difficulty: (2) Knowledge: (F) Page: 396

78. Cost differentials do not lead to wide price gaps.

Difficulty: (1) Knowledge: (F) Page: 397

79. In gray markets, products marketed in low-priced countries are shipped and resold
by unauthorized channels in high-priced markets.

Difficulty: (2) Knowledge: (F) Page: 401

80. Government policies do not have any impact on pricing decisions.

Difficulty: (1) Knowledge: (A) Page: 402

81. To cover the incremental costs of doing business in a foreign market, the final
foreign retail price will often be much higher than the domestic retail price.
This is called price _________________.

82. To combat hyperinflation, governments occasionally impose price controls.

Difficulty: (2) Knowledge: (F) Page: 404

83. One of the courses of action that a company can follow when faced with price
controls is to adapt the product line.

Difficulty: (2) Knowledge: (F) Page: 404

84. A stronger U.S. dollar undermines the competitive position of American exports.

Difficulty: (2) Knowledge: (F) Page: 406

85. An exporter strategy when faced with a weak domestic currency would be to
engage in nonprice competition by improving quality, delivery, and aftersale
service.

Difficulty: (2) Knowledge: (F) Page: 406, Exhibit 12-4

86. If an exporter were to stress price benefits, the exporter would probably be facing
a domestic currency that was perceived as being weak.

Difficulty: (2) Knowledge: (F) Page: 406, Exhibit 12-4

87. LCPS stands for:

88. In the area of international pricing, sellers and buyers usually prefer a quote in their domestic currency.

Difficulty: (2) Knowledge: (F) Page: 409

89. When sales transactions occur between related entities of the same company,
________________ pricing often occurs.

90. In arm’s-length prices, a firm uses the market mechanism as a cue for setting transfer
prices.

Difficulty: (2) Knowledge: (F) Page: 410

91. Cost-based pricing simply adds a mark-up to the cost of goods.

Difficulty: (1) Knowledge: (F) Page: 411

92. Negotiated transfer pricing is another form of nonmarket-based pricing.

Difficulty: (2) Knowledge: (F) Page: 411

93. Government-imposed market constraints favor nonmarket-based transfer pricing
methods.

Difficulty: (3) Knowledge: (F) Page: 411

94. In transfer pricing, BALS stands for:

95. Multinationals do not need to take antidumping laws into account when determining
their global pricing strategy.

Difficulty: (3) Knowledge: (F) Page: 412

96. VER is an acronym for:

97. Global pricing contract (GPCs) are demanded by governments.

Difficulty: (2) Knowledge: (F) Page: 415

98. Several multinationals doing business in the European Union harmonize their prices
to narrow price gaps between different member states..

Difficulty: (2) Knowledge: (F) Page: 415

99. When sales transactions occur in some form of compensation other than money
(such as trading corn for whiskey), the two trading companies are engaged in
________________.

100. In switch trading, a third party is involved which uses the credits to buy goods from
the deficit country.

Difficulty: (1) Knowledge: (F) Page: 419

101. Countertrade purchase is not the most popular form of countertrade.

Difficulty: (3) Knowledge: (F) Page: 419

Essay

102. In international marketing, price escalation can be a serious problem. To offset these difficulties marketers must be prepared to creatively meet the price escalation challenge. List the various ways that marketers might attack this problem.

103. Setting prices in a floating exchange rate world pose unique problems. Comment on how a company might react to floating exchange rates. What considerations are probably the most important for the decision maker to consider?

104. What is transfer pricing? Comment on the stakeholders and key drivers that impact the decision maker faced with transfer pricing.

105. Antidumping measures are very popular with most of the governments of industrialized nations. What measures might exporters consider to hedge themselves against antidumping procedures? Which method do you think is probably the best? Justify your answer.

106. Discuss the motives behind countertrade and the guidelines for making countertrade successful.

Chapter 13

Multiple Choice

1. In international marketing, advertising to some extent is a _________________
phenomenon.

a. cultural
b. social
c. general
d. static
e. global

Difficulty: (1) Knowledge: (F) Page: 427

2. ___________________ is one of most formidable barriers that international advertisers need to surmount.

a. Politics
b. Technology
c. Translation
d. Language
e. None of the above

Difficulty: (2) Knowledge: (F) Page: 427

3. In international marketing, numerous promotional efforts misfire because of
____________________ -related problems.

a. politics
b. technology
c. transfer
d. transaction
e. language

Difficulty: (2) Knowledge: (F) Page: 427

4. Translation errors include:

a. simple carelessness.
b. multiple-meaning words.
c. idioms.
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (F) Page: 427

5. All of the following are language barriers that can be identified as typical international
translation errors EXCEPT:

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (3) Knowledge: (F) Page: 427

6. To solve language-related barriers, companies in international markets should use
__________________ advertising agencies.

a. local
b. regional
c. global
d. transnational
e. domestic

Difficulty: (1) Knowledge: (F) Page: 428

7. In an advertising message, the original slogan was “Body by Fisher.” The translation
in a foreign market was “Corpse by Fisher.” This would be an example of which of
the following constraints on international promotion?

a. language barriers.
b. advertising regulations.
c. cultural constraints.
d. local attitudes toward advertising.
e. poor media infrastructure.

Difficulty: (1) Knowledge: (A) Page: 428

8. In an advertising message, the original slogan was “Body by Fisher.” The translation
in a foreign market was “Corpse by Fisher.” This would be an example of which of
the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

9. In an advertising message, the original slogan was “When I used this shirt, I felt
good.” The translation in a foreign market was “Until I used this shirt, I felt good.”
This would be an example of which of the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

10. In Britain, one U.S. advertiser ran a campaign that centered around the slogan
“You can use no finer napkin at your dinner table.” In Britain, some people use
the word “napkin” for the word “diapers.” This would be an example of which of
the following types of translation errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (2) Knowledge: (A) Page: 428

11. In Spanish, five different words can be used for the word “tires” (cauchos, cubiertas,
gomas, llantas, and neumaticos). Obviously, this might present problems in
advertising. This would be an example of which of the following types of translation
errors?

a. simple carelessness.
b. idioms.
c. local slang.
d. multiple-meaning words.
e. incorrect grammar.

Difficulty: (1) Knowledge: (A) Page: 429, Exhibit 13-1

12. Given that so many errors can occur with translation and misunderstanding of
advertising in the foreign market, which of the following is probably the easiest
solution to the problem?

a. involve ad agencies from the company’s domestic environment.
b. involve ad agencies from the host country’s environment.
c. check with government officials.
d. employ foreign language specialists for all markets.
e. don’t worry about it, the problem usually corrects itself.

Difficulty: (3) Knowledge: (F) Page: 428

13. All of the following are strategies for dealing with translation problems in a foreign
market EXCEPT:

a. involve ad agencies from the host country’s environment.
b. don’t translate the message for the foreign market.
c. add foreign language subtitles.
d. use voice-overs that use foreign slang.
e. check with foreign officials.

Difficulty: (3) Knowledge: (F) Pages: 428-9

14. Many of the trickiest promotional issues occur in the domain of
_________________.

a. environment
b. money
c. technology
d. business
e. religion

Difficulty: (2 Knowledge: (F) Page: 429

15. Of the barriers that face a foreign company when attempting to promote products in
a foreign market, ___________________ are arguably the biggest stumbling block
to successful advertising in the foreign market.

a. language barriers
b. advertising regulations
c. cultural constraints or barriers
d. local attitudes toward advertising
e. poor media infrastructure

Difficulty: (2) Knowledge: (F) Page: 429

16. When considering barriers that are faced by international marketers attempting to
successfully advertise in foreign markets, cultural constraints can pose huge
difficulties. The trickiest problem within this category is usually posed by:

a. the government.
b. trade unions.
c. environmental rights groups.
d. women.
e. the host country’s religion(s).

Difficulty: (3) Knowledge: (F) Page: 430

17. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. All of the following are dimensions of a value system used in
the cultural classification scheme EXCEPT:

a. power distance.
b. possessions.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

18. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. One dimension refers to the degree of inequality that is seen as
acceptable within the country. This dimension would best be described as:

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

19. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Dutch researcher
Geert Hofstede. One dimension refers to the extent that people within the culture
prefer structured situations with clear cut rules and little ambiguity. This dimension
would best be described as:

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (F) Page: 430

20. If ads in a foreign country stress performance, success, and completion, they would
probably be focusing on which of the following cultural classification schemes as a
way to reach a segment of the population where this dimension was high or
important.

a. power distance.
b. long-termism.
c. uncertainty avoidance.
d. individualism.
e. masculinity.

Difficulty: (2) Knowledge: (A) Page: 430

21. With respect to budget forms for advertising, the _______________ method simply
sets the overall advertising budget based on either past or expected sales revenue.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (1) Knowledge: (F) Page: 431

22. The primary appeal of the percentage of sales method of allocating an advertising
budget is its:

a. popularity.
b. accounting good sense.
c. control feature.
d. simplicity.
e. accuracy.

Difficulty: (2) Knowledge: (F) Page: 431

23. If an advertiser does not want to “rock the boat” and desires to sustain a minimum
“share of voice” they will probably choose which of the following advertising
budget forms?

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (F) Page: 432

24. The most popular of the budget methods (in fact, two-thirds of respondents in a
survey said they had used the method) is the _________________ method.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (F) Page: 433

25. If an advertiser spells out the goals of their communication strategy and determines
what they would like to accomplish with advertising and then plans a budget
accordingly, they are probably using the ______________ method of budgeting.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (1) Knowledge: (A) Page: 433

26. If an advertiser uses field experiments (such as systematically manipulating the
spending amount in different areas within the country to measure the impact of
advertising on the brand’s awareness, sales volume, and market share) to adjust
budget expenditures, they are probably using the ______________ method of
budgeting for advertising expense.

a. percentage of sales
b. competitive parity
c. all-you-can-afford
d. objective-and-task
e. marginal increment

Difficulty: (2) Knowledge: (A) Page: 433

27. A good case can be made for standardizing an ad campaign in the international
marketplace. All of the following would be good, justifiable reasons for
standardization EXCEPT:

a. scale economics.
b. consistent image.
c. government regulation.
d. global consumer segments.
e. creative talent.

Difficulty: (2) Knowledge: (A) Page: 435-37

28. Message consistency (an advertising standardization issue) matters a great deal in
markets with extensive media overlap or for goods that are sold to “cosmopolitan”
customers who travel the globe. The best example of a product or service that fits the
above is:

a. beer.
b. banking.
c. a beef product.
d. an automobile.
e. cosmetics.

Difficulty: (3) Knowledge: (A) Page: 439

29. In the domain of advertising, __________________ means that marketers encourage
their affiliates to adopt, or at least consider, advertising ideas that have proven
successful in other markets. Which of the following standardization benefits applies?

a. scale economics
b. consistent image
c. cross-fertilization
d. global consumer segments
e. creative talent

Difficulty: (2) Knowledge: (A) Page: 439

30. Nestle used an ad for Taster’s Choice coffee originally developed in the U.K. as its campaign in the U.S., with some minor changes to reflect actors and speech. This would be an example of which of the following reasons for using standardization in the foreign market?

a. scale economics
b. consistent image
c. cross-fertilization
d. global consumer segments
e. creative talent

Difficulty: (2) Knowledge: (A) Page: 439

31. Research from an advertising agency survey indicates that the number one reason
for standardizing multinational advertising was to:

a. take advantage of demographics.
b. take advantage of cultural similarities between the countries.
c. capitalize on the fact that the product was standardized.
d. make full use of a proven successful idea.
e. create a single brand image in all markets.

Difficulty: (3) Knowledge: (A) Page: 435

32. All of the following are barriers to standardization in international advertising
EXCEPT:

a. cultural differences.
b. budget.
c. advertising regulations.
d. differences in the degree of market development.
e. the “Not Invented Here” syndrome.

Difficulty: (2) Knowledge: (A) Page: Pages: 437-38

33. As an illustration of a barrier to advertising standardization, Ray-Ban had to re-shoot
a sunglasses commercial for Malaysia because the original version had Caucasian
actors. In Malaysia, ads featuring Caucasians are not allowed. This example would
be an example of which of the following barriers to standardization of international
advertising?

a. cultural differences.
b. budget.
c. advertising regulations.
d. differences in the degree of market development.
e. the “Not Invented Here” syndrome.

Difficulty: (2) Knowledge: (A) Pages: 437-38

34. In the area of “Not-Invented-Here” (NIH) syndrome, stonewalling attempts at
standardization may come from ________________ subsidiaries/advertising
agencies.

a. local
b. regional
c. global
d. transnational
e. multinational

Difficulty: (2) Knowledge: (F) Page: 438

35. In the ________________ approach, every country subsidiary follows its own course
developing its own ads based on what it thinks works best in its market.

a. host country
b. home country
c. foreign
d. laissez faire
e. polycentric

Difficulty: (1) Knowledge: (F) Page: 438

36. There are a variety of formats for creating international advertising. With _________
advertising, the creative strategy is highly centralized. Universal copy is developed
for all markets.

a. export
b. import
c. prototype (pattern)
d. concept cooperation
e. psychological

Difficulty: (2) Knowledge: (F) Page: 438

37. There are a variety of formats for creating international advertising. With _________
advertising, guidelines are given to local affiliates concerning the execution of the
advertising. The guidelines are then conveyed via manuals or tapes.

a. export
b. import
c. prototype (pattern)
d. concept cooperation
e. psychological

Difficulty: (2) Knowledge: (F) Page: 439

38. With prototype standardization, ____________________ spell out guidelines on the
positioning theme.

a. competitors
b. governments
c. advertising mangers
d. headquarters
e. CEOs

Difficulty: (3) Knowledge: (F) Page: 439

39. With __________________ advertising, guidelines are given to the local affiliates
concerning the execution of the advertising.

a. geotype
b. prototype
c. modulartype
d. export
e. psychological

Difficulty: (3) Knowledge: (A) Page: 439

40. Another term to describe the portfolio of media choices (and variations within those
choices) is called:

a. media decision making.
b. media super structure.
c. media infrastructure.
d. media bias.
e. media method.

Difficulty: (1) Knowledge: (F) Page: 440

41. High cost-per-thousand (CPMs) are found in areas that have a high per capita
__________.

a. LMP
b. ZNP
c. MMP
d. GNP
e. PPP

Difficulty: (3) Knowledge: (F) Page: 442

42. Recent developments in the global media landscape include the following EXCEPT:

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. growing importance of high definition television.

Difficulty: (2) Knowledge: (F) Pages: 442-43

43. All of the following can be characterized as being significant trends or developments
in the international media landscape EXCEPT:

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing importance of state controlled advertising.
e. improved monitoring.

Difficulty: (2) Knowledge: (F) Pages: 442-43

44. Infomercial marketers now have access to over one-half of Japanese consumers.
Which of the following trends would be most representative or closely associated
with the above fact?

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. improved monitoring.

Difficulty: (2) Knowledge: (A) Page: 443

45. To promote the Xbox video program, Microsoft gave away two million DVDs with an interactive commercial. This is an example of which of the following trends?

a. growing commercialization and deregulation of mass media.
b. shift from radio and print to TV advertising.
c. rise of global and regional media.
d. growing spread of interactive marketing.
e. improved monitoring.

Difficulty: (3) Knowledge: (A) Page: 443

46. Ad regulations governing the advertising of cigarettes would probably fall under
which of the following advertising regulation categories?

a. advertising of “vice products” and pharmaceuticals.
b. comparative advertising.
c. content of advertising messages.
d. advertising targeting children.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 445

47. If advertisers disparage their competition in an advertisement, the regulation category
that would govern this practice would probably be:

a. advertising of “vice products” and pharmaceuticals.
b. comparative advertising.
c. content of advertising messages.
d. advertising targeting children.
e. all of the above.

Difficulty: (1) Knowledge: (F) Page: 445

48. Given that advertising regulations not only govern advertising in foreign markets but
can also create difficulties, how can marketers cope? All of the following are
valid suggestions EXCEPT:

a. keep track of regulations and pending legislation.
b. challenge regulations in court.
c. adapt the marketing mix strategy.
d. try to circumvent the regulation by using local advertisers.
e. lobby for favorable regulations or results.

Difficulty: (2) Knowledge: (F) Pages: 446-47

49. When screening ad agencies, all of the following criteria might be used EXCEPT:

a. market coverage.
b. cost of agency talent and expense.
c. quality of coverage.
d. expertise with developing a central international campaign.
e. scope and quality of support services.

50. _________________ refer(s) to a collection of short-term incentive tools that lead to
quicker and/or larger sales of a particular product by consumers or the trade.

a. Advertising
b. Sales promotion
c. Internet marketing
d. Promotion
e. Publicity

Difficulty: (1) Knowledge: (F) Page: 449

51. Sampling, price-offs, coupons, sweepstakes, bonus packs, and trade allowances are
all examples of ____________________.

a. advertising
b. sales promotion
c. direct marketing
d. public relations
e. publicity

Difficulty: (2) Knowledge: (A) Page: 449

52. All of the following explain the local nature of sales promotion for the multinational
corporation EXCEPT:

a. economic development.
b. market maturity.
c. cultural perceptions.
d. trade structure.
e. new product development.

Difficulty: (3) Knowledge: (F) Pages: 449-50

53. If promotional dollars are aimed at the end-user, then the strategy is described as
being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

54. If promotional dollars are aimed at the middlemen, then the strategy is described as
being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

55. If promotional dollars are aimed at the trade or distributor, then the strategy is
described as being a ______________ strategy.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

56. Procter & Gamble has attempted to cut back on _____________ strategy incentives
by introducing every-day-low-pricing.

a. push
b. pull
c. conventional
d. vertical
e. horizontal

Difficulty: (1) Knowledge: (A) Page: 450

57. Adidas, the German sportswear maker, paid a hefty $80 million to $100 million in
cash and services for sponsorship of the 2008 Beijing Summer Olympics. This is an
example of _________________________.

a. event sponsorship
b. sales sponsorship
c. trade shows
d. publicity
e. public relations

Difficulty: (1) Knowledge: (F) Page: 452

58. Although, Coca-Cola was the official sponsor of the 2002 World Cup Soccer, Pepsi
managed to sign up some of the biggest soccer celebrities, including England’s soccer
star David Beckham. In event sponsorship, this is an example of ________________.

a. guerilla marketing
b. ambush marketing
c. passive marketing
d. active marketing
e. cooperative marketing

Difficulty: (3) Knowledge: (F) Page: 452

59. All of the following are risks associated with event sponsorship EXCEPT:

a. nonsponsors can come in.
b. too many sponsorships might be sold.
c. there might be clutter among the sponsors and their messages.
d. the sponsorship might be too expensive for the number of people that show up.
e. adequate protection of the sponsorship.

Difficulty: (3) Knowledge: (F) Page: 452
60. Trade shows are also called _______________________.

a. trade marts
b. trade markets
c. trade fairs
d. trade expos
e. trade circles

Difficulty: (1) Knowledge: (F) Page: 453

61. Trade shows in Europe:

a. are about more than just business.
b. are exactly the same as in the U.S.
c. never serve refreshments or meals.
d. might be much larger than American shows.
e. both A and D

Difficulty: (1) Knowledge: (F) Page: 454

62. Which of the following does NOT describe mobile marketing?

a. It refers to ads on the sides of trucks and buses.
b. Mobile marketing cannot interact with consumers.
c. It fosters top-of-mind brand awareness.
d. It increases customer involvement.
e. Both A and B

Difficulty: (1) Knowledge: (F) Page: 453

63. In a modern sense, the goal of many MNCs is to pursue a(n)________________
program. In this program, coordination of all communication vehicles would take
place. Key ideas would be communicated in a unified manner.

a. vertical communications
b. horizontal communications
c. integrated marketing communications
d. global communications
e. synergistic communications

Difficulty: (2) Knowledge: (F) Page: 458

64. The goal of ________________________________ is to coordinate mass
advertising, sponsorships, sales promotions, packaging, point-of-purchase displays,
and so forth.

a. integrated marketing communications
b. integrated horizontal communications
c. integrated vertical communications
d. global communications
e. synergistic communications

Difficulty: (2) Knowledge: (F) Page: 458

65. A __________________________________ program goes one step further since it is
a system of active promotional management that strategically coordinates global
communications in all of its component parts both horizontally (country-level) and
vertically (promotion tools).

a. vertical communications
b. horizontal communications
c. globally integrated marketing communications
d. global communications
e. synergistic communications

Difficulty: (3) Knowledge: (F) Page: 458

True/False Short Answer

66. Language is not a major barrier in international advertising.

Difficulty: (1) Knowledge: (F) Page: 427

67. One can identify three different types of _______________________: simple carelessness, multiple-meaning words, and idioms.

68. Language barriers can occur through translation problems. The most common of
these translation difficulties are due to ____________________ , multiple-meaning
words, and idioms.

69. Language barriers can occur through translation problems. If the original slogan
was “Body by Fisher” and the translation was “Corpse by Fisher,” the problem with
translation was probably due to a problem idiom.

Difficulty: (2) Knowledge: (A) Page: 428

70. Idioms that use slang from one country to another may inadvertently lead to
embarrassing meanings in the host country.

Difficulty: (1) Knowledge: (F) Page: 428

71. One obvious cure for misinterpreted meanings of advertising slogans in foreign
countries is to reduce the usage of slogans.

Difficulty: (2) Knowledge: (F) Page: 428

72. With respect to advertising, probably the trickiest of the cultural barriers centers
around the host country’s religion.

Difficulty: (2) Knowledge: (F) Page: 429

73. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede.
The value system construct that refers to the degree of inequality that is seen as
acceptable within the country is called ________________.

74. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede. One
of these constructs is called power distance. Research has shown that ads that
position products or services as status symbols are most likely to be effective in
countries with large power distance.

Difficulty: (2) Knowledge: (A) Page: 430

75. One framework that helps with studying the influence of culture on global
advertising is the cultural classification scheme developed by Geert Hofstede.
The value system construct that refers to the extent that people within the culture
prefer structured situations with clear-cut rules and little ambiguity is called
__________________.

76. Ad campaigns that center around the hard-sell approach (such as testimonials) are
advisable for cultures with high uncertainty avoidance such as the United States.

Difficulty: (2) Knowledge: (A) Page: 430

77. In the percentage of sales method, the overall advertising budget is based on either
past or expected sales revenues.

Difficulty: (1) Knowledge: (F) Page: 431

78. Viral marketing involves the selling of disease-causing agents.

79. With respect to budget forms that can be used in advertising, the ________________
method simply sets the overall advertising budget as a percentage of sales.

80. In the competitive parity rule, advertisers do not use competitors’ advertising spending as a benchmark.

Difficulty: (1) Knowledge: (A) Page: 431

81. With respect to budget forms that can be used in advertising, the _____________
method uses competition’s spending as a benchmark and provides the measure of
the optimal spending amount.

82. The most popular budgeting rule is the objective-and-task method.

Difficulty: (1) Knowledge: (F) Page: 433

83. In the domain of advertising, ___________________ means that marketers
encourage their affiliates to adopt, or at least consider, advertising ideas that have
proven successful in other markets.

84. “Not-Invented-Here” (NIH) syndrome does not come from local subsidiaries.

Difficulty: (3) Knowledge: (F) Page: 438

85. With export advertising, the creative strategy is highly centralized.

Difficulty: (3) Knowledge: (F) Page: 438

86. With prototype standardization, headquarters spell out guidelines on the positioning
themes and brand identity.

Difficulty: (2) Knowledge: (F) Page: 439

87. Shift from TV and print to radio advertising is becoming a big reality.

Difficulty: (1) Knowledge: (F) Pages: 442-43

88. Most firms do not rely heavily on the expertise of an advertising agency.

Difficulty: (1) Knowledge: (F) Page: 447

89. Sponsorship is one of the fastest growing promotion tools.

Difficulty: (2) Knowledge: (F) Page: 451

90. The goal of many MNCs is to avoid an integrated marketing communications
approach.

Difficulty: (2) Knowledge: (F) Page: 458

Essay

91. List and discuss the major challenges faced by international advertisers.

92. What situations are conducive to localization of advertising from the viewpoint of the international advertiser?

93. How should marketers cope with advertising regulations?

94. How do you choose an advertising agency overseas?

Chapter 14

Multiple Choice

1. Unlike the United States where customers visit car dealers, a majority of cars are sold
by door-to-door salespeople in _________________.

a. India.
b. Pakistan.
c. Japan.
d. Ireland.
e. Mongolia.

Difficulty: (2) Knowledge: (A) Page: 421

2. All of the following are tasks of the average salesperson EXCEPT:

a. take orders.
b. deliver products.
c. repair products.
d. educate consumers.
e. provide technical knowledge.

Difficulty: (1) Knowledge: (F) Page: 422

3. The salesperson can best be described as being the ______________ for the company.

a. support mechanism
b. front line
c. mouthpiece
d. promoter
e. educator

Difficulty: (2) Knowledge: (F) Page: 422

4. The salesforce management process starts with setting:

a. objectives and strategy.
b. objectives and manufacturing.
c. objectives and marketing.
d. objectives and operations.
e. objectives and raw material.

Difficulty: (3) Knowledge: (F) Page: 423

5. When researchers try to put the word international into sales management and
personal selling, clarification is needed. ____________________ considerations
include issues that analyze more than one country’s assets, strengths, and situations,
or that deal directly with cross-border coordination.

a. International product
b. International strategy
c. International mix
d. Intercultural
e. Global society

Difficulty: (1) Knowledge: (F) Page: 423

6. All of the following are examples of international sales strategy issues EXCEPT:

a. sales force skill availability.
b. selling style differences.
c. country image.
d. expatriate recruiting.
e. centralized training.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

7. Which of the following is an example of an issue that is addressed by intercultural
issues with the foreign country?

a. sales force skill availability.
b. selling style differences.
c. country image.
d. expatriate recruiting.
e. centralized training.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

8. All of the following are examples of intercultural issues with the foreign country
EXCEPT:

a. motivation.
b. cultural sensitivity.
c. ethical standards.
d. relationship building.
e. home to host communications.

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

9. Which of the following is an example of an issue faced by international sales
strategy?

a. motivation.
b. cultural sensitivity.
c. ethical standards.
d. relationship building.
e. home to host communications.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

10. Sales force skill availability, company image, expatriate recruiting, and centralized
training are issues relevant to ________________________ considerations.

a. international product
b. international sales strategy
c. international mix
d. intercultural issues with the foreign country
e. global society

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

11. Motivation, cultural sensitivity, ethical standards, fairness, and relationship building
are issues relevant to _______________________ considerations.

a. international product
b. international sales strategy
c. international mix
d. intercultural issues with the foreign country
e. global society

Difficulty: (1) Knowledge: (F) Page: 423, Exhibit 14-1

12. In the sales management “process,” the first step is where the manager:

a. sets objectives and strategy.
b. determines goals and purposes.
c. recruits.
d. trains.
e. supervises.

Difficulty: (2) Knowledge: (F) Page: 423

13. A key decision that a marketer must make with respect to international marketing is
_______________________. This decision limits and defines key underlying aspects
of its future sales force management.

a. which market to enter
b. how much to spend in a market
c. how to enter the market
d. how far should a market be entered
e. how long to stay in a market

Difficulty: (3) Knowledge: (A) Page: 423

14. The _________________ in(into) a market will determine how large the sales force
needs to be and will influence how much training it will require.

a. form of marketing
b. form of entry
c. form of promotion
d. form of commission
e. form of management

Difficulty: (2) Knowledge: (F) Page: 423

15. How large a sales force needs to be, how much training the sales force will need,
whether the sales force is predominately local or foreign, and the manner of
compensation are all issues influenced by the __________________ in(into) a
market.

a. form of marketing
b. form of entry
c. form of promotion
d. form of commission
e. form of management

Difficulty: (2) Knowledge: (F) Page: 423

16. With respect to sales and sales management, the entry method into a market is also
called the ____________________________.

a. zone process
b. level of migration
c. level of expatriation
d. level of complexity
e. level of integration

Difficulty: (3) Knowledge: (F) Page: 424

17. With respect to sales and sales management entry into a foreign market, _________
integration refers to greater ownership and control of the distribution channel.
a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (2) Knowledge: (A) Page: 424

18. If a company begins its foreign sales by exporting through a merchant distributor who
takes title to the product and performs all the necessary foreign sales functions, this
would be a form of ________________ integration.

a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (3) Knowledge: (A) Page: 424

19. If a company begins its foreign sales by exporting through merchant distributors and
then purchases a foreign sales subsidiary and locates product warehouses abroad, this
would be a form of _____________________ integration.

a. vertical
b. horizontal
c. forward
d. backward
e. dual

Difficulty: (3) Knowledge: (A) Page: 424

20. Selling through an Export Management Company (EMC) or an Export Trading
Company (ETC) is considered a _____________ involvement approach to
international sales.

a. low
b. middle
c. high
d. backward
e. parallel

Difficulty: (1) Knowledge: (F) Page: 424

21. _____________________ serves the needs of their clients in entering a market or
sourcing goods from a market. They are characterized by their “service” nature and
efforts to interact with and meet the needs of the exporter client.

a. A foreign franchise
b. An Export Trading Company
c. An Export Management Company
d. A Noraizi agent
e. A bulk-breaker

Difficulty: (2) Knowledge: (F) Page: 424

22. Which of the following degrees of involvement would probably be in use when
Export Management Companies, Export Trading Companies, or direct exporting
are being used by the firm?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (1) Knowledge: (A) Page: 425

23. Which of the following degrees of involvement would probably be in use when
piggybacking and selling through chains are used by the firm?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 425

24. Many ______________________ use EMCs services mainly to test the international
arena.

a. contract manufacturers
b. franchisees
c. experienced exporters
d. inexperienced exporters
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 425

25. If the company describes its situation as being concerned with a contract for sales
from the U.S., no sales force or representatives abroad, and little or no control over
the foreign marketing process, the firm will probably use which form of involvement
listed below?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

26. If the company uses expatriates to oversee sales regions and lead training, the firm
will probably use which form of involvement listed below?

a. limited foreign involvement and visibility
b. local management and sales force
c. expatriate management and local sales force (mixed)
d. heavy to complete expatriate sales force
e. maximum global control and world wide ownership

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

27. _____________________ is usually a large conglomerate that imports, exports,
countertrade, invests, and manufactures in the global arena.

a. A foreign franchise
b. An Export Trading Company
c. An Export Management Company
d. A Noraizi agent
e. A bulk-breaker

Difficulty: (2) Knowledge: (F) Page: 425

28. Sogoshosha (such as Mitsubishi, Mitsui, Sumitomo, and Marubeni) are the Japanese
equivalents of _______________________.

a. a foreign franchise
b. an Export Trading Company
c. an Export Management Company
d. a dealer network
e. a bulk-breaker

Difficulty: (2) Knowledge: (A) Page: 425

29. If a company follows a _______________ involvement path, it normally gives
up the ability to motivate and monitor the sales force and to train them to better serve
the customer.

a. low
b. middle
c. high
d. backward
e. parallel

Difficulty: (1) Knowledge: (F) Page: 425

30. When a company has the ____________________ involvement approach, the
company (because it uses either host country employees or expatriates) must face
the foreign culture and intercultural communication can become an issue that must
be dealt with through training.

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

31. Which of the following forms of company sales involvement generally have the
lowest involvement of expatriates?

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

32. Which of the following forms of company sales involvement generally have the
highest involvement of expatriates?

a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

33. When a company has a _________________ involvement approach, the company
substantially controls the foreign distribution channels.
a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (1) Knowledge: (F) Page: 426

34. As an example of a company that has the _______________________ involvement
approach, the company will generally own warehouses where goods are stored and/or
own outlets where products are sold.
a. low-level
b. mid-level
c. high-level
d. backward level
e. parallel level

Difficulty: (2) Knowledge: (A) Page: 426

35. Which of the following statements MOST accurately describes the state of
international selling?

a. At the level of personal selling there is little true international selling.
b. International selling is a function of the degree of involvement.
c. Because of the global nature of business today, global selling transcends
international boundaries.
d. International selling will never work.
e. International selling is tightly monitored by most governments because of the
potential for funds outflow.

Difficulty: (3) Knowledge: (F) Page: 427

36. Which of the following statements MOST accurately describes the state of
international selling?

a. Despite growing “international sales,” salespeople typically work only in one
region.
b. International selling is a function of the degree of involvement.
c. Because of the global nature of business today, global selling transcends
international boundaries.
d. International selling will never work.
e. International selling is tightly monitored by most governments because of the
potential for funds outflow.

Difficulty: (3) Knowledge: (F) Page: 427

37. Personal selling is predominantly a _________________ activity.

a. psychological
b. ethnic
c. tribal
d. group
e. personal

Difficulty: (1) Knowledge: (F) Page: 427

38. A _________________ occurs when we group people (from what might appear
to us as very similar cultures) together in perhaps an inappropriate manner because
those people consider themselves to be different.

a. cultural assimilation
b. cultural harmony
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (F) Page: 428

39. Germans are typically viewed as scientifically exacting and industrious people.
However, the typical German manufacturing work week is only thirty hours and
the workers jealously guard their free time and show little interest in working
overtime. This would be an example of the dangers of ____________________.

a. cultural onomonopea
b. cultural adiaphoria
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (A) Page: 428

40. If a marketing manager were to mistakenly group South Koreans and Japanese
together (either as a market or by business and labor practices), this would be an
example of a _________________ problem.

a. cultural onomonopea
b. cultural adiaphoria
c. cultural generalization
d. cultural syncopation
e. cultural similarity

Difficulty: (2) Knowledge: (A) Page: 428

41. The differences between the cultures of companies in two countries are
based more on the ingrained cultural values of the ___________________.

a. consumers
b. governments
c. board of directors
d. CEOs
e. employees

Difficulty: (2) Knowledge: (A) Page: 428

42. One popular tool for characterizing people that addresses their cognitive styles is
the ____________________.

a. Kelsey-Ciebold scale.
b. Johns-Hopkins initial perception scale.
c. Majors-Hawkins Cognitive Indicator.
d. Myers-Briggs Type Indicator.
e. Spaniel test.

Difficulty: (2) Knowledge: (F) Page: 431

43. The ________________ classifies people on four personal dimensions. These are
extrovert versus introvert, sensing versus intuitive, thinking versus feeling, and
judging versus perceiving.

a. Hartman profile
b. Myers-Briggs Type Indicator
c. Majors-Hawkins Cognitive Indicator
d. Spaniel test for concepts
e. Freudian fantasy test

Difficulty: (2) Knowledge: (F) Page: 431

44. According to the Myers-Briggs Type Indicator test, the _____________ tends to
rely on the environment for guidance, be action-oriented, sociable, and communicate
with ease and frankness.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (2) Knowledge: (F) Page: 431, Exhibit 14-4

45. According to the Myers-Briggs Type Indicator test, the _____________ tends to
show a greater concern with concepts and ideas than with external events, relative
detachment, and enjoyment of solitude and privacy over companionship.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (2) Knowledge: (F) Page: 431, Exhibit 14-4

46. According to the Myers-Briggs Type Indicator test, the _____________ tends to
focus on immediate experience, become more realistic and practical, and develop
skills such as acute powers of observation and memory for details.

a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (3) Knowledge: (F) Page: 431, Exhibit 14-4

47. According to the Myers-Briggs Type Indicator test, the _____________ tends to
value the possibility and meaning more than immediate experience, and become
more imaginative, theoretical, abstract, and future oriented.
a. extrovert
b. introvert
c. sensing person
d. intuitive person
e. thinking person

Difficulty: (3) Knowledge: (F) Page: 431, Exhibit 14-4

48. All of the following are steps in the sales force management process EXCEPT:

a. setting sales force objectives.
b. designing sales force strategy.
c. recruiting and selecting salespeople.
d. commission system management.
e. supervising salespeople.

Difficulty: (2) Knowledge: (F) Page: 433

49. The first step in the sales force management process is best described as being:

a. designing sales force strategy.
b. setting sales force objectives.
c. recruiting and selecting salespeople.
d. commission system management.
e. supervising salespeople.

Difficulty: (2) Knowledge: (F) Page: 433

50. The __________________ states explicitly what the sales force will be asked to do.

a. sales force strategy
b. sales force objectives
c. sales force training procedures
d. sales force recruiting procedures
e. sales force evaluation procedures

Difficulty: (2) Knowledge: (F) Page: 433

51. Setting sales force objectives internationally will not only depend on the company
goals but will also depend on:

a. the training procedures.
b. the recruiting procedures.
c. the evaluation procedures.
d. an analysis of the culture and the values of the country it is entering.
e. management standards for excellence.

Difficulty: (2) Knowledge: (F) Page: 434

52. __________________ addresses the structure, size, and compensation of the sales
force.

a. Sales force objectives
b. Sales force goals
c. Sales force strategy
d. Sales force policy
e. Sales force vision

Difficulty: (2) Knowledge: (F) Page: 434

53. With respect to sales force structure, the ____________________ sales force has
each salesperson responsible for a particular area (reporting up the line to regional
sales managers).

a. territorial
b. product
c. customer
d. matrix
e. “open plan”

Difficulty: (1) Knowledge: (F) Page: 434

54. With respect to sales force structure, the ______________________ sales force has
each salesperson sell only one product or product line (even when selling to a single
customer).

a. territorial
b. product
c. customer
d. matrix
e. “open plan”

Difficulty: (1) Knowledge: (F) Pages: 434-35

55. With respect to the functions of sales force strategy, the ______________ refers to
and determines the physical positioning and responsibilities of each salesperson.

a. size
b. structure
c. compensation procedure
d. modeling procedure
e. evaluation procedure

Difficulty: (1) Knowledge: (F) Page: 434

56. In order to ensure a globally consistent sales strategy, a company will likely:
a. conduct sales training on a country-by-country basis.
b. train the sales managers in the headquarters country and send them abroad.
c. bring all employees to the headquarters country for training, then send them
to their home markets.
d. hire professional sales trainers to travel abroad to train employees.
e. none of the above

Difficulty: (2) Knowledge: (a) Page: 436

57. Difficulties in setting compensation packages for global salesforces include:
a. unions may restrict wage options.
b. some cultures are not motivated to work harder regardless of monetary
incentives.
c. local firms may protest that the MNC is stealing the best talent with wages
out of line with local standards.
d. culture may dictate that people of the same rank should not be compensated
differently regardless of performance.
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 446

58. Ethics for international sales reps:
a. are the same regardless of country.
b. can be taught and are no longer a problem once training has taken place.
c. don’t matter—reps should do what the home culture expects.
d. demand clear corporate policies to help reps avoid problems.
e. should be ignored until a complaint is made, then the guilty should be punished.

Difficulty: (2) Knowledge: (A) Page: 438

59. Evaluations of sales performance should be ________.
a. cumulative
b. exhaustive
c. quantitative
d. qualitative
e. both C and D

Difficulty: (2) Knowledge: (F) Page: 438

60. ____________________ the sales force means directing and motivating the sales
force to fulfill the company’s objectives and providing the resources to allow them
to do so.

a. Recruiting
b. Training
c. Evaluating
d. Supervising
e. Compensating

Difficulty: (2) Knowledge: (F) Page: 436

61. With respect to rewarding salespeople, _________________ reinforces the negative
image of the salesperson benefiting from the sale, with no regard for the purchaser’s
well-being.

a. the salary system
b. the commission system
c. the motivation system
d. the retainer system
e. the hourly wage system

Difficulty: (2) Knowledge: (F) Page: 437

62. With respect to evaluating salespeople, _________________ evaluations can be
in the form of comparisons of sales, of sales percents, or increases in sales.

a. parametric
b. qualitative
c. quantitative
d. nonparametric
e. decisional

Difficulty: (2) Knowledge: (F) Page: 438

63. Stages of the negotiation process include the following EXCEPT:

a. non-task sounding.
b. task-related information exchange.
c. foreign travel.
d. persuasion.
e. concessions and agreements.

Difficulty: (2) Knowledge: (F) Page: 439

64. In international marketing, negotiation strategies include the following EXCEPT:

a. employ an outsourcing consultant.
b. employ an agent or advisor.
c. involve a mediator.
d. induce the counterpart to follow one’s own negotiation script.
e. Adapt the counterpart’s negotiation script.

Difficulty: (3) Knowledge: (F) Page: 439

65. ___________________ are home country personnel sent overseas to manage local
operations in the foreign market.

a. Managers
b. International personnel
c. Group managers
d. Expatriates
e. Foreign managers

Difficulty: (1) Knowledge: (F) Page: 443

66. All of the following are advantages that expatriates have over foreign nationals as
managers of MNCs, EXCEPT:

a. more intelligence.
b. better communication.
c. better understanding of office politics.
d. develops better future managers.
e. better relationships with the home office.

Difficulty: (2) Knowledge: (F) Page: 444

67. All of the following are disadvantages of using expatriates over foreign nationals as
managers, EXCEPT:

a. cross-cultural training.
b. motivation.
c. honesty.
d. compensation.
e. family discord.

Difficulty: (2) Knowledge: (F) Pages: 443-44

68. The general trend among U.S. multinationals has been a decreasing use of
______________ managers overseas and an increasing reliance on ____________
foreign talent since the 1990s.

a. global, local
b. international, local
c. European, local
d. expatriate, local
e. Asian, local

Difficulty: (3) Knowledge: (A) Page: 443

69. The single most compelling reason that most expatriates return home early from
their tour of duty abroad is:

a. motivation.
b. salary.
c. health.
d. fear of the foreign environment.
e. family discord.

Difficulty: (2) Knowledge: (F) Page: 447

70. Expatica’s Relocation Services’ 2008 survey provided the following recommendations regarding reducing attrition rates EXCEPT:

a. membership in top private business clubs.
b. chances to use international experience.
c. a choice of positions upon return.
d. recognition.
e. repatriation career support.

Difficulty: (2) Knowledge: (F) Page: 448

True/False Short Answer

71. Unlike the United States, the majority of cars sold in Japan are sold door-to-door.

Difficulty: (2) Knowledge: (A) Page: 421

72. The salesperson is not the front line for the company.

Difficulty: (1) Knowledge: (F) Page: 422

73. Sales people do not sell services.

Difficulty: (1) Knowledge: (A) Page: 422

74. When considering international sales management issues, ________________
considerations are issues that analyze more than one country’s assets, strengths, and
situations, or that deal directly with cross-border coordination.

75. Sales force skill availability, country image, and expatriate recruiting are all issues
that are relevant as intercultural issues with the foreign country.

Difficulty: (3) Knowledge: (F) Page: 423, Exhibit 14-1

76. Motivation, cultural sensitivity, ethical standards, and fairness are all issues that are
relevant as intercultural issues with the foreign country.

Difficulty: (2) Knowledge: (F) Page: 423, Exhibit 14-1

77. The question of how to enter the market is central to marketing.

Difficulty: (1) Knowledge: (F) Page: 423

78. Backward integration refers to greater ownership and control of the distribution
channel.

Difficulty: (3) Knowledge: (F) Page: 423

79. If a firm has limited foreign involvement and visibility, a correct choice for them to
use in entering a foreign country would be to develop an expatriate sales force.

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

80. If a firm has limited foreign involvement and visibility, a correct choice for them to
use in entering a foreign country would be to enter into an arrangement with an
Export Management Company.

Difficulty: (2) Knowledge: (A) Page: 424, Exhibit 14-2

81. The term sogoshosha in Japan describes an Export Trading Company.

Difficulty: (2) Knowledge: (A) Page: Page: 425

82. Personal selling is predominantly a group activity.

Difficulty: (1) Knowledge: (F) Page: 427

83. At the level of personal selling there is little true international selling.

84. Equating Korean and Japanese consumers and business practices to be the same just
because they are in geographic proximity to one another would be a mistake often
made because of _______________________.

85. Myers-Briggs-Type Indicator (MBTI) is a tool for addressing people’s cognitive
styles.

Difficulty: (3) Knowledge: (F) Page: 431

86. One of the dimensions of Myers-Briggs-Type Indicator (MBTI) include ethnocentric
behavior:

Difficulty: (1) Knowledge: (F) Page: 431

87. The first step in the process of sales force management starts with recruiting and
selecting salespeople.

Difficulty: (1) Knowledge: (F) Page: 434

88. The size of the salesforce depends on the sales structure.

89. In the negotiation process, nontask soundings do not include activities that are used to
establish a rapport among the parties involved.

90. ______________ are home country personnel sent overseas to manage local
operations in the foreign market.

91. Negotiations practices do not vary enormously across cultures.

Difficulty: (2) Knowledge: (F) Page: 439

92. Expatriate involvement in international sales has been on the rise since the 1990s.

Difficulty: (2) Knowledge: (F) Page: 443

93. Once the expatriate is overseas, training becomes more difficult.

Difficulty: (3) Knowledge: (F) Page: 445

94. Cross-cultural training is on the decline in recent years.

Difficulty: (2) Knowledge: (F) Page: 445

95. Repatriation is the return of the expatriate employee from overseas.

Difficulty: (1) Knowledge: (F) Page: 446

96. Expatriates do not face a long list of difficulties upon returning home.

Difficulty: (2) Knowledge: (F) Page: 448

Essay

97. It has been said that selling is the world over. However, there are differences between the way that domestic and international selling efforts occur and are managed. Comment on these differences.

98. Considering various types of entry formats into the international arena, under what circumstances might it be advisable for the company to attempt a traveling global salesforce?

99. Considering the four major categories of the Myers-Briggs Type Indicator, which of the categories (or combination of categories) best describes you? Explain why.

100. Not all United States sales methods or systems can automatically be exported abroad. Considering the information provided by research on different cultural dimensions, why might it be difficult to adopt a U.S.-style commission system for salespeople in such countries as Japan or Mexico. Be sure to remember how these two countries might rank on the five cultural dimension scales.

101. Why do most firms still consider expatriates to be a valuable extension of their company? What are the advantages and disadvantages of using expatriates?

Chapter 15

Multiple Choice

1. In global logistics and distribution, Coca-Cola’s success relies largely on its global
distribution arm, ______________________, the world’s largest bottler group.

a. Coca-Cola Enterprises
b. Coca-Cola Network
c. Coca-Cola Web
d. Coca-Cola Team
e. Coca-Cola Trucking Co.

Difficulty: (2) Knowledge: (F) Page: 452

2. According to the textbook, which of the following famous business thinkers
characterized logistics as being “the darkest continent of business?”

a. Philip Kotler.
b. Stephen Covey.
c. Michael E. Porter.
d. Peter Drucker.
e. Tom Peters.

Difficulty: (3) Knowledge: (F) Page: 452

3. As firms start operating on a global basis, ___________________ need to manage the shipping of raw materials, components, and supplies among various manufacturing sites at the most economical and reliable rates.

a. human resource managers
b. logistics managers
c. operations managers
d. outsourcing managers
e. information technology managers

Difficulty: (2) Knowledge: (F) Page: 452

4. In 2011, the total logistics cost represented about 8.5 percent of the GDP, or $1 trillion in the _________________.

a. U.S.
b. Ireland
c. Portugal
d. Belgium
e. Romania

Difficulty: (1) Knowledge: (F) Page: 452

5. In 2012, in the U.S., the total logistics cost was ______ percent of the U.S. GDP.

a. 1
b. 3
c. 5.5
d. 8.5
e. 10.5

Difficulty: (2 Knowledge: (F) Page: 452

6. __________________ transportation refers to the seamless transfer of goods from
one mode of transportation (such as an aircraft) to another (such as a ship) and
vice versa without the hassle of unpacking and repackaging of goods to suit the
dimensions of the mode of transportation being used.

a. Bi-polar
b. Bi-modal
c. Intercontinental
d. Dual-basic
e. Intermodal

Difficulty: (2) Knowledge: (F) Page: 452

7. __________________ refers to the means of keeping continuous tabs on the exact
location of the goods being shipped in the logistics chain.

a. Data processing
b. Messaging service
c. Tracking technology
d. Computerized messaging
e. Hybrid technology

Difficulty: (2) Knowledge: (F) Page: 452

8. With electronic tracking technology, shippers are able to quickly react to any
disruption in the shipments because the shipper knows where exactly the goods are
in real time and:

a. labor can be adjusted accordingly.
b. the alternative means can be quickly mobilized should problems develop.
c. costs can always be evaluated.
d. losses are rare.
e. customer service is now at a premium.

Difficulty: (1) Knowledge: (A) Page: 452

9. ________________ is defined as the design and management of a system that directs
and controls the flows of materials into, through and out of the firm across national
boundaries to achieve its corporate objectives at a minimum total cost.

a. Global goods flow
b. Global distribution
c. Global logistics
d. Global wholesaling
e. Global shipping

Difficulty: (2) Knowledge: (F) Page: 453

10. Global logistics encompasses:

a. advertising and personal selling.
b. purchasing and manufacturing.
c. materials management and trucking.
d. materials management and physical distribution.
e. pricing and manufacturing.

Difficulty: (2) Knowledge: (A) Page: 453

11. ___________________ refers to the inflow of raw materials, parts, and supplies in
and through the firm.

a. Global logistics
b. Physical distribution
c. Materials management
d. Purchasing processes
e. Global distribution

Difficulty: (2) Knowledge: (F) Page: 453

12. The global logistics process begins with which of the following?

a. materials management
b. processing and assembly
c. physical distribution
d. raw materials, components, and supplies
e. finished products ready for shipment

Difficulty: (2) Knowledge: (F) Page: 453

13. When raw materials, components, and supplies are converted or manipulated for
processing and assembly by the firm, the process is monitored and controlled by
the ________________________ function of the firm.

a. physical distribution
b. purchasing
c. intermodal transportation
d. materials handling
e. materials management

Difficulty: (3) Knowledge: (A) Page: 453

14. _______________________ refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory, customer
service/order entry, and admission.

a. Physical distribution
b. Purchasing
c. Intermodal transportation
d. Global logistics
e. Materials management

Difficulty: (2) Knowledge: (F) Page: 453

15. All of the following are activities that occur during physical distribution EXCEPT:

a. transportation.
b. warehousing.
c. inventory.
d. order entry.
e. promotion and advertising.

Difficulty: (1) Knowledge: (A) Page: 453, Exhibit 15-1

16. With respect to distribution costs, a geographically large country such as the United
States will normally incur more ______________________ costs than in smaller
countries.

a. transportation, insurance, and inventory
b. warehousing, customer service/order entry, and general administration
c. transportation and inventory
d. materials handling
e. warehousing and transportation

Difficulty: (3) Knowledge: (A) Page: 453

17. Which of the following factors contribute significantly to the increased complexity
and cost of global logistics as compared to domestic logistics?

a. domestic intermediaries
b. service
c. purchasing
d. exchange rate fluctuation
e. materials handling

Difficulty: (1) Knowledge: (F) Page: 455

18. All of the following factors contributed significantly to the increased complexity and
cost of global logistics as compared to domestic logistics EXCEPT:

a. exchange rate fluctuation.
b. distance.
c. domestic intermediaries.
d. foreign intermediaries.
e. negotiations with government officials and distributors.

Difficulty: (2) Knowledge: (F) Page: 455

19. Recently the U.S. dollar depreciated while the Japanese yen soared in value. Honda
found that it was much cheaper to ship its Accord models to Europe from its Ohio
plant than from Japan. This could most accurately be classed as a move made
because of problems or opportunities with:

a. distance.
b. logistics.
c. exchange rate fluctuations.
d. foreign intermediaries.
e. domestic intermediaries.

Difficulty: (1) Knowledge: (A) Page: 455

20. The bulk of international trade is handled by ________________________.

a. ocean shipping
b. air transport
c. trucking services
d. railroads
e. inland waterways

Difficulty: (1) Knowledge: (A) Page: 455

21. The most important factors in determining an optimal mode of transportation for
foreign markets are the value-to-volume ratio, perishability of the product, and:

a. the cost of transportation.
b. intermodal ratio.
c. total cost ratio to inventory and warehousing expense.
d. the cost of insurance.
e. the distance to speed relationship.

Difficulty: (2) Knowledge: (F) Page: 456

22. All of the following are important factors in determining an optimal mode of
transportation to be used in foreign markets EXCEPT:
a. the cost of transportation.
b. the value-to-volume ratio.
c. the perishability of the product.
d. obsolescence along the product life cycle.
e. the cost of insurance.

Difficulty: (3) Knowledge: (F) Pages: 456

23. The _________________ is determined by how much value is added to the materials
used in the product.

a. perishability of the product
b. cost of transportation
c. the cost of insurance
d. the value-to-volume ratio
e. the intermodal ratio

Difficulty: (1) Knowledge: (F) Page: 456

24. The ________________ of the product refers to the quality degradation over time
and/or product obsolescence along the product life cycle.

a. perishability
b. cost of transportation
c. cost of insurance
d. value-to-volume ratio
e. intermodal ratio

Difficulty: (1) Knowledge: (F) Page: 456

25. All of the following are viable options for shipping products internationally on a
global basis (anywhere in the world) EXCEPT:

a. ocean shipping.
b. air freight.
c. cargo liner service.
d. truck.
e. intermodal transportation.

Difficulty: (2) Knowledge: (A) Page: 456

26. The primary forms of ocean shipping include all of the following EXCEPT:

a. liner service.
b. bulk shipping.
c. tanker shipping.
d. irregular runs.
e. FedEx surface.

Difficulty: (1) Knowledge: (A) Page: 456

27. If a product were to be categorized as being heavy, bulky, and nonperishable,
probably the best form of global shipping would be:

a. ocean shipping.
b. air freight.
c. truck.
d. rail.
e. barge.

Difficulty: (1) Knowledge: (F) Page: 456

28. If a company wished to ship semiconductor chips abroad, they would probably
choose:

a. ocean shipping.
b. air freight.
c. truck.
d. rail.
e. barge.

Difficulty: (1) Knowledge: (A) Page: 457

29. Research has shown that if Nike or Reebok were to be transporting their footwear
from plants in Asia to the United States, they would probably choose which of the
following transportation modes?

a. ocean shipping
b. air freight
c. truck
d. rail
e. barge

Difficulty: (2) Knowledge: (A) Page: 458

30. The traditional logistics strategy involves ____________________ based on
forecasting and inventory speculation.

a. supply and demand
b. anticipatory demand management
c. inventory volume equations
d. purchasing ratios
e. microeconomic principles

Difficulty: (2) Knowledge: (F) Page: 458

31. Information technology, electronic data interchange, and intermodal transportation
have made ____________________ a reality in physical distribution.

a. low cost transportation
b. a “no returns” policy
c. ultimate distribution service
d. just-in-time delivery
e. accurate purchasing management

Difficulty: (2) Knowledge: (F) Page: 458

32. Multinational corporations can use ________________ as a strategic tool in dealing
with currency fluctuations and as a hedge against inflation.

a. buying power
b. just-in-time management
c. just-in-time delivery
d. purchasing management
e. inventory

Difficulty: (3) Knowledge: (F) Page: 458

33. By increasing ___________________ before imminent depreciation of a currency
instead of holding cash, the firm may reduce its exposure to currency depreciation
losses.

a. buying power
b. plant and equipment
c. trucks
d. materials handling equipment (such as forklifts)
e. inventory

Difficulty: (2) Knowledge: (F) Page: 458

34. ___________ inventories also provide a hedge against inflation because the value of
the goods/parts held in inventory remains the same compared to the buying power of
local currency.

a. High-tech
b. Low-tech
c. High
d. Low
e. None of the above

Difficulty: (3) Knowledge: (A) Page: 458

35. __________________ refers to coordinating production and distribution across
geographic boundaries.

a. Rationalization
b. Utility management
c. Physical distribution management
d. Logistic integration
e. Logistic modeling

Difficulty: (2) Knowledge: (F) Page: 459

36. _________________ means reducing resources to achieve more efficient and
cost-effective operations.

a. Rationalization
b. Utility management
c. Physical distribution management
d. Logistic integration
e. Logistic modeling

Difficulty: (2) Knowledge: (F) Page: 459

37. Another profound change in the last decade is the proliferation of _______________.

a. IT warehouses
b. e-commerce
c. information technology
d. global shipping traffic
e. global air traffic

Difficulty: (2) Knowledge: (F) Page: 459

38. 3PL stands for:

a. third-party logistics.
b. third-power logistics.
c. third-peer logistics.
d. third-production logistics.
e. none of the above.

Difficulty: (1) Knowledge: (F) Page: 461

39. The largest third-party logistics sector is the value-added ________________ and
_________________ industry.

a. warehousing, purchasing
b. warehousing, manufacturing
c. warehousing, distribution
d. warehousing, painting
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 461

40. The trend toward third-party logistics is a result of the _____________ and the
_____________.

a. Internet, enterprise resource planning
b. Internet, technology simulations
c. Internet, customer relationship management
d. Internet, Intranet
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 462

41. The Internet and Intranet facilitate __________________________.

a. parallel delivery.
b. cheap delivery.
c. expensive delivery.
d. forward-time delivery.
e. on-time delivery.

Difficulty: (1) Knowledge: (F) Page: 462

42. _________________ influences decisions regarding what activities and
technologies a company should concentrate its investment and managerial
resources in (in relation to its competitors in the industry).
a. Relative advantage
b. Absolute cost advantage
c. Comparative advantage
d. Competitive advantage
e. Sourcing advantage

Difficulty: (2) Knowledge: (F) Page: 464

43. __________________ affects the company’s decision about where to source and
market, based on lower cost of labor and other resources in one country relative to
another.

a. Relative advantage
b. Absolute cost advantage
c. Comparative advantage
d. Competitive advantage
e. Sourcing advantage

Difficulty: (2) Knowledge: (F) Page: 464

44. Some distribution companies even find that the best way to be successful is to create a
distribution ________________.

a. alliances
b. mergers
c. acquisitions
d. consortia
e. joint ventures

Difficulty: (3) Knowledge: (F) Page: 463

45. Sourcing strategy includes two basic choices. One of these is intra-firm sourcing
and the other is __________________.

a. importing
b. outsourcing
c. in-sourcing
d. matrix manipulation
e. horizontal integration

Difficulty: (1) Knowledge: (F) Page: 465

46. As a type of intra-firm sourcing, _____________________ is when a company
procures major components in-house by producing them domestically.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (2) Knowledge: (F) Page: 465

47. As a type of intra-firm sourcing, _____________________ is when a company
procures major components from its foreign subsidiary.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (1) Knowledge: (F) Page: 465

48. As a type of outsourcing, _____________________ is when a company
buys major components from independent suppliers at home.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. a domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (2) Knowledge: (F) Pages: 466

49. As a type of outsourcing, _____________________ is when a company
buys major components from independent suppliers overseas.

a. domestic in-house sourcing
b. offshore subsidiary sourcing
c. a domestic purchasing arrangement
d. offshore outsourcing (offshore sourcing)
e. export management company

Difficulty: (1) Knowledge: (F) Page: 466

50. Covisint is probably the largest global online ________ procurement system.

a. C2B
b. B2B
c. B2G
d. C2C
e. B2C

Difficulty: (2) Knowledge: (F) Page: 466-67

51. Typical B2B procurement systems rely on _______________ that emphasize the
lowest bids on a global basis.

a. promotions
b. selling
c. manufacturing
d. auctions
e. production

Difficulty: (2) Knowledge: (F) Page: 469

52. Companies that outsource to the extent that they adopt a “designer role” in
global competition (i.e., offer innovations in product design without investing
in manufacturing process technology) have been described by some as being:

a. vertical corporations.
b. horizontal corporations.
c. hollow corporations.
d. supply and demand corporations.
e. monopoly manufacturers.

Difficulty: (3) Knowledge: (F) Page: 468

53. A __________________ is an area that is located within a nation, but is considered
outside of the customs territory of the nation.

a. border zone
b. red zone district
c. warehouse district
d. dock facility
e. free trade zone

Difficulty: (1) Knowledge: (F) Page: 472

54. In the United States, a free trade zone is officially called a __________________.

a. Maquiladora operation
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 473

55. All of the following are benefits of using a free trade zone EXCEPT:

a. duty deferral and elimination.
b. lower tariff rates.
c. no government interference in intelligence gathering activities.
d. exchange rate hedging.
e. “Made in U.S.A.” designation.

Difficulty: (1) Knowledge: (F) Page: 473, Exhibit 15-4

56. Duty deferral and elimination, lower tariff rates, exchange rate hedging, and a
“Made in U.S.A.” designation are all benefits of using a __________________.

a. Maquiladora operation
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 473, Exhibit 15-4

57. At the macro-level, benefits of using a free trade zone include all of the following
EXCEPT:

a. increased investment and employment.
b. more revenue through increased local taxes.
c. obtaining a beachhead in a foreign market without being in the mainstream
distribution process.
d. the ability to reassemble large shipments into different groupings.
e. no duties on labor.

Difficulty: (3) Knowledge: (A) Page: 473, Exhibit 15-4

58. Japan has established trade zones to increase __________________.

a. maquiladora operations
b. assembly operations
c. imports
d. exports
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 474

59. Various governments have established ____________________________.

a. export processing circles.
b. export processing groups.
c. export processing clans.
d. export processing networks.
e. export processing zones.

Difficulty: (3) Knowledge: (A) Page: 474

60. _________________________ usually provide tax- and duty-free treatment of
production facilities whose output is meant to be exported.

a. Gray products processing zones
b. High-tech processing zones
c. Maquiladora processing zones
d. Export processing zones
e. Import processing zones

Difficulty: (2) Knowledge: (F) Page: 474

61. To show the increasing power of retailers in today’s business world, the traditional
supply chain that was once powered by the manufacturer has been turned around.
Distribution today is characterized as being ____________ in nature.

a. push
b. pull
c. vertical shove
d. horizontal slant
e. parallelism

Difficulty: (2) Knowledge: (F) Page: 480

62. Which of the following should a company NOT do with a channel partner?

a. seek companies with good contacts
b. treat companies as short-term partners
c. withhold information from the distribution partner
d. allow the distribution partner to make marketing strategy decisions
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 476-77

63. If a retail firm sells a product under its own store name it is called a:

a. unique brand.
b. vertical brand.
c. horizontal brand.
d. store brand or private label.
e. hybrid label.

Difficulty: (1) Knowledge: (F) Page: 479

64. When Heinz sells its soup products to grocery store chains and allows them to
put their own store names on the product, the product is being sold as a:

a. domestic brand.
b. national brand.
c. manufacturers brand.
d. store brand or private label.
e. service label.

Difficulty: (1) Knowledge: (A) Page: 479

65. In which of the following countries are store brands marginal players because of
loyalty to national or manufacturer brands?

a. United States.
b. United Kingdom.
c. Japan.
d. France.
e. Canada.

Difficulty: (3) Knowledge: (A) Page: 480

66. All of the following are factors that have explained the success of private labels
in recent years EXCEPT:

a. better packaging decoration.
b. improved quality of private-label products.
c. development of premium private-label brands.
d. expansion into new product categories.
e. internationalization of retail chains.

Difficulty: (2) Knowledge: (F) Page: 480

67. As a branding strategy, _______________ is especially attractive to MNCs that
face well-entrenched incumbent brands in the markets they plan to enter. (This
overcomes the problem of shelf-space denial.)

a. domestic branding
b. national branding
c. manufacturers branding
d. store branding or private labeling
e. service labeling

Difficulty: (1) Knowledge: (F) Page: 480

68. The traditional supply chain powered by manufacturer push is becoming a:

a. demand chain driven by logistics.
b. demand chain driven by advertising.
c. service chain driven by customer service.
d. service chain driven by response time.
e. demand chain driven by customer pull.

Difficulty: (1) Knowledge: (F) Page: 480

69. With respect to strategies available to the business unit, a ____________ strategy
appears to be more effective than a __________ strategy in emerging markets.

a. service/product
b. product/service
c. push/pull
d. pull/push
e. pull/parallel

Difficulty: (2) Knowledge: (A) Page: 480

70. On-time retail information management carries two distinct advantages which are:

a. reduced inventory and accounting information at the retail level.
b. reduced inventory and market information at the retail level.
c. reduced inventory and manufacturing information at the retail level.
d. reduced inventory and production information at the retail level.
e. reduced inventory and outsourcing information at the retail level.

Difficulty: (3) Knowledge: (A) Page: 481

71. Industrialized countries tend to have a lower distribution outlet density than the
_______________________.

a. regional markets
b. global markets
c. world markets
d. submerging markets
e. emerging markets

Difficulty: (2) Knowledge: (A) Page: 482

72. The Large Scale Retail Store Law (LSRSL) in _______________ helped to protect
small retail stores.

a. Singapore
b. Pakistan
c. Indonesia
d. Japan
e. South Korea

Difficulty: (2) Knowledge: (A) Page: 483

73. In _________________, store hours are limited and stores do not open on Sundays.

a. Germany
b. USA
c. Mexico
d. Brazil
e. UK

Difficulty: (2) Knowledge: (A) Page: 485

74. _______________ is the fastest growing Internet market in Asia.

a. China
b. India
c. Indonesia
d. Hong Kong
e. South Korea

Difficulty: (2) Knowledge: (A) Page: 486

75. The Mexican version of the free trade zone is called the _________________.

a. Maquiladora operation or industry
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (F) Page: 489

76. In Mexico another name for the Maquiladora operation or industry is the:

a. in-bond or twin-plant program.
b. bonded warehouse.
c. border zone.
d. cross border zone.
e. indentured zone.

Difficulty: (2) Knowledge: (F) Page: 489

77. In Mexico, the free trade zone program (also called the in-bond or twin-plant
program) is called the _____________________________.

a. Maquiladora operation or industry
b. border zone
c. red zone district
d. Foreign Trade Zone
e. Channel Zone

Difficulty: (2) Knowledge: (A) Page: 489

78. Mexico allows duty-free imports of machinery and equipment for manufacturing
as well as components for further processing and assembly, as long as at least 80
percent of the plant’s output is exported. This is called a _______________
industry.

a. moonlighting
b. cross border
c. gray market
d. TRW
e. Maquiladora

Difficulty: (2) Knowledge: (A) Page: 489

79. Mexico’s border industrialization program was developed in __________.

a. 1945
b. 1955
c. 1965
d. 1975
e. 1985

Difficulty: (3) Knowledge: (F) Page: 489

80. Mexico permits _______ percent foreign ownership of the maquiladora plants in the
designated maquiladora zone.

a. 25
b. 50
c. 75
d. 90
e. 100

Difficulty: (2) Knowledge: (F) Page: 489

81. Mexico is an attractive location for ____________ intensive assembly.

a. capital
b. labor
c. technology
d. repair
e. service

Difficulty: (1) Knowledge: (A) Page: 489

True/False Short Answer

82. When Peter Drucker described logistics as “the darkest continent of business” he
probably meant it is was ________________________.

83. In 2008, in the United States, total logistical cost is estimated to be about 20 percent of the country’s GDP.

84. Global logistics encompasses materials management only.

Difficulty: (1) Knowledge: (F) Page: 453

85. _________________ transportation refers to the seamless transfer of goods from one
mode of transport to another and vice versa without the hassle of unpacking and
repackaging.

86. Materials management does not include the inflow of raw material, parts, and supplies through the firm.

Difficulty: (2) Knowledge: (F) Page: 453

87. ________________ is defined as the design and management of a system that
directs and controls the flows of materials into, through and out of the firm across
national boundaries to achieve its corporate objectives at a minimum total cost.

88. Global logistics, unlike domestic logistics, does not put emphasis on physical
distribution.

Difficulty: (2) Knowledge: (F) Page: 453

89. ___________________ refers to the inflow of raw materials, parts, and supplies
in and through the firm.

90. ___________________ refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory,
customer service/order entry, and administration.

91. Materials management refers to the movement of the firm’s finished products
to its customers, consisting of transportation, warehousing, inventory,
customer service/order entry, and administration.

92. Physical distribution refers to the inflow of raw materials, parts, and supplies
in and through the firm.

93. The bulk of international trade is handled by airlines.

94. The inventory-to-volume ratio is determined by how much value is added to materials
used in the product.

95. Air freight represents more than 40 percent of the value of goods shipped in
international commerce.

96. Ocean shipping is used extensively for the transport of heavy perishable cargoes.

97. In intermodal transportation, only one type of transportation is employed.

98. Rationalization means reducing resources to achieve more efficient and cost-effective operations.

Difficulty: (1) Knowledge: (A) Page: 459

99. ____________________ refers to coordinating production and distribution
across geographic boundaries.

100. In global logistics and distribution, 3PL stands for:

101. A ___________________ is an area that is located within a nation, but is
considered outside of the customs territory of the nation.

102. The Mexican version of a free trade zone is called the ___________________.

103. Wal-Mart is the largest retailer in the world.

104. LSRSL stands for:

105. In China, basket shopping is still considered the norm for most consumers.

Difficulty: (2) Knowledge: (A) Page: 485

106. An agent intermediary takes title to goods.

Difficulty: (1) Knowledge: (F) Page: 475

107. A merchant intermediary does not take title to goods.

Difficulty: (1) Knowledge: (F) Page: 475

108. In Japan, private brands are very popular.

Difficulty: (2) Knowledge: (F) Page: 480

Essay

109. Explain what the terms global logistics, materials management, and physical distribution mean. Describe the various operations and procedures encompassed by these terms.

110. The global logistics manager must understand the specific properties of the different modes of transportation in order to use them optimally. What are the most important factors in determining an optimal mode of transportation? List and briefly describe each of the factors.

111. Explain the role that so called “third-party logistics” (3PL) companies play in contemporary international trade. Cite the advantages of using third-party companies in the trade process.

112. Explain the role of the free trade zone in modern trade. Explain the free trade zone’s relationship and benefit to global logistics.

113. In which parts of the world are private labels popular? Why? What factors might explain this?

114. Explain the concept and function of the Maquiladora operation or industry in Mexico.

Chapter 16

Multiple Choice

1. ___________________ is the most popular way for many companies to become
international.

a. Exporting
b. Importing
c. Licensing
d. Contract manufacturing
e. None of the above

Difficulty: (2) Knowledge: (F) Page: 491

2. _______________ is usually the first entry mode of entry used by many companies.

a. Exporting
b. Importing
c. Licensing
d. Contract manufacturing
e. None of the above

Difficulty: (1) Knowledge: (F) Page: 491

3. In 2011, an estimated _______________ American jobs depended on international trade and export expansion.

a. 1 million
b. 8 million
c. 10 million
d. 15 million
e. 20 million

Difficulty: (3) Knowledge: (F) Page: 492

4. In 2011, exports represented about __________ percent of the U.S. GDP.

a. 5 percent
b. 8 percent
c. 9 percent
d. 10 percent
e. 14 percent

Difficulty: (3) Knowledge: (F) Page: 492

5. For a firm beginning exports for the first time, the first step is to use available
___________________.

a. primary data
b. secondary data
c. tertiary data
d. Internet data
e. intranet data

Difficulty: (2) Knowledge: (F) Page: 492

6. As an aid to expanding information about world trade, increasingly, international
marketing information is available in the form of ____________________.

a. CD-ROMs
b. electronic encyclopedias
c. electronic databases
d. CIA reports
e. government intelligence reports

Difficulty: (2) Knowledge: (F) Page: 492

7. Which of the following countries is the largest participant in database growth?

a. United Kingdom
b. Germany
c. Japan
d. France
e. United States

Difficulty: (1) Knowledge: (A) Page: 492

8. Approximately how many databases (that can be used to help with international
trade) are available online in the world?

a. 1,000
b. 3,000
c. 4,000
d. 5,000
e. 6,000

Difficulty: (3) Knowledge: (F) Page: 492

9. Conducting export research on China and Russia would best be done by:

a. doing database research.
b. doing on-line searches.
c. doing field work.
d. using existing government facts and figures.
e. using data supplied by trade missions.

Difficulty: (2) Knowledge: (A) Page: 493

10. The identification of an appropriate overseas market and an appropriate segment
involves grouping by all of the following criteria EXCEPT:

a. socioeconomic characteristics.
b. political and legal characteristics.
c. consumer variables.
d. service variables.
e. financial conditions.

Difficulty: (2) Knowledge: (F) Page: 493

11. When attempting to identify an appropriate overseas market and an appropriate
segment, socioeconomic variables should be considered. All of the following
are socioeconomic variables that should be considered EXCEPT:

a. demographics.
b. economic.
c. geographic.
d. econometrics.
e. climatic characteristics.

Difficulty: (2) Knowledge: (F) Page: 493

12. When attempting to identify an appropriate overseas market and an appropriate
segment, consumer variables should be considered. All of the following
are consumer variables that should be considered EXCEPT:

a. service quality.
b. purchase frequency.
c. lifestyle.
d. preferences.
e. purchase behavior.

Difficulty: (2) Knowledge: (F) Page: 493

13. To get an idea of market segments in a foreign country, the marketer can first
group regions within countries across the world by macroeconomic variables.
An illustration of one of these macroeconomic variables would be:

a. level of industrial development.
b. purchase preferences.
c. services sought.
d. lifestyles.
e. purchase frequency.

Difficulty: (2) Knowledge: (A) Page: 493

14. Data for grouping along macroeconomic criteria are available from international
agencies such as:

a. the International Court of Justice
b. the World Court.
c. the World Bank.
d. the National Geographic Society.
e. the World Economic Council.

Difficulty: (2) Knowledge: (F) Page: 494

15. The easiest product to sell abroad with respect to logistics is a(n) _____________
product.

a. differentiated
b. semi-standardized
c. clustered
d. gray market
e. standardized

Difficulty: (1) Knowledge: (F) Page: 494

16. _________________ exporting involves the use of independent U.S. middlemen
to market the firm’s products overseas.

a. Direct
b. Indirect
c. Parallel
d. Synchronized
e. Dual

Difficulty: (2) Knowledge: (F) Page: 495

17. When independent U.S. middlemen market a firm’s goods in an overseas market,
they are called ______________________. They market through their own network
of foreign distributors and their own sales force.

a. exporters
b. export specialists
c. export representatives
d. distribution specialists
e. parallel exporters

Difficulty: (2) Knowledge: (F) Page: 495

18. The CEM stands for:

a. cash export manager.
b. customs export manager.
c. charismatic export manager.
d. combination export manager.
e. collective export manager.

Difficulty: (2) Knowledge: (F) Page: 495

19. The _________________ acts as the export department to a small exporter or a
large producer with small overseas sales.

a. combination export manager (CEM)
b. export merchant
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

20. The Japanese trading companies are known as:

a. keiretsus
b. chaebols
c. sogonets
d. sogoshoshas
e. akimonos

Difficulty: (3) Knowledge: (F) Page: 495

21. In order to expand their exporting activities, many Japanese firms rely on giant
general trading companies known as _________________________.

a. keiretsus
b. chaebols
c. sogonets
d. sogoshoshas
e. akimonos

Difficulty: (3) Knowledge: (F) Page: 495

22. All of the following are common types of export representatives in the United
States EXCEPT:

a. combination export manager (CEM).
b. export merchant.
c. export commission house.
d. export consortium.
e. the trading company.

Difficulty: (3) Knowledge: (F) Page: 495

23. The _________________ buys and sells on their own accounts and assumes all the
responsibilities of exporting a product. Manufacturers do not control sales activities.

a. combination export manager (CEM)
b. export merchant
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

24. The _____________________ is someone who brings together an overseas buyer
and a U.S. manufacturer for the purpose of an export sale and earns a commission
for establishing a contact that results in a sale.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

25. A(n) ____________________ places orders on behalf of its foreign clients
with U.S. manufacturers and acts as a finder for its client to get the best buy.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 495

26. ___________________ are large, foreign organizations engaged in exporting and
importing. They buy on their own account and export the goods to their home
country.

a. Combination export manager (CEM)
b. Export broker
c. Export commission house
d. Piggyback exporter
e. Trading companies

Difficulty: (2) Knowledge: (F) Page: 495

27. A(n) ___________________ refers to the practice where U.S. firms that have an
established export department assume, under a cooperative agreement, the
responsibility of exporting the products of other U.S. companies.

a. combination export manager (CEM)
b. export broker
c. export commission house
d. piggyback exporter
e. trading company

Difficulty: (2) Knowledge: (F) Page: 496

28. Which of the following is an example of a large trading company?

a. IBM.
b. General Motors.
c. Mitsui.
d. Volvo.
e. Wal-Mart.

Difficulty: (1) Knowledge: (A) Page: 496

29. _________________ exporting occurs when a manufacturer or exporter sells directly
to an importer or buyer located in a foreign market.

a. Direct
b. Indirect
c. Parallel
d. Synchronized
e. Dual

Difficulty: (2) Knowledge: (F) Page: 496

30. With respect to direct exporting, the primary difference between a foreign sales
subsidiary and a foreign sales branch is that the foreign sales branch:

a. is larger.
b. is smaller.
c. is not a separate legal entity.
d. uses home country managers.
e. does not pay taxes.

Difficulty: (2) Knowledge: (A) Page: 497

31. The following characteristics (high set-up costs, higher credit risks, and higher
customer loyalty) apply to which of the following forms of exporting?

a. direct
b. indirect
c. parallel
d. synchronized
e. dual

Difficulty: (2) Knowledge: (A) Page: 497, Exhibit 16-2

32. In the U.S., ______________________ allows exporters to file export information at
no cost over the Internet.

a. Auxiliary Export System
b. Amended Export System
c. Automated Export System
d. Alliance Export System
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 497

33. All exports from the United States (except to Canada and U.S. territories) require
a(n) _____________________.

a. letter of credit.
b. letter of ownership.
c. letter for transportation permission.
d. export license.
e. social security number.

Difficulty: (2) Knowledge: (A) Page: 498

34. The second pillar of the export transaction is the logistics of the export transaction.
Included in this transaction are all of the following EXCEPT:

a. a bill of lading.
b. the terms of sale.
c. the payment.
d. a dispute mechanism.
e. monitoring of the shipment and delivery of the goods.

Difficulty: (3) Knowledge: (F) Page: 499

35. A(n) _________________________ is a contract between the exporter and the
shipper indicating that the shipper has accepted responsibility for the goods and
will provide transportation in return for payment.

a. bill of disclosure
b. term of sale
c. payment statement
d. transportation invoice
e. bill of lading

Difficulty: (2) Knowledge: (F) Page: 499

36. A(n) _______________________ is a bill for the goods stating basic information
about the transaction, including a description of the merchandise, total cost of the
goods sold, addresses of the buyer and seller, and delivery and payment.

a. bill of disclosure
b. term of sale
c. payment statement
d. commercial invoice
e. bill of lading

Difficulty: (2) Knowledge: (F) Page: 499

37. When the exporter quotes a price for the goods, including charges for delivery
of the goods alongside a vessel at a port (the seller covers all costs of unloading and
wharfage at the shipment port and the buyer covers all other charges to get the goods
to the buyer), this form of terms of shipment is called:

a. ex-works.
b. free alongside ship (FAS).
c. free on board (FOB).
d. cost and freight (CFR).
e. Cost, Insurance, and Freight (CIF).

Difficulty: (3) Knowledge: (A) Page: 501, Exhibit 16-4

38. INCOTERMS 2000 which went into effect from January 1, 2000 and is an acronym
for ____________________________, are the internationally accepted standard
definitions for the terms of sale by the International Chamber of Commerce.

a. Industrial Commercial Terms
b. Insurance Commercial Terms
c. Irrevocable Commercial Terms
d. International Commercial Terms
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 501

39. When the exporter quotes a price for the goods, including charges for delivery
of the goods alongside a vessel at a port (the seller covers all costs of unloading and
wharfage plus loading the goods on the vessel and the buyer covers all other charges
to get the goods to the buyer), this form of terms of shipment is called:

a. ex-works.
b. free alongside ship (FAS).
c. free on board (FOB).
d. cost and freight (CFR).
e. Cost, Insurance, and Freight (CIF).

Difficulty: (3) Knowledge: (A) Page: 501, Exhibit 16-4

40. All of the following are possible payment terms for goods exported to another nation
EXCEPT:

a. advance payment
b. third party draft.
c. confirmed irrevocable letter of credit.
d. unconfirmed irrevocable letter of credit
e. open account

Difficulty: (3) Knowledge: (F) Page: 502, Exhibit 16-5

41. A(n) __________________ is a payment form where a shipment is held by the
importer until the merchandise has been sold, at which time payment is made to the
exporter.

a. cash with order
b. confirmed irrevocable letter of credit
c. sight draft
d. time draft
e. consignment

Difficulty: (1) Knowledge: (F) Page: 502, Exhibit 16-5

42. A(n) _______________________ is a payment form where a cash payment occurs
when the order is placed.

a. cash with order
b. confirmed irrevocable letter of credit
c. sight draft
d. time draft
e. consignment

Difficulty: (1) Knowledge: (F) Page: 502, Exhibit 16-5

43. A(n) ________________________ is a payment form where a draft is so drawn as to
be payable on presentation to the drawee (usually the buyer).

a. cash with order
b. third party draft
c. confirmed irrevocable letter of credit
d. sight draft
e. time draft

Difficulty: (2) Knowledge: (F) Page: 502, Exhibit 16-5

44. The terms of payment between the exporter and importer are a matter of negotiation
and depend on a variety of factors. All of the following might be on that list of
factors EXCEPT:

a. the buyer’s credit standing.
b. the seller’s reputation.
c. the amount of the sale transaction.
d. the risks associated with the type of merchandise to be shipped.
e. the usual practice in the trade.

Difficulty: (2) Knowledge: (F) Page: 500

45. _______________ risk is the risk that the importer will not pay or fail to pay on the
agreed terms.

a. Credit
b. Exchange
c. Transfer
d. Importer
e. Exporter

Difficulty: (1) Knowledge: (F) Page: 500

46. ___________________ risk exists when the sale is in the importer’s currency and
that currency depreciates in terms of the dollar, leaving the exporter with a lesser
number of dollars.

a. Foreign credit
b. Foreign exchange
c. Foreign transfer
d. Foreign payment
e. Foreign delivery

Difficulty: (1) Knowledge: (F) Page: 500

47. ___________________ risk refers to the chances that payment will not be made
due to the importer’s inability to obtain U.S. dollars and transfer them to the
exporter.

a. Credit
b. Exchange
c. Transfer
d. Importer
e. Exporter

Difficulty: (1) Knowledge: (F) Page: 500

48. A confirmed irrevocable letter of credit is issued by the ____________ bank and
confirmed by a bank usually in the ____________ country.

a. importer’s, exporter’s
b. exporter’s, importer’s
c. investment, exporter’s
d. government’s, exporter’s
e. none of the above

Difficulty: (3) Knowledge: (F) Page: 502, Exhibit 16-5

49. A shipment that is held by the importer until the merchandise has been sold is called:

a. advance payment.
b. confirmed irrevocable letter of credit.
c. unconfirmed irrevocable letter of credit.
d. open account.
e. consignment.

Difficulty: (2) Knowledge: (F) Page: 502, Exhibit 16-5

50. The Japan External Trade Organization (JETRO) which helps foreign businesses to
export to Japan is affiliated with Japan’s _____________________________.

a. Ministry of Business, Trade, and Industry
b. Ministry of Economy, Trade, and Industry
c. Ministry of Economy, Trade, and Technology
d. Ministry of Economy, Trade, and Logistics
e. Ministry of Economy, Trade, and Agriculture

Difficulty: (3) Knowledge: (F) Page: 504

51. The Ex-Im Bank is described as being a:

a. bank that lends exclusively to importers.
b. new name for the old “World Bank.”
c. federally supported bank whose mission is to thwart communism by making
loans to anti-communist nations and exporters.
d. federally supported bank whose mission is to support exporters with necessary
credit.
e. bank which is not in existence yet. The concept still awaits Congressional
approval.

Difficulty: (2) Knowledge: (F) Page: 505

52. The main emphasis of the Ex-Im Bank’s lending practices today is in the area of:

a. loans to Japan.
b. loans to Taiwan.
c. loans to Mexico.
d. loans for prior bankrupt countries.
e. project finance (such as infrastructure projects—roads, dams, etc.).

Difficulty: (2) Knowledge: (A) Page: 505

53. Ex-Im Bank is not an aid or development agency, but a_____________________
corporation.

a. state
b. domestic
c. regional
d. private
e. government

Difficulty: (2) Knowledge: (A) Page: 505

54. Ex-Im Bank has two major programs in place which include:

a. Project Finance Division and Working Capital Program.
b. Project Finance Division and Working Capital Business Program.
c. Project Finance Division and Working Capital Export Program.
d. Project Finance Division and Working Capital Guarantee Program.
e. Project Finance Division and Working Capital Infrastructure Program.

Difficulty: (1) Knowledge: (A) Page: 505

55. One of the biggest advantages the United States has in importing is that U.S.
companies can:

a. order unlimited amounts of goods.
b. always sell what they order abroad.
c. be assured that the government will support their trade efforts.
d. pay in U.S. dollars–a currency accepted everywhere.
e. always turn a profit with the goods they buy because of market demand.

Difficulty: (3) Knowledge: (A) Page: 508

56. Since most world trade is done in dollars, the U.S. importer does not usually need to
_____________ foreign exchange transactions.

a. capitalize
b. hedge
c. capitate
d. survey
e. monitor

Difficulty: (1) Knowledge: (F) Page: 508

57. All of the following are activities that an importer would normally go through in
order to complete the purchase process. Which of the items listed below does not
logically fit?

a. Find a bank in the exporter’s country to handle financial transactions.
b. Establish a letter of credit to smooth the process.
c. Decide on the mode of transfer of goods.
d. Always use an export or import middleman to expedite the process.
e. Check compliance with national laws.

Difficulty: (2) Knowledge: (A) Page: 510

58. When a shipment reaches the United States, the consignee (usually the importer) will
file ______________ with the port director at the port of entry.

a. visas
b. product passports
c. bills of landing
d. bills of shipping
e. entry documents

Difficulty: (2) Knowledge: (F) Page: 510

59. With respect to shipments entering the United States, a(n) __________ is a guarantee
by someone that the duties and any potential penalties will be paid to the customs
of the importing country.

a. line of credit
b. transfer
c. bond
d. permit
e. tariff

Difficulty: (1) Knowledge: (F) Page: 510

60. Merchandise arriving from Canada and Mexico, trade fair goods, and perishable
goods and shipments assigned to the U.S. government almost always utilize the
____________________ to enable fast delivery after arrival.

a. quick release form
b. quick permit form
c. Customs form 7200
d. Special Permit for Immediate Delivery
e. block and load release form

Difficulty: (2) Knowledge: (A) Page: 511

61. If goods enter a ________________, they can be re-exported anytime (up to five
years) without payment of duty.

a. holding pen
b. corporate security zone
c. bonded warehouse
d. wharf zone
e. parallel import zone

Difficulty: (2) Knowledge: (F) Page: 511

62. When import duties are paid, the _________________ duty is a percentage of the
value of the merchandise.

a. ad valorem
b. specific
c. compound
d. nontariff
e. import

Difficulty: (1) Knowledge: (F) Page: 511

63. When import duties are paid, the _________________ duty is a specified amount
of the per unit weight or other quantity of the merchandise.

a. ad valorem
b. specific
c. compound
d. nontariff
e. import

Difficulty: (2) Knowledge: (F) Page: 511

64. When import duties are paid, the _________________ duty is a combination of a
specified amount of the per unit weight or other quantity of the merchandise plus
an ad valorem rate.

a. bonded
b. corkage
c. compound
d. nontariff
e. import

Difficulty: (1) Knowledge: (F) Page: 511

65. _________________ duties are assessed on imported merchandise sold to
importers in the United States at a price that is less than the fair market value.

a. Ad valorem
b. Specific
c. Compound
d. Nontariff
e. Antidumping

Difficulty: (1) Knowledge: (F) Page: 511

66. ______________________ duties are duties that are assessed to counter the
effects of subsidies provided by foreign governments to goods that are exported
to the United States.

a. Ad valorem
b. Specific
c. Compound
d. Countervailing
e. Antidumping

Difficulty: (1) Knowledge: (F) Page: 511

67. ________________ channels refer to the legal export/import transaction involving
genuine products into a country by intermediaries other than the authorized
distributors.

a. Black market
b. Gray market
c. Positioned
d. Zoned
e. Red zone

Difficulty: (2) Knowledge: (F) Page: 512

68. Another name for gray market channels is _________________.

a. positioned imports
b. concentric marketing
c. strategic entry imports
d. parallel imports
e. sidebar hedging

Difficulty: (2) Knowledge: (A) Page: 512

69. Brand reputation is a critical element in _________________ products.

a. gray
b. black
c. furniture
d. smuggled
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 512

70. All of the following conditions lend to the development of gray markets EXCEPT:

a. currency fluctuations.
b. differences in market demand.
c. legal differences.
d. opportunistic behavior.
e. foreign trade outlets.

Difficulty: (3) Knowledge: (A) Page: 513

True/False Short Answer

71. Exporting is the first mode of foreign entry used by many companies.

Difficulty: (1) Knowledge: (F) Page: 491

72. Exports represent about 4 percent of the U.S. gross domestic product (GDP).

Difficulty: (3)Knowledge: (F) Page: 492

73. For a firm beginning exports for the first time, the first step is to use available primary data.

Difficulty: (1) Knowledge: (F) Page: 492

74. The World Bank publishes the World Development Report.

Difficulty: (2) Knowledge: (F) Page: 494

75. A standardized product is not the easiest to sell abroad.

Difficulty: (1) Knowledge: (F) Page: 494

76. _________________ exporting involves using independent U.S. middlemen to
market the firm’s products overseas.

77. The combination export manager (CEM) acts as the import department to a small
importer.

Difficulty: (2) Knowledge: (F) Page: 495

78. Piggyback exporting refers to the practice where U.S. firms that have an established
export department assume, under a cooperative agreement, the responsibility of
exporting the products of other U.S. companies.

Difficulty: (2) Knowledge: (F) Page: 495

79. In the U.S., the Automated Export System (AES) enables exporters to file import
information at no cost over the Internet.

Difficulty: (1) Knowledge: (F) Page: 497

80. Exports from the United States do not require an export license.

Difficulty: (1) Knowledge: (F) Page: 498

81. A bill of lading is a contract between the exporter and the shipper indicating that the
shipper has accepted responsibility for the goods and will provide transportation in
return for payment.

Difficulty: (1) Knowledge: (F) Page: 499

82. INCOTERMS is an acronym for _____________________________________.

83. FOB is an acronym for ______________________.

84. Exchange risk is the risk that the importer will not pay or fail to pay on the agreed
terms.
Difficulty: (2) Knowledge: (F) Page: 502

85. A confirmed irrevocable letter of credit is issued by the importer’s bank and
confirmed by a bank usually in the exporter’s country.

Difficulty: (3) Knowledge: (F) Page: 502

86. The Japan External Trade Organization (JETRO) is affiliated with the U.S.
department of Commerce.

Difficulty: (1) Knowledge: (F) Page: 504

87. The World Bank is a federally supported bank whose mission is to support the Ex-Im
Bank.

Difficulty: (1) Knowledge: (F) Page: 505

88. The American Export Trading Company act was passed in 1982.

Difficulty: (2) Knowledge: (F) Page: 506

89. More than 90 percent of the world’s trade is denominated in U.S. dollars.

Difficulty: (2) Knowledge: (F) Page: 508

90. With respect to importing fees, a(n) ______________ duty is a percentage of the
value of the merchandise.

91. Antidumping duties are assessed on imported merchandise sold to importers in
the United States at a price that is less than the fair market value.

Difficulty: (2) Knowledge: (F) Page: 511

92. Gray market channels are also known as parallel imports.

Difficulty: (1) Knowledge: (F) Page: 512

93. Three conditions are necessary for gray markets to develop. The conditions include:
(a) Availability of products in other markets, (b) limited trade barriers, and (c)
_______________________.

94. Gray marketing is an illegal trade transaction.

95. Smuggling and black market activities are illegal global markets.

Essay

96. Indicate the factors that a prospective exporter might examine to choose an export market.

97. Describe the direct and indirect channels of distribution that are available to exporters. As part of the description process, indicate any conditions or advantages that might be present in these channels.

98. Pick three (3) of the options available to exporters when it comes to terms of payment. Explain each of the options available based on your choice.

99. Describe the role the U.S. government plays in maintaining and fostering export activities. Demonstrate this role with specific examples of activities that the government might undertake.

100. Describe gray markets. Explain how they develop. Describe your feelings about buying from a gray market.

Chapter 17

Multiple Choice

1. The capstone of a company’s global marketing activities is its ____________________________.

a. strategic marketing plan.
b. strategic marketing design.
c. strategic marketing circle.
d. strategic marketing products.
e. strategic marketing processes.

Difficulty: (2) Knowledge: (F) Page: 575

2. The content of a global strategic marketing plan covers the following four areas
EXCEPT:

a. a market situation analysis.
b. objectives.
c. strategies.
d. regional analysis.
e. action plans.

Difficulty: (2) Knowledge: (F) Page: 576

3. The first step of a global strategic marketing plan starts with:

a. market situation analysis.
b. actions plans.
c. strategies.
d. global ranking.
e. objectives.

Difficulty: (1) Knowledge: (F) Page: 576

4. Top-down strategic planning is based on a _____________________ approach.

a. decentralized
b. centralized
c. regional
d. globalized
e. local

Difficulty: (2) Knowledge: (F) Page: 576

5. A bottom-up planning approach starts with the ______________ subsidiaries.

a. local
b. global
c. transnational
d. manufacturing
e. high-tech

Difficulty: (2) Knowledge: (F) Page: 576

6. A recent survey of large multinational corporations found that pure ______________
planning was most popular (used by 66 percent of the companies surveyed).

a. bottom-up
b. top-down
c. strategic
d. long-term
e. short-term

Difficulty: (3) Knowledge: (F) Page: 576

7. A series of key criteria impact global organizations and their organizational designs.
All of the following would be major environmental influences on the organizational
design decision and structure EXCEPT:

a. competitive environment.
b. rate of environmental change.
c. product diversity.
d. regional trading blocs.
e. nature of customers.

Difficulty: (2) Knowledge: (F) Pages: 577-78

8. As international sales grow, the organizational structure will evolve to mirror the
growing importance of the firm’s _________________ activities.

a. local
b. regional
c. global
d. strategic
e. manufacturing

Difficulty: (1) Knowledge: (F) Page: 578

9. A series of key criteria impact global organizations and their organizational designs.
All of the following would be major firm-specific factors on the organizational
design decision and structure EXCEPT:

a. strategic importance of international business.
b. product diversity.
c. company heritage.
d. regional trading blocs.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (F) Page: 578

10. Which of the following would be considered a key environmental factor that
influences
global organization design decisions and structure?

a. strategic importance of international business.
b. product diversity.
c. company heritage.
d. regional trading blocs.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (F) Page: 578

11. In the area of global organizational design, the major firm-specific factors include the
following EXCEPT:

a. local customers.
b. strategic importance of international business.
c. product diversity.
d. company heritage.
e. quality of local managerial skills.

Difficulty: (3) Knowledge: (A) Page: 578

12. Typically, when overseas sales account for a very small fraction of the company’s
overall sales revenues, ____________________ can easily handle the firm’s
global activities.

a. complex organizational structures
b. network organizational structures
c. simple organizational structures
d. a virtual system
e. a matrix system

Difficulty: (1) Knowledge: (A) Page: 579

13. All of the following are examples of the principal designs that firms can adopt to
organize their global activities EXCEPT:

a. an international division.
b. a city division.
c. a product-based structure.
d. a geographic structure.
e. a matrix structure.

Difficulty: (2) Knowledge: (F) Pages: 578-79

14. Under the _____________________ design of global activities organization, the
company basically has two entities (the domestic division and the international
division).

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

15. Under the _____________________ design of global activities organization, the
company is organized along its various product divisions.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

16. Under the _____________________ design of global activities organization, the
company is configured along areas such as countries, regions, or some combination
of these two levels.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 578

17. Under the _____________________ design of global activities organization, the
company uses the option of integrating two approaches so there is a dual chain of
command.

a. international division
b. cryptic division
c. product-based structure
d. geographic structure
e. matrix structure

Difficulty: (1) Knowledge: (A) Page: 579

18. Most companies that engage in global marketing will initially start off by establishing
a(n):

a. city division.
b. country division.
c. international division.
d. export department.
e. export commission manager.

Difficulty: (2) Knowledge: (F) Page: 579

19. Which of the following organizational structures is most appropriate for the company
whose product line is not too diverse and does not require a large amount of
adaptation to the local country needs?

a. international division
b. cryptic division
c. global product division structure
d. geographic structure
e. matrix structure

Difficulty: (2) Knowledge: (A) Page: 579

20. Which of the following organizational structures is most appropriate for the high-tech
company with highly complex products or MNCs with a very diversified product
portfolio?

a. international division
b. cryptic division
c. global product division structure
d. geographic structure
e. matrix structure

Difficulty: (2) Knowledge: (A) Page: 579

21. If a high-tech company organizes itself by breaking into business networks, radio
communications, public telecommunications, components, and microwave systems,
which of the following organizational structures would probably be in use?

a. international division
b. global product division structure
c. global network solutions
d. geographic structure
e. matrix structure

Difficulty: (3) Knowledge: (A) Page: 579

22. All of the following are benefits of the global product division structure EXCEPT:

a. large degree of flexibility in terms of cross-country resource allocation.
b. large degree of flexibility in terms of cross-country strategic planning.
c. scale economics.
d. facilitates a global focus.
e. easy communication and coordination among the various product divisions
without duplication of effort.

Difficulty: (2) Knowledge: (F) Page: 579

23. Which of the following areas are very difficult for a global product division to
accomplish (therefore, this area is a shortcoming)?

a. large degree of flexibility in terms of cross-country resource allocation.
b. large degree of flexibility in terms of cross-country strategic planning.
c. scale economics.
d. facilitates a global focus.
e. easy communication and coordination among the various product divisions
without duplication of effort.

Difficulty: (3) Knowledge: (A) Page: 580

24. All of the following are problems with country-based subsidiaries EXCEPT:

a. they are too costly.
b. they have coordination problems with corporate headquarters.
c. cross-fertilization is hindered.
d. local market conditions go unnoticed.
e. a not-invented-here mentality exists.

Difficulty: (3) Knowledge: (F) Page: 580

25. All of the following are profiles that are suggested for the twenty-first century
country manager EXCEPT:

a. the trader.
b. the power broker.
c. the builder.
d. the ambassador.
e. the cabinet member.

Difficulty: (3) Knowledge: (F) Pages: 581-82

26. As a profile of a twenty-first century country manager, _________________
establishes a beachhead in a new market or heads a recently acquired local distributor.
They should have an entrepreneurial spirit.

a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 581

27. As a profile of a twenty-first century country manager, _________________
is a team player with profit and loss responsibility for a small- to medium-sized
country. Team-manship is key here.
a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

28. As a profile of a twenty-first century country manager, _________________
develops local markets. They are entrepreneurs who are willing to be part of regional
global strategy teams.

a. the trader
b. the representative
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

29. As a profile of a twenty-first century country manager, _________________
is in charge of large and/or strategic markets. Prime responsibilities include handling
government relations and integrating acquisitions and strategic alliances.

a. the trader
b. the power broker
c. the builder
d. the ambassador
e. the cabinet member

Difficulty: (2) Knowledge: (A) Page: 582

30. With respect to regional structures, a recent survey found that all of the following
roles were performed EXCEPT:

a. scouting.
b. liberating.
c. strategic simulation.
d. signaling commitment.
e. pooling resources.

Difficulty: (3) Knowledge: (F) Page: 583

31. The _________________ structure of organization explicitly recognizes the
multidimensional nature of global strategic decision making.

a. international division
b. customer division
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 583

32. The primary advantages of the matrix structure for organizing is that they represent
the growing complexities of the global market arena and:

a. it fosters team spirit and cooperation among managers.
b. it secures higher profits.
c. it does not duplicate efforts.
d. it has smooth and accurate communications.
e. it has clear lines of communication with no confusion.

Difficulty: (2) Knowledge: (F) Page: 584

33. All of the following are considered to advantages of the matrix structure of
organizing EXCEPT:

a. it fosters team spirit.
b. it fosters cooperation among managers.
c. it does not duplicate efforts.
d. it causes managers to think globally.
e. it causes managers to think globally but act locally.

Difficulty: (3) Knowledge: (F) Page: 584

34. Which of the following would be considered a disadvantage or drawback of the
matrix structure of organizing?

a. it does not foster team spirit.
b. it does not foster cooperation among managers.
c. it duplicates efforts and can cause confusion.
d. it prohibits managers from thinking globally.
e. it causes managers to think locally only.

Difficulty: (2) Knowledge: (A) Page: 584

35. All of the following are disadvantages or drawbacks of the matrix structure of
organizing EXCEPT:

a. dual reporting leads to conflicts and confusion.
b. dual profit responsibilities lead to conflicts and confusion.
c. bureaucratic bloat.
d. power clashes can occur.
e. managers think globally and act locally.

Difficulty: (1) Knowledge: (A) Page: 584

36. The __________________ is one solution that has been suggested to cope with the
shortcomings associated with the classical hierarchical organization structures.

a. international division
b. global network
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 585

37. The __________________ model is an attempt to reconcile the tension between
the need for local responsiveness and the wish to be an integrated whole.

a. international division
b. global network
c. global product division
d. geographic
e. matrix

Difficulty: (2) Knowledge: (F) Page: 585

38. Asea Brown Boveri (ABB), the Swiss-Swedish engineering company is an example
of ______________________.

a. local networking
b. regional networking
c. global networking
d. domestic networking
e. high-tech networking

Difficulty: (2) Knowledge: (F) Page: 586

39. The networked global organization is sometimes referred to as
_____________________.

a. international.
b. multinational.
c. transnational.
d. local-national.
e. quasi-national.

Difficulty: (3) Knowledge: (A) Page: 585

40. In the area of global branding strategies, the following options are used EXCEPT:

a. global branding committee.
b. brand champion.
c. global brand manager.
d. informal, ad-hoc branding meetings.
e. network meetings.

Difficulty: (2) Knowledge: (F) Pages: 26-27

41. In the process of global brand management, if a company decides against a formal
structure, it might still find it worthwhile to have an informal mechanism. This
usually takes the form of a(n) ______________ branding meeting.

a. ad-hoc
b. temporary
c. longitudinal
d. outside
e. domestic

Difficulty: (2) Knowledge: (F) Page: 587

42. Global branding committees are usually made up of ________________
executives.

a. matrix
b. network
c. medium-line
d. top-line
e. bottom-line

Difficulty: (2) Knowledge: (F) Page: 587

43. A ______________________ is a top-line executive (sometimes CEO) who
serves as the brand’s advocate.

a. brand champion
b. product champion
c. local champion
d. corporate champion
e. high-tech champion

Difficulty: (1) Knowledge: (F) Page: 587

44. Global brand manager positions are created when top management lacks
___________________ expertise:

a. high-tech
b. human resources
c. operational
d. manufacturing
e. marketing

Difficulty: (1) Knowledge: (F) Page: 587

45. Several management theorists have made an attempt to come up with the “right”
fit between the MNC’s environment (internal and external) and the organizational
setup. One popular model examines the relationship between organizational
structure, _____________________, and the importance of foreign sales to the
company (as a share of total sales).

a. product prices
b. domestic services
c. foreign product deliveries
d. foreign product diversity
e. purchasing habits

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

46. The Stopford and Wells model shows the relationship between the:

a. organizational structure, foreign product diversity and domestic sales.
b. organizational structure, foreign product diversity and local sales.
c. organizational structure, foreign product diversity and the importance of foreign
sales.
d. organizational structure, foreign product diversity and regional sales.
e. organizational structure, foreign product diversity and high-tech sales.

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

47. According to the Stopford and Wells model, when companies first explore the global
marketplace, they start off with a(n) ___________________________.

a. local division
b. regional division
c. international division
d. global division
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 589, Exhibit 17-6

48. According to the Stopford and Wells model, as foreign sales expand without an
increase in the firm’s foreign product assortment diversity, the company will most
likely switch to a __________________________ structure.

a. host-country area
b. home-country area
c. global area
d. geographic area
e. local area

Difficulty: (3) Knowledge: (F) Page: 589, Exhibit 17-6

49. A(n) ____________________ can be described as being where country and
regional managers look at strategic issues from multiple perspectives.

a. glocal mindset
b. global mindset
c. local mindset
d. regional mindset
e. country mindset

Difficulty: (1) Knowledge: (F) Page: 590

50. To make global marketing strategies work, companies need to establish a(n)
____________________.

a. career system.
b. development system.
c. control system.
d. appeals system.
e. listening system.

Difficulty: (1) Knowledge: (F) Page: 590

51. The main purpose of a _____________ is to ensure that the behaviors of the
various parties within the organization are in line with the company’s strategic
goals.

a. career system
b. development system
c. control system
d. appeals system
e. listening system

Difficulty: (1) Knowledge: (F) Page: 590

52. All of the following are parts (or basic building blocks) of a formal control system
EXCEPT:

a. the establishment of performance standards.
b. the measurement and evaluation of performance against standards.
c. the analysis and correction of deviation from standards.
d. perfection training.
e. none of the above.

Difficulty: (1) Knowledge: (F) Page: 590-91

53. Formal control systems are also called ________________ control systems.

a. administrative
b. conductive
c. selective
d. bureaucratic
e. strategic

Difficulty: (2) Knowledge: (F) Page: 590

54. The first step in any control process should be to:

a. clearly establish rewards and punishments.
b. set standards (metrics).
c. set controls.
d. set monitoring mechanisms.
e. establish who the controller is.

Difficulty: (1) Knowledge: (F) Page: 590

55. The two types of standards are behavior and ____________________________.

a. outcome-based.
b. performance-based.
c. intellectual-based.
d. strategic-based.
e. structural-based.

Difficulty: (2) Knowledge: (F) Page: 590

56. Although proper reward systems are crucial to motivate subsidiary managers, a
recent study has shown that the key role played is by the presence of ____________.

a. strong leadership
b. bonuses
c. perks
d. due process
e. nondiscrimination

Difficulty: (3) Knowledge: (F) Page: 591

57. The two most common forms of informal control are human resource development
and _________________.

a. manufacturing
b. production
c. network structure
d. strategic control
e. corporate culture

Difficulty: (3) Knowledge: (F) Page: 591

58. Corporate cultures can be clan-based or ___________________.

a. market based
b. leader based
c. employee based
d. symbol based
e. tradition based

Difficulty: (3) Knowledge: (F) Page: 591

59. The __________________ form of corporate culture is distinguished by an
embodiment of a long socialization process; strong, power norms; and a
defined set of internalized controls.

a. market based
b. leader based
c. employee based
d. clan based
e. tradition based

Difficulty: (2) Knowledge: (A) Page: 591

60. The _________________ form of corporate culture is distinguished by norms that
are loose or absent; socialization processes are limited; and control systems are purely
based on performance measures.

a. market based
b. leader based
c. employee based
d. clan based
e. tradition based

Difficulty: (2) Knowledge: (A) Page: 591

61. To shape a shared vision, cultural values primarily demand which of the following
properties?

a. easy to understand in only one way and written in English.
b. have clarity, continuity, and consistency.
c. have symbolism, sex-appeal, and sensitivity.
d. be dynamic, demanding, and declarative.
e. be global, gifted, and guiding.

Difficulty: (2) Knowledge: (A) Page: 592

62. The company’s management programs are another major ________________ control
tools.

a. informal
b. formal
c. simple
d. dynamic
e. complex

Difficulty: (1) Knowledge: (A) Page: 592

True/False Short Answer

63. The capstone of a company’s global marketing activities is its strategic marketing plan.

Difficulty: (1) Knowledge: (F) Page: 575

64. The first step of a global strategic marketing plan starts with market situation analysis.

Difficulty: (2) Knowledge: (F) Page: 576

65. The content of a global strategic marketing plan covers four areas which include:
market situation analysis, objectives, strategies, and ____________________.

66. Companies with substantial product diversity tend to go for a global geographic
division configuration.

Difficulty: (2) Knowledge: (F) Page: 579

67. The charter of the international division is to develop and coordinate the firm’s global
operations.

Difficulty: (3) Knowledge: (F) Page: 579

68. The global product structure is most appropriate for companies whose product line
is not too diverse and does not need a large amount of adaptation to local country
needs.

Difficulty: (2) Knowledge: (A) Page: 579

69. Under the ________________ design, the company configures its organization
along geographic areas.

70. Country-focused organizations can be very good forms of structure because they
tend to be less costly than other forms.

Difficulty: (3) Knowledge: (F) Page: 580

71. Under the __________________ design, the company integrates two approaches and
has a dual chain of command.

72. Some corporate strategy experts believe that in the twenty-first century, the role of the
country manager will be minimal.

Difficulty: (2) Knowledge: (F) Page: 581

73. The ___________________ type of manager is characterized as being in charge of
large and/or strategic markets. They also handle government relations.

74. With respect to organizational forms, the matrix structure explicitly recognizes the
multidimensional nature of global strategic decision making.

Difficulty: (1) Knowledge: (F) Page: 583

75. The matrix structure explicitly recognizes the multidimensional nature of global
strategic decision making.

Difficulty: (2) Knowledge: (A) Page: 583

76. Matrix structure can be a bureaucratic bloat.

Difficulty: (2) Knowledge: (A) Page: 583

77. The network global organization is sometimes also referred to as an “ethnocentric”
organization.

Difficulty: (1) Knowledge: (F) Page: 585

78. Asea Brown Boveri is a prime example of networking.

Difficulty: (2) Knowledge: (F) Page: 585

79. A brand champion is not a top-line executive.

Difficulty: (3) Knowledge: (F) Page: 587

80. The Stopford-Wells international structural stages model shows the relationship
between the MNCs’ networks and their overseas productivity.

Difficulty: (3) Knowledge: (A) Page: 589

81. The concept of a glocal mind-set encourages looking at strategic issues from multiple
perspectives.

Difficulty: (3) Knowledge: (A) Page: 590

82. The first step in the control process is to set standards.

Difficulty: (1) Knowledge: (F) Page: 590

83. Clan cultures embody a long socialization process, strong powerful norms, and a
defined set of internalized controls.

Difficulty: (2) Knowledge: (F) Page: 591

84. In market cultures, norms are always very strong.

Difficulty: (3) Knowledge: (F) Page: 591

85. The company’s management programs are another major formal control tools.

Difficulty: (2) Knowledge: (F) Page: 592

Essay

86. List and briefly discuss the key criteria that impact global organizational design.

87. List and briefly describe the principal organizational design options that firms can use to organize their global activities. Cite the advantages and disadvantages of each form.

88. Describe the five profiles that country managers might need to fit to be able to lead their organizations into the challenges of the twenty-first century.

89. Explain how a global networked organization might differ from a matrix organizational structure. To answer this question, review the characteristics of both structures carefully.

90. Although some feel country managers are obsolete, most companies believe they are essential to the firm. What reasons make country managers more important than ever? What roles will they play?

Chapter 18

Multiple Choice

1. Emerging markets can be found in which of the following areas?

a. Africa
b. Asia
c. Latin America
d. Eastern Europe
e. All of the above

Difficulty: (1) Knowledge: (F) Page: 597

2. Emerging markets refer to:

a. countries that used to be called “less developed countries.”
b. countries that were previously called “Third World.”
c. countries that lacked convertible currency.
d. countries that were communist.
e. both a and b

3. Which of the following is NOT a category of emerging markets?

a. developed countries
b. advanced emerging
c. secondary emerging
d. frontier countries
e. both a and d

4. Which of these does not describe the BRIC nations?

a. They consist of Brazil, Russia, India and China.
b. They have large populations.
c. They constitute almost 15 percent of world GDP.
d. They are developed countries.
e. All have growing economies.

5. The BRIC nations:

a. are all rich in natural resources.
b. are small countries with high income economies
c. are expected to surpass the GDP of the G7 nations within 20 years.
d. constitute a trade bloc.
e. none of the above

6. The Next Eleven:

a. is a George Clooney movie sequel.
b. consists of a diverse group of emerging markets.
c. constitute their own trade bloc.
d. are all located in Asia.
e. none of the above

7. Which of the following nations is NOT a member of the Next Eleven?

a. Malaysia
b. Indonesia
c. Egypt
d. Mexico
e. Nigeria

Difficulty: (2) Knowledge: (F) Page: 599

8. What event caused severe setbacks to many emerging markets?

a. global warming
b. China’s rise as a global superpower
c. losses in the World Cup soccer matches
d. the Asian financial crisis
e. EU focus on North Africa as a trading partner

9. Emigrant workers from emerging markets:

a. are a nuisance to the countries they work in.
b. deplete the economy of their home country.
c. are almost always unskilled workers.
d. form local communities abroad that can be leveraged.
e. travel only within their own continent.

Difficulty: (2) Knowledge: (A) Page: 599

10. Which country has the greatest number of mobile phone subscribers per 100 inhabitants?

a. Italy
b. Russia
c. Germany
d. United Kingdom
e. Nigeria

Difficulty: (1) Knowledge: (F) Page: 601, Exhibit 18-2

11. After China, the country with the largest shopping malls in the world is:

a. United States
b. Philippines
c. Turkey
d. Canada
e. Malaysia

Difficulty: (1) Knowledge: (F) Page: 602, Exhibit 18-3

12. Because emerging markets have underdeveloped infrastructure:

a. they cannot afford the best products from MNCs.
b. they can leapfrog old technology.
c. they are more eager to adopt new products.
d. R&D efforts are centered in these markets to generate new ideas.
e. distribution channels will be easier to set up.

Difficulty: (2) Knowledge: (A) Page: 600

13. Emerging markets:

a. cannot afford the most modern products.
b. are innovative in service offerings.
c. embrace new products quickly.
d. have low time-to-takeoff for new products.
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 605

14. Global competitors:

a. are not headquartered in emerging markets.
b. duel for market share in emerging markets but only consist of MNCs from developed countries.
c. come only from the BRIC nations.
d. may emerge from any nation to challenge established MNCs.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 607

15. Significant companies from emerging markets are leaders in which of these industries?

a. smart phones
b. computers
c. beer
d. cars
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 604

16. Acer, the world leader in laptop manufacturing and design, is based in which country?

a. South Korea
b. Taiwan
c. China
d. Japan
e. Singapore

Difficulty: (2) Knowledge: (F) Pages: 604

17. Jollibee competes in which industry around the world?

a. theme parks
b. entertainment
c. fast food
d. children’s clothing
e. shoes

Difficulty: (2) Knowledge: (F) Page: 603

18. Jollibee is a major international player that has its headquarters in ________.

a. Malaysia
b. Indonesia
c. China
d. Philippines
e. India

Difficulty: (2) Knowledge: (F) Page: 604

19. Which of the following brands has NOT been bought by firms in emerging markets?

a. Miller beer
b. Jaguar
c. IBM PC
d. Ferrari
e. Budweiser

Difficulty: (2) Knowledge: (F) Page: 604

20. One strategy used by the new champions to succeed in major markets is:

a. reviving old technology to save money.
b. copying the same model as MNCs from developed markets but with cheaper items.
c. employing the latest technology.
d. training staff in foreign companies first.
e. both a and d

Difficulty: (2) Knowledge: (A) Pages: 604-6

21. Emerging market champions:

a. avoid new technology because it is too expensive.
b. use a combination of old technology and cheap labor for a competitive advantage.
c. leapfrog to the newest technologies to offer quality products.
d. copy MNC products to avoid problems with product development.
e. try to avoid innovation.

Difficulty: (2) Knowledge: (A) Page: 605

22. Rapid scale-up of new champions:

a. doesn’t occur because capital is in short supply.
b. can be done by absorbing smaller rivals.
c. is achieved by investing more than smaller rivals.
d. both b and c
e. can only be done with the help of outside loans from such as the World Bank.

Difficulty: (2) Knowledge: (A) Page: 606

23. When would emerging market companies use a dodge strategy?

a. when its assets are transferable
b. when there is little pressure to globalize
c. when industry pressure is high
d. when assets are only valuable in the home market
e. both c and d

Difficulty: (3) Knowledge: (A) Page: 606

24. An emerging market company would be a defender when:

a. its assets are transferable.
b. there is little pressure to globalize.
c. industry pressure is high.
d. assets are only valuable in the home market.
e. both b and d

Difficulty: (3) Knowledge: (A) Pages: 606-7

25. When competing with the new champions from emerging markets, MNCs:

a. should give up—the new champions have cheaper labor and the latest technology.
b. can ignore the new champions—they are only effective in emerging markets.
c. should focus on the high end of the market and leave the rest to the local companies.
d. buy out local rivals and use them to challenge the new champion in the home market.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 608

26. MNCs are being threatened by new champions from the emerging markets. Which of the following strategies is NOT recommended for them?

a. Continue to use low cost sourcing in emerging markets.
b. Sell only goods developed by home country R&D in emerging markets.
c. Ignore emerging market branding strategies as being too elementary.
d. Do not invest in the mass markets of emerging economies as they will never amount to much revenue.
e. All of the above are not suggested.

Difficulty: (2) Knowledge: (A) Page: 608

27. Companies from the emerging markets are proving to be surprising challengers to older, larger MNCs. Which of the following would you recommend as an MNC strategic response?

a. Invest in growing mass markets of developing countries.
b. Partner with companies from the emerging markets.
c. Buy out smaller rival firms in the emerging markets.
d. Consider developing countries as more than just manufacturing sites.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 608

28. BOP stands for:

a. a type of music common to developing countries.
b. bottom of the pyramid.
c. bottom of the pile.
d. boost our profits.
e. none of the above

Difficulty: (1) Knowledge: (F) Page: 608

29. Some people are optimistic about the BOP as a market segment. This is because:

a. they are hopeless romantics and can’t face reality.
b. there is a great deal of untapped money in the BOP.
c. BOP is critical for long term growth of the company.
d. the BOP needs help and would welcome input from outsiders.
e. only b and c

Difficulty: (3) Knowledge: (A) Page: 609

30. Despite its dismal financial condition, the BOP has support as a viable market segment. This is because:

a. Wal-Mart concentrated in a similar area in the U.S. and became a world player.
b. incomes are expected to rise over time and this segment could become brand loyal.
c. challenges faced here could be the basis for new and innovative products.
d. the BOP is a source of cheap labor.
e. both b and c

Difficulty: (3) Knowledge: (A) Page: 609

31. The BOP:

a. constitutes a majority of the world’s population.
b. generates $2 an hour in wages.
c. is found mostly in the western hemisphere.
d. does not offer opportunities for MNCs.
e. is a viable market for only small firms with very cheap products.

Difficulty: (2) Knowledge: (A) Pages: 608-9

32. Bottom of the pyramid means:

a. lower class Egyptians.
b. the lowest level of consumer involvement with your product.
c. the lowest satisfaction level of Maslow’s hierarchy.
d. people earning less than $2 per day.
e. the first step toward $1 million on a game show.

Difficulty: (1) Knowledge: (F) Page: 608

33. Compared to developed countries, segments in emerging markets are:

a. enormous.
b. much more coarse and difficult to define.
c. harder to reach because media options are not as well developed.
d. less wealthy.
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 610

34. Hindustan Unilever pursued the following strategy to expand its market share in India.

a. retained the low unit price concept only for shampoo
b. focused its efforts on the BOP masses
c. emphasized local R&D efforts
d. concentrated on the urban population for sales
e. offered a wide variety of brands to tightly segment the market

Difficulty: (3) Knowledge: (F) Page: 610, Global Perspective 18-1

35. Hindustan Lever decided that its product line should include:

a. only products for the rich, so it could charge a premium.
b. products for all three major segments: affluent, middle income, and low income.
c. low income only, to capture the entire lower end as loyal customers for the future.
d. only the middle income, as they were ignored by other firms.
e. both the middle and upper income groups, as profit margins were viable there.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

36. Social marketing—in the form of new product development and/or aiding development:

a. is not practiced by emerging market companies.
b. is a waste of time—the population won’t be exposed to the messages and is unlikely to follow directions.
c. can expand market opportunities for the firm.
d. builds goodwill that can be leveraged into greater profits.
e. both c and d

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

37. What best describes the outcome of early entry into emerging markets?

a. It can be lucrative, especially for huge markets like China and India.
b. It is likely to fail because the markets don’t or can’t appreciate the product.
c. It will probably face few direct competitors.
d. Products will be too expensive for local consumers.
e. None of the above

Difficulty: (2) Knowledge: (A) Page: 611

38. There are many reasons why a company might prefer to be a follower in a new market, not a first entrant. Which of these is NOT one of those reasons?

a. reduced profits because the market is already gone
b. fewer pitfalls as the follower can see the mistakes of the first-mover
c. better developed marketing channels
d. competitive response from other MNCs and local competitors
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 611

39. Why is being a first-mover attractive in emerging markets?

a. Pent-up demand may lead to high initial sales.
b. Governments are eager to offer concessions to first-movers.
c. Early entrants get best access to key marketing resources.
d. Marketing dollars generate higher productivity.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 611

40. What approach should smaller firms take in emerging markets?

a. Be a follower so you don’t make costly mistakes.
b. Be a first-mover—to the victor go the spoils.
c. Be a first-mover to outmaneuver larger firms eyeing the same market.
d. Avoid the markets altogether—they take too much time and effort to develop compared to the pay-off for a small firm.
e. Merge with a local company.

Difficulty: (3) Knowledge: (A) Page: 611

41. The risks of entering emerging markets:

a. are financial, but only in terms of getting paid promptly and in full.
b. are financial, but include both currency volatility and getting paid.
c. are marketing related only—we wouldn’t enter a country where we couldn’t get paid.
d. are marketing and currency volatility driven.
e. cover the enter spectrum of marketing and financial risks.

Difficulty: (2) Knowledge: (A) Page: 612

42. Entry strategies for emerging markets include _______.

a. export
b. licensing
c. joint venture
d. direct investment
e. all of the above

Difficulty: (1) Knowledge: (A) Page: 612

43. The preferred entry mode(s) for emerging markets:

a. include(s) both licensing and minority joint venture.
b. seek(s) to adapt products to ensure the capture of the market.
c. involve(s) direct investment to close the market to local challengers and later MNCs.
d. focus (focuses) on marketing instead of sales.
e. both a and b

Difficulty: (2) Knowledge: (A) Page: 612

44. Which of the following is not a common risk when entering emerging markets?

a. product piracy
b. enforcing property rights
c. well-developed marketing infrastructure
d. antitrust laws
e. government intervention

Difficulty: (2) Knowledge: (A) Page: 612

45. When MNCs enter an emerging market, they are likely to:

a. share product secrets with the new country.
b. insist on tight corporate control.
c. take a high risk approach to increase the chance for greater rewards.
d. emphasize sales as a measure of success.
e. both b and d

Difficulty: (2) Knowledge: (A) Page: 612

46. Product policies that have been pursued when entering emerging markets include:

a. no adaptation—the risks and expense are too great.
b. selling a narrow range of premium goods.
c. pursuing backward innovation.
d. anchoring the product entry with products near the end of their life cycle in the home market.
e. all of the above

Difficulty: (3) Knowledge: (A) Page: 613

47. Probably the least effective product design option is:

a. no adaptation—sell what we already make.
b. to sell our normal products at premium prices.
c. to sell a stripped down version of a normal good.
d. to extend the product life cycle by selling obsolete goods abroad.
e. All of the above are equally effective.

Difficulty: (2) Knowledge: (A) Page: 613

48. Backward innovation and selling obsolete goods:

a. run a risk of consumer backlash in emerging markets.
b. could save the company money on product development.
c. should not be used because cutting edge products are most highly favored in emerging markets.
d. are entirely different approaches to entering a market.
e. a, b and c are all reasonable answers

Difficulty: (3) Knowledge: (A) Page: 613

49. Common features that products must have to be successful in emerging markets include:

a. the very latest designs.
b. the widest variety of options.
c. ruggedness.
d. high quality.
e. warranties.

Difficulty: (3) Knowledge: (A) Page: 613

50. Companies have used which of the following methods to enhance product acceptance in emerging markets?

a. washing machines that can restart after a power outage
b. changing detergent formulae to use more water
c. selling a top-end water purifier in India for greater assurance of pure water
d. lowering quality to keep prices low
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 613

51. When designing a product for emerging markets, companies should consider which of the following?

a. low price, ruggedness, and low quality
b. low price, inconsistent quality, and ability to run without electricity
c. high price, consistent quality, and a warranty
d. low incomes, unreliable power supplies, and scarce resources
e. low price, back-up power supplies, and a warranty

Difficulty: (2) Knowledge: (A) Page: 613

52. A manually operated sewing machine would:

a. be a backward innovation.
b. be an example of a product life cycle extension.
c. be rejected in emerging markets as not being modern enough.
d. be too difficult to operate.
e. likely have the idea copied as soon as it hit the market.

Difficulty: (3) Knowledge: (A) Page: 613

53. Brand strategies proven to succeed in emerging markets include:

a. pursuing only the wealthy—they don’t require product or price changes.
b. aiming brands at various market segments with different formulae and prices.
c. focusing on the emerging middle class for its growing buying power and eventual loyalty.
d. purchasing a local brand as part of the product offering.
e. both b and d

Difficulty: (3) Knowledge: (A) Page: 613

54. Which of the following is MOST likely to be used when packaging for emerging markets?

a. large packages to cater to the bigger families common in these countries
b. large packages because an entire village will share the product
c. smaller packages at lower price points
d. large packages with individual wrappers so merchants can resell in smaller quantities
e. both c and d

Difficulty: (3) Knowledge: (A) Pages: 614-15

55. Package design in emerging markets can largely ignore the feature of ________.

a. sturdiness
b. heat resistance
c. freshness
d. sustainability
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 614-15

56. Because of the climate and sales conditions of many emerging markets, packages should:

a. come frozen so freshness and safety are ensured.
b. be made of the cheapest materials to save money.
c. be sold with reusable containers.
d. allow people to see and smell the product before buying.
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 614-15

57. A package characteristic with perhaps greater significance in emerging markets than developed countries is ________.

a. refrigeration
b. sustainability
c. safety
d. variety of sizes
e. metal containers

Difficulty: (3) Knowledge: (A) Page: 615

58. The pricing strategy most likely to succeed in emerging markets is:

a. very low prices that everyone can afford—large volume makes up for low margins.
b. premium pricing only—establish the image of quality and save money on not having to adapt the product for local sale.
c. cater to the growing middle class and raise prices as income goes up.
d. saturate all price points with different products and make money at all levels.
e. All of the above are equally viable.

Difficulty: (2) Knowledge: (A) Page: 615

59. Why is distribution considered to be the biggest challenge when entering an emerging market?

a. It isn’t—pricing is.
b. It isn’t—product adaptation is.
c. Distribution infrastructure is too complex to navigate.
d. The country’s land mass is a deterrent.
e. All of the above

Difficulty: (2) Knowledge: (A) Page: 616

60. Which of the following is NOT a reason why distribution is difficult in emerging markets?

a. Local and rural areas can both be easily reached.
b. Shopping malls and supermarkets are on the rise in emerging markets.
c. Traditional retailers can be hard to work with.
d. Operating capital of retailers may be lacking.
e. Local brands are difficult to displace on the shelves.

Difficulty: (2) Knowledge: (A) Page: 616

61. P&G succeeded in Russia by:

a. using door to door sales reps.
b. direct export to a single large distributor in Moscow.
c. partnering with EU firms that already had a presence in Russia.
d. developing its own distributor network in exchange for exclusivity.
e. none of the above—Unilever is the dominant player in Russia.

Difficulty: (2) Knowledge: (F) Page: 617

62. When managing distributors in emerging markets, MNCs should:

a. pick partners with extensive local product-market knowledge.
b. choose partners with excellent English-speaking skills.
c. focus on entrepreneurs to build local good-will.
d. only enter markets with a company-owned distributor network.
e. select distributors who are competent working with MNCs.

Difficulty: (2) Knowledge: (A) Page: 618

63. Direct selling in emerging markets:

a. is attractive because of the rapid growth of internet sales.
b. often works best in a B2B setting.
c. is valuable in countries where face-to-face sales are common.
d. both b and c
e. none of the above—direct selling should be avoided as too difficult to supervise.

Difficulty: (2) Knowledge: (A) Page: 618

64. Emerging market distributors seeking exclusive territories should:

a. be told yes, on a temporary basis.
b. be denied, because this policy retards rapid market development.
c. be ignored—we will set up a company-owned distribution network.
d. be told no territories exist—everyone can sell everywhere, and the winner gets the final contract.
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 619

65. Communication challenges include:

a. raising brand awareness.
b. educating customers about product use and benefits.
c. creating brand image.
d. gaining loyalty.
e. all of the above

Difficulty: (2) Knowledge: (F) Page: 619

66. Push strategies:

a. are less viable in emerging markets than pull strategies.
b. are never used in emerging markets because channels are in disarray.
c. work well in many countries because of the enormous channel power of distributors.
d. result in the MNC being cheated because channel members keep the incentives for themselves.
e. never reach consumers.

Difficulty: (2) Knowledge: (A) Page: 619

67. Which of the following is a reason why a push strategy would succeed in emerging markets?

a. more frequent shopping than in developed countries
b. heavy reliance on retailer recommendations about brands
c. significant distributor power
d. numerous opportunities for brand switching
e. all of the above

Difficulty: (2) Knowledge: (A) Page: 619

68. Why might pull strategies aimed at consumers in emerging markets NOT be very successful?

a. They don’t understand the message about the product.
b. Coupons may be stolen and never reach the consumer for redemption.
c. Mass media are less effective in the emerging nations.
d. All of the above apply.
e. None of the above apply—emerging market consumers love coupons.

Difficulty: (3) Knowledge: (A) Page: 619

True/False Short Answer

69. Emerging markets are not a tempting target for MNCs.

Difficulty: (1) Knowledge: (F) Page: 597

70. The most busy McDonald’s in the world is in Peking.

Difficulty: (1) Knowledge: (F) Page: 597

71. The bulk of the revenues from some MNCs come from emerging markets.

Difficulty: (1) Knowledge: (F) Page: 598

72. Transition economies are those that are moving from very poor to more developed.

Difficulty: (1) Knowledge: (F) Page: 598

73. Iran is one of the BRIC nations.

Difficulty: (1) Knowledge: (F) Page: 598

74. BRIC stands for “big, rich, independent countries”.

Difficulty: (1) Knowledge: (F) Page: 598

75. Remittances from foreign workers are important to emerging market economies.

Difficulty: (1) Knowledge: (F) Page: 599

76. Most of the world’s largest shopping malls are in Asia.

Difficulty: (1) Knowledge: (F) Page: 602, Exhibit 18-3

77. No companies from emerging market countries have made it to the Fortune Global 500 list.

Difficulty: (1) Knowledge: (F) Page: 603

78. Most of the largest banks in the world are from the United States.

Difficulty: (1) Knowledge: (F) Page: 603

79. Product piracy is not a problem in China.

Difficulty: (1) Knowledge: (F) Page: 604

80. Products from emerging markets only compete as low-end challengers to established brands.

Difficulty: (2) Knowledge: (A) Page: 604

81. MNCs cannot use products developed in emerging markets because the quality standards are too low to be transferred to MNC home markets.

Difficulty: (2) Knowledge: (A) Page: 608

82. India is experiencing changes in its income pattern from pyramid to diamond.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

83. Hindustan Unilever is a major corporation based in Pakistan.

Difficulty: (2) Knowledge: (F) Page: 610, Global Perspective 18-1

84. Social marketing in the Third World is a waste of time and money.

Difficulty: (2) Knowledge: (A) Page: 610, Global Perspective 18-1

85. Risk levels of entering emerging markets are higher than those for developed countries.

Difficulty: (1) Knowledge: (A) Page: 612

86. Backward innovation and selling obsolete goods are different names for the same product strategy.

Difficulty: (2) Knowledge: (F) Page: 613

87. The most common packaging choice for emerging markets is a smaller package.

Difficulty: (1) Knowledge: (A) Page: 614

88. Frugal engineering means making very cheap, low quality products so you can get the most profit.

Difficulty: (1) Knowledge: (A) Page: 615

89. Local autonomy should always be granted to distributors because they know the market better than the MNC.

Difficulty: (2) Knowledge: (A) Page: 619

90. Push strategies are more likely to be successful in emerging markets than pull strategies.

Difficulty: (2) Knowledge: (A) Page: 619

91. Billboards can be effective in reaching both rich and poor consumers in emerging markets.

Difficulty: (2) Knowledge: (A) Page: 619

Essay

92. Describe the characteristics that define emerging markets.

93. Despite coming from humble origins and lacking much of the resources of the major global firms, many companies from emerging markets are serious challengers in world markets. What strategies do they employ to enable them to succeed?

94. What are the strategic options for emerging market firms in global marketing? Under what conditions would each be suggested?

95. There are some commonly held beliefs about marketing mix strategy that have been proven to be less than optimal. Identify some of these.

96. Describe the communication challenges faced when entering emerging markets.

Chapter 19

Multiple Choice

1. According to the text, the Web clearly provides a unique _______________ and
______________ channel to marketers across the globe.

a. distribution, higher education
b. distribution, production
c. distribution, network
d. distribution, communication
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 626

2. According to this textbook, compared to the U.S., Europe as a future Internet
market will be:
a. better, because virtual retailers have a competitive advantage over traditional
stores.
b. worse because there are so many languages.
c. better because delivery is faster.
d. worse because Europe has less well developed Internet infrastructure.
e. both A and C

Difficulty: (2) Knowledge: (A) Page: 626

3. Although the Internet has become a global phenomenon, it first originated in (the):

a. Italy.
b. Japan.
c. U.S.A.
d. Belgium.
e. Singapore.

Difficulty: (1) Knowledge: (F) Page: 627

4. In 2005, the worldwide Internet population surpassed 1 billion.

a. 1 billion
b. 2 billion
c. 3 billion
d. 4 billion
e. 5 billion

Difficulty: (2) Knowledge: (F) Page: 627

5. The country with the most Internet users is:
a. United States
b. Japan
c. India
d. China
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 627, Exhibit 19-1

6. The country with the highest penetration rate of Internet users is:
a. United States
b. Japan
c. South Korea
d. United Kingdom
e. Canada

Difficulty: (2) Knowledge: (F) Page: 627, Exhibit 19-1

7. The majority of the Internet users now live outside of ________________ speaking
countries.

a. English
b. French
c. Arabic
d. German
e. Spanish

Difficulty: (1) Knowledge: (F) Page: 628

8. Which of the following is NOT a barrier to Internet marketing?

a. language
b. culture
c. infrastructure
d. access charges
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 627

9. The barriers to global e-commerce are:

a. language barriers.
b. cultural barriers.
c. infrastructure.
d. all of the above.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 627

10. The structural barriers to global e-commerce include the following EXCEPT:
a. language barriers.
b. cultural barriers.
c. infrastructure.
d. knowledge barriers.
e. roaming charges.

Difficulty: (1) Knowledge: (A) Page: 630-31

11. Which of these languages is NOT in the top three on Internet sites?

a. Hindu
b. Chinese
c. Spanish
d. German
e. Both a and d

Difficulty: (2) Knowledge: (F) Page: 628

12. Using only English on a website:

a. is doomed to fail.
b. is ethnocentric.
c. works in some industries like aerospace.
d. limits your market.
e. both c and d

Difficulty: (3) Knowledge: (A) Page: 628

13. In global e-commerce, Web site localization services have created the need for more:

a. translators.
b. copy writers.
c. media specialists.
d. network specialists.
e. knowledge experts.

Difficulty: (2) Knowledge: (A) Page: 628

14. Companies that wish to make their Web sites international by translating the
information and content into other languages have two alternatives that may include:

a. hire a firm or a person doing the translation.
b. use a software having the translation function.
c. use only English.
d. both a and b
e. both b and c

Difficulty: (2) Knowledge: (A) Page: 628

15. Which of these would NOT be a barrier to Internet marketing?

a. preference for face-to-face business transactions
b. lack of familiarity with credit cards
c. strict Internet security measures
d. website wording, logos, and colors
e. patriotism

Difficulty: (2) Knowledge: (F) Pages: 628-9

16. In the Asia-Pacific region, B2B e-commerce activities are facing obstacles which
could hinder the growth of the Internet. These obstacles include:

a. doing business on a face-to-face basis.
b. cultivating relationships and secrecy issues.
c. reluctance to share information.
d. all of the above are obstacles.
e. none of the above are obstacles.

Difficulty: (1) Knowledge: (A) Pages: 628-9

17. In many countries, businesspeople prefer to do business on a________________.

a. virtual basis.
b. simple basis.
c. complex basis.
d. face-to-face basis.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 628

18. E-readiness for Brazil, India, Russia and China is:

a. unknown—they won’t answer the surveys.
b. excellent—their relative backwardness lets them jump ahead with the latest
technology.
c. middle of the pack because their economies are growing rapidly.
d. very low.
e. none of the above

Difficulty: (2) Knowledge: (F) Page: 631

19. ISP is an acronym for:

a. Internet strategies provider.
b. Internet standards provider.
c. Internet service provider.
d. Internet system provider.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 629

20. In many European markets, consumers are reluctant to surf the Web because of:

a. high telecommunication charges.
b. low per capita income.
c. government rules and regulations.
d. distribution costs.
e. limited training and education.

Difficulty: (2)Knowledge: (F) Page: 632

21. In many countries, the cost of going online can be reduced by:

a. government deregulations.
b. increased competition.
c. new access alternatives.
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (A) Page: 632

22. In Japan, access to the web was previously dominated by ______________________, the Japanese telecom firm, which charges sky-high fees.

a. British Telecom.
b. Toyota.
c. Nippon Telephone & Telegraph (NTT).
d. Seven-Eleven Japan.
e. AT&T.

Difficulty: (1) Knowledge: (A) Page: 632

23. In the Internet world, there are many unsolved issues. For example, e-commerce is global but the national laws are mostly ________________.

a. local
b. regional
c. political
d. religious
e. secular

Difficulty: (1) Knowledge: (A) Page: 632

24. At the global level, a new nongovernmental body has been established to resolve domain disputes. The name of this body is:

a. Internet Corporation for Domain Names (ICDN).
b. Internet Corporation for Assigned Names (ICAN).
c. Internet Corporation for Assigned Names and Numbers (ICANN).
d. Internet Corporation for Networks (ICN).
e. Internet Corporation for Domain Disputes (ICDD).

Difficulty: (3) Knowledge: (F) Page: 633

25. In the area of global marketing, the Internet offers two major benefits to companies that may be interested in selling their products worldwide. The two benefits include:

a. cost/efficiency savings and accessibility (connectivity).
b. cost/efficiency savings and brand image.
c. cost/efficiency savings and product standardization.
d. cost/efficiency savings and high quality intelligence.
e. cost/efficiency savings and product image.

Difficulty: (3) Knowledge: (A) Page: 633

26. According to the text, regarding the profile of Internet buyers, differences across countries are mainly due to two factors which are:

a. access charges and availability of computer programmers.
b. access charges and availability of outsourcing.
c. access charges and availability of entertainment options.
d. access charges and availability of CNN.
e. access charges and availability of AOL.
.
Difficulty: (3) Knowledge: (A) Page: 634

27. At the core of any global Web marketing strategy is the conflict between local responsiveness and _______________________.

a. local integration
b. regional integration
c. transnational integration
d. polycentric integration
e. global integration
.
Difficulty: (3) Knowledge: (A) Page: 637

28. In the product policy area, the Internet can help build:

a. regional brands.
b. food brands only.
c. global brands.
d. high-tech brands.
e. tangible brands.
.
Difficulty: (2) Knowledge: (A) Page: 641

29. Marketing of services differs from tangible goods in four areas:

a. intangibility, simultaneity, heterogeneity, and perishability.
b. intangibility, simultaneity, heterogeneity, and collectivity.
c. intangibility, simultaneity, heterogeneity, and connectivity.
d. intangibility, simultaneity, heterogeneity, and believability.
e. intangibility, simultaneity, heterogeneity, and credibility.

Difficulty: (2) Knowledge: (A) Page: 643

30. India Yahoo! is different from normal portals because is has:

a. no online auctions.
b. astrology.
c. no online shopping.
d. real estate.
e. cricket.

Difficulty: (2) Knowledge: (F) Page: 642

31. In some countries, customers might resent having the human element removed from
the service encounter because of:

a. cultural factors.
b. national factors.
c. technology factors.
d. consumption factors.
e. international factors.

Difficulty: (2) Knowledge: (A) Page: 644

32. In international marketing, a Web site gives service marketers the ability to offer _________ hour service to customers worldwide.

a. 10
b. 15
c. 20
d. 22
e. 24

Difficulty: (1) Knowledge: (F) Page: 644

33. Because of the Internet, many MNCs’ pricing decisions are less _____________.

a. national
b. flexible
c. creative
d. rigid
e. vertical

Difficulty: (3) Knowledge: (A) Page: 644

34. In the area of pricing, the Internet facilitates:

a. work transparency.
b. price transparency.
c. profit transparency.
d. channel transparency.
e. none of the above is true.

Difficulty: (2) Knowledge: (A) Page: 644

35. For global marketers, the Web could affect the firm’s high margins because of:

a. profit transparency.
b. channel transparency.
c. price transparency.
d. channel captaincy.
e. knowledge transparency.

Difficulty: (2) Knowledge: (A) Page: 644

36. In Internet marketing, consumers often are aware of low prices because of the availability of brand and pricing information. This is a result of:

a. profit transparency.
b. knowledge transparency.
c. labor transparency.
d. profit transparency.
e. price transparency.

Difficulty: (2) Knowledge: (A) Page: 644

37. To deal with price transparency issues in Internet marketing, companies can use methods such as:

a. cutting prices in high-price countries.
b. localizing the products.
c. refusal to handle orders from overseas.
d. All of the above methods can be used.
e. None of the above methods are used.

Difficulty: (3) Knowledge: (A) Page: 645

38. In many industries, connectivity means that existing channels/distributors can be bypassed by connecting:

a. buyers and suppliers.
b. buyers and governments.
c. buyers and software companies.
d. buyers and advertisers.
e. buyers and media companies.

Difficulty: (1) Knowledge: (A) Page: 645

39. Manufacturers who plan to add the Internet to their existing international channels should be aware of two possibilities:

a. replacement effect and international effect.
b. replacement effect and complementary effect.
c. complementary effect and managerial effect.
d. complementary effect and adaptation effect.
e. replacement effect and quality effect.

Difficulty: (1) Knowledge: (A) Page: 645

40. In international distribution, replacement effect can:

a. cannibalize existing distribution channels.
b. delete existing distribution channels.
c. replace existing distribution channels.
d. downsize existing distribution channels.
e. add more distribution channels

Difficulty: (2) Knowledge: (A) Page: 645

41. In international distribution, complementary effect can:

a. expand the overall business.
b. cannibalize existing distribution channels.
c. materialize the overall business.
d. downsize existing distribution channels.
e. none of the above.

Difficulty: (2) Knowledge: (A) Pages: 645-6

42. Click-and-mortar retailers are defined as:

a. those large retail chains trying to compete by pursuing no Web site presence.
b. those large retail chains trying to compete by making alliances and joint ventures.
c. those large retail chains trying to compete by going international.
d. those large retail chains trying to compete by hiring Web specialists.
e. those large retail chains trying to compete by setting up a Web site presence.

Difficulty: (2) Knowledge: (A) Page: 647

43. Click-and-mortar chains provide one advantage where:

a. products cannot be returned to the local stores.
b. products can be returned to the local stores.
c. click-and mortar stores have no Web sites.
d. All of the above.
e. None of the above.

Difficulty: (1) Knowledge: (A) Page: 647

44. In international marketing, many well-known brands in pure web retailing (e-trade, Amazon.com) still have limited ________________________ expertise.

a. local
b. international
c. regional
d. economic
e. political

Difficulty: (1) Knowledge: (A) Page: 648

45. Success of an e-tailing model will depend on three factors which include:

a. consumer behavior, cost structure, and networks.
b. consumer behavior, cost structure, and government policies.
c. consumer behavior, cost structure, and logistics.
d. consumer behavior, cost structure, and human resources.
e. consumer behavior, cost structure, and manufacturing.

Difficulty: (2) Knowledge: (A) Page: 648

46. According to Jupiter Research, online advertising spending is expected to grow to around ____________ in the U.S. by 2009.

a. $10 billion
b. $16 billion
c. $20 billion
d. $30 billion
e. $35 billion

Difficulty: (3) Knowledge: (F) Page: 648

47. The Internet offers advantages to international advertisers which include:

a. global reach.
b. interactivity.
c. precise information
d. all of the above.
e. none of the above.

Difficulty: (2) Knowledge: (A) Pages: 648-9

48. In Internet advertising, by clicking on the banner ad, users can be taken to the:

a. internet’s databank.
b. advertiser’s web site.
c. Netscape’s site.
d. Yahoo’s site.
e. none of the above.

Difficulty: (1) Knowledge: (A) Page: 649

49. According to the text, the ultimate success of an online campaign depends on the following factors EXCEPT:

a. the nature of the product.
b. the targeting.
c. choice of the site.
d. execution of the ad.
e. hiring an efficient CEO.

Difficulty: (2) Knowledge: (A) Page: 650

50. Although Internet advertising is growing at a very rapid pace, many advertisers are skeptical about its potential as a global promotion tool because of (the):

a. annoyance factor.
b. audience measurement.
c. click-thru rates.
d. high access and/or phone charges
e. all of the above.
.
Difficulty: (1) Knowledge: (A) Page: 650

51. International marketers who plan on using the Web as an advertising tool should familiarize themselves with:

a. advertising regulations and restrictions in foreign markets.
b. search engines.
c. distribution channels.
d. digital networks.
e. digital suppliers.

Difficulty: (2) Knowledge: (A) Page: 650

52. Keyword search advertising allows the company to have a link to its Web site when
people are looking for ________________________ -related information.

a. people
b. market
c. product
d. country
e. none of the above

Difficulty: (2) Knowledge: (A) Page: 649

53. In Internet advertising, microsites are created to promote ____________________
brands.

a. hybrid
b. individual
c. complex
d. global
e. none of the above

Difficulty: (1) Knowledge: (A) Page: 649

54. The ultimate success of an online campaign hinges on four factors which include:

a. nature of the product, the target, choice of site, and color
b. nature of the product, the target, choice of site, and graphics
c. nature of the product, the target, choice of site, and banners
d. nature of the product, the target, choice of site, and execution of the ad
e. none of the above

Difficulty: (3) Knowledge: (A) Page: 650

55. Online campaigns would work for __________________________________.

a. high involvement goods.
b. low involvement goods.
c. vertical involvement goods
d. horizontal involvement goods
e. none o the above

Difficulty: (2) Knowledge: (A) Page: 650

True/False Short Answer

56. Small and medium-size companies (SMEs) are also participating in the area of e-commerce and Internet-related opportunities.

Difficulty: (1) Knowledge: (A) Page: 626

57. Internet usage worldwide is not growing.

Difficulty: (1) Knowledge: (A) Page: 627

58. ISP is an acronym for Internet Standards Provider.

Difficulty: (2) Knowledge: (A) Page: 629

59. Knowledge barrier is not one of the barriers in Internet-related activities.

Difficulty: (1) Knowledge: (A) Page: 628

60. In many European markets, consumers are reluctant to spend time surfing the Web
because of higher telecommunication charges.

Difficulty: (2) Knowledge: (F) Page: 632

61. There are many unsolved issues in the Internet. For example, e-commerce is global
but the national laws are mostly transnational.

Difficulty: (1) Knowledge: (A) Page: 632

62. The Internet has leveled the playing field between large and small firms in global
competition.

63. Asians have the most favorable attitude toward Internet shopping.

64. The Internet is not helping companies to create global brands.

Difficulty: (3) Knowledge: (A) Page: 634

65. Google is the #1 search engine throughout the world.

66. Consumer co-creation involves customers in value creation.

67. Mass customization is not the major plus of the Web.

Difficulty: (1) Knowledge: (A) Page: 644

68. Web sites enable companies to manage perishability.

Difficulty: (1) Knowledge: (A) Page: 644

69. In international marketing, a Web site gives service marketers the ability to offer 24 hour service to customers worldwide.

Difficulty: (1) Knowledge: (F) Page: 644

70. For global marketers, the Web could affect the firm’s high margins because of price transparency.

Difficulty: (2) Knowledge: (A) Page: 644

71. In many industries, connectivity means that existing channels can be bypassed by
connecting buyers and suppliers directly.

Difficulty: (1) Knowledge: (A) Page: 645

72. In international distribution, replacement effect does not cannibalize existing distribution channels.

Difficulty: (2) Knowledge: (A) Page: 645

73. It is estimated that most of the Internet advertising spending will be spent in Japan.

Difficulty: (1) Knowledge: (A) Page: 648

74. Banner advertising is not used in Internet advertising.

Difficulty: (1) Knowledge: (A) Page: 648

75. Keyword search advertising allows the company to have a link to its competitors.

Difficulty: (2) Knowledge: (A) Page: 649

76. Microsites are used to promote a particular brand.

Difficulty: (2) Knowledge: (A) Page: 649

77. Online campaigns would work for high-involvement goods whose buyers engage in
product research and price comparisons.

Difficulty: (3) Knowledge: (A) Page: 650

Essay

78. Describe briefly the history of the Internet. Which nations are becoming prominent among Internet users? How does their growth compare with the Internet readiness shown in Exhibit 19-2?

79. Although global e-commerce is expected to increase, it has encountered obstacles and structural barriers. Discuss these structural barriers.

80. Discuss some of the ramifications of the Internet for global marketing strategies. Also explain some of the challenges faced by international marketers in the areas of global branding and Internet-based new products.

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“Reflection” Please respond to the following:
• Reflecting on the past ten (10) weeks, specify what you believe are the two (2) most important concepts you have learned in this course.
• Predict two (2) ways you will be able to apply these concepts to your current job and career in the future. Give your opinion on the manner in which this course’s learning outcomes contribute to the MBA curriculum. Provide a rationale for your response.

MKT 475 Week 11 Quiz – Strayer University New

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Quiz 10 Chapter 15

Strategic Marketing Implementation and Control

True/False Questions

1. The analytical dimension of marketing planning process is concerned with the organizational structure in which planning is carried out, along with the associated information resources and corporate culture.

2. Internal marketing involves developing programs to win line management support for new strategies.

3. External marketing involves changing the attitudes and behavior of employees working at key points of contact with customers.

4. Internal marketing goals include promoting the external marketing strategy.

5. The balanced scorecard method is used to implement marketing plans.

6. The balanced scorecard method formally includes an assessment of the strategy component across all aspects of the business unit at the same time.

7. A benefit of the balanced scorecard methodology is that it is feasible for any business unit level strategy and provides a means to link performance evaluation to strategy implementation.

8. The second step in marketing evaluation and control is determining performance metrics and standards.

9. When monitoring a firm’s effectiveness of marketing activities, external information sources must be excluded.

10. Marketing metrics should be chosen to reflect issues most closely linking marketing investments with value chain requirements.

Multiple Choice Questions

11. The _____ indicates marketing objectives and the strategy and tactics for accomplishing the objectives, and guides implementation and control. 
A. strategic marketing plan
B. traditional marketing design
C. integrated marketing communications
D. market positioning strategy

12. Which of the following techniques guides short-term marketing activities?
A. Strategic marketing plan
B. Annual marketing plan
C. Situation analysis
D. Positioning strategy

13. Which of the following marketing planning process dimensions is concerned with an organization’s structure, associated information resources, and corporate culture?
A. Analytical process dimension
B. Behavioral process dimension
C. Organizational process dimension
D. Cognitive process dimension

14. Which of the following marketing planning process dimensions is concerned with managerial perceptions, participation, and strategic assumptions?
A. Analytical process dimension
B. Cognitive process dimension
C. Organizational process dimension
D. Behavioral process dimension

15. Which of the following marketing planning process dimensions is concerned with techniques, procedures, systems, and planning models?
A. Analytical process dimension
B. Cognitiveprocess dimension
C. Organizational process dimension
D. Behavioral process dimension

16. Which of the following is true about internal marketing?
A. It positions the marketing strategy in the customer marketplace.
B. Its goals include promoting the external marketing strategy.
C. It aims at providing superior external customer service to support internal strategy.
D. Its aim is to better align internal market objectives with external capabilities.

17. Which of the following is true about internal marketing?
A. It positions the marketing strategy in the customer marketplace.
B. It involves changing the attitudes and behavior of customers at key points of contact with employees.
C. It is aimed at the potential customers within the company.
D. It is targeted at particular market segments and niches.

18. _____ is a formalized management control system that implements a given business unit strategy by means of activities across four areas: financial, customer, internal business process, and learning and growth (or innovation).
A. Benchmarking
B. Internal strategy-organization fit
C. Strategic marketing audit
D. Balanced scorecard method

19.Which of the following is true of the balanced scorecard method?
A. It translates aggregate and broadly defined strategies to very specific actions.
B. It provides a means to link customer satisfaction with value orientation.
C. It is not feasible for business unit level strategies.
D. It does not assess the strategy component across all aspects of the business unit.

20. The _____ approach allows consideration of specific activities which will accomplish the objective, but also formally includes an assessment of the strategy component across all aspects of the business unit at the same time. 
A. vertical assessment
B. balanced scorecard
C. strategic marketing audit
D. benchmarking

21. Which of the following is the initial step in setting up a strategic marketing evaluation program?
A. Obtaining and analyzing information for performance-gap identification
B. Selecting performance criteria and choosing relevant marketing metrics
C. Conducting strategic marketing audit
D. Assessing performance and taking necessary action

22. Which of the following is the strategic marketing audit used for?
A. To translate broadly defined marketing strategy into very specific actions
B. To provide a means to link performance evaluation to strategy implementation
C. To ensure that activities in one area do not interfere with activities in another area
D. To initiate a formal strategic marketing planning program

23. The results of the _____ provide the basis for selecting performance criteria and choosing relevant marketing metrics to assess actual performance against plans and tactical intent.
A. strategic marketing audit
B. integrated marketing communications
C. balanced scorecard
D. customer relationship analysis

24. _____ use both internal and external information sources to provide a structure for monitoring the effectiveness of marketing activities and strategies.
A. Marketing segmentation strategies
B. Balanced scorecard methods
C. Marketing metrics
D. Salesforce strategies

25. The choice of the most relevant marketing metrics should be made in the light of the need to:
A. track performance relative to alliances.
B. track performance relative to suppliers.
C. track performance over investment capabilities.
D. measure performance relative to strategy.

26. Which of the following is a danger of using a marketing dashboard?
A. The dashboard contains metrics only relevant to assessing past performance.
B. The dashboard contains metrics which only give insight into present performance.
C. The dashboard contains metrics which only give insight into future developments.
D. The dash board contains only metrics related to the main business drivers.

27. Which of the following approaches is a quality control technique useful in determining when operating results are fluctuating normally or instead are disorderly?
A. Value chain analysis
B. Statistical process-control methods
C. Benchmarking
D. Data-control processes

28. _____ is/are used to analyze and improve results in marketing performance measures such as the number of orders processed, customer complaints, and territory sales.
A. Value chain analysis
B. Benchmarking
C. Quality-control charts
D. Cluster analysis

29. A _____ indicates when the process is experiencing normal variation and when the process is out of control.
A. data-control process
B. value chain analysis
C. BCG matrix
D. control-chart analysis

30. Which of the following is true of a control-chart analysis?
A. It cannot be used to detect randomness in operating results.
B. Its control boundaries are set using historical data.
C. It can only be used to establish average and upper limits of the measure.
D. It can only be used to establish average and lower limits of the measure.

Essay Questions

31. What are the core tasks of a CMO?

32. Explain the dimensions of the marketing planning process.

33. Discuss factors that influence the implementation of a marketing strategy.

34. Discuss how organizational designs help implement a strategic marketing plan.

35. What guiding points should be considered when selecting relevant marketing metrics?

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Week 11 D1
Determine two ways to apply what you learned in this course in your current or a future position.

Week 11 D2
Assess how your own theories of consumer behavior have matured or changed since the beginning of this course.

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Quiz 10 Chapter 22 and 23

Finance Company Operations

1. ____ finance companies concentrate on purchasing credit contracts from retailers and dealers.
a. Consumer
b. Sales
c. Commercial
d. None of the above

2. Which of the following is not a source of finance company funds to support operations?
a. loans from banks
b. commercial paper
c. federal funds
d. bonds

3. When a finance company’s assets are ____ interest rate sensitive than its liabilities and when interest rates are expected to ____, bonds can provide long-term financing at a rate that is completely insulated from rising market rates.
a. less; increase
b. less; decrease
c. more; increase
d. more; decrease

4. Finance companies differ from commercial banks, savings institutions, and credit unions in that they
a. normally do not obtain funds from deposits.
b. focus on financing acquisitions by companies.
c. focus on providing residential mortgages.
d. use most of their funds to purchase stocks.

5. Which of the following is not a main source of funds for finance companies?
a. bank loans
b. commercial paper issues
c. bonds
d. capital

6. Finance companies are more likely to issue bonds when their assets are presently ____ interest-rate sensitive than their liabilities, and when interest rates are expected to ____.
a. more; decrease
b. less; increase
c. more; increase
d. less; decrease

7. If finance companies were confident about projections of ____ interest rates, they may consider using the funds obtained from issuing bonds to offer loans with ____ rates.
a. declining; variable
b. rising; fixed
c. rising; variable
d. A and B

8. Finance companies would prefer to increase their long-term debt most once interest rates
a. have declined.
b. have increased.
c. were stable for several years.
d. were projected to decline.

9. The main competition for finance companies in the consumer loan market comes from
a. pension funds.
b. life insurance companies and property and casualty insurance companies.
c. commercial banks and savings and institutions.
d. mutual funds.

10. When finance companies purchase a firm’s receivables at a discount, and are responsible for processing and collecting the balances of these accounts, they act as a
a. leasing agent.
b. lessor.
c. lessee.
d. factor.

11. When a finance company purchases equipment for use by another business, the finance company provides financing in the form of
a. factoring.
b. leasing.
c. a banker’s acceptance.
d. a letter of credit.

12. Finance companies are exempt from state regulations.
a. True
b. False

13. Finance companies are not subject to state regulations on intrastate business.
a. True
b. False

14. Finance companies are subject to
a. a maximum limit on loan size.
b. ceiling interest rates on loans provided.
c. a maximum length on loan maturity.
d. regulations on intra-state banking.
e. all of the above

15. If finance companies with a greater rate-sensitivity of liabilities than assets wanted to reduce interest-rate risk, they could
a. shorten their average asset life.
b. lengthen their average asset life.
c. shorten the maturity of debt that they issue.
d. make greater use of fixed-rate loans.

16. Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
a. True
b. False

17. Compared to other lending financial institutions, finance companies have a ____ loan delinquency rate, and the average rate charged on loans is ____ on average.
a. lower; lower
b. lower; higher
c. higher; higher
d. higher; lower

18. A wholly owned subsidiary whose primary purpose is to finance sales of the parent company’s products and services, provide wholesale financing to distributors of the parent company’s products, and purchase receivables of the parent company is a
a. captive finance subsidiary.
b. factor.
c. leasing agent.
d. captive factoring agent.

19. Which of the following statements is incorrect?
a. A captive finance subsidiary’s purpose is to finance sales of the parent company’s products and services.
b. An operating agreement between the parent and the captive specifies the type of receivables that qualify for same and specific services provided by the parent.
c. A captive can be used to finance distributor or dealer inventories until a sale occurs.
d. A captive is rarely used to finance products leased to others.

20. ____ provide loans to firms that cannot obtain financing from commercial banks.
a. Consumer finance companies
b. Sales finance companies
c. Commercial finance companies
d. None of the above

21. Which of the following is not a use of finance company funds?
a. consumer loans
b. business loans
c. commercial paper
d. real estate loans
e. All of the above are uses of finance company funds.

22. Finance companies commonly act as ____ for accounts receivable; that is, they purchase a firm’s receivables at a discount and are responsible for processing and collecting the balances of these accounts.
a. brokers
b. dealers
c. market makers
d. factors
e. none of the above

23. Most finance companies are commonly exposed to all forms of risk below except ____ risk.
a. exchange rate
b. interest rate
c. liquidity
d. credit

24. Changes in economic growth are ____ related to a finance company’s cash flows, and changes in the risk-free rate are ____ related to a finance company’s cash flows.
a. positively; negatively
b. negatively; positively
c. negatively; negatively
d. positively; positively

25. Finance companies participate in the ____ market to reduce interest rate risk.
a. money
b. bond
c. options
d. swap

26. Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.
a. True
b. False

27. Business finance companies focus on loans to very large businesses.
a. True
b. False

28. Consumer finance companies sometimes provide Business finance companies to individuals.
a. True
b. False

29. Although commercial paper is available only for short-term financing, finance companies can continually roll over their issues to create a permanent source of funds.
a. True
b. False

30. After interest rates increase, finance companies tend to use more long-term debt to lock in the cost of funds over an extended period of time.
a. True
b. False

31. Some finance companies offer credit card loans through a particular retailer.
a. True
b. False

32. The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.
a. True
b. False

33. The value of a finance company can be modeled as the present value of its future cash flows.
a. True
b. False

34. The most important risk for finance companies is ____ risk.
a. settlement
b. accounting
c. credit
d. exchange rate

35. Finance companies can accumulate capital by doing all of the following except
a. retaining earnings.
b. issuing stock.
c. issuing commercial paper.
d. Finance companies can build their capital base by doing all of the above.

36. Consumer finance companies primarily focus on for
a. consumer loans.
b. consumer advising.
c. consumer regulation.
d. none of the above

37. Finance companies are regulated by the states but are not subject to regulation by an agency of the federal government.
a. True
b. False

38. Historically, captive finance subsidiaries were associated with:
a. the automobile industry.
b. the oil and gas industry.
c. the textile industry.
d. department stores.

Chapter 23—Mutual Fund Operations

1. Which of the following statements is incorrect?
a. Mutual funds serve as a key financial intermediary.
b. Managers of mutual funds do not analyze economic and industry trends.
c. Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
d. Some mutual funds offer check-writing privileges.

2. No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.
a. registered representatives of a brokerage firm; registered representatives of a brokerage firm
b. registered representatives of a brokerage firm; the mutual fund of concern
c. the mutual fund of concern; registered representatives of a brokerage firm
d. the mutual fund of concern; the mutual fund of concern

3. To cover managerial expenses, mutual funds typically charge
a. management fees of less than 2 percent of total assets per year.
b. commissions of typically 8 to 10 percent of transaction market value per year.
c. management fees of typically more than 10 percent of total assets per year.
d. commissions of typically 3 to 5 percent of the transaction market value per year.

4. Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
a. closed-end funds.
b. load mutual funds.
c. no-load mutual funds.
d. open-end mutual funds.

5. ____ funds do not normally repurchase their shares from investors.
a. Closed-end
b. Load mutual
c. No-load mutual
d. Open-end mutual

6. Most closed-end funds invest in
a. stock and bonds.
b. money market securities.
c. gold.
d. derivatives.

7. Exchange-traded funds are like open-end funds in the sense that
a. their shares are traded on an exchange, and their share price changes throughout the day.
b. they have a fixed number of shares.
c. they are not actively managed.
d. none of the above

8. Hedge funds differ from open-end mutual funds in the sense that
a. they require a much smaller initial investment.
b. they are open to additional investments at any time.
c. their investors cannot sell shares back to the fund at any time they desire.
d. they invest in very limited set of securities.

9. Shares of open-end mutual funds are purchased and sold on exchanges.
a. True
b. False

10. Mutual funds
a. are unregulated.
b. are required to disclose the names of their portfolio managers in the prospectus.
c. are not required to disclose any information about their past performance.
d. are exempt from all taxes.

11. Which of the following is not disclosed in the prospectus?
a. the minimum amount of investment required
b. the investment objective of the funds
c. the fees incurred by the mutual fund
d. all of the above are disclosed

12. The net asset value of a mutual fund is estimated once every week.
a. True
b. False

13. Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
a. lower; underperform
b. higher; outperform
c. lower; outperform
d. A and B

14. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False

15. Money market funds invest mostly in
a. stocks.
b. long-term bonds.
c. real estate.
d. short-term securities.

16. If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
a. share price appreciation.
b. capital gains distribution.
c. dividends.
d. split net asset value.

17. Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called
a. income funds.
b. capital appreciation funds.
c. specialty funds.
d. dividend funds.

18. Mutual funds composed of bonds that offer periodic coupon payments are
a. income funds.
b. specialty funds.
c. dividend funds.
d. growth funds.

19. Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.
a. longer; less
b. shorter; less
c. shorter; more
d. A and C

20. The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign currencies. (Assume no change in the prices of foreign stocks.)
a. increases
b. decreases
c. is unaffected
d. can increase or decrease depending on the dollar’s degree of strength

21. Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.
a. global
b. foreign
c. combined
d. mixed

22. A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.
a. specialty
b. growth
c. capital appreciation
d. growth and income

23. The majority of mutual fund assets are in the form of
a. common stocks.
b. preferred stocks.
c. U.S. government bonds.
d. municipal bonds.

24. If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.
a. 25
b. 50
c. 75
d. 90

25. When the redemptions of money market mutual fund shares exceeds sales of shares, the fund accommodates the amount of excessive redemptions by
a. selling some of the assets contained in the portfolio.
b. issuing stock.
c. issuing bonds.
d. borrowing from banks.

26. Money market fund assets include all of the following, except
a. stocks.
b. repurchase agreements.
c. Treasury bills.
d. CDs.

27. If money market funds definitely expect interest rates to increase, they will ____ their average asset maturity.
a. not adjust
b. shorten
c. lengthen
d. shorten (if the expected change is small) or lengthen (if the expected change is large)

28. Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.
a. low; high
b. high; high
c. high; low
d. low; low

29. Equity real estate investment trusts invest
a. in mortgage and construction loans.
b. directly in properties.
c. in common stocks issued by construction companies.
d. in common stocks issued by real estate brokerage firms.

30. Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market value will ____ as interest rates increase.
a. equity; increase
b. equity; decrease
c. mortgage; increase
d. mortgage; decrease

31. When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual funds, and ____ deposits in depository institutions.
a. reduce; reduce
b. reduce; increase
c. increase; reduce
d. increase; increase

32. The composition of asset allocation funds
a. is focused completely on one type of security as specified by the particular mutual fund.
b. is fixed and not altered by the mutual fund managers.
c. A and B
d. none of the above

33. A mutual fund prospectus does not contain
a. minimum amount of investment required.
b. return on the fund since its inception.
c. investment objective of the mutual fund.
d. exposure of the mutual fund to various types of risk.
e. fees incurred by the mutual fund.

34. The ____ of a mutual fund indicates the value per share.
a. net asset value
b. gross asset value
c. net stock value
d. net bond value
e. none of the above

35. Mutual funds whose funds are promoted strictly by the mutual fund of concern are called
a. closed-end funds.
b. load mutual funds.
c. no-load mutual funds.
d. open-end mutual funds.

36. Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual funds.
a. tax-free
b. income
c. high-yield
d. growth
e. none of the above

37. ____ are most likely to invest in mortgages.
a. Stock mutual funds
b. Bond mutual funds
c. Load funds
d. Closed-end funds

38. Hedge funds that exceed a specified size must register with the
a. Securities and Exchange Commission (SEC).
b. Federal Reserve.
c. Office of Thrift Supervision.
d. Federal Mutual Fund Board.

39. According to SEC regulations, the majority of the members on a mutual fund’s board of directors must be
a. employed by the fund.
b. outsiders (not employed by the fund).
c. certified public accountants.
d. certified financial analysts.

40. An expense ratio represents ____ divided by the fund’s ____.
a. annual fees charged to investors; 12b-1 fees
b. annual fees charged to investors; net asset value
c. initial sales charge (load); 12b-1 fees
d. initial sales charge (load); net asset value

41. The most common investment by closed-end funds is in
a. derivatives.
b. bonds.
c. money market securities.
d. international equity securities.

42. ____ are beneficial for investors who want to invest in tax-exempt securities.
a. Municipal bond funds
b. Growth and income funds
c. International and global funds
d. Money market funds

43. When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.
a. high; discount
b. low; discount
c. high; premium
d. B and C are correct

44. Which of the following statements is incorrect?
a. Commercial paper is commonly purchased by money market funds.
b. From an investor’s perspective, money market funds usually have a low level of credit risk.
c. Money market funds tend to have low interest rate risk compared to bond funds.
d. If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

45. The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.
a. True
b. False

46. Exchange-traded funds can be purchased on margin.
a. True
b. False

47. Investors can sell exchange-traded funds short.
a. True
b. False

48. Mutual fund managers seek securities that have much liquidity so that they could easily sell them in the secondary market at any time.
a. True
b. False

49. Closed-end funds are closed to new investment but allow redemptions by shareholders.
a. True
b. False

50. Closed-end fund managers must hold more cash than mutual fund managers.
a. True
b. False

51. Index mutual funds are not traded throughout the day, while exchange-traded funds are.
a. True
b. False

52. Venture capital funds typically invest in stocks of publicly-traded companies.
a. True
b. False

53. Many businesses that go public are partially backed by venture capital before the IPO.
a. True
b. False

54. Private equity funds use most of their money to invest in stocks of publicly-traded companies.
a. True
b. False

55. Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or near bankruptcy.
a. True
b. False

56. Hedge funds commonly engage in short selling.
a. True
b. False

57. ____ are not exchange-traded funds.
a. Spiders
b. Growth mutual funds
c. Diamonds
d. Sector Spiders

58. Which of the following statements is incorrect?
a. ETFs are like index mutual funds because the share price adjusts over time in response to the change in the index level.
b. Both ETFs and index mutual funds pay dividends in the form of additional shares to investors.
c. The portfolio management of both ETFs and index mutual funds is very complex.
d. ETFs can be traded throughout the day.

59. Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as
a. index mutual funds.
b. exchange-traded funds.
c. money market funds.
d. none of the above

60. Exchange traded funds can be
a. traded throughout the day.
b. purchased on margin.
c. sold short.
d. all of the above

61. ____ trade at one-tenth of the S&P 500 value.
a. Spiders
b. Cubes
c. Diamonds
d. World Equity Benchmark Shares

62. Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that discloses details about the components of the funds and risks involved.
a. True
b. False

63. The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.
a. True
b. False

64. Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.
a. True
b. False

65. The expenses incurred by a mutual fund are billed separately to investors, and are not included in the fund’s net asset value (NAV).
a. True
b. False

66. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False

67. Large mutual funds can exert some control over the management of firms because they commonly represent the largest shareholders.
a. True
b. False

68. Investors who feel capable of making their own investment decisions often prefer to invest in load funds.
a. True
b. False

69. The term “mutual funds” is normally used to represent closed-end funds, and does not include open-end funds.
a. True
b. False

70. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of every day.
a. True
b. False

71. Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.
a. True
b. False

72. The returns on international stock mutual funds are affected only by foreign companies’ stock prices, and are independent of currency movements.
a. True
b. False

73. Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.
a. True
b. False

74. A mutual fund’s performance is usually unrelated to market conditions.
a. True
b. False

75. The SEC requires that a majority of the directors of a mutual fund board be independent (not employed by the fund).
a. True
b. False

76. Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.
a. True
b. False

77. Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed.
a. True
b. False

78. Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.
a. True
b. False

79. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.
a. True
b. False

80. Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be influenced by interest rate movements.
a. True
b. False

81. Hedge funds are more heavily regulated than mutual funds.
a. True
b. False

82. Which of the following is not true regarding mutual funds?
a. They are a key financial intermediary.
b. They provide an important service to individual investors seeking to invest funds.
c. Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves.
d. They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

83. Which of the following statements is incorrect?
a. Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are traded on a stock exchange.
b. Unlike a closed-end fund, an ETF has a fixed number of shares.
c. ETFs differ from most open-end and closed-end funds in that they are not actively managed.
d. One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

84. A mutual fund prospectus does not contain the
a. minimum amount of investment required.
b. investment objective of the mutual fund.
c. exposure of the mutual fund to various types of risk.
d. return on the fund since its inception.
e. fees incurred by the mutual fund.

85. The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.
a. gross asset value
b. net asset value
c. net stock value
d. net bond value

86. Which of the following is incorrect about money market funds (MMFs)?
a. The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.
b. MMFs have higher interest rate risk than bond funds.
c. MMFs normally generate positive returns over time
d. All of the above are correct.

87. ____ are most likely to invest in mortgages.
a. Stock mutual funds
b. Real estate investment trusts (REITs)
c. Load funds
d. Closed-end funds
e. None of the above

88. Mutual funds are not required to disclose which of the following in the prospectus?
a. the names of the portfolio managers
b. the length of time that the portfolio managers have been employed by the fund in that position
c. the performance record in recent years
d. the number of investors currently investing in the mutual fund
e. Mutual funds are required to disclose all of the above in a prospectus

89. Which of the following is not a way in which mutual funds generate returns for their shareholders?
a. They can pass on any earned income as dividend payments to shareholders.
b. They distribute the capital gains resulting from the sale of securities within the fund.
c. The mutual fund price appreciates.
d. All of the above are ways in which a mutual fund generates returns to its shareholders.

90. A(n) ____ fund contains a sales charge.
a. load
b. no-load
c. closed-end
d. open-end
e. none of the above

91. ____ funds are open to investment from investors at any time.
a. Load
b. No-load
c. Open-end
d. Closed-end
e. None of the above

92. Which of the following statements is incorrect?
a. Investors can purchase shares directly from an open-end fund at any time.
b. The number of shares of an open-end fund is always changing.
c. Open-end funds typically maintain some cash on hand in case investments exceed redemptions.
d. There are many different categories of open-end mutual funds.

93. ____ funds focus on a group of companies sharing a particular characteristic.
a. Specialty
b. Growth and income
c. Closed-end
d. Capital appreciation
e. None of the above

94. Bond portfolios with some bonds rated below Baa by Moody’s or BBB by Standard and Poor’s, available for investors desiring high return and willing to incur high risk, are called ____ funds.
a. growth
b. capital appreciation
c. junk bond
d. bond
e. none of the above

95. Which of the following statements is incorrect?
a. A mutual fund is usually run by an investment company.
b. Although many mutual funds have grown substantially over time, their expense ratios have generally increased over time.
c. For each mutual fund, all expenses charged and reflected in the expense ratio are always valid.
d. The SEC requires that a majority of the directors of a mutual fund board be independent.

96. Money market funds commonly invest in
a. stocks.
b. real estate.
c. commercial paper.
d. U.S. Treasury bonds.
e. none of the above

97. Which of the following is not true with respect to venture capital funds?
a. They typically invest in young, growing firms that need equity funding but are not ready or willing to go public.
b. More than half of all VC investing is in businesses that are being created.
c. Venture capital funds tend to focus on technology firms, which have the potential for high returns but also exhibit a high level of risk.
d. Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.
e. All of the above are correct with respect to venture capital funds.

98. ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest in securities.
a. Growth
b. Open-end
c. Capital appreciation
d. Hedge
e. Specialty

99. Exchange-traded funds distribute their capital gains to their shareholders, who must pay tax on the gains.
a. True
b. False

100. Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds can be sold _________.
a. at any time during trading hours; at any time via private trading networks
b. only at the end of the day; at any time during trading hours
c. at any time via private trading networks; at any time during trading hours
d. at any time during trading hours; only at the end of the day

101. The average annual fee on actively managed exchange-traded funds is ________, which is _________.
a. zero.
b. lower than the typical annual fee on open-end mutual funds.
c. higher than the typical annual fee on open-end mutual funds.
d. the same as the typical annual fee on open-end mutual funds.

102. An investor who believes that technology stocks will perform well but does not want to select individual technology stocks might invest in:
a. Spiders.
b. WEBs.
c. Cubes.
d. Diamonds.

103. If interest rates are expected to ________, mortgage real investment trusts (REITs) ___________.
a. decline; become less attractive
b. rise; become less attractive
c. rise; are not affected
d. decline; are not affected

104. Investors who invest in a hedge fund of funds essentially pay two layers of management fees.
a. True
b. False

105. Hedge funds commonly use financial leverage, which can:
a. magnify their returns and magnify their losses.
b. magnify their returns and limit their losses.
c. reduce their risk and limit their losses.
d. magnify their returns and not affect their risk.

FIN 320 Week 11 Final Exam – Strayer University New

FIN/320 Week 11 Final Exam – Strayer

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

9
Student: ___________________________________________________________________________
1. Testing many different trading rules until you find one that would have worked in the past is called _______.

A. data mining

B. perceived patterning

C. pattern searching

D. behavioral analysis

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

A. data mining

B. fundamental analysis

C. charting

D. behavioral finance

3. The trin statistic is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

4. The put/call ratio is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

5. Relative strength is ______ indicator.

A. a fundamental

B. an economic

C. a technical

D. an international

6. Short interest is a ______ indicator.

A. sentiment

B. flow of funds

C. market structure

D. fundamental

7. Moving averages are ______ indicators.

A. sentiment

B. flow of funds

C. trend

D. fundamental

8. Market breadth is a ______ indicator.

A. sentiment

B. flow of funds

C. technical

D. fundamental

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

A. market breadth

B. market volume

C. trin ratio

D. relative strength ratio

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

A. bearish; bullish

B. bullish; bearish

C. bearish; false

D. bullish; false

11. Technical analysis focuses on _____________________.

A. finding opportunities for risk-free investing

B. finding repeating trends and patterns in prices

C. changing prospects for earnings growth of particular firms or industries

D. forecasting technical regulatory changes

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

A. distorted; limited arbitrage opportunities

B. distorted; fundamental efficiency

C. allocationally efficient; limitless arbitrage opportunities

D. distorted; allocational efficiency

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

A. the price index pierces the left shoulder

B. the price index pierces the right shoulder

C. the price index pierces the head

D. none of these options takes place

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

A. the starting point for a new moving average

B. a bearish signal

C. a bullish signal

D. none of these options

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

A. market momentum has become positive

B. market momentum has become negative

C. there is no regular pattern for this stock’s market momentum

D. professional analysts’ opinions are invalid until the stock price rises again

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

A. be below the current price

B. be above the current price

C. be equal to the current price

D. become more volatile than it had been before prices fell

17. A moving average of stock prices _________________.

A. always lies above the most recent price

B. always lies below the most recent price

C. is less volatile than the actual prices

D. is more volatile than the actual prices

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

A. in 25 years.

B. in 40 years.

C. in 50 years.

D. in 75 years.

19. A support level is ___________________.

A. a level beyond which the market is unlikely to rise

B. a level below which the market is unlikely to fall

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

D. the peak of a market wave or cycle

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

A. 18 months

B. 4 years

C. 8 years

D. 50 years

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

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

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

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

D. sine and cosine functions

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

A. rational; irrational

B. irrational; rational

C. greedy; philanthropic

D. philanthropic; greedy

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

A. markets are not weak-form efficient

B. there are limits to arbitrage activity

C. there are no significant trading costs

D. market psychology is inconsistent over time

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

A. buy signal

B. sell signal

C. congestion area

D. trend reversal

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

A. 5%; are excessively conservative

B. 15%; overestimate their ability

C. 20%; suffer from framing biases

D. 25%; engage in mental accounting

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

A. representativeness bias

B. framing error

C. conservatism

D. memory bias

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

A. representativeness bias

B. framing error

C. memory bias

D. overconfidence

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

A. uncorrelated

B. negatively correlated

C. positively correlated

D. positively correlated for women and negatively correlated for men

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

A. mental accounting

B. framing bias

C. conservatism

D. representativeness bias

30. Which of the following is not a sentiment indicator?

A. Confidence index

B. Short interest

C. Odd-lot trading

D. Put/call ratio

31. Which of the following is considered a sentiment indicator?

A. A 200-day moving average

B. Short interest

C. Credit balances in brokerage accounts

D. Relative strength

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

A. overconfidence

B. representativeness

C. forecast errors

D. mental accounting

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

A. Credit analysts

B. Fundamental analysts

C. Systems analysts

D. Technical analysts

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

A. bearish signal

B. bullish signal

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

D. trend reversal signal

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

A. bearish signal

B. bullish signal

C. trend confirmation signal

D. signal to enter the options market

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

A. bond price index

B. confidence index

C. relative strength index

D. trin ratio

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

A. overconfidence

B. representativeness

C. forecast errors

D. mental accounting

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

A. Bill will have more regret over the loss than Shelly

B. Shelly will have more regret over the loss than Bill

C. Bill and Shelly will have equal regret over their losses

D. Bill’s and Shelly’s risk aversion will increase in the future

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

A. market breadth

B. market volume

C. odd-lot trading

D. short interest

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

A. regret avoidance

B. overconfidence

C. that she has a diminishing marginal utility of wealth

D. prospect theory loss aversion

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

A. buy the stock

B. hold the stock

C. sell the stock

D. short the stock

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

A. buy bonds this period if you held stocks last period

B. buy stocks this period that performed poorly last period

C. buy stocks this period that performed well last period

D. do nothing if you held the stock last period

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

A. be reflected in stock prices immediately

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

C. lead to high volatility in stock market prices

D. leave prices unchanged

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

A. bearish signal

B. bullish signal

C. volume decline

D. signal reversal

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

A. it applies to only Russian stocks

B. its main proponent found contrary research results

C. only two independent data points are generated each century

D. the stock market is too volatile to generate smooth waves

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

A. book value

B. resistance level

C. support level

D. confidence level

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

A. Prospect theory

B. Framing

C. A moving average

D. Conservatism

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

A. loss aversion

B. regret avoidance

C. mental accounting

D. framing bias

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

A. book value

B. resistance level

C. support level

D. the Dow line

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

A. technical trends in prices

B. momentum effects

C. fundamental risk

D. trend reversals

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

A. bearish signal

B. bullish signal

C. trend confirmation signal

D. signal to enter the options market

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

A. outperforming; buying

B. outperforming; selling

C. underperforming; buying

D. underperforming; selling

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

A. increased; bullish

B. increased; bearish

C. decreased; bullish

D. decreased; bearish

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

A. -10,449,000

B. -167

C. 167

D. 10,449,000

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

A. .90; bullish

B. .90; bearish

C. 1.11; bullish

D. 1.11; bearish

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

A. bullish

B. neutral

C. bearish

D. trend reversal

57. A point and figure chart:

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

A. I and II only

B. II and III only

C. I, III, and IV only

D. I, II, III, and IV

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

A. it has performed well compared to its closest competitors

B. it has exceeded its own historical high

C. trading volume in the stock has exceeded the normal trading volume

D. it has outperformed the market index

59. Technical traders view mutual fund investors as _________ market timers.

A. excellent

B. frequent

C. neutral

D. poor

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

A. security prices adjust rapidly to new information

B. security prices adjust gradually to new information

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

D. all investors have immediate and costless access to information

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

A. Buy signal

B. Sell signal

C. Hold signal

D. This is not interpreted as a signal

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

A. overweighting effect

B. head-in-the-sand effect

C. disposition effect

D. prospector effect

63. Which one of the following best describes fundamental risk?

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

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

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

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

64.

The trin on day 2 is ___.

A. .72

B. 1.04

C. .92

D. .55

65.

The confidence index on day 1 is _____.

A. .82

B. .89

C. .92

D. 1.09

66.

The breadth on day 3 is _______.

A. -70

B. 10

C. 90

D. 170

67.

The cumulative breadth for the first 2 days is ___.

A. -240

B. -50

C. 110

D. 250

68.

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

A. -140; bullish

B. -140; bearish

C. -300; bullish

D. -300; bearish

69.

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

A. increased; bullish

B. increased; bearish

C. decreased; bullish

D. decreased; bearish

70.

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

A. increased; bullish

B. decreased; bullish

C. increased; bearish

D. decreased; bearish

71. Problems with behavioral finance include:

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

A. I only

B. II only

C. I and III only

D. I, II, and III

72. A major problem with technical trading strategies is that ________.

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

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

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

D. Kondratieff showed that you can’t identify trends without 48 to 60 years of data

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

A. when the long-term direction of the market is positive

B. when the long-term direction of the market is negative

C. when the long-term direction of the market is stable

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

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

A. loss aversion

B. mental accounting

C. overreaction

D. managerial overconfidence

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

A. loss aversion

B. mental accounting

C. overreaction

D. winner’s curse

76.

Identify the resistance-level stock price.

A. $40

B. $42

C. $44

D. $46

77.

Identify the support level stock price.

A. $40

B. $42

C. $44

D. $46

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

A. Overconfidence

B. Loss aversion

C. Mental accounting

D. Calendar bias

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

A. relative strength index; declining with

B. relative strength index; declining faster than

C. moving average; above

D. moving average; below

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

A. Framing bias

B. Excessive volatility

C. Loss aversion

D. Mental accounting

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

A. intermediate trend level

B. minor trend level

C. resistance level

D. support level

82.

The moving average generates buy signal(s) _____.

A. on days 3, 11, and 15

B. on days 2 and 16

C. on days 5, 9, and 13

D. on no days

83.

The moving average generates sell signals _____.

A. on days 3, 11, and 15

B. on days 7, 15, and 18

C. on days 5, 9, and 13

D. on day 16

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

A. congestion area

B. penetration point

C. resistance level

D. support level

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

A. confidence index

B. odd-lot trading

C. short interest

D. trin statistic

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

A. 0

B. 1

C. 2

D. 3

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

A. 0

B. 1

C. 2

D. 3

10
Student: ___________________________________________________________________________
1. The invoice price of a bond is the ______.

A. stated or flat price in a quote sheet plus accrued interest

B. stated or flat price in a quote sheet minus accrued interest

C. bid price

D. average of the bid and ask price

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

A. issuer

B. underwriter

C. holder

D. dealer

3. A collateral trust bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

4. A mortgage bond is _______.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

5. A debenture is _________.

A. secured by other securities held by the firm

B. secured by equipment owned by the firm

C. secured by property owned by the firm

D. unsecured

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

A. capital gain; capital loss

B. capital gain; capital gain

C. capital loss; capital gain

D. capital loss; capital loss

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

A. maturity date

B. coupon payment date

C. coupon rate

D. dividend yield

8. Inflation-indexed Treasury securities are commonly called ____.

A. PIKs

B. CARs

C. TIPS

D. STRIPS

9. In regard to bonds, convexity relates to the _______.

A. shape of the bond price curve with respect to interest rates

B. shape of the yield curve with respect to maturity

C. slope of the yield curve with respect to liquidity premiums

D. size of the bid-ask spread

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

A. Both bonds are examples of Eurobonds.

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

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

D. Neither bond is a Eurobond.

11. The primary difference between Treasury notes and bonds is ________.

A. maturity at issue

B. default risk

C. coupon rate

D. tax status

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

A. increasing only the coupon rate

B. increasing only the par value

C. increasing both the par value and the coupon payment

D. increasing the promised yield to maturity

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

A. A dividend restriction clause

B. A sinking fund clause

C. A requirement to subordinate any new debt issued

D. A price-earnings ratio

14. To earn a high rating from the bond rating agencies, a company would want to have:

I. A low times-interest-earned ratio
II. A low debt-to-equity ratio
III. A high quick ratio

A. I only

B. II and III only

C. I and III only

D. I, II, and III

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

A. declining liquidity premiums

B. an expectation of an upcoming recession

C. a decline in future inflation expectations

D. an increase in expected interest rate volatility

16. __________ are examples of synthetically created zero-coupon bonds.

A. COLTS

B. OPOSSMS

C. STRIPS

D. ARMs

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

A. callable

B. coupon

C. puttable

D. Treasury

18. TIPS are an example of _______________.

A. Eurobonds

B. convertible bonds

C. indexed bonds

D. catastrophe bonds

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

A. Eurobonds

B. Yankee bonds

C. Samurai bonds

D. foreign bonds

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

A. $30

B. $33

C. $32.78

D. $30.90

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

A. high grade

B. intermediate grade

C. investment grade

D. junk bonds

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

A. AA

B. BBB

C. BB

D. CCC

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

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

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

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

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

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

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

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

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

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

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

A. Mortgage bonds

B. Senior debentures

C. Preferred stock

D. Equipment obligation bonds

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

A. asset-backed bonds

B. convertible bonds

C. inverse floaters

D. index bonds

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

A. Asset-backed bonds

B. TIPS

C. Catastrophe

D. Pay-in-kind

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

A. an asset-backed

B. a TIPS

C. a catastrophe

D. a pay-in-kind

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

A. longer; higher

B. longer; lower

C. shorter; higher

D. shorter; lower

30. Which one of the following statements is correct?

A. Invoice price = Flat price – Accrued interest

B. Invoice price = Flat price + Accrued interest

C. Flat price = Invoice price + Accrued interest

D. Invoice price = Settlement price – Accrued interest

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

A. callable

B. coupon

C. puttable

D. Treasury

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

A. Callable feature

B. Convertible feature

C. Subordination clause

D. Sinking fund

33. Serial bonds are associated with _________.

A. staggered maturity dates

B. collateral

C. coupon payment dates

D. conversion features

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

A. Zero-coupon bonds

B. Coupon bonds selling at a discount

C. Coupon bonds selling at a premium

D. Floating-rate bonds

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

A. increase

B. decrease

C. not change

D. change in an unpredictable manner

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

A. $1,000

B. $884

C. $933

D. $980

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

A. $50

B. $190

C. $200

D. $240

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

A. 7.2%

B. 8.8%

C. 9.1%

D. 9.6%

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

A. 6%

B. 7.23%

C. 8.12%

D. 9.45%

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

A. 6%

B. 6.49%

C. 6.73%

D. 7%

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

A. 6%

B. 6.58%

C. 7.2%

D. 8%

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

A. $1,000

B. $1,062.81

C. $1,081.82

D. $1,100.03

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

A. $856.04

B. $891.86

C. $926.47

D. $1,000

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

A. $1,140

B. $1,170

C. $1,180

D. $1,200

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

A. .4%; .3%

B. .4%; .5%

C. .5%; .5%

D. .5%; .8%

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

A. $458.11

B. $641.11

C. $789.11

D. $1,100.11

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

A. lower than

B. slightly higher than

C. identical to

D. twice as high as

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

A. 5%

B. 5.5%

C. 7.6%

D. 8.9%

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

A. multiyear analysis

B. horizon analysis

C. maturity analysis

D. reinvestment analysis

50. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 1-year interest rate 1 year from now should be about _________.

A. 6%

B. 7.5 %

C. 9.02%

D. 10.08%

51. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

One year from now bond C should sell for ________ (to the nearest dollar).

A. $857

B. $842

C. $835

D. $821

52. $1,000 par value zero-coupon bonds (ignore liquidity premiums)

The expected 2-year interest rate 3 years from now should be _________.

A. 9.55%

B. 11.74%

C. 14.89%

D. 13.73%

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

A. nominal yield

B. current yield

C. yield to maturity

D. yield to call

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

A. .72%

B. 1.85%

C. 2.58%

D. 3.42%

55. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 2 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

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

A. A callable debenture

B. A puttable mortgage bond

C. A callable mortgage bond

D. A puttable debenture

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

A. 10-year maturity, selling at 80

B. 10-year maturity, selling at 100

C. 20-year maturity, selling at 80

D. 20-year maturity, selling at 100

58. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 3 years from now should be _________.

A. 7%

B. 8%

C. 9%

D. 10%

59. Consider the following $1,000 par value zero-coupon bonds:

The expected 1-year interest rate 4 years from now should be _________.

A. 16%

B. 18%

C. 20%

D. 22%

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

A. its coupon rate is greater than its yield to maturity

B. its coupon rate is less than its yield to maturity

C. its coupon rate is equal to its yield to maturity

D. its coupon rate is less than its conversion value

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

A. 6.72%

B. 9.17%

C. 4.49%

D. 8.98%

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

A. higher

B. lower

C. the same

D. indeterminate

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

A. expected increases in inflation over time

B. expected decreases in inflation over time

C. the presence of a liquidity premium

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

64. The yield to maturity on a bond is:

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

A. I only

B. II only

C. I and II only

D. I, II, and III

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

A. marketability

B. risk

C. taxation

D. call protection

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

A. $97.22

B. $104.49

C. $364.08

D. $732.14

67. A discount bond that pays interest semiannually will:

I. Have a lower price than an equivalent annual payment bond
II. Have a higher EAR than an equivalent annual payment bond
III. Sell for less than its conversion value

A. I and II only

B. I and III only

C. II and III only

D. I, II, and III

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

A. $581.97

B. $1,163.93

C. $2,327.87

D. $3,000

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

A. 4.8%

B. 6.1%

C. 7.7%

D. 10.4%

70. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the nominal rate of return on the TIPS bond in the first year?

A. 5%

B. 5.15%

C. 8.15%

D. 9%

71. Consider a newly issued TIPS bond with a 3-year maturity, par value of $1,000, and coupon rate of 5%. Assume annual coupon payments.

What is the real rate of return on the TIPS bond in the first year?

A. 5%

B. 8.15%

C. 7.15%

D. 4%

72. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

Suppose market interest rates decline by 100 basis points (i.e., 1%). The effect of this decline would be ______.

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

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

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

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

73. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If interest rates are expected to rise, then Joe Hill should ____.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

74. On May 1, 2007, Joe Hill is considering one of the following newly issued 10-year AAA corporate bonds.

If the volatility of interest rates is expected to increase, then Joe Hill should __.

A. prefer the Wildwood bond to the Asbury bond

B. prefer the Asbury bond to the Wildwood bond

C. be indifferent between the Wildwood bond and the Asbury bond

D. The answer cannot be determined from the information given.

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

A. 2.07%

B. 8.03%

C. 9.01%

D. 11.12%

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

A. $9,828.12

B. $9,809.38

C. $9,840.62

D. $9,813.42

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

A. 102:10

B. 102:11

C. 102:12

D. 102:13

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

A. $13.21

B. $12.57

C. $15.44

D. $16.32

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

A. $999.55

B. $1,002.01

C. $1,007.45

D. $1,012.13

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

A. $9,828.12

B. $9,925

C. $9,934.37

D. $9,955.43

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

A. $4.81

B. $14.24

C. $25

D. $50

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

A. 1.14%

B. 3.45%

C. 4.59%

D. 8.04%

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

A. 10.4%

B. 9.57%

C. 7.45%

D. 8.78%

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

A. .61%

B. -5.39%

C. 1.28%

D. -3.25%

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

A. $0

B. $4.27

C. $9.38

D. $33.51

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

A. $9.10

B. $4.25

C. $7.68

D. $5.20

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

A. 4.8%

B. 4.85%

C. 9.6%

D. 9.7%

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

A. 4.3%

B. 4.5%

C. 5.2%

D. 5.5%

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

A. 4.08%

B. 4.5%

C. 5.1%

D. 5.6%

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

A. Increased

B. Decreased

C. Stayed the same

D. The answer cannot be determined from the information given.

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

A. indenture

B. covenant agreement

C. trustee agreement

D. collateral statement

12
Student: ___________________________________________________________________________
1. A top-down analysis of a firm’s prospects starts with an analysis of the ____.

A. firm’s position in its industry

B. U.S. economy or even the global economy

C. industry

D. specific firm under consideration

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

A. 178%

B. 79.5%

C. 265.4%

D. 36%

3. An increase in the value of the yen against the U.S. dollar can cause the Japanese automaker Toyota to either _____________ on its U.S. sales.

A. lose market share or reduce its profit margin

B. gain market share or reduce its profit margin

C. lose market share or increase its profit margin

D. gain market share or increase its profit margin

4. You estimate that the present value of a firm’s cash flow is valued at $15 million. The break up value of the firm if you were to sell the major assets and divisions separately would be $20 million. This is an example of what Peter Lynch would call ___________.

A. a stalwart

B. slow growth

C. a star

D. an asset play

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

A. the United Kingdom

B. the Euro

C. Switzerland

D. Canada

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

A. growth stocks; long-term bonds

B. long-term bonds; growth stocks

C. defensive stocks; growth stocks

D. defensive stocks; long-term bonds

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

A. leading

B. lagging

C. coincident

D. mixed

8. The Conference Board’s Consumer Confidence Index is released ______.

A. daily

B. weekly

C. monthly

D. quarterly

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

A. if you can forecast the economy at all

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

C. if you can forecast the economy better than the average forecaster

D. only if you can forecast the economy with perfect accuracy

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

A. Internet service providers

B. Biotechnology

C. Wireless communication

D. Auto manufacturing

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

A. Financials

B. Technology

C. Food and beverage

D. Cyclicals

12. The most widely used monetary policy tool is _________.

A. altering the discount rate

B. altering reserve requirements

C. open market operations

D. increasing the budget deficit

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

A. Capacity utilizationrate

B. Participation rate

C. Durable goods orders rate

D. Industrial production rate

14. According to __________ economists, the growth of the U.S. economy in the 1980s can be attributed to lower marginal tax rates, which improved the incentives for people to work.

A. Keynesian

B. monetarist

C. supply-side

D. demand-side

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

A. GDP

B. industrial production

C. capacity utilization

D. factory orders

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

A. positive demand shock

B. positive supply shock

C. negative demand shock

D. negative supply shock

17. GDP refers to _________.

A. the amount of personal disposable income in the economy

B. the difference between government spending and government revenues

C. the total manufacturing output in the economy

D. the total production of goods and services in the economy

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

A. an asset play

B. a slow grower

C. a stalwart

D. a turnaround

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

A. Technical analysis

B. Fundamental analysis

C. Both technical analysis and fundamental analysis

D. Indexing

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

A. fundamental analysis

B. technical analysis

C. momentum analysis

D. indexing

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

A. Coca-Cola

B. Microsoft

C. ExxonMobil

D. Kmart

22. Inflation is caused by ________________.

A. unions

B. rapid growth of the money supply

C. excess supply

D. low rates of capacity utilization

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

A. buy long-term bonds

B. buy short-term bonds

C. buy common stocks

D. buy preferred stocks

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

A. add; default premium to

B. subtract; default premium from

C. add; expected inflation to

D. subtract; expected inflation from

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

A. A change in the price of imported oil

B. Frost damage to the orange crop

C. A change in the level of education of the average worker

D. An increase in the level of government spending

26. If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions.

A. below-average

B. average

C. above-average

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

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

A. Social Security spending

B. Medicare spending

C. Fed purchases of Treasury securities

D. Changes in the tax rate

28. Supply-side economics tends to focus on _______________.

A. government spending

B. price controls

C. monetary policy

D. increasing productive capacity

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

A. Balance of trade

B. Budget deficit

C. Gross domestic product

D. Output gap

30. Which one of the following is probably the most direct and immediate way to stimulate or slow the economy, although it is not very useful for fine-tuning economic performance?

A. Fiscal policy

B. Monetary policy

C. Supply-side policy

D. Rising minimum wages

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

A. demand shock

B. supply shock

C. monetary shock

D. refinery shock

32. ______________ in interest rates are associated with stock market declines.

A. Anticipated increases

B. Unanticipated increases

C. Anticipated decreases

D. Unanticipated decreases

33. The average duration of unemployment is _________.

A. a leading economic indicator

B. a coincidental economic indicator

C. a lagging economic indicator

D. both a coincidental indicator and a lagging indicator

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

A. balance of trade

B. real exchange rate

C. real interest rate

D. nominal exchange rate

35. Everything else equal, an increase in the government budget deficit would:

I. Increase the government’s demand for funds
II. Shift the demand curve for funds to the left
III. Increase the interest rate in the economy

A. II only

B. I and II only

C. I and III only

D. I, II, and III

36. Which of the following affects a firm’s sensitivity of its earnings to the business cycle?

I. Financial leverage
II. Operating leverage
III. Type of product

A. II only

B. I and II only

C. I and III only

D. I, II, and III

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

A. The nominal exchange rate

B. The nominal interest rate

C. The real exchange rate

D. The real interest rate

38. An example of a highly cyclical industry is the _________.

A. automobile industry

B. tobacco industry

C. pharmaceutical industry

D. utility industry

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

A. leading economic indicators

B. coincidental economic indicators

C. lagging economic indicators

D. leading and coincidental indicators, respectively

40. Which one of the following is not a demand shock?

A. Increase in government spending

B. Increases in the money supply

C. Reductions in consumer spending

D. Improvements in education of U.S. workers

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

A. Unions force an increase in national wage rates.

B. The oil supply from the Middle East drops 30%.

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

D. Chinese purchases of U.S. exports increase.

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

A. peak

B. contraction

C. trough

D. expansion

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

A. peak

B. contraction

C. trough

D. expansion

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

A. you have more information than others

B. you are a better analyst than others

C. you have the same information as others

D. you are an equally good analyst as others

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

A. automobile

B. banking

C. construction

D. medical services

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

A. the Senate; 10-year

B. the House of Representatives; 8-year

C. the President; 14-year

D. the Secretary of the Treasury; 6-year

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

A. low dividend payout rates

B. low rates of investment

C. low rates of return on investment

D. low R&D spending

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

A. The capacity utilization rate

B. The participation rate

C. The unemployment rate

D. The natural rate

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

A. The exchange rate

B. The gross domestic product growth rate

C. The inflation rate

D. The real interest rate

50. An analyst starts by examining the broad economic environment and then considers the implications of the economy on the industry in which the firm operates. Finally, the firm’s position within the industry is examined. This is called __________ analysis.

A. bottom-up

B. outside-inside

C. top-down

D. upside-down

51. Assume that the Federal Reserve increases the money supply. This will cause:

I. Interest rates to decrease
II. Consumption and investment to decrease
III. Inflation to fall

A. I only

B. I and II only

C. II and III only

D. I, II, and III

52. The discount rate is the ________.

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

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

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

D. interest rate that banks charge their best corporate customers

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

A. stimulate; stimulate

B. stimulate; discourage

C. discourage; stimulate

D. discourage; discourage

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

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

55. Increases in the money supply will cause demand for investment and consumption goods to __________ in the short run and may cause prices to __________ in the long run.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

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

A. 2.91%

B. 3.85%

C. 1.45%

D. 2.12%

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

A. -6%

B. 4%

C. 5.77%

D. 14.4%

58. Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase:

I. Maturity
II. Relative decline
III. Consolidation

A. III, I, II

B. I, III, II

C. III, II, I

D. I, II, III

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

A. sector rotation

B. contraction/expansion analysis

C. life-cycle analysis

D. business-cycle shifting

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

A. $0

B. $90,000

C. $180,000

D. $270,000

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

A. $90,000

B. $210,000

C. $300,000

D. $630,000

62. The fed funds rate is the __________.

A. interest rate that banks charge their best corporate customers

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

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

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

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

A. 300,000

B. 400,000

C. 500,000

D. 600,000

64. The goal of supply-side policies is to _______.

A. increase government involvement in the economy

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

C. maximize tax revenues of the government

D. focus more on wealth redistribution policies

65. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

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

A. start-up

B. consolidation

C. maturity

D. relative decline

66. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Characteristics _______ would be typical of an industry that is in the start-up stage.

A. 4 and 7

B. 1 and 4

C. 2 and 5

D. none of these options

67. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

Characteristics ____ would be typical of an industry that is in the consolidation stage.

A. 6 and 7

B. 1 and 4

C. 5 and 6

D. 2 and 8

68. An industry analysis for manufacturers of a small personal care gadget observed the following characteristics:

1. Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate.
2. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited.
3. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year.
4. The current penetration rate in the United States is 60% of households and will be difficult to increase.
5. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common.
6. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service.
7. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase.
8. New manufacturers continue to enter the market.

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

A. 1, 2, and 3

B. 4 and 5

C. 6, 7, and 8

D. all of these options

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

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

B. The annual budget should always be balanced.

C. Deficits should always equal surpluses.

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

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

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

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

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

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

71. Which of the following actions should the central bank take if monetary authorities want to reduce the supply of money to slow the rate of inflation?

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

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

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

D. Increase taxes, reducing costs and causing prices to fall.

72. The decline in the value of the dollar relative to the yen will have what impact on the purchase of U.S. goods in Japan?

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

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

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

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

73. Which of the following are examples of cyclical industries?

I. Maytag
II. Computer chip manufacturers
III. Kellogg’s Frosted Flakes
IV. Pfizer

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. I, II, III, and IV

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

A. greater than 1; less than 1

B. less than 1; less than 1

C. less than 1; greater than 1

D. greater than 1; greater than 1

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

A. Exchange rates

B. Inflation

C. Gross domestic product

D. Budget deficits

76. The federal government decides to pay for the transition to private social security accounts with a one-time $1 trillion bond issue. What will be the biggest concern to businesses relative to the “crowding out” effect?

A. Higher interest rates due to the new government borrowing

B. Inflation resulting from more government purchases

C. A negative supply shock

D. Shortage of investment due to new accounts

77. An expanding economy requires more workers. If the supply of workers becomes inadequate to meet the demand, what is the likely impact on the economy?

A. An economic slowdown is likely

B. Employment trends will reverse and unemployment will occur

C. Government deficits will result from capacity utilization

D. Inflation may result from upward wage pressures

78. An expanding economy puts stress on the manufacturing ability of a company. When a firm turns business down during periods of economic expansion, a problem exists in the area of ____________.

A. asset allocation

B. capacity utilization

C. employment management

D. strategic planning

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

A. expanding economy

B. increased inflation

C. interest rate declines

D. lower GDP

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

A. the Federal Reserve System

B. Congress

C. money center banks

D. the Treasury department

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

A. SIC

B. NAICS

C. ISO 57

D. ISM

82. During 2004 China increased its use of global oil by 40%. This followed a 100% increase during the previous 5 years. How do economists refer to this kind of economic event?

A. Demand shock

B. Equilibrium event

C. Expanding commodity event

D. Supply shock

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

A. demand shock

B. equilibrium event

C. expanding commodity event

D. supply shock

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

A. necessities; income

B. luxuries; leverage

C. discretionary goods; time of purchase

D. produced with high fixed costs; entertainment

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

A. start-up

B. consolidation

C. maturity

D. relative decline

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

A. Start-up stage

B. Consolidation stage

C. Maturity stage

D. Relative decline stage

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

A. start-up

B. consolidation

C. maturity

D. relative decline

88. Large-growth companies generally emerge in the __________ stage.

A. start-up

B. consolidation

C. maturity

D. relative decline

89. Which of the following are barriers to entry?

I. Large economies of scale required to be profitable
II. Established brand loyalty
III. Patent protection for the firm’s product
IV. Rapid industry growth

A. I and II only

B. I, II, and III only

C. II, III, and IV only

D. III and IV only

13
Student: ___________________________________________________________________________
1. The accounting measure of a firm’s equity value generated by applying accounting principles to asset and liability acquisitions is called ________.

A. book value

B. market value

C. liquidation value

D. Tobin’s q

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

A. Start-up phase

B. Consolidation

C. Maturity

D. Relative decline

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

A. a higher

B. a lower

C. an unchanged

D. The answer cannot be determined from the information given.

4. The value of Internet companies is based primarily on _____.

A. current profits

B. Tobin’s q

C. growth opportunities

D. replacement cost

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

A. book value per share

B. P/E multiples

C. profits

D. asset values

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

A. higher; higher

B. lower; lower

C. higher; lower

D. They are unrelated.

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

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

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

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

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

8. Earnings yields tend to _______ when Treasury yields fall.

A. fall

B. rise

C. remain unchanged

D. fluctuate wildly

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

A. Dividend payout ratio

B. Intrinsic value

C. Market capitalization rate

D. Plowback ratio

10. Which one of the following is equal to the ratio of common shareholders’ equity to common shares outstanding?

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin’s q

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

A. 1.83

B. 1.5

C. 1.35

D. 1.46

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

A. the dividend payout ratio is optimal

B. the stock’s required return is equal to the growth rate in earnings and dividends

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

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

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

A. has a Tobin’s q value < 1 B. will generate a positive alpha C. has an expected return less than its required return D. has a beta > 1

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

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

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

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

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

15. A firm that has an ROE of 12% is considering cutting its dividend payout. The stockholders of the firm desire a dividend yield of 4% and a capital gain yield of 9%. Given this information, which of the following statements is (are) correct?

I. All else equal, the firm’s growth rate will accelerate after the payout change.
II. All else equal, the firm’s stock price will go up after the payout change.
III. All else equal, the firm’s P/E ratio will increase after the payout change.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

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

A. return on assets will increase

B. earnings retention ratio will increase

C. earnings growth rate will fall

D. stock price will fall

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

A. Book value per share

B. Liquidation value per share

C. Market value per share

D. Tobin’s q

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

A. less than

B. equal to

C. greater than

D. greater than or equal to

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

A. 0%

B. 100%

C. between 0% and 50%

D. between 50% and 100%

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

A. growth rate is less than or equal to the required return

B. growth rate is greater than or equal to the required return

C. growth rate is less than the required return

D. growth rate is greater than the required return

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

A. -10%

B. -20%

C. -25%

D. -33%

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

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

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

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

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

A. will be higher than the intrinsic value of stock B

B. will be the same as the intrinsic value of stock B

C. will be less than the intrinsic value of stock B

D. The answer cannot be determined from the information given.

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

A. $31.25

B. $32.37

C. $38.47

D. $41.32

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

A. 8.33

B. 12.5

C. 19.23

D. 24.15

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

A. 7.14

B. 14.29

C. 16.67

D. 22.22

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

A. $16.67

B. $25

C. $37.50

D. $40.83

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

A. .5%

B. 1%

C. 1.5%

D. 2%

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

A. 4.5%

B. 10.5%

C. 15%

D. 30%

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

A. $13.50

B. $45.50

C. $91

D. $114.29

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

A. 5%

B. 15%

C. 17.5%

D. 45%

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

A. $25

B. $16.87

C. $19.24

D. $20.99

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

A. $1.12

B. $1.44

C. $2.40

D. $5.60

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

A. $20.93

B. $69.77

C. $128.57

D. $150

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

A. 9%

B. 12%

C. 14%

D. 18%

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

A. $20

B. $70

C. $90

D. $115

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

A. $25

B. $50

C. $75

D. $100

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

A. $25

B. $50

C. $83.33

D. $208

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

A. -$6.33

B. $0

C. $20.34

D. $26.67

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

A. Firm A

B. Firm B

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

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

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

A. higher than

B. equal to

C. lower than

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

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

A. less than 1

B. equal to 1

C. greater than 1

D. less than zero

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

A. increase

B. decrease

C. stay the same

D. No typical pattern can be expected.

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

A. 1.4

B. .9

C. .8

D. .5

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

A. 8%

B. 10.8%

C. 15.6%

D. 16.8%

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

A. $24.29

B. $27.39

C. $31.13

D. $34.52

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

A. 7.25%

B. 10.25%

C. 14.75%

D. 21%

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

A. 4

B. 17.65

C. 37.50

D. 50

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

A. higher; lower

B. higher; higher

C. lower; lower

D. lower; higher

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

A. $10

B. $22.73

C. $27.78

D. $41.67

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

A. 2%

B. 5%

C. 8%

D. 9%

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

A. $50

B. $100

C. $150

D. $200

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

A. $63.80

B. $65.13

C. $67.95

D. $85.60

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

A. $13.07

B. $13.58

C. $18.25

D. $18.78

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

A. the stock experienced a drop in its P/E ratio

B. the company had a decrease in its dividend payout ratio

C. both earnings and share price increased by 20%

D. the required rate of return increased

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

A. an increase in the dividend payout ratio

B. a reduction in investor risk aversion

C. an expected increase in the level of inflation

D. an increase in the yield on Treasury bills

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

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

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

C. less risk than the typical company

D. less sensitivity to market trends than the typical company

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

A. D1

B. D0

C. g

D. k

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

A. $26.67

B. $35.19

C. $42.94

D. $59.89

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

A. 12

B. 8.33

C. 10.25

D. 18.55

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

A. 12.82

B. 7.69

C. 8.33

D. 9.46

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

A. $17.78

B. $20

C. $40

D. None of these options

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

A. 5%

B. 10%

C. 20%

D. None of these options

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

A. $23.57

B. $15

C. $19.78

D. $21.34

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

A. earnings growth will increase and the stock’s P/E will increase

B. earnings growth will decrease and the stock’s P/E will increase

C. earnings growth will increase and the stock’s P/E will decrease

D. earnings growth will increase and the stock’s P/E may or may not increase

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

A. 1.5

B. 1.25

C. 1.1

D. 1

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

At what price would you expect ART to sell?

A. $25

B. $34.29

C. $42.86

D. $45.67

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

At what P/E ratio would you expect ART to sell?

A. 8.33

B. 11.43

C. 14.29

D. 15.25

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

What is the present value of growth opportunities for ART?

A. $8.57

B. $9.29

C. $14.29

D. $16.29

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

What price do you expect ART shares to sell for in 4 years?

A. $53.96

B. $44.95

C. $41.68

D. $39.76

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

A. $85

B. $125

C. $185

D. $305

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

A. $57

B. $65

C. $75

D. $95

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

A. $1 billion

B. $2 billion

C. $3 billion

D. $4 billion

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

A. $679.81 million

B. $715.54 million

C. $769.23 million

D. $803.03 million

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

A. $405.6 million

B. $454.2 million

C. $505.8 million

D. $553.5 million

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

A. $269 million

B. $296 million

C. $305 million

D. $327 million

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

A. $2,168 billion

B. $2,445 billion

C. $2,565 billion

D. $2,998 billion

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

A. $1,950 billion

B. $2,497 billion

C. $2,585 billion

D. $3,098 billion

80. Firm A has a stock price of $35, and 60% of the value of the stock is in the form of PVGO. Firm B also has a stock price of $35, but only 20% of the value of stock B is in the form of PVGO. We know that:

I. Stock A will give us a higher return than Stock B.
II. An investment in stock A is probably riskier than an investment in stock B.
III. Stock A has higher forecast earnings growth than stock B.

A. I only

B. I and II only

C. II and III only

D. I, II, and III

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

A. $27.27

B. $37.50

C. $66.67

D. $70

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

A. $9.09

B. $10.10

C. $11.11

D. $12.21

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

A. $6

B. $24.50

C. $44.44

D. $75

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

A. 92%

B. 87%

C. 77%

D. 64%

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

A. 27 years

B. 37 years

C. 55 years

D. 75 years

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

A. Import/export trade

B. Software

C. Telecommunications

D. Utility

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

A. the terminal value used

B. whether one uses FCFF or FCFE

C. the time period used to estimate the cash flows

D. whether the firm is currently paying dividends

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

A. how easy it is to come up with accurate model inputs

B. the precision of the value estimate

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

D. how all the different models typically yield identical value results

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

A. Price-to-book ratio

B. P/E ratio

C. Price-to-cash-flow ratio

D. Price-to-sales ratio

14
Student: ___________________________________________________________________________
1. Which of the following assets is most liquid?

A. Cash equivalents

B. Receivables

C. Inventories

D. Plant and equipment

2. Cost of goods sold refers to ___________.

A. direct costs attributable to producing the product sold by the firm

B. salaries, advertising, and selling expenses

C. payments to the firm’s creditors

D. payments to federal and local governments

3. Many observers believe that firms “manage” their income statements to _______.

A. minimize taxes over time

B. maximize expenditures

C. smooth their earnings over time

D. generate level sales

4. Depreciation expense is in what broad category of expenditures?

A. Operating expenses

B. General and administrative expenses

C. Debt interest expense

D. Tax expenditures

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

A. $175 million

B. $155 million

C. $120 million

D. $55 million

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

A. volatile exchange rates

B. the lack of common accounting standards

C. lower disclosure standards in the United States than abroad

D. the lack of transparent reporting standards across the EU

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

A. increased greatly

B. increased slightly

C. remained constant

D. decreased

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

A. decrease

B. increase

C. not change

D. change but in an indeterminable manner

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

A. Income statement

B. Balance sheet

C. Statement of operating earnings

D. Statement of cash flows

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

A. Increased $138 million

B. Decreased $138 million

C. Increased $836 million

D. Decreased $836 million

11.

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

A. $5

B. $28

C. $30

D. $33

12.
Based on the cash flow data in the table for Interceptors Inc., which of the following statements is (are) correct?

I. This firm appears to be a good investment because of its steady growth in cash.
II. This firm has been able to generate growing cash flows only by borrowing or selling equity to offset declining operating cash flows.
III. Financing activities have been increasingly important for this firm’s operations, at least in the short run.

A. I only

B. II and III only

C. II only

D. I and II only

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

A. total assets

B. total liabilities

C. shareholders’ equity

D. fixed assets

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

A. EBIT/Total assets; Net profit/Total assets

B. Net profit/Total assets; EBIT/Total assets

C. EBIT/Total assets; Net profit/Equity

D. Net profit/EBIT; Sales/Total assets

15. A firm increases its financial leverage when its ROA is greater than the cost of debt. Everything else equal, this change will probably increase the firm’s:

I. Beta
II. Earnings variability over the business cycle
III. ROE
IV. Stock price

A. I and II only

B. III and IV only

C. I, III, and IV only

D. I, II, and III only

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

A. 0; uses as much debt as possible

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

C. 1; uses no interest-bearing debt

D. -1; pays down its existing debts

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

A. Net profit/Interest expense

B. Pretax profit/EBIT

C. EBIT/Sales

D. EBIT/Interest expense

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

A. DuPont analysis

B. technical analysis

C. comparative analysis

D. liquidity analysis

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

A. Interest burden

B. Profit margin

C. Asset turnover

D. Earnings yield ratio

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

A. GAAP

B. IFRS

C. FASB

D. GASB

21. Operating ROA can be found as the product of ______.

A. Return on sales × ATO

B. Tax burden × Interest burden

C. Interest burden × Leverage ratio

D. ROE × Dividend payout ratio

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

A. 8.4

B. 11.9

C. 17.62

D. 47.6

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

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

B. equal to ROE

C. greater than ROE

D. less than ROE

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

A. the firm’s use of financial leverage is positively contributing to ROE

B. the firm’s use of financial leverage is negatively contributing to ROE

C. the firm’s use of operating leverage is positively contributing to ROE

D. the firm’s use of operating leverage is negatively contributing to ROE

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

A. 2.88

B. 2

C. 1.75

D. .69

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

A. 4%

B. 6%

C. 8%

D. 12%

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

A. 12.4%

B. 14.5%

C. 16.6%

D. 17.8%

28. Economic value added (EVA) is:

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

B. ROA × ROE

C. a measure of the firm’s abnormal return

D. largest for high-growth firms

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

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

B. A profitable firm will always have a positive EVA.

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

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

30. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s current ratio for 2012 indicates that Flathead’s liquidity has ________ since 2011.

A. risen

B. fallen

C. stayed the same

D. The answer cannot be determined from the information given.

31. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s inventory turnover ratio is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 11.6

B. 10.2

C. 9.5

D. 7.7

32. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s debt-to-equity ratio for 2012 is _________.

A. 2.13

B. 2.44

C. 2.56

D. 2.89

33. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s cash flow from operating activities for 2012 was _______.

A. $810,000

B. $775,000

C. $755,000

D. $735,000

34. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The industry average ACP is 32 days. How is Flathead doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

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

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

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

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

35. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s total asset turnover for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 3.56

B. 3.26

C. 3.14

D. 3.02

36. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. In 2012 Flathead generated ______ of EBIT for every dollar of sales.

A. $.075

B. $.086

C. $.092

D. $.099

37. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s return on equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 6.5%

B. 26.5%

C. 33.4%

D. 38%

38. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s P/E ratio for 2012 is _________.

A. 3.39

B. 3.6

C. 13.33

D. 10.67

39. The financial statements of Flathead Lake Manufacturing Company are shown below:

Note: The common shares are trading in the stock market for $15 per share

Refer to the financial statements of Flathead Lake Manufacturing Company. The firm’s compound leverage ratio is __________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 1.5

B. 2

C. 2.5

D. 3

40. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s current ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

41. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s quick ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

42. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s leverage ratio for 2012 is _________.

A. 1.3

B. 1.5

C. 1.69

D. 2.83

43. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s times-interest-earned ratio for 2012 is _________.

A. 2.8

B. 6

C. 9

D. 11.11

44. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s fixed-asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 2.8

B. 6

C. 9

D. 11.11

45. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s asset turnover ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. 1.3

B. 1.5

C. 1.69

D. 2.83

46. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s return-on-sales ratio for 2012 is _________.

A. .0409

B. .0429

C. .0475

D. .0753

47. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s return-on-equity ratio for 2012 is _________. (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

A. .0409

B. .0429

C. .0462

D. .0923

48. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s P/E ratio for 2012 is _________.

A. 2.8

B. 3.6

C. 6

D. 11.11

49. The financial statements of Burnaby Mountain Trading Company are shown below.

Note: The common shares are trading in the stock market for $27 each.

Refer to the financial statements of Burnaby Mountain Trading Company. The firm’s market-to-book value for 2012 is _________.

A. .1708

B. .1529

C. .1462

D. .1636

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

A. 7.56%

B. 15.12%

C. 20.16%

D. 30.24%

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

A. 15.12%

B. 28.42%

C. 37.24%

D. 40.6%

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

A. understate; overstate

B. understate; understate

C. overstate; understate

D. overstate; overstate

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

A. has more current liabilities than the industry average

B. has more leased assets than the industry average

C. will be less profitable than the industry average

D. has more current assets than the industry average

54. A firm has a lower inventory turnover, a longer ACP, and a lower fixed-asset turnover than the industry averages. You should not be surprised to find that this firm has:

I. Lower ATO than the industry average
II. Lower ROA than the industry average
III. Lower ROE than the industry average

A. I only

B. I and II only

C. II and III only

D. I, II, and III

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

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

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

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

D. All of these options.

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

A. earnings yield is above the industry average

B. P/E ratio is above the industry average

C. dividend payout ratio is too high

D. interest burden must be below the industry average

57. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by operating activities of Haven Hardware?

A. -$30,000

B. $220,000

C. $320,000

D. $780,000

58. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by or used in investing activities of Haven Hardware?

A. -$12,000

B. -$62,000

C. $12,000

D. $164,000

59. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net cash provided by or used in financing activities of Haven Hardware?

A. -$10,000

B. -$120,000

C. $10,000

D. $120,000

60. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the net increase or decrease in cash for Haven Hardware for 2012?

A. -$94,000

B. -$88,000

C. $88,000

D. $188,000

61. Use the following cash flow data of Haven Hardware for the year ended December 31, 2012.

What is the cash at the end of 2012 for Haven Hardware?

A. $6,000

B. $94,000

C. $736,000

D. $188,000

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

A. total asset turnover

B. fixed-asset turnover

C. average collection period

D. cash ratio

63. Which of the following would result in a cash inflow under the heading “Cash flow from investing” in the statement of cash flows?

A. Purchase of capital equipment

B. Payments to suppliers for inventory

C. Collections on receivables

D. Sale of production machinery

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

A. Cash flow from investment activities

B. Cash flow from operating activities

C. Cash flow from financing

D. Cash flow from extraordinary events

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

A. $8 million

B. -$6 million

C. $3 million

D. -$4 million

66. Another term for EVA is ______.

A. net income

B. operating income

C. residual income

D. market-based income

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

A. Increase in accounts receivable

B. Decrease in inventories

C. Decrease in taxes payable

D. Decrease in bonds outstanding

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

A. Acquisition of another business

B. Capital gain from sale of a subsidiary

C. Decrease in net investments

D. Sale of equipment

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

A. Dividends paid

B. A delay in collecting on accounts receivable

C. Net new investments

D. An increase in accounts payable

70. The table below shows some data for Key Biscuit Company:

What must have caused the firm’s ROE to drop?

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

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

C. The compound leverage ratio was less than 1.

D. The operating ROA was declining.

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

A. $50 increase

B. $100 increase

C. $150 increase

D. $250 increase

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

A. $20 increase

B. $80 increase

C. $100 increase

D. $200 increase

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

A. $10 decrease

B. $90 decrease

C. $180 decrease

D. $190 decrease

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

A. Increase of $225

B. Increase of $130

C. Decrease of $195

D. Decrease of $110

75. The term quality of earnings refers to ________.

A. how well reported earnings conform to GAAP

B. the realism and sustainability of reported earnings

C. whether actual earnings matched expected earnings

D. how well reported earnings fit a trend line of earnings growth

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

A. channel stuffing

B. clogging the network

C. spamming the johns

D. artificial sales

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

A. Asset turnover

B. Current ratio

C. Liquidity ratio

D. Quick ratio

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

A. .243

B. .267

C. .826

D. .972

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

A. 1.58%

B. 5.68%

C. 12.2%

D. 13.33%

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

A. 1.88%

B. 6.68%

C. 12.15%

D. 17.02%

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

A. strictly enforced; weakly enforced

B. rules-based; principles-based

C. evolutionary; devolutionary

D. based on government standards; based on corporate practice

82. The quick ratio is a measure of a firm’s __________.

A. asset turnover

B. market valuation

C. liquidity

D. interest burden

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

A. .25

B. .3

C. .335

D. .372

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

A. the firm has no interest payments

B. the firm uses less debt as a percentage of financing

C. the firm’s interest payments are equal to the firm’s pretax profits

D. the firm’s debt has a positive contribution to the firm’s ROA

15
Student: ___________________________________________________________________________
1. You purchase one IBM July 120 call contract for a premium of $5. You hold the option until the expiration date, when IBM stock sells for $123 per share. You will realize a ______ on the investment.

A. $200 profit

B. $200 loss

C. $300 profit

D. $300 loss

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

A. $200 profit

B. $200 loss

C. $500 profit

D. $500 loss

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

A. $300 profit

B. $300 loss

C. $500 loss

D. $200 profit

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

A. $300 profit

B. $200 loss

C. $600 loss

D. $200 profit

5. ______ option can only be exercised on the expiration date.

A. A Mexican

B. An Asian

C. An American

D. A European

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

A. more; European-

B. less; European-

C. more; Canadian-

D. less; Canadian-

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

A. Max (0, ST – X)

B. Min (0, ST – X)

C. Max (0, X – ST)

D. Min (0, X – ST)

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

A. Max (0, ST – X)

B. Min (0, ST – X)

C. Max (0, X – ST)

D. Min (0, X – ST)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

12. A time spread may be executed by _____.

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

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

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

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

13. Which of the following statements about convertible bonds are true?

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

A. I and III only

B. I and IV only

C. I, II, and IV only

D. III and IV only

14. A quanto provides its holder with the right to ______________.

A. participate in the payoffs from a portfolio of gambling casino stocks

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

C. participate in the investment performance of a foreign security

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

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

A. Max (-C0, ST – X – C0)

B. Min (-C0, ST – X – C0)

C. Max (C0, ST – X + C0)

D. Max (0, ST – X – C0)

16. Strips and straps are variations of __________.

A. straddles

B. collars

C. money spreads

D. time spreads

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

A. Max (P0, X – ST – P0)

B. Min (-P0, X – ST – P0)

C. Min (P0, ST – X + P0)

D. Max (0, ST – X – P0)

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

A. warrants

B. LEAPS

C. GICs

D. CATs

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

A. less than 1 year

B. less than 2 years

C. between 1 and 2 years

D. between 1 and 3 years

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

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

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

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

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

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

A. second Monday

B. third Wednesday

C. second Thursday

D. third Friday

22. The writer of a put option _______________.

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

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

C. has the right to buy shares at a set price

D. has the right to sell shares at a set price

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

A. Ease and low cost of trading

B. Anonymity of participants

C. Contracts that are tailored to meet the needs of market participants

D. No concerns about counterparty credit risk

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

A. 1

B. 10

C. 100

D. 1,000

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

A. $1

B. $5

C. $20

D. $25

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

A. time spread

B. long straddle

C. short straddle

D. money spread

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

A. AMEX

B. CBOE

C. NYSE

D. CFTC

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

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

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

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

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

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

A. at the money

B. in the money

C. out of the money

D. knocked out

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

A. time spread

B. long straddle

C. short straddle

D. money spread

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

A. at the money

B. in the money

C. out of the money

D. knocked in

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

A. covered call

B. long straddle

C. naked call

D. money spread

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

A. time spread

B. long straddle

C. short straddle

D. money spread

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

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

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

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

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

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

A. long straddle

B. naked put

C. protective put

D. short stroll

36. The value of a listed call option on a stock is lower when:

I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

A. II, III, and IV only

B. I, III, and IV only

C. I, II, and III only

D. I, II, III, and IV

37. The Option Clearing Corporation is owned by _________.

A. the exchanges on which stock options are traded

B. the Federal Deposit Insurance Corporation

C. the Federal Reserve System

D. major U.S. banks

38. The value of a listed put option on a stock is lower when:

I. The exercise price is higher.
II. The contract approaches maturity.
III. The stock decreases in value.
IV. A stock split occurs.

A. II only

B. II and IV only

C. I, II, and III only

D. I, II, III, and IV

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

A. call premium

B. stock price

C. stock price minus the value of the call

D. strike price minus the stock price

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

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

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

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

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

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

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

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

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

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

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

A. equal to the call premium

B. larger the lower the stock price

C. limited

D. unlimited

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

A. decrease; decrease

B. decrease; increase

C. increase; decrease

D. increase; increase

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

A. are; are not

B. are; are

C. are not; are

D. are not; are not

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

A. an American

B. a European

C. an Asian

D. an Australian

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

A. ST – X if ST > X, 0 if ST ≤ X

B. – (ST – X) if ST > X, 0 if ST ≤ X

C. 0 if ST ≥ X, X – ST if ST < X

D. 0 if ST ≥ X, – (X – ST) if ST < X

47. A “bet” option is also called a ____ option.

A. barrier

B. lookback

C. digital

D. foreign exchange

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

A. SPX

B. DJX

C. CME

D. OEX

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

A. $1,980

B. $4,900

C. $5,000

D. $2,080

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

A. $120

B. $1,000

C. $11,000

D. $12,000

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

A. $125

B. $450

C. $575

D. unlimited

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

A. either lower than $44.25 or higher than $55.75

B. between $44.25 and $55.75

C. higher than $55.75

D. lower than $44.25

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

A. $150

B. $400

C. $600

D. $1,850

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

A. Writing an uncovered call option

B. Writing an uncovered put option

C. Buying a call option

D. Buying a put option

55. Which one of the following is a correct statement?

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

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

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

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

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

A. $33; $3.50

B. $33; $31.50

C. $35; $3.50

D. $35; $35

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

To establish a bull money spread with calls, you would _______________.

A. buy the 55 call and sell the 45 call

B. buy the 45 call and buy the 55 call

C. buy the 45 call and sell the 55 call

D. sell the 45 call and sell the 55 call

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

Ignoring commissions, the cost to establish the bull money spread with calls would be _______.

A. $1,050

B. $650

C. $400

D. $400 income rather than cost

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

If in June the stock price is $53, your net profit on the bull money spread (buy the 45 call and sell the 55 call) would be ________.

A. $300

B. -$400

C. $150

D. $50

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

To establish a bull money spread with puts, you would _______________.

A. sell the 55 put and buy the 45 put

B. buy the 45 put and buy the 55 put

C. buy the 55 put and sell the 45 put

D. sell the 45 put and sell the 55 put

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

Suppose you establish a bullish money spread with the puts. In June the stock’s price turns out to be $52. Ignoring commissions, the net profit on your position is _______________.

A. $500

B. $700

C. $200

D. $250

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

What would be a simple options strategy using a put and a call to exploit your conviction about the stock price’s future movement?

A. Sell a call.

B. Purchase a put.

C. Sell a straddle.

D. Buy a straddle.

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

Selling a straddle would generate total premium income of _____.

A. $300

B. $400

C. $500

D. $700

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

Suppose you write a strap and the stock price winds up to be $42 at contract expiration. What was your net profit on the strap?

A. $200

B. $300

C. $700

D. $400

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

How can you create a position involving a put, a call, and riskless lending that would have the same payoff structure as the stock at expiration?

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

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

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

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

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

A. $300

B. $200

C. $475

D. $0

67. A covered call strategy benefits from what environment?

A. Falling interest rates

B. Price stability

C. Price volatility

D. Unexpected events

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

A. $300 profit

B. $100 loss

C. $500 profit

D. $200 profit

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

A. Bull spread

B. Long put

C. Short call

D. Straddle

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

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

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

A. $32.50

B. $35

C. $37.50

D. $37.60

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

A. $24.15

B. $25

C. $25.87

D. $27.86

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

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

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

A. Long call and short put

B. Long call and long put

C. Short call and short put

D. Short call and long put

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

A. long call

B. short call

C. short put

D. long put

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

A. Covered call

B. Protective put

C. Short put

D. Straddle

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

A. Collar

B. Covered Call

C. Protective put

D. Straddle

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

A. Buy a strip.

B. Buy a strap.

C. Buy a straddle.

D. Write a straddle.

79. When issued, most convertible bonds are issued _____________.

A. deep in the money

B. deep out of the money

C. slightly out of the money

D. slightly in the money

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

A. straight debt value of the bond

B. conversion value of the bond

C. straight debt value of the bond minus the conversion value

D. straight debt value of the bond plus the conversion value

81. Warrants differ from listed options in that:

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

A. I only

B. I and II only

C. II and III only

D. I, II, and III

82. Suppose you find two bonds identical in all respects except that bond A is convertible to common stock and bond B is not. Bond A is priced at $1,245, and bond B is priced at $1,120. Bond A has a promised yield to maturity of 5.6%, and bond B has a promised yield to maturity of 6.7%. The stock of bond A is trading at $49.80 per share. Which of the following statements is (are) correct?

I. The value of the conversion option for bond A is $125.
II. The lower promised yield to maturity of bond A indicates that the bond is priced according to its straight debt value rather than its conversion value.
III. If bond A can be converted into 25 shares of stock, the investor would break even at the current prices.

A. II only

B. I and III only

C. III only

D. I, II, and III

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

A. -$15

B. $200

C. $85

D. $185

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

A. $195,000

B. $220,000

C. $175,000

D. $215,000

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

A. greater; lower

B. greater; greater

C. lower; greater

D. lower; lower

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

A. $300 profit

B. $100 loss

C. $400 loss

D. $200 profit

87. You own $75,000 worth of stock, and you are worried the price may fall by year-end in 6 months. You are considering using either puts or calls to hedge this position. Given this, which of the following statements is (are) correct?

I. One way to hedge your position would be to buy puts.
II. One way to hedge your position would be to write calls.
III. If major stock price declines are likely, hedging with puts is probably better than hedging with short calls.

A. I only

B. II only

C. I and III only

D. I, II, and III

17
Student: ___________________________________________________________________________
1. Today’s futures markets are dominated by trading in _______ contracts.

A. metals

B. agriculture

C. financial

D. commodity

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

A. decrease substantially

B. increase substantially

C. remain unchanged

D. increase or decrease substantially

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

A. long call option

B. long put option

C. long futures contract

D. short futures contract

4. The clearing corporation has a net position equal to ______.

A. the open interest

B. the open interest times 2

C. the open interest divided by 2

D. zero

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

A. cash; cash

B. cash; actual

C. actual; cash

D. actual; actual

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

A. Listed put option

B. Short futures contract

C. Forward contract

D. Listed call option

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

A. market timers; lower transaction cost

B. banks; lower risk

C. wealthy investors; tax treatment

D. money market funds; limited exposure

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

A. Investors; regulators

B. Hedgers; speculators

C. Speculators; hedgers

D. Regulators; investors

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

A. futures positions are easier to trade

B. futures contracts are tailored to the specific needs of the investor

C. futures trading preserves the anonymity of the participants

D. counterparty credit risk is not a concern on futures

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

A. an arbitrage

B. a cross-hedge

C. an over hedge

D. a spread hedge

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

A. all outstanding silver futures contracts

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

C. silver futures contracts traded during the day

D. silver futures contracts traded the previous day

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

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

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

A. pay; pay

B. pay; receive

C. receive; pay

D. receive; receive

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

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

B. credit risk; all traders understand the risk of the contracts

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

D. trading cost; trading volume is reduced

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

A. market

B. credit

C. interest rate

D. basis

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

A. greater than

B. less than

C. equal to

D. sometimes less than and sometimes greater than

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

A. sell wheat futures

B. buy wheat futures

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

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

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

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

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

A. cross-hedge

B. reversing trade

C. spread position

D. straddle

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

A. federal funds

B. Eurodollars

C. banker’s acceptances

D. repurchase agreements

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

A. 5%-15%

B. 10%-20%

C. 15%-25%

D. 20%-30%

22. Margin must be posted by ________.

A. buyers of futures contracts only

B. sellers of futures contracts only

C. both buyers and sellers of futures contracts

D. speculators only

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

A. a margin call

B. marking to market

C. a variation margin check

D. the initial margin requirement

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

A. Original futures price – Spot price at maturity

B. Spot price at maturity – Original futures price

C. Zero

D. Basis

25. Margin requirements for futures contracts can be met by ______________.

A. cash only

B. cash or highly marketable securities such as Treasury bills

C. cash or any marketable securities

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

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

A. daily limit

B. daily margin

C. maintenance margin

D. convergence limit

27. Which one of the following is a true statement?

A. A margin deposit can be met only by cash.

B. All futures contracts require the same margin deposit.

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

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

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

A. marking to market

B. the convergence property

C. the open interest

D. the triple witching hour

29. A futures contract __________.

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

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

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

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

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

A. Index arbitrage

B. Marking to market

C. Reversing trades

D. Settlement transactions

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

A. Marking to market

B. The convergence property

C. The open interest

D. The triple witching hour

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

A. LIBOR

B. Treasury bills

C. Eurodollars

D. Treasury bonds

33. The CME weather futures contract is an example of ______________.

A. a cash-settled contract

B. an agricultural contract

C. a financial future

D. a commodity future

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

A. not yet being offered by any exchanges

B. offered overseas but not in the United States

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

D. scheduled to begin trading in 2015 on several exchanges

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

A. a cross-hedge

B. a reversing trade

C. a speculation

D. marking to market

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

A. cross-hedging

B. long hedging

C. spreading

D. speculating

37. Futures markets are regulated by the __________.

A. CFA Institute

B. CFTC

C. CIA

D. SEC

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

A. cross-hedging

B. short hedging

C. spreading

D. speculating

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

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

B. that the market believed that Obama would not win the election

C. nothing about the market’s belief concerning the odds of Obama winning

D. that the market believed Obama’s chances of winning were about 43%

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

A. sell S&P 500 Index futures

B. sell Treasury-bond futures

C. buy Treasury-bond futures

D. buy wheat futures

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

A. are; are

B. are; are not

C. are not; are

D. are not; are not

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

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

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

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

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

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

A. long; long

B. long; short

C. short; long

D. short; short

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

A. make; make

B. make; take

C. take; make

D. take; take

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

A. buy interest rate futures

B. buy Treasury bonds in the spot market

C. sell interest rate futures

D. sell S&P 500 futures

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

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

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

C. price discrepancies would open arbitrage opportunities for investors who spot them

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

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

A. the futures price minus the spot price

B. the spot price minus the futures price

C. the futures price minus the initial margin

D. the profit on the futures contract

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

A. CBOE

B. CBOT

C. CME

D. Eurex

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

A. fines and other penalties imposed by the SEC

B. arbitrage opportunities for investors who spot them

C. suspension of delivery privileges

D. suspension of trading

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

A. F1 = S0(1 + rf)

B. F0 = S0(1 + rf – d)T

C. F0 = S0(1 + rf + d)T

D. F0 = S0(1 + rf)T

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

A. F0 – FT

B. F0 – S0

C. FT – F0

D. FT – S0

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

A. long; long

B. long; short

C. short; long

D. short; short

53. Approximately __________ of futures contracts result in actual delivery.

A. 0%

B. less than 1% to 3%

C. less than 5% to 15%

D. less than 60% to 80%

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

A. be hurt; be hurt

B. be hurt; profit

C. profit; be hurt

D. profit; profit

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

A. must be paid if the position has been closed out

B. must be paid if the position has not been closed out

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

D. need not be paid if the position supports a hedge

56. A speculator will often prefer to buy a futures contract rather than the underlying asset because:

I. Gains in futures contracts can be larger due to leverage.
II. Transaction costs in futures are typically lower than those in spot markets.
III. Futures markets are often more liquid than the markets of the underlying commodities.

A. I and II only

B. II and III only

C. I and III only

D. I, II, and III

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

A. -$12,500

B. -$15,000

C. $15,000

D. $12,500

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

A. 1,274.33

B. 1,286.95

C. 1,268.61

D. 1,291.29

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

A. $1,504.99

B. $1,569.08

C. $1,554.04

D. $1,557.73

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

A. buy stock-index futures

B. sell stock-index futures

C. buy stock-index options

D. sell foreign exchange futures

61. At contract maturity the basis should equal ___________.

A. 1

B. 0

C. the risk-free interest rate

D. -1

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

A. buy the September contract and sell the June contract

B. sell the September contract and buy the June contract

C. sell the September contract and sell the June contract

D. buy the September contract and buy the June contract

63. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

The arbitrage profit implied by these prices is _____________.

A. $3.27

B. $4.39

C. $5.24

D. $6.72

64. A 1-year gold futures contract is selling for $1,645. Spot gold prices are $1,592 and the 1-year risk-free rate is 3%.

Based on the above data, which of the following set of transactions will yield positive riskless arbitrage profits?

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

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

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

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

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

A. $95.24

B. $100

C. $105

D. $107

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

A. $76.29

B. $93.46

C. $107

D. $131.08

67. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

After Monday’s close the balance on your margin account will be ________.

A. $2,700

B. $2,000

C. $3,137.50

D. $2,262.50

68. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

At the close of day on Tuesday your cumulative rate of return on your investment is _____.

A. 16.2%

B. -5.8%

C. -.16%

D. -2.2%

69. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

On which of the given days do you get a margin call?

A. Monday

B. Tuesday

C. Wednesday

D. None of these options

70. On Monday morning you sell one June T-bond futures contract at 97:27, that is, for $97,843.75. The contract’s face value is $100,000. The initial margin requirement is $2,700, and the maintenance margin requirement is $2,000 per contract. Use the following price data to answer the following questions.

The cumulative rate of return on your investment after Wednesday is a ____.

A. 79.9% loss

B. 2.6% loss

C. 33% gain

D. 53.9% loss

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

A. $40 million

B. $400 million

C. $400 billion

D. $400 trillion

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

A. the futures price will be higher as contract maturity increases

B. F0 < S0 C. FT > ST

D. arbitrage profits are possible

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

A. 17%

B. LIBOR

C. LIBOR + 1%

D. LIBOR – 1%

74. Interest rate swaps involve the exchange of ________________.

A. actual fixed-rate bonds for actual floating-rate bonds

B. actual floating-rate bonds for actual fixed-rate bonds

C. net interest payments and an actual principal swap

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

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

A. long call

B. short call

C. short stock position

D. long stock position

76. The _________ contract dominates trading in stock-index futures.

A. S&P 500

B. DJIA

C. Nasdaq 100

D. Russell 2000

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

A. Nasdaq Composite; Russell 2000

B. NYSE; DJIA

C. S&P 500; DJIA

D. Russell 2000; S&P 500

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

A. banks

B. brokers

C. clearinghouses

D. margin

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

A. 31%

B. 41%

C. 52%

D. 64%

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

A. $10,400

B. $14,300

C. $16,500

D. $21,300

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

A. Convergence

B. Margin

C. Basis

D. Volatility

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

A. buy T-bond futures

B. sell T-bond futures

C. buy stock-index futures

D. sell stock-index futures

83. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

What are the farmer’s proceeds from the sale of corn?

A. $27,500

B. $31,875

C. $33,875

D. $35,950

84. A farmer sells futures contracts at a price of $2.75 per bushel. The spot price of corn is $2.55 at contract expiration. The farmer harvested 12,500 bushels of corn and sold futures contracts on 10,000 bushels of corn.

Ignoring the transaction costs, how much did the farmer improve his cash flow by hedging sales with the futures contracts?

A. $0

B. $2,000

C. $31,875

D. $33,875

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

A. sell T-bond futures

B. buy T-bond futures

C. buy stock-index futures

D. sell stock-index futures

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

A. buy T-bond futures and sell stock-index futures

B. sell T-bond futures and buy stock-index futures

C. buy stock-index futures and buy T-bond futures

D. sell stock-index futures and sell T-bond futures

87. The Student Loan Marketing Association (SLMA) has short-term student loans funded by long-term debt. To hedge out this interest rate risk, SLMA could:

I. Engage in a swap to pay fixed and receive variable interest payments
II. Engage in a swap to pay variable and receive fixed interest payments
III. Buy T-bond futures
IV. Sell T-bond futures

A. I and II only

B. I and IV only

C. II and III only

D. II and IV only

18
Student: ___________________________________________________________________________
1. A mutual fund with a beta of 1.1 has outperformed the S&P 500 over the last 20 years. We know that this mutual fund manager _____.

A. must have had superior stock selection ability.

B. must have had superior asset allocation ability.

C. must have had superior timing ability.

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

2. The comparison universe is __________.

A. the bogey portfolio

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

C. the set of all mutual funds in the United States

D. the set of all mutual funds in the world

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

A. Average excess return to beta ratio

B. Average excess return to standard deviation ratio

C. Alpha to standard deviation of residuals ratio

D. Average return minus required return

4. The M2 measure is a variant of ________________.

A. the Sharpe measure

B. the Treynor measure

C. Jensen’s alpha

D. the appraisal ratio

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

A. 84.6%

B. 118%

C. 18%

D. 15.4%

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

A. dollar-weighted return method; dollar-weighted return method

B. dollar-weighted return method; time-weighted return method

C. time-weighted return method; dollar-weighted return method

D. time-weighted return method; time-weighted return method

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

A. Sharpe; Sharpe

B. Sharpe; Treynor

C. Treynor; Sharpe

D. Treynor; Treynor

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

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

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

A. is better than the performance of portfolio B

B. is the same as the performance of portfolio B

C. is poorer than the performance of portfolio B

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

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

A. The Treynor-Black model

B. The single-index model

C. The Fama-French three-factor model

D. The Sharpe model

11. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the Treynor measure for portfolio A?

A. 12.38%

B. 2.38%

C. .91%

D. 3.64%

12. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

What is the M2 measure for portfolio B?

A. .43%

B. 1.25%

C. 1.77%

D. 1.43%

13. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

If these portfolios are subcomponents that make up part of a well-diversified portfolio, then portfolio ______ is preferred.

A. A

B. B

C. C

D. S&P 500

14. The risk-free rate, average returns, standard deviations, and betas for three funds and the S&P 500 are given below.

Based on the M2 measure, portfolio C has a superior return of _____ as compared to the S&P 500.

A. -1.33%

B. 1.43%

C. 2%

D. 0%

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

A. Security selection

B. Passive investing

C. Market efficiency

D. Market timing

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

A. $100

B. $1,626

C. $1.5 million

D. $36.7 billion

17. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Sharpe ratio for performance evaluation. The fund with the highest Sharpe ratio of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

18. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Treynor measure for performance evaluation. The fund with the highest Treynor measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. The answer cannot be determined from the information given.

19. The average returns, standard deviations, and betas for three funds are given below along with data for the S&P 500 Index. The risk-free return during the sample period is 6%.

You want to evaluate the three mutual funds using the Jensen measure for performance evaluation. The fund with the highest Jensen measure of performance is __________.

A. fund A

B. fund B

C. fund C

D. S&P 500

20. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total excess return on the managed portfolio was __________.

A. 2%

B. 3%

C. 4%

D. 5%

21. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

22. In a particular year, Salmon Arm Mutual Fund earned a return of 16% by making the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total excess return was __________.

A. 1.5%

B. 2%

C. 2.5%

D. 3.5%

23. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The total extra return on the managed portfolio was __________.

A. 1%

B. 2%

C. 3%

D. 4%

24. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of asset allocation across markets to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

25. In a particular year, Lost Hope Mutual Fund made the following investments in asset classes:

The return on a bogey portfolio was 12%, based on the following:

The contribution of security selection within asset classes to the total extra return was __________.

A. -1%

B. 0%

C. 1%

D. 2%

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

A. Geometric average

B. Arithmetic average

C. Dollar weighted

D. Internal

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

A. Sharpe ratio

B. Treynor measure

C. Jensen measure

D. appraisal ratio

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

A. alpha

B. beta

C. excess return

D. standard deviation

29. The M2 measure of portfolio performance was developed by ______________.

A. Modigliani and Miller

B. Modigliani and Modigliani

C. Merton and Miller

D. Fama and French

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

A. the markets are efficient

B. portfolio risk is constant over time

C. diversification pays off

D. security selection is more valuable than asset allocation

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

A. a call option

B. a futures contract

C. a put option

D. a forward contract

32. One hundred fund managers enter a contest to see how many times in 13 years they can earn a higher return than their competitors. The probability distribution of the number of successful years out of 13 for the best-performing money managers is

Out of this sample, chance alone would indicate that there is a ______ probability that someone would beat the market at least 11 times out of 13 years.

A. 51.3%

B. 65.9%

C. 67.1%

D. 10.83%

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

A. a market portfolio

B. a passive portfolio

C. an active portfolio

D. an index portfolio

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

A. be skewed to the left

B. be skewed to the right

C. exhibit kurtosis

D. exhibit neither skewness nor kurtosis

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

A. 68%

B. 74%

C. 88%

D. 97%

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

A. alphas equal to zero

B. negative alphas

C. positive alphas

D. some negative and some positive alphas

37. Portfolio performance is often decomposed into various subcomponents, such as the return due to:

I. Broad asset allocation across security classes
II. Sector weightings within equity markets
III. Security selection with a given sector

The one decision that contributes most to the fund performance is _____.

A. I

B. II

C. III

D. All contribute equally to fund performance.

38. The theory of efficient frontiers has __________.

A. no adherents among practitioners

B. a small number of adherents among practitioners

C. a significant number of adherents among practitioners

D. complete support by practitioners

39. In the Treynor-Black model, security analysts __________.

A. analyze a relatively small number of stocks

B. analyze all stocks that are publicly traded

C. are redundant

D. devote their attention to market timing rather than fundamental analysis

40. In the Treynor-Black model, security analysts __________.

A. analyze the entire universe of stocks

B. assume that markets are inefficient

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

D. focus on selecting the best-performing bogey

41. Active portfolio management consists of:

I. Market timing
II. Security selection
III. Sector selection within given markets
IV. Indexing

A. I and II only

B. II and III only

C. I, II, and III only

D. I, II, III, and IV

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

A. decreases

B. increases

C. remains the same

D. may increase or decrease

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

A. alpha

B. beta

C. residual variance

D. information ratio

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

A. alphas; zero

B. alphas; positive

C. betas; positive

D. standard deviations; positive

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

A. alpha/beta

B. alpha/residual variance

C. beta/residual variance

D. none of these options

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

A. alpha/nonsystematic risk ratio

B. alpha/systematic risk ratio

C. delta/nonsystematic risk ratio

D. delta/systematic risk ratio

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

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

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

A. equal proportions of stocks A and B

B. more of stock A than stock B

C. more of stock B than stock A

D. The answer cannot be determined from the information given.

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

A. macroeconomic; macroeconomic

B. macroeconomic; microeconomic

C. microeconomic; macroeconomic

D. microeconomic; microeconomic

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

A. a higher Sharpe ratio than a passive strategy

B. a lower Sharpe ratio than a passive strategy

C. the same Sharpe ratio as a passive strategy

D. very few securities

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

A. measure the returns to a completely passive strategy

B. measure the returns to a similar active strategy

C. measure the returns to a given investment style

D. equal the return on the S&P 500

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

A. No; no

B. No; some

C. Some; no

D. Some; some

53. A passive benchmark portfolio is:

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

A. I only

B. I and III only

C. II and III only

D. I, II, and III

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

A. -5%

B. 5%

C. 10%

D. 95%

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

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

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

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

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

56. The term alpha transport refers to _____.

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

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

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

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

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

A. 20%

B. 60%

C. 75%

D. 120%

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

A. $30,000

B. $67,500

C. $108,750

D. $217,500

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

A. $31,250

B. $200,000

C. $500,000

D. $625,000

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

A. Russell 2000 Index

B. S&P 500 Index

C. Wilshire 5000 Index

D. Dow Jones Industrial Average

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

A. 6%

B. 11%

C. 21%

D. 25%

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

What was the manager’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

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

What was the bogey’s return in the month?

A. 2.07%

B. 2.21%

C. 2.24%

D. 4.8%

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

What was the manager’s over- or underperformance for the month?

A. Underperformance = .03%

B. Overperformance = .03%

C. Overperformance = .14%

D. Underperformance = 3%

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

What is the contribution of security selection to relative performance?

A. -.15%

B. .15%

C. -.3%

D. .3%

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

What is the contribution of asset allocation to relative performance?

A. -.18%

B. .18%

C. -.15%

D. .15%

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

A. Jensen’s alpha

B. M2

C. the Treynor ratio

D. the Sharpe ratio

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

A. completely efficient

B. nearly efficient

C. very inefficient

D. random walks

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

A. diversifiable risk; beta

B. beta; alpha

C. alpha; beta

D. alpha; diversifiable risk

70. Empirical tests to date show ______________.

A. that many investors have earned large rewards by market timing

B. little evidence of market-timing ability

C. clear-cut evidence of substantial market-timing ability

D. evidence that absolutely no market-timing ability exists

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

A. .58%

B. .68%

C. .78%

D. .88%

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

A. 2.15%

B. 2.76%

C. 2.94%

D. 3.14%

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

A. .1143

B. .1233

C. .1354

D. .1477

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

A. .0833

B. .1083

C. .1114

D. .1163

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

A. .3978

B. .4158

C. .4563

D. .4706

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

A. .4757

B. .5263

C. .6842

D. .7252

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

A. .017

B. .034

C. .067

D. .078

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

A. .017

B. .028

C. .036

D. .078

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

A. the bogey portfolio

B. the Vanguard Index

C. Jensen’s alpha

D. the Treynor measure

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

A. Asset allocation

B. Index returns

C. Risk-free returns

D. Security selection

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

A. T-bills portfolio

B. S&P 500 Index fund

C. Perfect market timing

D. Random stock selection

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

A. Solely active management

B. Enhanced index approach

C. Passive management

D. Random selection

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

A. Active analysis

B. Attribution analysis

C. Passive analysis

D. Treynor-Black Analysis

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

A. security selection ability

B. better sector weightings in the equity portfolio

C. the asset allocation decision

D. finding securities with positive alphas

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

A. portfolio’s alpha and beta

B. portfolio’s unsystematic risk

C. portfolio’s beta and slope of the characteristic line

D. security selection component of the portfolio

86. The Treynor-Black model combines an actively managed portfolio with an efficiently diversified portfolio in order to:

I. Improve the diversification of the overall portfolio
II. Improve the overall portfolio’s Sharpe ratio
III. Reach a higher CAL than would otherwise be possible

A. I only

B. I and II only

C. II and III only

D. I, II, and III

19
Student: ___________________________________________________________________________
1. In 2011, U.S. securities represented ______ of the world market for equities.

A. less than 25%

B. more than two-thirds

C. between 30% and 40%

D. a consistent 50%

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

A. The United States

B. Japan

C. The United Kingdom

D. Switzerland

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

A. $13.9

B. $23.4

C. $30.2

D. $45.5

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

A. 34%

B. 44%

C. 54%

D. 64%

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

A. an active; a passive

B. a passive; an active

C. a security selection expert; a market timer

D. a fundamental; a technical

6. WEBS are ____________________.

A. investments in country-specific portfolios

B. traded exactly like mutual funds

C. identical to ADRs

D. designed to give investors foreign currency exposure to multiple countries

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

A. WEBS

B. MSCI

C. ADR

D. EAFE

8. Generally speaking, countries with ______ capitalization of equities ________.

A. larger; have higher GDP

B. smaller; are wealthier

C. larger; have smaller GDP

D. larger; are higher-growth countries

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

A. 22%

B. 44%

C. 68%

D. 85%

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

A. higher

B. lower

C. the same

D. sometimes lower and sometimes higher

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

A. 1.98

B. 1.02

C. .02

D. 1.05

12. EAFE stands for _______.

A. Equity And Foreign Exchange

B. European, Australian, Far East

C. European, Asian, Foreign Exchange

D. European, American, Far East

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

A. Default risk

B. Foreign exchange risk

C. Market risk

D. Political risk

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

A. CBOE

B. Dow Jones

C. EAFE

D. Lehman Index

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

A. home-country bias

B. excessive diversification

C. active management

D. passive management

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

A. United States, India, China, and Japan

B. United States, China, Canada, and Japan

C. United States, China, Japan, and Germany

D. China, United Kingdom, Canada, and United States

17. The proper formula for interest rate parity is ___________.

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

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

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

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

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

A. relatively high

B. relatively low

C. declining slightly

D. declining rapidly

19. It appears from empirical work that exchange rate risk ____________.

A. has been declining for individual investments in recent years

B. is mostly diversifiable

C. is mostly systematic risk

D. is unimportant for an investment in a single foreign country

20. Passive investors with well-diversified international portfolios _________.

A. can safely ignore all political risk in emerging markets

B. can expect very large diversification gains from their international investing

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

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

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

A. Japan

B. Germany

C. United Kingdom

D. Australia

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

A. between -1 and -.5

B. between -.50 and 0

C. between 0 and .5

D. between .5 and 1

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

A. 2

B. 4

C. 5

D. 12

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

A. local fat

B. nativism

C. home-country bias

D. misleading representation

25. Corruption is _________ risk variable.

A. a firm-specific

B. a political

C. a financial

D. an economic

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

A. sell the Swiss franc bonds now

B. sell the Swiss franc forward

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

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

27. The annual inflation rate is ______ risk variable.

A. a firm-specific

B. a political

C. a financial

D. an economic

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

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

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

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

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

29. A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.

A. ×88.97

B. ×145.34

C. ×154.67

D. ×164.56

30. You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don’t have to worry about affecting your returns is __________.

A. business-cycle risk

B. beta risk

C. inflation risk

D. currency risk

31. According to the International Country Risk Guide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

A. Japan

B. United States

C. China

D. India

32. Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the British security is ________.

A. 5.06%

B. 6.74%

C. 8.48%

D. 10.13%

33. The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn by investing in the Canadian security is __________.

A. 5%

B. 7.25%

C. 20%

D. 22.43%

34. Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

A. ₤.5150

B. ₤.5142

C. ₤.5123

D. ₤.4859

35. The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should be worth __________.

A. $1.83

B. $1.91

C. $2.08

D. $2.18

36. The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.

A. $1.93

B. $2.22

C. $2.56

D. $2.76

37. The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S. bill and the Canadian bill.

A. 9.7%

B. 2.9%

C. 2.8%

D. 2%

38. The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.

A. -3%

B. 3%

C. 3.35%

D. 8.72%

39. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________.

A. 12%

B. 12.5%

C. 14%

D. 15.5%

40. Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on your portfolio would be __________.

A. 10.96%

B. 12.25%

C. 13.42%

D. 15.5%

41. Inclusion of international equities in a U.S. investor’s portfolio has historically produced ___________________.

A. a substantially reduced portfolio variance

B. a slightly reduced portfolio variance

C. a substantially poorer portfolio variance

D. a slightly poorer portfolio variance

42. WEBS are _____________.

A. mutual funds marketed internationally on the Internet

B. synthetic domestic stock indexes

C. equity indexes that replicate the price and yield performance of foreign stock portfolios

D. single stock investments in a foreign security

43. You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

A. -3.8%

B. 2.2%

C. 5.6%

D. 15%

44. Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won’t move and that interest rate parity will hold, then ____________.

A. the yen-per-dollar exchange rate should rise

B. the dollar-per-yen exchange rate should rise

C. the exchange rate should stay the same if parity holds

D. The answer cannot be determined from the information given.

45. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

How many shares can the investor purchase?

A. 140

B. 100

C. 71.43

D. None of these options

46. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated return?

A. 14%

B. 10%

C. 9.3%

D. 7.1%

47. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the pound-denominated return?

A. 14%

B. 10%

C. 9.3%

D. 7.1%

48. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

A. 25.7%

B. 16%

C. 14.3%

D. 9.3%

49. Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤.

After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

A. 10%

B. 6.43%

C. 4.34%

D. 2.12%

50. You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________ quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.

A. a direct; an indirect

B. an indirect; a direct

C. a foreign; a U.S.

D. a U.S.; a foreign

51. Among emerging countries the largest equity market in 2011 was located in _____________.

A. China

B. India

C. Brazil

D. Russia

52. In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

A. 0; 100

B. 0; 50

C. 50; 0

D. 100; 0

53. Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

A. Brazil

B. China

C. Columbia

D. Turkey

54. The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?

A. $3,000 gain

B. $3,000 loss

C. $6,000 loss

D. No gain or loss

55. An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer’s gain or loss?

A. $529 gain

B. $529 loss

C. $619 gain

D. $619 loss

56. A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country’s composite rating is _________.

A. 75

B. 50

C. 40

D. 35

57. The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

A. 1.30

B. 1.31

C. 1.32

D. 1.33

58. The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

A. 101

B. 102

C. 105

D. 108

59. The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

A. 1.24%

B. 2.35%

C. 3.98%

D. 5.35%

60. In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________.

I. Large budget deficit
II. Large trade deficit
III. Large amount of total debt

A. I only

B. I and II only

C. I and III only

D. I, II, and III

61. The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

A. large institutional investors

B. individual investors

C. government agencies

D. central banks

62. Of the following, which is the most commonly used international index?

A. DJIA

B. EAFE

C. Russell 2000

D. S&P 500

63. WEBS differ from mutual funds in that:

I. WEBS can be shorted.
II. WEBS trade continuously on the AMEX.
III. WEBS are passively managed.

A. II only

B. II and III only

C. I and III only

D. I, II, and III

64. The variation in the betas of emerging markets suggests that ____________.

A. emerging markets are more uniform than developed markets

B. beta does not hold in international markets

C. international diversification may reduce portfolio risk

D. riskier emerging markets have uniformly lower betas

65. One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

A. $94,322

B. $55,345

C. $44,318

D. $33,595

66. One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

A. $60,384

B. $42,973

C. $68,422

D. $78,500

67.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to currency selection?

A. -5%

B. -3%

C. 2%

D. 1%

68.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to country selection?

A. -.60%

B. -.75%

C. .12%

D. .22%

69.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager’s performance.

What is the difference in return of the manager’s portfolio due to stock selection?

A. 1.15%

B. 3.25%

C. 5.45%

D. 6.13%

20
Student: ___________________________________________________________________________
1. Which of the following are characteristics of a hedge fund?

I. Pooling of assets
II. Strict regulatory oversight by the SEC
III. Investing in equities, debt instruments, and derivative instruments
IV. Professional management of assets

A. I and II only

B. II and III only

C. III and IV only

D. I, III, and IV only

2. 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.

A. commingled pool

B. unit trust

C. hedge fund

D. money market fund

3. Hedge funds are typically set up as _______________.

A. limited liability partnerships

B. corporations

C. REITs

D. mutual funds

4. A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

A. multistrategy

B. managed futures

C. dedicated short bias

D. event-driven

5. ______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

A. Hedge funds

B. Closed-end funds

C. REITs

D. Mutual funds

6. Which of the following typically employ(s) significant amounts of leverage?

I. Hedge funds
II. Equity mutual funds
III. Money market funds
IV. Income mutual funds

A. I only

B. I and II only

C. III and IV only

D. I, II, and III only

7. As of 2012, hedge funds had approximately _____ under management.

A. $.5 trillion

B. $1.6 trillion

C. $2 trillion

D. $3.2 trillion

8. A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

A. transparency

B. a lock-up period

C. a back-end load

D. convertible arbitrage

9. Hedge fund managers are compensated by ___________________.

A. deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

B. deducting a percentage of any gains in asset value

C. selling shares in the trust at a premium to the cost of acquiring the underlying assets

D. charging portfolio turnover fees

10. Management fees for hedge funds typically range between _____ and _____.

A. .5%; 1.5%

B. 1%; 2%

C. 2%; 5%

D. 5%; 8%

11. Hedge funds can invest in various investment options that are not generally available to mutual funds. These include:

I. Futures and options
II. Merger arbitrage
III. Currency contracts
IV. Companies undergoing Chapter 11 restructuring and reorganization

A. I only

B. I and II only

C. I, II, and III only

D. I, II, III, and IV

12. A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

A. $1,000; $5,000

B. $5,000; $25,000

C. $25,000; $250,000

D. $250,000; $1,000,000

13. The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

A. establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

B. allocate money to several other funds while long-short funds do not

C. invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

D. invest only in equities and bonds while long-short funds use only derivatives

14. Convertible arbitrage hedge funds _________.

A. attempt to profit from mispriced interest-sensitive securities

B. hold long positions in convertible bonds and offsetting short positions in stocks

C. establish long and short positions in global capital markets

D. use derivative products to hedge their short positions in convertible bonds

15. Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

A. Buy gold in the spot market, and sell the futures contract.

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

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

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

16. An example of a neutral pure play is _______.

A. pairs trading

B. statistical arbitrage

C. convergence arbitrage

D. directional strategy

17. You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

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

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

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

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

18. You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

A. pairs trading

B. convergence play

C. statistical arbitrage

D. a long-short equity hedge

19. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

The 1-year oil futures price should be equal to __________.

A. $68

B. $70.21

C. $71.25

D. $74.88

20. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

The arbitrage profit implied by these prices is _____________.

A. $6.50

B. $5.44

C. $4.29

D. $3.25

21. A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%.

Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

A. Buy oil in the spot market with borrowed money, and sell the futures contract.

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

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

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

22. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

How many shares did you purchase?

A. 13,333

B. 25,000

C. 50,000

D. 66,000

23. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

If the share price after 3 years increases to $15.28, what is the value of your investment?

A. $553,600

B. $625,000

C. $733,800

D. $764,000

24. Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years.

What is your annualized return over the 3-year holding period?

A. 14.45%

B. 15.18%

C. 16%

D. 17.73%

25. Which of the following are not managed investment companies?

A. Hedge funds

B. Unit investment trusts

C. Closed-end funds

D. Open-end funds

26. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

How many S&P 500 contracts do you need to sell to hedge your portfolio?

A. 25

B. 35

C. 50

D. 60

27. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

A. 0

B. 1

C. 1.2

D. The answer cannot be determined from the information given.

28. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

What is the expected quarterly return on the hedged portfolio?

A. 0%

B. 2%

C. 3%

D. 4%

29. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

How much is the portfolio expected to be worth 3 months from now?

A. $15,000,000

B. $15,450,000

C. $15,600,000

D. $16,000,000

30. You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250.

Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

A. statistical arbitrage

B. pure play

C. a short equity hedge

D. fixed-income arbitrage

31. Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager’s outlook are called ____________________.

A. asset allocation funds

B. multistrategy funds

C. event-driven funds

D. market-neutral funds

32. When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets.

A. $120; $20

B. $20; $120

C. $20; $20

D. $120; $120

33. The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

A. statistical arbitrage

B. an unhedged play

C. a tail event

D. a liquidity trap

34. Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

A. Convergence arbitrage

B. Statistical arbitrage

C. Pairs trading

D. Convertible arbitrage

35. Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?

A. 15.05%

B. 15.5%

C. 17.25%

D. 18%

36. Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus.

What was the management cost for the year?

A. $4,877,000

B. $4,900,000

C. $5,929,000

D. $6,446,000

37. Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus.

What was the annual return on this fund?

A. 16.5%

B. 18.04%

C. 18.55%

D. 21%

38. Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

A. 6.45%

B. 8.52%

C. 8.95%

D. 9.46%

39. Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

A. pure play

B. leverage

C. directional bests

D. net short positions

40. A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund?

A. $15

B. $15.60

C. $16.30

D. $17.55

41. You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund’s expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

A. 5.35%

B. 7.23%

C. 8.19%

D. 10%

42. A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______.

A. 143

B. 157

C. 196

D. 218

43. Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

A. zero; positive

B. positive; negative

C. positive; zero

D. negative; positive

44. Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio ______ and a long position in portfolio __________.

A. A; A

B. A; B

C. B; A

D. B; B

45. According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

A. equal to

B. considerably higher than

C. slightly lower than

D. slightly higher than

46. Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

A. less liquid

B. more liquid

C. event-driven

D. shorter-maturity

47. Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

A. market

B. liquidity

C. systematic

D. interest rate

48. Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

A. A; A

B. A; B

C. B; A

D. B; B

49. In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

A. September; lower

B. January; higher

C. January; lower

D. December; higher

50. To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

A. long-short bias

B. survivorship bias

C. backfill bias

D. incentive bias

51. Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

A. reporting bias

B. survivorship bias

C. backfill bias

D. incentive bias

52. Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

A. about the same as

B. much lower than

C. much higher than

D. only slightly lower than

53. Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

A. writing a call option

B. receiving a free call option

C. writing a put option

D. receiving a free put option

54. A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

A. 5%

B. 10%

C. 20%

D. 25%

55. The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

A. other hedge funds

B. convertible securities and preferred stock

C. equities and bonds

D. managed futures and options

56. A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can’t charge incentive fees ________.

A. when a fund stays flat

B. when a fund falls and does not recover to its previous high value

C. when a fund falls by 10% or more

D. none of these options. (Managers can always charge incentive fees.)

57. If the risk-free interest rate is rf and equals the fund’s benchmark, the portfolio’s net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________.

A. .2; S0

B. 1; S0(1 + rf)

C. 1.2; S0

D. .2; S0(1 + rf)

58. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

What is the exercise price on the incentive fee?

A. $100

B. $105

C. $110

D. $115

59. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

What is the Black-Scholes value of the call option on the management incentive fee?

A. $6.67

B. $8.18

C. $9.74

D. $10.22

60. Assume the risk-free interest rate is 10% and is equal to the fund’s benchmark, the portfolio’s net asset value is $100, and the fund’s standard deviation is 20%. Also assume a time horizon of 1 year.

Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund’s net asset value exceeds the stated benchmark?

A. $4.24

B. $4

C. $3.84

D. $2.20

21
Student: ___________________________________________________________________________
1. Which one of the following is an example of “global” consumption smoothing?

A. Borrowing to buy a car

B. Borrowing to buy a home

C. Saving to send children to college

D. Saving during your working years for retirement

2. Inflation has an adverse effect on your savings because:

I. It erodes the purchasing power of the dollars you have saved.
II. It increases the real rate of return on the dollars you save.
III. Unless sheltered, it increases the taxes owed on investment income.

A. I only

B. II and III only

C. I and III only

D. I, II, and III

3. If you want to tilt your savings toward later years, you might be well advised to purchase which of the following types of readily available insurance?

A. Career failure insurance

B. Disability insurance

C. Unemployment insurance

D. Moral hazard insurance

4. Which one of the following represents local consumption smoothing?

I. Saving during your working years for retirement
II. Borrowing money to buy a car
III. Putting off a vacation for a year until you can afford it

A. I only

B. II and III only

C. I and II only

D. I, II, and III

5. In a private defined benefit pension plan the ___________ bears the investment risk, and in a private defined contribution plan the ____________ bears the investment risk.

A. plan sponsor; employee

B. employee; plan sponsor

C. U.S. government; plan sponsor

D. plan sponsor; U.S. government

6. A decrease of 1% in both your tax exemption and your income tax rate would, on net, _______________.

A. make you better off

B. make you worse off

C. make you neither better off nor worse off

D. make you either better or worse off depending on your age

7. Tax shelters __________________.

A. postpone payment of tax liabilities

B. decrease investment risk

C. increase the pretax rate of return earned

D. benefit the government more than the investor

8. The tax effect of a traditional retirement plan is to _____ taxes.

A. evade

B. postpone

C. erase

D. avoid

9. The U.S. income tax code is generally _____.

A. regressive

B. progressive

C. flat

D. peaked

10. Contributions to a _____________ are not tax deductible.

A. traditional retirement plan

B. Roth retirement plan

C. 401k plan

D. 403b plan

11. No taxes are paid on withdrawals made during retirement from a _________.

A. traditional retirement plan

B. Roth retirement plan

C. 401k

D. 403b plan

12. You earn 6% on your corporate bond portfolio this year, and you are in a 25% federal tax bracket and an 8% state tax bracket. Your after-tax return is _____. (Assume that federal taxes are not deductible against state taxes and vice versa).

A. 4.5%

B. 4.14%

C. 4.02%

D. 3.12%

13. You work for Fun-A-Rama Corporation and receive stock options as an incentive for your performance on the job. You are counting on the stock options to provide the funds you’ll need for your retirement. This is called _____________.

A. adverse selection

B. a 529 plan

C. a moral hazard

D. a Texas hedge

14. You can tax-shelter only one-half of your retirement savings. You want to invest one-half of your savings in bonds and one-half in stocks. How much of the bonds and how much of the stocks should you allocate to the tax-sheltered investment?

A. Stock and bond investments should be equally invested in both tax-sheltered and nonsheltered accounts.

B. You should place all the stocks in tax-sheltered accounts and all the bonds in nonsheltered accounts.

C. You should place all the bonds in tax-sheltered accounts and all the stocks in nonsheltered accounts.

D. It makes no difference how you allocate your stock and bond investments among tax sheltered and nonsheltered accounts.

15. Social Security is ____________.

A. a pension plan only

B. an insurance plan only

C. a combination of a pension and insurance plan

D. an involuntary intergenerational transfer

16. The Social Security system _______________.

A. is financed in a regressive way

B. is regressive in the way it allocates benefits

C. is progressive in the way it is financed

D. is fully funded for the foreseeable future

17. Total annuity income is positively correlated with:

I. Longevity
II. Durability of marriage
III. Expected length of your base (Social Security) annuity

A. I only

B. I and II only

C. II and III only

D. I, II, and III

18. The solvency of Social Security is threatened by ______________.

A. increasing population longevity

B. above-replacement growth of the U.S. population

C. alternative tax shelters

D. the growth of competing defined contribution plans

19. A person in poor health trying to buy supplemental health insurance is an example of ________.

A. moral hazard

B. adverse selection

C. a Texas hedge

D. actuarial error

20. A person in excellent health with a long life expectancy chooses a lifetime annuity. This is an example of _________.

A. moral hazard

B. adverse selection

C. a Texas hedge

D. actuarial error

21. It would be costly to provide wage insurance because of the ___________ problem.

A. moral hazard

B. adverse selection

C. Texas hedge

D. actuarial error

22. You earned 8% on your corporate bond portfolio this year, and you are in a 15% federal tax bracket. If over your holding period inflation was 3%, your real after-tax rate of return was _____.

A. 6.8%

B. 3.69%

C. 4.91%

D. 4.25%

23. As you get older, you decide to reduce the risk level of your retirement portfolio because your portfolio is nearing your minimum acceptable level. As the portfolio does better, you reallocate funds into higher-risk categories. You are practicing a form of ____________.

A. manipulating tax shelters

B. involuntary intergenerational transfers

C. excessive savings

D. dynamic hedging

24. Tilting your retirement savings plan toward your later years should only be done by investors _____________.

A. who are sufficiently risk averse

B. who are more tolerant of risk

C. who are unsure if their income growth will keep up with inflation

D. who want to retire early

25. Employers commonly match at least some portion of employee contributions to:

I. 401k plans
II.403b plans
III. Self-directed retirement plans

A. I only

B. I and II only

C. II only

D. I, II, and III

26. A saver who expects to have a higher tax rate after retirement would prefer a ______.

A. Roth retirement plan

B. traditional retirement plan

C. 401k plan

D. 403b plan

27. A retirement plan that offers a tax shelter will defer ______________ taxes on contributions and investment earnings.

A. income

B. sales

C. property

D. estate

28. A study by Spivack and Kotlikoff (1981) showed that a marriage contract increases the dollar value of lifetime savings by as much as _____.

A. 5%

B. 10%

C. 25%

D. 50%

29. Taxes are applied to the _______________________.

A. real value of sheltered investment income

B. nominal value of unsheltered investment income

C. nominal value of sheltered investment income

D. real value of unsheltered investment income

30. One feasible way to hedge labor income is to ____________________.

A. diversify your investment portfolio away from the industry in which you work

B. save for retirement only from investment income

C. change careers every 7 years

D. invest heavily in the stock options provided by your firm

31. Which one of the following is not likely to be subject to adverse selection?

A. Health insurance providers

B. Lifetime annuity providers

C. Life insurance providers

D. Social Security

32. Average Indexed Monthly Earnings are used to compute ___________.

A. the consumer price index

B. your Social Security retirement benefits

C. your maximum 401k contribution

D. your maximum retirement plan contribution

33. The Social Security Primary Insurance Amount formula favors ______.

A. older workers

B. high-income workers

C. younger workers

D. low-income workers

34. Contributions to a traditional retirement plan are __________, and contributions to a Roth retirement plan are ____________.

A. not tax deductible; not tax deducible

B. tax deductible; tax deductible

C. tax deductible; not tax deductible

D. not tax deductible; tax deductible

35. How many years of Social Security contributions count for determination of benefits?

A. 25

B. 35

C. 45

D. All yearly contributions count.

36. Under current rules most workers will have ________ of their salary deducted to pay for Social Security retirement benefits and _______ toward Medicare.

A. 1.45%; 6.2%

B. 6.2%; 1.45%

C. 7.65%; 1.45%%

D. 15.3%; 4.9%

37. In 2012, the income cap on Social Security taxes was set at _____ with an exemption of _____.

A. $200,000; $10,000

B. $153,600; $7,600

C. $110,100; $0

D. $96,000; $10,000

38. If your marginal tax rate is 15%, your capital gains tax rate on a stock you have held for 10 years would be ___.

A. 5%

B. 15%

C. 20%

D. 27.5%

39. A tax shelter that allows for tax-exempt saving for higher education is called a _____.

A. Roth savings plan

B. 403b

C. 401k

D. 529 plan

40. Withdrawals from a traditional retirement plan prior to age ___ are taxable and must pay a ___ tax penalty.

A. 59½; 10%

B. 62; 5%

C. 65; 7½ %

D. 63½; 5%

41. In planning for retirement, an investor decides she will save $2,000 every year for 25 years. At a 7% return on her investment, how much money will she have at the end of 25 years?

A. $119,015

B. $125,316

C. $126,498

D. $128,420

42. In planning for retirement, an investor decides she will save $11,000 every year for 40 years. At an 11% return on her investment, how much money will she have at the end of 40 years (to the nearest hundred thousand dollars)?

A. $1,400,000

B. $2,800,000

C. $4,900,000

D. $6,400,000

43. An investor plans to retire at age 60 with total savings of $1,000,000. If she is currently 35 years old, has no savings, and expects to earn 8% per year on her investments, how much money must she set aside every year?

A. $15,546

B. $13,679

C. $11,892

D. $10,324

44. An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 15-year life span, and he wants a $30,000-per-year annuity, payable at the end of each year. If the insurance company uses a 4% assumed investment rate, how much should the annuity cost?

A. $296,928

B. $312,236

C. $333,552

D. $353.982

45. A safe driver who drives faster as a result of purchasing collision car insurance would be an example of the ___________ problem.

A. moral hazard

B. adverse selection

C. Texas hedge

D. actuarial error

46. A worker plans to retire in 20 years. He needs $20,000 per year in retirement income in today’s dollars. If inflation is forecast at 3.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $20,000?

A. $30,353

B. $34,159

C. $37,398

D. $39,796

47. An insurance company plans to sell annuities to investors. Based on actuarial calculations, an investor has a 20-year life span, and she wants a $50,000-per-year annuity, payable at the end of each year. If the insurance company uses a 3% assumed investment rate, how much should the annuity cost?

A. $696,928

B. $743,874

C. $833,552

D. $953.982

48. A worker plans to retire in 30 years. He hopes to receive $65,000 per year in retirement income. If inflation is forecast at 2.5% per year, what annual income should he plan to receive in the first year of retirement in order to maintain the purchasing power on $65,000?

A. $65,000

B. $76,159

C. $98,398

D. $136,342

49. An investor must decide between putting $2,000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor’s tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

A. The investment in the regular retirement plan.

B. The investment in the Roth retirement plan.

C. Both investments will have the same future value after taxes.

D. The answer cannot be determined from the information given.

50. A regular retirement plan requires that taxes be paid at the time the money is removed from the plan. What is the after-tax value of a $5,000 deposit into a retirement plan today that generates an 8% return for 20 years if the investor is taxed at the 28% level?

A. $16,779

B. $20,135

C. $21,685

D. $23,305

51. What is the value of a $2,500 deposit into a retirement plan if the investment earns 12% per year for 15 years?

A. $12,174

B. $13,684

C. $14,652

D. $15,523

52. The employees of a firm complain that they cannot afford to contribute $8,000 per year to a 401k because of the loss of $8,000 of take-home pay. In fact, how much will the take-home pay be reduced if all taxes combined total 33%?

A. $5,360

B. $6,340

C. $7,637

D. $8,000

53. An employee uses her firm’s 401k plan. If she decides to contribute $11,000 per year and pays an effective tax rate for all items of 28%, what is the reduction in her take-home pay each year?

A. $3,080

B. $4,210

C. $7,920

D. $11,000

54. An investor has an effective tax rate on all items of 30%, and he decides to put $8,000 into a 401k. The future value of the investment that results from the deferral of taxes over 30 years at an 8% return equals _____________.

A. $2,400

B. $8,000

C. $10,400

D. $24,150

55. Withdrawals after retirement from a traditional retirement plan are __________, and withdrawals after retirement from a Roth retirement plan are ____________.

A. taxable; not taxable

B. not taxable; taxable

C. tax deductible; not tax deductible

D. not tax deductible; tax deductible

56. If you start saving for retirement only in your later years and your income growth from that point is rapid, then ________________________.

A. a traditional retirement plan is probably a better choice than a Roth retirement plan

B. a Roth retirement plan is probably a better choice than a traditional retirement plan

C. a SEP is probably a better choice than Medicare

D. a 401k is probably a better choice than a 403b

57. Which one of the following statements about 401k plans is not correct?

A. The employer will typically match some portion of an employee’s contributions to a 401k.

B. A 401k plan is a defined contribution plan.

C. Allowable contributions to 401k plans are limited.

D. Withdrawals from 401k plans are not taxed upon retirement.

58. Suppose you have maxed out your allowable contributions to your tax-sheltered retirement plans and you still want to shelter income. The best choice of investment for you to minimize the tax bill is to invest in _________.

A. a bond portfolio

B. stocks with high dividend yields

C. a blended stock and bond portfolio containing zero-coupon bonds

D. stocks with low or zero dividend yields

59. A bond portfolio and a stock portfolio both provided an unrealized pretax return of 8% to a taxable investor. If the stocks paid no dividends, we know that the ________.

A. after-tax return of the stock portfolio was higher than the after-tax return of the bond portfolio

B. after-tax return of the bond portfolio was higher than the after-tax return of the stock portfolio

C. after-tax income of the stock portfolio was equal to the after-tax income of the bond portfolio

D. after-tax income of the stock portfolio could have been higher or lower than the after-tax income of the bond portfolio, depending on the marginal tax rate of the investor

60. Statistics show that life expectancy at age 66 for males is about _____ additional years and for females is about _____ additional years.

A. 15; 20

B. 16; 19

C. 18; 22

D. 19; 24

61. Currently, the maximum combined taxable income of a retired household that avoids having to pay any taxes on a portion of their Social Security benefit is ______.

A. $15,000

B. $32,000

C. $45,000

D. $75,000

62. An investor can earn a 6% nominal rate of return, but inflation is expected to be 3%. If the individual invests $2,000 per year for 20 years, the real future value of this investment is ________. (All investments occur at year-end).

A. $73,571

B. $66,334

C. $53,251

D. $48,732

63. An individual wants to have $95,000 per year to live on when she retires in 30 years. The individual is planning on living for 20 years after retirement. If the investor can earn 6% during her retirement years and 10% during her working years, how much should she be saving during her working life? (Hint: Treat all calculations as annuities.)

A. $9,872

B. $8,234

C. $7,908

D. $6,624

64. If you plan for a bequest for your children, your grandchildren, their children, and so on, your planning horizon becomes _____.

A. equal to the life span of your children

B. 100 years, or your lifetime, whichever ends first

C. infinite

D. double what it would have been without the bequest

65. You want to minimize your current tax bill by maximizing your contributions to your _____________.

A. taxable bond portfolio

B. Roth retirement plan

C. 401k or 403b plan

D. taxable savings account

66. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return.

How much money will Sharon have in her retirement plan after 6 years?

A. $30,000

B. $35,575

C. $38,578

D. $41,451

67. Sharon decides to put $5,000 into her retirement plan at the age of 25. She will continue to invest the same amount for a total of 6 years and then stop contributing. Assume 10% annual return.

How much money will Sharon have in her retirement plan when she is ready to retire at age 62?

A. $554,856

B. $623,245

C. $740,480

D. $1,311,805

68. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is the amount of the total contribution to his 403b if John contributes 5% of his own money?

A. $5,600

B. $8,400

C. $11,200

D. $12,500

69. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is John’s effective salary reduction if he is in the 25% tax bracket?

A. $2,100

B. $2,800

C. $5,600

D. $8,400

70. A nonprofit organization offers a 5% salary contribution to John’s 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year.

What is John’s total cost of his 5% contribution?

A. $2,100 cost

B. $2,800 cost

C. $700 benefit

D. $3.500 benefit

71. The fact that the U.S. government provides deposit insurance to banks creates a form of ___________, which is at least partially offset by requiring banks to hold more capital if they are riskier.

A. moral hazard

B. adverse selection

C. risk aversion

D. interest rate risk

72. An investor in the 34% tax bracket would be indifferent between a corporate bond with a before-tax yield of 8% and a municipal bond with a yield of _________.

A. 3.91%

B. 6.15%

C. 5.28%

D. 10.72%

73. An investor who is in the 35% federal tax bracket and the 5% state bracket buys a 6.5% yield corporate bond. What is his after-tax yield? (Assume that federal taxes are not deductible against state taxes and vice versa).

A. 3.9%

B. 4.75%

C. 6.5%

D. 9.9%

22
Student: ___________________________________________________________________________
1. To _____ means to mitigate a financial risk.

A. invest

B. speculate

C. hedge

D. renege

2. In a defined benefit pension plan, the _____ bears all of the fund’s investment performance risk.

A. employer

B. employee

C. fund manager

D. government

3. In a defined contribution pension plan, the _____ bears all of the fund’s investment performance risk.

A. employer

B. employee

C. fund manager

D. government

4. My pension plan will pay me a yearly retirement amount equal to 2% of my highest annual salary for each year of service. I must have ___________.

A. a defined benefit plan

B. a defined contribution plan

C. an endowment fund

D. a variable annuity

5. A ______ insurance policy provides death benefits, with no buildup of cash value.

A. whole-life

B. universal life

C. variable life

D. term life

6. If the maturity of a bank’s assets is much longer than the maturity of its liabilities and it wants to limit its interest rate risk, the bank may _________.

A. prefer to invest in long-term bonds in its asset portfolio

B. prefer to invest in equities in its asset portfolio

C. prefer to invest in variable-rate assets

D. decide to increase its fixed-rate mortgage holdings

7. You are thinking of investing in one of two assets. Asset A has higher systematic risk than asset B. You can be sure that asset A’s _______ return will be higher than asset B’s, but you can’t be sure if asset A’s _______ return will be higher than asset B’s.

A. realized; expected

B. real; nominal

C. expected; realized

D. nominal; expected

8. A mutual fund may not hold more than ______ of the shares of any publicly traded company.

A. 5%

B. 10%

C. 25%

D. 50%

9. Which one of the following would be considered a “cash equivalent” investment?

A. Treasury bills

B. Common stock

C. Corporate bonds

D. Real estate

10. For a bank, the difference between the interest rate charged to borrowers and the interest rate paid on liabilities is called the __________.

A. insurance premium

B. interest rate spread

C. risk premium

D. term premium

11. Price volatility is greatest on which one of the following investments?

A. Commercial paper

B. 20-year zero-coupon bonds

C. Treasury notes

D. Treasury bills

12. A portfolio manager indexes part of a portfolio and actively manages the rest of the portfolio. This is called a _________ strategy.

A. passive-aggressive

B. passive core

C. passively active

D. balanced fund

13. The major asset most people have during their early working years is their ________.

A. home

B. stock portfolio

C. earning power derived from their skills

D. bond portfolio

14. At the early stage of an individual’s working career, his or her retirement portfolio should probably consist mostly of _______.

A. annuities

B. stocks

C. bonds

D. commodities

15. If an investor wants to invest 100% of her portfolio in safe assets but does not want to manage her portfolio, she should invest in __________.

A. a money market fund

B. a growth stock fund

C. several different money market instruments

D. several different stocks

16. Just 2 months after you put money into an investment, its price falls 25%. Assuming that none of the investment fundamentals have changed, which of the following actions would evidence the greatest risk tolerance?

A. You sell to avoid further worry and buy something else.

B. You do nothing and wait for the investment to come back.

C. You buy more, thinking that if it was a good investment before, now it’s not only good but cheap too.

D. You sue your financial adviser.

17. To become a CFA, you must do all of the following except which one?

A. Pass three exams designed to ensure that you have sufficient knowledge of investments.

B. Obtain 3 years of work experience in money management.

C. Become a member of a local Society of the Financial Analysts Federation.

D. Divest all your own stock holdings to eliminate any potential conflicts of interest with client recommendations.

18. Which of the following is not one of the main areas covered in the examinations that must be taken in order to achieve the designation of Chartered Financial Analyst?

A. Investment management ethics

B. Securities analysis

C. Securities marketing techniques

D. Portfolio management

19. As the typical investor ages, the composition of his wealth usually switches from primarily _______ to primarily _______.

A. human capital; financial capital

B. financial capital; human capital

C. intellectual capital; physical capital

D. investable capital; noninvestable capital

20. The two most important factors in describing an individual’s or organization’s investment objectives are ________________.

A. income level and age

B. income level and risk tolerance

C. age and risk tolerance

D. return requirement and risk tolerance

21. The term hedge refers to an investment that is used ________________.

A. primarily for tax-loss selling purposes

B. to mitigate specific financial risks

C. to conceal one’s true investment strategy from other market participants

D. primarily to defer capital losses

22. The price of your investment increases 20% one month after you buy it. You do not believe that the stock’s prospects have changed. Which one of the following actions would indicate the lowest amount of risk aversion?

A. You hang on to the stock, anticipating that it will go higher.

B. You buy more stock, anticipating that it will go higher.

C. You sell all of your stock holdings immediately.

D. You sell half of your stock holdings and invest the proceeds in other areas of your portfolio.

23. An individual is on the game show Squeal or No Squeal, and she has a choice between receiving a certain gain of $100,000 and receiving a 50% chance of winning $200,000 or zero. If she takes the gamble instead of the certain $100,000, she is acting ____________________.

A. like a person who is risk-neutral

B. like a person who is risk averse

C. like a person who is a risk lover

D. irrationally

24. Which of the following typically strives to earn a return on their investments that exceeds the actuarially determined rate of return?

A. Banks

B. Thrifts

C. Mutual funds

D. Pension funds

25. If an individual confers legal title to property to another person or institution to manage the property on their behalf, the individual has created ___________.

A. a personal trust

B. a charitable trust

C. an endowment fund

D. a mutual fund

26. Personal trusts are typically allowed to engage in which of the following investment activities?

I. Buying and selling futures contracts.
II. Short-selling securities.
III. Purchasing and writing options.
IV. Buying stock on margin.

A. I only

B. II and III only

C. II and IV only

D. None of the given activities are allowed.

27. If a defined benefit pension fund’s actual rate of return is _____ than the actuarial assumed rate, then the ___________.

A. greater; employees will benefit

B. greater; firm’s shareholders will benefit

C. lower; employees will benefit

D. lower; firm’s shareholders will benefit

28. An employee has an average wage of $60,000 and has worked for the firm for 25 years. The defined benefit pension plan pays retirees 2.5% of the average wage times the years of service. The employee can expect to receive _______ per year upon retirement.

A. $18,000

B. $37,500

C. $45,325

D. $55,250

29. Life insurance companies try to hedge the risks inherent in whole-life insurance policies by investing in __________.

A. long-term bonds

B. money market mutual funds

C. savings accounts

D. short-term commercial paper

30. A pension fund will owe $10 million to retirees in 6 years. An actuary assumes an 8% rate of return on the funds invested in the pension plan. If the pension plan receives annual contributions from the company sponsor, how much must the company pay each year to fully fund the pension liability?

A. $1,212,587

B. $1,363,154

C. $1,533,333

D. $1,666,667

31. The risk that a downturn in the market may substantially reduce your investment principal is called _______.

A. purchasing power risk

B. interest rate risk

C. market risk

D. liquidity risk

32. The possibility that you are too conservative and your money doesn’t grow fast enough to keep pace with inflation is called ________.

A. purchasing power risk

B. liquidity risk

C. timing risk

D. market risk

33. A pension fund will owe $15 million to retirees in 20 years. An actuary assumes a 6% rate of return on the funds invested in the pension plan, but the fund actually earns 8%. The pension plan receives annual contributions from the company sponsor. If the 8% rate of return is expected to continue, by how much can the company reduce its pension payments per year?

A. $65,437

B. $79,985

C. $89,462

D. $95,320

34. Many defined benefit pension plans have a target rate of return on investment that is equal to the ____________.

A. firm’s return on equity

B. plan’s assumed actuarial rate of return

C. economic inflation rate because wages often increase with inflation

D. estimated stock market return

35. _______ is a life insurance policy that provides a death benefit and a fixed-rate tax-deferred savings plan.

A. Term life

B. Whole life

C. Variable life

D. Universal life

36. Empirical evidence confirms that investors become __________ as they approach retirement.

A. greedier

B. less interested in investments

C. more risk averse

D. more risk tolerant

37. _______ is a life insurance policy that will provide a death benefit only and has no savings plan.

A. Term life

B. Whole life

C. Variable life

D. Universal life

38. Of the following, the investment time horizon is typically the shortest for __________.

A. banks

B. endowment funds

C. life insurance companies

D. pension funds

39. A passive asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over time

C. varying the proportions of a portfolio in each asset class in response to changing market conditions

D. selecting individual securities in different sectors that are believed to be undervalued

40. An active asset allocation strategy involves _________.

A. investing in the stock of companies that are price takers

B. maintaining approximately the same proportions of a portfolio in each asset class over time

C. varying the proportions of a portfolio in each asset class in response to changing market conditions

D. selecting individual securities in different sectors that are believed to be undervalued

41. Endowment funds are held by __________.

A. financial intermediaries

B. individuals

C. profit-oriented firms

D. nonprofit institutions

42. Which one of the following is a life insurance policy that will provide a fixed death benefit and allows the policyholder to choose where to invest the policy’s cash value?

A. Term life

B. Whole life

C. Variable life

D. Industrial life

43. Under a “passive core” portfolio management strategy, a manager would ___________.

A. index the entire portfolio

B. index part of the portfolio and actively manage the rest

C. delegate the management of core segments of the portfolio to other managers

D. actively manage the entire portfolio

44. Of the following, the most flexible type of life insurance policy from the policyholder’s perspective is probably a ___________ policy.

A. term life

B. whole life

C. variable life

D. universal life

45. The amount of risk an individual should take depends on his or her:

I. Return requirements
II. Risk tolerance
III. Time horizon

A. I only

B. I and II only

C. II and III only

D. I, II, and III

46. Earnings on variable life and universal life insurance policies are ___________.

A. never taxed

B. taxed only at the capital gains tax rate

C. not taxed until the money is withdrawn

D. not taxed at the federal level but are taxed at the state level

47. When a company sets up a defined contribution pension plan, the __________ bears all the risk and the __________ receives all the return from the plan’s assets.

A. employee; employee

B. employee; employer

C. employer; employee

D. employer; employer

48. Suppose that the pretax holding-period returns on two stocks are the same. Stock A has a high dividend payout policy and stock B has a low dividend payout policy. If you are a high-tax rate individual and do not intend to sell the stocks during the holding period, __________.

A. stock A will have a higher after-tax holding-period return than stock B

B. the after-tax holding period returns on stocks A and B will be the same

C. stock B will have a higher after-tax holding-period return than stock A

D. The answer cannot be determined from the information given.

49. The objectives of personal trusts normally are __________ in scope than those of individual investors, and personal trust managers typically are __________ than individual investors.

A. broader; more risk averse

B. broader; less risk averse

C. more limited; more risk averse

D. more limited; less risk averse

50. The prudent investor rule requires __________.

A. executives of companies to avoid investing in options of companies they work for

B. executives of companies to disclose their transactions in stocks of companies they work for

C. professional investors who manage money for others to avoid all risky investments

D. professional investors who manage money for others to constrain their investments to those that would be approved by a prudent investor

51. The prudent investor rule is an example of a regulation designed to ensure appropriate _____________ by money managers.

A. fiduciary responsibility

B. fiscal responsibility

C. monetary responsibility

D. marketing procedures

52. An investor has a long time horizon and desires to earn the market rate of return. However, the investor will need to withdraw funds each year from her investment portfolio. The biggest constraint a planner would face with this client is a ___________ constraint.

A. tax

B. risk-tolerance

C. liquidity

D. social

53. When used in the context of investment decision making, the term liquidity refers to _____________.

A. the ease and speed with which an asset can be sold at any value possible

B. the ease and speed with which an asset can be sold without having to discount the value

C. an aspect of monetary policy

D. the proportion of short-term to long-term investments held in an investor’s portfolio

54. The term investment horizon refers to __________.

A. the proportion of short-term to long-term investments held in an investor’s portfolio

B. the planned liquidation date of an investment

C. the average maturity date of investments held in a portfolio

D. the maturity date of the longest investment in the portfolio

55. The choice of an active portfolio management strategy rather than a passive strategy assumes ___________.

A. the ability to continuously adjust the portfolio to provide superior returns

B. asset allocation involving only domestic securities

C. stable economic conditions over the short term

D. the ability to minimize trading costs

56. Conservative investors are likely to want to invest in __________ mutual funds, while risk-tolerant investors are likely to want to invest in __________.

A. income; high growth

B. income; moderate growth

C. moderate-growth; high growth

D. high-growth; moderate growth

57. The first step any investor should take before beginning to invest is to __________.

A. establish investment objectives

B. develop a list of investment managers with superior records to interview

C. establish asset allocation guidelines

D. decide between active management and passive management

58. Which of the following is the least likely to be included in the portfolio management process?

A. Monitoring market conditions and relative values

B. Monitoring investor circumstances

C. Identifying investor constraints and preferences

D. Organizing the investment management process itself

59. A clearly understood investment policy statement is not critical for which one of the following?

I. Mutual funds
II. Individuals
III. Defined benefit pension funds

A. II only

B. III only

C. I only

D. None of these options (A policy statement is necessary for all three.)

60. An investor refuses to invest in any firm that produces alcohol or tobacco. This is an example of a ___________ constraint.

A. return requirement

B. risk-tolerance

C. liquidity

D. social

61. Under the provisions of a typical defined benefit pension plan, the employer is responsible for _____________.

A. investing in conservative fixed-income assets

B. paying benefits to retired employees

C. counseling employees in the selection of asset classes

D. paying employees the market rate of return on employee contributions

62. A life insurance firm wants to minimize its interest rate risk, and it is planning on paying out $250,000 in 5 years. Which one of the following investments best matches its goal?

A. High-yield utility stocks

B. 5-year zero-coupon bonds

C. 10-year coupon bonds

D. Money market investments rolled over as needed

63. An institutional investor will have to pay off a maturing bond issue in 3 years. The institution has 10,000 bonds outstanding, each with a $1,000 par value. The institutional money manager is reevaluating the fund’s total portfolio of $100 million at this time. She is bullish on stocks and wants to put the most she can into the stock market, but she cannot risk being unable to pay off the bonds. Three-year zero-coupon bonds are available paying 6% interest. What percentage of the total $100 million portfolio can she put in stocks and still ensure meeting the bond payments?

A. 87.4%

B. 88.5%

C. 90%

D. 91.6%

64. An investor with high risk aversion will likely prefer which of the following risk and return combinations?

A. Expected return = 12%, historical standard deviation = 17%

B. Expected return = 14%, historical standard deviation = 19%

C. Expected return = 16%, historical standard deviation = 21%

D. Expected return = 18%, historical standard deviation = 23%

65. An investor with low risk aversion will likely prefer which of the following risk and return combinations?

A. Expected return = 11%, historical standard deviation = 12%

B. Expected return = 12%, historical standard deviation = 14%

C. Expected return = 14%, historical standard deviation = 18%

D. Expected return = 17%, historical standard deviation = 21%

66. Medfield College’s $10 million endowment fund is not allowed to spend any contributed capital or any capital gains. The fund may spend only investment earnings. The fund is expected to need between $500,000 and $1,000,000 to pay for new lab equipment for the science building. Which of the following is (are) true?

I. The fund should have a target rate of return of at least 10%.
II. The limitations on spending require that the fund limit its considerations to growth stocks.
III. The requirement to spend money out of the fund this year provides a liquidity constraint that may reduce the fund’s rate of return.

A. I only

B. II only

C. I and III only

D. I, II, and III

67. An investor is looking at different retirement investment choices, and he is willing to accept one with upside potential even if that means sacrificing certainty. Which of the following will he most likely select?

A. Fixed annuity

B. Defined benefit plan

C. Defined contribution plan

D. Bonds invested in a retirement plan

68. Both a wife and her husband work in the airline industry. They are in their 40s, and they have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on long-term capital gains and will need at least a 9% to 11% average rate of return to meet their retirement goals. They desire a diversified portfolio, and liquidity is not currently a major concern. Which of the following asset allocations seems to best fit their situation?

A. 10% money market; 40% long-term bonds; 10% commodities; 40% high-dividend-paying stocks

B. 0% money market; 60% long-term bonds; 40% stocks

C. 10% money market; 30% long-term bonds; 10% commodities; 50% high-dividend-paying stocks

D. 5% money market; 30% long-term bonds; 5% commodities; 60% stocks, most with low dividends and high growth prospects

69. A family will retire in a few years. They have a high tax bracket and are concerned about their after-tax rate of return. A meeting with their financial planner reveals that they are primarily focused on safety of principal and will need a 6% to 8% average rate of return on their portfolio. They desire a diversified portfolio, and liquidity is likely to be a concern due to health reasons. Which of the following asset allocations seems to best fit this family’s situation?

A. 10% money market; 50% intermediate-term bonds; 40% blue chip stocks, many with high dividend yields

B. 0% money market; 60% intermediate-term bonds; 40% stocks

C. 10% money market; 30% intermediate-term bonds; 60% high-dividend-paying stocks

D. 5% money market; 35% intermediate-term bonds; 60% stocks, most with low dividends

70. Your sister, an avid outdoors person, works in the airline industry, and she has come to you (the financial guru) for investment advice. She is looking into purchasing stocks she knows something about. She is considering purchasing stock in Boeing, Lockheed Martin, United Technologies (maker of aircraft engines), and Cabela’s Sporting Goods. Based only on the information given, which stock should you recommend for her?

A. Boeing

B. Lockheed Martin

C. United Technologies

D. Cabela’s

71. In 1937 the Eli Lilly family donated millions of dollars in stock to fund a not-for-profit charitable organization. Such organizations are typically called _________________.

A. annuities

B. endowments

C. mutual funds

D. personal trusts

72. Which one of the following institutions typically has the longest investment horizon?

A. Mutual funds

B. Pension funds

C. Property and casualty insurers

D. Banks

73. For which one of the following institutions is liquidity usually the most important?

A. Mutual funds

B. Pension funds

C. Life insurers

D. Banks

74. One of the major functions of the investment committee is to ________________.

A. determine security selection of each portfolio operated by the investment company

B. translate the objectives and constraints of the investment company into an asset universe

C. determine the percentages of each security in the total investment company portfolio

D. calculate and report the overall rate of return to investment company constituents

75. For an investor concerned with maximizing liquidity, which of the following investments should be avoided?

A. Real estate

B. Bonds

C. Domestic stocks

D. International stocks

76. The asset universe is the _____________________.

A. set of investments in which an investment company can legally invest

B. existing set of assets the investment company currently owns in one or more of its portfolios

C. list of assets approved by the investment committee that may be placed into the investment company’s portfolio

D. market portfolio of all available risky assets

77. Go Global Investment Management has an asset allocation strategy of 60% U.S. investments and 40% global investments. Within the United States, Go Global has allocated 70% of its portfolio to equities and 30% to bonds. Go Global now holds 3% of its U.S. equity portfolio in the stock of Wally World. Internationally, Go Global has allocated 55% to equities and 45% to bonds. About what percentage of Go Global’s total portfolio is invested in Wally World?

A. 1%

B. 1.26%

C. 1.5%

D. 1.77%

78. Major functions of the investment committee include all but which one of the following?

A. Engage in security selection for each portfolio managed

B. Broadly determine the overall asset allocation of the investment company

C. Determine the asset-class weights for each portfolio

D. Determine the asset universe

79. A portfolio consists of three index funds: an equity index, a bond index, and an international index. The portfolio manager changes the weights periodically according to forecasts for each sector. This is an example of __________.

A. a passively managed core with an actively managed component

B. a totally passively managed fund

C. passive asset allocation with active security selection

D. active asset allocation with passive security selection

80. A portfolio consists of three index funds: an equity index accounting for 40% of the total portfolio, a bond index accounting for 30% of the total portfolio, and an international index accounting for 30% of the total portfolio. After each quarter the portfolio manager buys and sells some of each sector to preserve the original weights for each sector. This is an example of ____________.

A. a passively managed core with an actively managed component

B. a totally passively managed fund

C. passive asset allocation with active security selection

D. active asset allocation with passive security selection

81. One way that life insurance firms can hedge the risk created by offering whole-life insurance policies is by ________________.

A. holding long-term bonds

B. holding equities

C. holding short-term bonds

D. exercising its right to terminate the policy

FIN 317 Week 11 Final Exam – Strayer University New

FIN/317 Week 11 Final Exam – Strayer

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Chapters 7 Through 15

Part 1: Chapters 7 Through 11
Part 2: Chapters 12 Through 15

CHAPTER 7

TYPES AND COSTS OF FINANCIAL CAPITAL

True-False Questions

1. The accounting emphasis on accrued revenue and expenses and depreciation is the same emphasis as that of finance managers.

2. Traditional accounting does not focus on the implicit cost of equity that is the required capital gains to complement dividends. However, evaluation methods exist to determine this value by financial managers.

3. Formal historical accounting procedures include explicit records of debt (interest and principal) and dividend capital costs.

4. Public financial markets are markets for the creation, sale and trade of illiquid securities having less standardized negotiated features.

5. A venture’s “riskiness” in terms of poor performance or failure is usually very high during the maturity stage of its life cycle.

6. A venture’s “riskiness” in terms of poor performance or failure is usually high to moderate during the rapid-growth stage of its life cycle.

7. First-round financing during a venture’s survival stage comes primarily from venture capitalists and investment banks.

8. Startup financing usually comes from entrepreneurs, business angels, and investment bankers.

9. Commercial banks provide liquidity-stage financing for ventures in the rapid-growth stage of their life cycles.

10. A venture’s “riskiness” in terms of the likelihood of poor performance or failure decreases as it moves from its development stage through to its rapid-growth stage.

11. A nominal interest rate is an observed or stated interest rate.

12. The “real interest rate” (RR) is the interest one would face in the absence of inflation, risk, illiquidity, and any other factors determining the appropriate interest rate.

13. The risk-free interest rate is the interest rate on debt that is virtually free of inflation risk.

14. Inflation premium is the rising prices not offset by increasing quality of goods being purchased.

15. “Default-risk” is the risk that a borrower will not pay the interest and/or the principal on a loan.

16. The “prime rate” is the interest rate charged by banks to their highest default risk business customers.

17. Bond ratings reflect the inflation risk of a firm’s bonds.

18. The relationship between real interest rates and time to maturity when default risk is constant is called the term structure of interest rates.

19. The graph of the term structure of interest rates, which plots interest rates to time to maturity is called the yield curve.

20. Liquidity premiums reflect the risk associated with firms that possess few liquid assets.

21. Subordinated debt is secured by a venture’s assets, while senior debt has an inferior claim to a venture’s assets.

22. Early-stage ventures tend to have large amounts of senior debt relative to more mature ventures.

23. Investment risk is the chance or probability of financial loss on one’s venture investment, and can be assumed by debt, equity, and founding investors.

24. A venture with a higher expected return relative to other ventures will necessarily have a higher standard deviation or returns.

25. Historically, large-company stocks have averaged higher long-term returns than small-company stocks.

26. The coefficient of variation measures the standard deviation of a venture’s return relative to its expected return.

27. Closely held corporations are those companies whose stock is traded over-the-counter.

28. Typically, the stocks of closely held corporations aren’t publicly traded.

29. Organized exchanges have physical locations where trading takes place, while the over-the-counter market is comprised of a network of brokers and dealers that interact electronically.

30. Market cap is determined by multiplying a firm’s current stock price by the number of shares outstanding.

31. The excess average return of long-term government bonds over common stock is called the market risk premium.

32. The weighted average cost of capital is simply the blended, or weighted cost of raising equity and debt capital.

33. Venture capital holding period returns (all stages) for the 10-year period ending in 2012 were about the same as the returns on the S&P 500 stocks.

Multiple-Choice Questions

1. Which one of the following markets involve liquid securities with standardized contract features such as stocks and bonds?
a. private financial market
b. derivatives market
c. commodities market
d. real estate market
e. public financial market

2. Which of the following markets involve direct two-party negotiations over illiquid, non-standardized contracts such as bank loans and direct placement of debt?
a. primary market
b. secondary market
c. options market
d. private financial market
e. public financial market

3. Which of the following is an example of rent on financial capital?
a. interest on debt
b. dividends on stock
c. collateral on equity
d. a and b
e. a, b, and c

4. Which of the following describes the observed or stated interest rate?
a. real rate
b. nominal rate
c. risk-free rate
d. prime rate
e. inflation rate

5. Which of the following describes the interest rate in addition to the inflation rate expected on a risk-free loan?
a. real rate
b. nominal rate
c. risk-free rate
d. prime rate
e. inflation rate

6. Which of the following describes the interest rate on debt that is virtually free of default risk?
a. real rate
b. nominal rate
c. risk-free rate
d. prime rate
e. inflation rate

7. Which of the following describes the interest rate charged by banks to their highest quality customers?
a. real rate
b. nominal rate
c. risk-free rate
d. prime rate
e. inflation rate

8. Which of the following is not a component in determining the cost of debt?
a. inflation premium
b. default risk premium
c. liquidity premium
d. maturity premium
e. interest rate premium

9. The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?
a. inflation premium
b. default risk premium
c. liquidity premium
d. maturity premium
e. investment risk premium

10. The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?
a. inflation premium
b. default risk premium
c. liquidity premium
d. maturity premium
e. investment risk premium

11. The added interest rate charged due to the inherent increased risk in long-term debt is called?
a. inflation premium
b. default risk premium
c. liquidity premium
d. maturity premium
e. investment risk premium

12. Suppose the real risk free rate of interest is 4%, maturity risk premium is 2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest rate on this venture’s debt capital?
a. 13%
b. 14%
c. 15%
d. 16%
e. 17%

13. A venture has raised $4,000 of debt and $6,000 of equity to finance its firm. Its cost of borrowing is 6%, its tax rate is 40%, and its cost of equity capital is 8%. What is the venture’s weighted average cost of capital?
a. 8.0%
b. 7.2%
c. 7.0%
d. 6.2%
e. 6.0%

14. Your venture has net income of $600, taxable income of $1,000, operating profit of $1,200, total financial capital including both debt and equity of $9,000, a tax rate of 40%, and a WACC of 10%. What is your venture’s EVA?
a. $400,000
b. $200,000
c. $ 0
d. ($180,000)
e. ($300,000)

15. The “risk-free” interest rate is the sum of:
a. a real rate of interest and an inflation premium
b. a real rate of interest and a default risk premium
c. an inflation premium and a default risk premium
d. a default risk premium and a liquidity premium
e. a liquidity premium and a maturity premium

16. Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “startup” stage of their life cycles:
a. 20%
b. 25%
c. 40%
d. 50%

17. Which one of the following components is not used when estimating the cost of risky debt capital?
a. real interest rate
b. inflation premium
c. default risk premium
d. market risk premium
e. liquidity premium

18. Which of the following components is not typically included in the rate on short-term U.S. treasuries?
a. liquidity premium
b. default risk premium
c. market risk premium
d. b and c
e. a, b, and c

19. The word “risk” developed from the early Italian word “risicare” and means:
a. don’t care
b. take a chance
c. to dare
d. to gamble

20. The difference between average annual returns on common stocks and returns on long-term government bonds is called a:
a. default risk premium
b. maturity premium
c. risk-free premium
d. liquidity premium
e. market risk premium

21. What has been the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s?
a. 10%
b. 16%
c. 25%
d. 30%
e. 40%

22. Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the “development” stage of their life cycles:
a. 15%
b. 20%
c. 25%
d. 40%
e. 50%

23. Corporate bonds might involve which of the following types of “premiums.”
a. inflation premium
b. default risk premium
c. liquidity premium
d. maturity premium
e. all of the above
none of the above

24. Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?
a. Development stage
b. Startup stage
c. Survival stage
d. Rapid-growth stage
e. Maturity stage

25. A venture’s “riskiness” in terms of possible poor performance or failure would be considered to be “very high” in which of the following life cycle stages:
a. Startup stage
b. Survival stage
c. Rapid-growth stage
d. Maturity stage

26. Which of the following types of financing would be associated with the highest target compound rate of return?
a. public and seasoned financing
b. second-round and mezzanine financing
c. first-round financing
d. startup financing
e. seed financing

27. The cost of equity for a firm is 20%. If the real interest rate is 5%, the inflation premium is 3%, and the market risk premium is 2%, what is the investment risk premium for the firm?
a. 10%
b. 12%
c. 13%
d. 15%

28. Use the SML model to calculate the cost of equity for a firm based on the following information: the firm’s beta is 1.5; the risk free rate is 5%; the market risk premium is 2%.
a. 4.5%
b. 8.0%
c. 9.5%
d. 10.5%

29. Calculate the weighted average cost of capital (WACC) based on the following information: the capital structure weights are 50% debt and 50% equity; the interest rate on debt is 10%; the required return to equity holders is 20%; and the tax rate is 30%.
a. 7%
b. 10%
c. 13.5%
d. 17.5%
e. 20%

30. Calculate the weighted average cost of capital (WACC) based on the following information: the equity multiplier is 1.66; the interest rate on debt is 13%; the required return to equity holders is 22%; and the tax rate is 35%.
a. 11.5%
b. 13.9%
c. 15.0%
d. 16.6%

31. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 16%; cost of common equity = 30%; equity to value = 60%; debt to value = 40%; and a tax rate = 25%.
a. 10%
b. 16%
c. 19.8%
d. 22.8%
e. 30%

32. Calculate the after-tax WACC based on the following information: nominal interest rate on debt = 12%; cost of common equity = 25%; common equity = $700,000; interest-bearing debt = $300,000; and a tax rate = 25%.
a. 15%
b. 16.4%
c. 20.2%
d. 22.8%
e. 30%

33. Venture capital holding period returns (all stages) for the 20-year period ending in 2012, had a compound average return of approximately:
a. 35%
b. 28%
c. 21%
d. 14%
e. 7%

Supplemental Problems related to Chapter 7 Appendix A (and Chapter 4 Appendix A)

1. Estimate a firm’s NOPAT based on: Net sales = $2,000,000; EBIT = $600,000; Net income = $20,000; and Effective tax rate = 30%.
a. $600,000
b. $420,000
c. $150,000
d. $70,000
e. $40,000

2. Estimate a firm’s economic value added (EVA) based on: NOPAT = $400,000; amount of financial capital used = $1,600,000; and WACC = 19%.
a. $26,000
b. $36,000
c. $96,000
d. $54,000
e. $64,000

3. Find a venture’s “economic value added” (EVA) based on the following information: EBIT = $200,000; financial capital used = $500,000; WACC = 20%; effective tax rate = 30%.
a. $20,000
b. $25,000
c. $30,000
d. $40,000
e. $50,000

CHAPTER 8

SECURITIES LAW CONSIDERATIONS WHEN OBTAINING VENTURE FINANCING

True-False Questions

1. The securities Exchange act of 1934 provides for the regulation of securities exchanges and over-the-counter markets.

2. The Investment Company Act of 1940 defines investment companies and excludes them from using some of the registration exemptions originating in the 1933 Ac

3. The Investment Advisers Act of 1940 provides a definition of an investment company.

4. According to the Investment Advisers Act of 1940, a bank would not be classified as an “investment advisor”.

5. The Securities Act of 1933 is the main body of federal law governing the creation and sale of securities in the U.S.

6. The Securities Exchange Act was passed in 1933 and the Securities Act was passed in 1934.

7. The trading of securities is regulated under the Securities and Exchange Act of 1954.

8. Regulation of investment companies (including professional venture capital firms) is carried out under the Investment Company Act of 1940.

9. State laws designed to protect high net-worth investors from investing in fraudulent security offerings are known as blue-sky laws.

10. Offerings and sales of securities are regulated under the Securities Act of 1933 and state blue-sky laws.

11. Blue-sky laws are federal laws designed to protect individuals from investing in fraudulent security offerings.

12. The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

13. Investor liability in a limited liability company (LLC) is limited to the owners’ investments.

14. Investor liability in a proprietorship or corporation is unlimited.

15. The life of a proprietorship is determined by the owner.

16. It is usually easier to transfer ownership in a proprietorship relative to a corporation.

17. The two basic types of exemptions from having to register securities with the SEC are security and transaction exemptions.

18. The Securities Act of 1933 provides a very narrow definition as to what constitutes a security.

19. SEC Rule 147 provides guidance on the issuer’s diligent responsibilities in assuring that offerees are in-state and that securities don’t move across state lines.

20. A private placement, or transactions by an issuer not involving any public offering, is exempt from registering the security.

21. Accredited investors are specifically protected by the Securities Act of 1933 from investing in unregistered securities issues.

22. The typical business organization for a venture in its rapid-growth stage is a partnership or LLC.

23. In SEC v. Ralston Purina (1953), the U.S. Supreme Court took an important step toward defining a public offering for the purposes of Section 4(2) of the Securities Act of 1933.

24. SEC Regulation D requires the registration of securities with the SEC.

25. An early stage venture that is not an investment company and has written compensation agreements can structure compensation-related securities issues so they are exempt from SEC registration requirements.

26. SEC Regulation D took effect in 1932 and provides the basis for “safe harbor” as a private placemen

27. Rule 504 under Regulation D has a $2 million financing limit (i.e., applies to sales of securities not exceeding $2 million).

28. A Rule 504 exemption under Regulation D has no limit in terms of the number and qualifications of investors.

29. A Regulation D Rule 505 offering cannot exceed $5 million in a twelve-month period.

30. A Regulation D Rule 505 offering is limited to 35 accredited investors.

31. A Regulation D Rule 506 offering has no limit in terms of the dollar amount of the offering but is limited to 35 unaccredited investors.

32. Regulation A, while technically considered an exemption from registration, is a public offering rather than a private placemen

33. Regulation A allows for registration exemptions on private security offerings so long as all investors are considered to be financially sophisticated.

34. Regulation A issuers are allowed to “test the waters” before preparing the offering circular (unlike almost all other security offerings).

35. Regulation A offerings are allowed up $10 million and do not have limitations on the number or sophistication of offerees.

36. The objective of the Jumpstart Our Business Startups Act of 2012 is to stimulate the initiation, growth, and development of small business companies.

37. Title II of the JOBS Act of 2012 eliminates the general solicitation and advertising restriction for Regulation D 506 offerings.

Note: Following are true-false questions relating to materials presented in Appendix B of Chapter 8.

1. The definition of an “accredited investor,” initially defined in the Securities Act of 1933, was expanded in Rule 501 of Reg D.

2. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is a net worth greater than $1,000,000.

3. One of the monetary requirements for individuals or natural persons as accredited investors as defined in Regulation D Rule 501 is individual annual income greater than $500,000.

4. Regulation D Rule 502 focuses, in part, on resale restrictions imposed on privately-placed securities.

5. Rule 503 of Regulation D states that a Form D should be filed with the SEC within six months after the first sale of securities.

Multiple-Choice Questions

1. Which of the following is not true regarding the Securities Act of 1933?
a. it was passed in response to abuses thought to have contributed to the financial catastrophes of the Great Depression
b. it covers securities fraud
c. it requires securities to be registered formally with the federal government
d. it set of the nature and authority of the Securities and Exchange Commission
e. it focuses on those who provide investment advice

2. The U.S. federal law that impacts the creation and sales of securities is:
a. Securities Exchange Act of 1934
b. Securities Act of 1933
c. Investment Company Act of 1940
d. Investment Advisers Act of 1940

3. The efforts to regulate the trading of securities takes place under which of the following securities laws?
a. Securities Act of 1933
b. state “blue-sky” laws
c. Securities and Exchange Act of 1934
d. Investment Company Act of 1940
e. Investment Advisers Act of 1940

4. Efforts to regulate the offerings and sales of securities take place under which of the following securities laws?
a. Securities Act of 1933
b. state “blue-sky” laws
c. Securities and Exchange Act of 1934
d. Investment Company Act of 1940
e. Investment Advisers Act of 1940
Both a and b
g. Both a and c

5. In securities law, which of the following is (are) true?
a. ignorance is no defense
b. security regulators may alter your investment agreement to the benefit of the investors
c. Securities Act of 1933 gives the SEC broad civil procedures to use in enforcement
d. Securities Act of 1933 gives the SEC some criminal procedures to use in enforcement
e. a, b, and c above
a, b, c, and d above

6. Which of the following is not a security?
a. treasury stock
b. debenture
c. put option
d. real property
e. call option

7. State securities regulations are referred to as:
a. Regulation A legislation
b. “stormy day” laws
c. “blue sky” laws
d. SEC oversight legislation

8. Which of the following is not true about registering securities with the SEC?
a. it is a time consuming process
b. it required the disclosure of accounting information
c. it is usually done with the help of an investment bank
d. it is an inexpensive process
e. it provides information to prospective investors

9. All of the following do not create any securities registration responsibilities except?
a. Treasury securities
b. Municipal bonds
c. securities issued by publicly held companies
d. securities issued by banks
e. securities issued by the government

10. Ventures that reach their survival stage of their life cycles and seek first-round financing are typically organized as:
a. proprietorships or partnerships
b. LLCs or corporations
c. corporations
d. partnerships or LLCs
e. proprietorships or corporations

11. Investor liability is “unlimited” under which of the following types of business organizational forms?
a. proprietorship
b. limited liability company (LLC)
c. corporation
d. S corporation
e. S limited liability company (SLLC)

12. Which one of the following is not a requirement for registration of securities with the SEC?
a. the name under which the issuer is doing business
b. the name of the state where the issuer is organized
c. the names of all products sold by the issuer
d. the names and addresses of the directors
e. the names of the underwriters

13. The returning of all funds to equity investors as a common “remedy” for a “fouled up” securities offering is called:
a. just action
b. fraud
c. second round financing
d. a rescission
e. mezzanine financing

14. “Security” exemptions from registration with the SEC include which of the following:
a. securities issued by banks and thrift institutions
b. government securities
c. intrastate offerings
d. securities issued by large, high quality corporations
e. a, b, and c above
f. a, b, c, and d above

15. The basic types of “transaction” exemptions for registration with the SEC are:
a. private placement exemption
b. “too big to fail” exemption
c. accredited investor exemption
d. intrastate offering exemption
e. a and c above
b and d above

16. In the Ninth Circuit Court of Appeals decision on SEC v. Murphy, all of the following were considerations in determining an offering to be a private placement except:
a. there must be an arm’s length relationship between the issuer of the security and the prospective purchaser
b. the number of offerees must be limited
c. the size and the manner of the offering must not indicate widespread solicitation
d. the offerees must be sophisticated
e. some relationship between the offerees and the issuer must be present

17. Which SEC Regulation took effect in 1982 and provides the basis for “safe harbor” as a private placement?
a. Regulation A
b. Regulation B
c. Regulation C
d. Regulation D
e. Regulation E

18. Unless your security is exempted, what Section of the Securities Act of 1933 requires you to file a registration statement with the SEC?
a. Section 1
b. Section 2
c. Section 3
d. Section 4
e. Section 5

19. Which one of the following is not an exemption method for making an offering exempt from SEC registration?
a. 4(2) private offering
b. accredited investor
c. Regulation D
d. Regulation A
e. Regulation Z

20. Exemptions for private placement offerings and sales of securities in the amount of $2 million are handled under which one of the follow rules under Regulation D?
a. Rule 501
b. Rule 502
c. Rule 503
d. Rule 504
e. Rule 505

21. Which one of the following SEC registration exemptions has a financing limit in a 12-month period and permits a maximum of 35 unaccredited investors?
a. Section 4(2)
b. Reg D: Rule 504
c. Reg D: Rule 505
d. Reg D: Rule 506
e. Regulation A

22. Rule 504 of Regulation D limits the total number of investors to:
a. 35
b. 100
c. 35 unaccredited investors and any number of accredited investors
d. there is no limit on the number of accredited or unaccredited
investors

23. Offerings exempted from registration under rule 505 of Regulation D may raise up to $5 million in a:
a. 6-month period
b. 9-month period
c. 12-month period
d. 18-month period
e. 24-month period

24. Rule 506 of Regulation D is limited in terms of the number of unaccredited investors to:
a. 20
b. 25
c. 30
d. 35
e. 40

25. Which one of the following “rules” under Regulation D has a $5 million financing limit?
a. Rule 504
b. Rule 505
c. Rule 506
d. Rule 507
e. Rule 508

26. While Section 4(2) does not limit the dollar amount of an offering, the interpretation of the law has stipulated that:
a. the investors must be sophisticated
b the number of investors must be limited to 35
c. the funds must be raised within a 12-month period
d. the offering must be extended to the public, and not only investors
who have a relationship with the issuer

27. An offering that raises $2,500,000 over a 12-month period, involving 35 unaccredited investors and 5 accredited investors, might be exempt from registration under:
a. Section 4(6)
b. Regulation D: Rule 504
c. Regulation D: Rule 505
d. none of the above

28. Which one of the following is not a characteristic of Regulation A?
a. An offering is limited to $5 million
b. the number offerees or investors is limited to 35
c. the offering is a public offering
d. the securities issued can generally be freely resold

29. Of the following, which is not true about Regulation A?
a. it is shorter and simpler than the full registration
b. it does not have limitations on the number or sophistication of offerees.
c. it is a public offering rather than a private placement
d. it can generally be freely sold
e. it requires no offering statement be filed with the SEC

30. Which of the following exemptions involves a public, and not a private, offering?
a. Section 4(2)
b. Rule 501
c. Rule 505
d. Rule 506
e. Regulation A

31. Under Regulation A, which one of the following is not true?
a. issuers are allowed to test the waters prior to preparing the offering circular
b. after filing a SEC statement, the issuer can communicate with perspective investors orally, in writing, by advertising in newspapers, radio, television, or via the mail to determine investor interest
c. issuers can take commitments or funds
d. there is a formal delay of 20 calendar days before sales are made
e. if the interest level is insufficient, the issuer can drop Regulation A filing

32. The JOBS Act of 2012 provides for which of the following:
a. establishes a new business classification called “Emerging Growth Company”
b. lifts restrictions on general solicitation and advertising for Reg D 506 accredited investor offerings
c. establishes a small offering registration exemption and calls for SEC rules relating to the sales of securities to an Internet :crowd” (security crowd funding)
d. a and b above
e. a, b, and c

Note: Following are multiple-choice questions relating to materials presented in Appendix B of Chapter 8.

1. Rule 501 of Regulation D expands the categories of accredited investors. Which is not one of the categories?
a. any organization formed for the specific purpose of acquiring securities with assets in excess of $5 million
b. any director or executive officer of the issuer of securities being sold
c. any individual whose net worth exceeds $1 million
d. any partnership
e. any trust with total assets greater the $5 million

2. Which of the following is not a condition of a Regulation D offering under Rule 502?
a. integration
b. offering
c. information
d. solicitation
e. resale

3. Which of the following are requirements of natural persons to be accredited investors under Regulation D Rule 501?
a. net worth greater than $5 million
b. total assets greater than $1 million
c. individual (single) annual income greater than $200,000
d. stock market portfolio greater than $2 million
e. all of the above

4. Rule 502 of Regulation D deals with:
a. integration
f. information
g. solicitation
h. resale
i. a and b above
e. a, b, c, and d above

5. Rule 503 dictates that for all Reg D exemptions, a Form D should be filed within how many days after the first sale of securities?
a. 1 day
b. 15 days
c. 30 days
d. six months
e. one year

6. The primary exemption from the prohibition of resale of unregistered securities (including, but not limited to, securities safely harbored in Rules 505 and 506 offerings) is:
a. Rule 111
b. Rule 122
c. Rule 133
d. Rule 144
e. Rule 147

CHAPTER 9

PROJECTING FINANCIAL STATEMENTS

True-False Questions

1. Long-term financial planning begins with a forecast of annual working capital needs.

2. In a typical venture’s life cycle, the rapid-growth stage involves creating and building value, obtaining additional financing, and examining exit opportunities.

3. Forecasting for firms with operating histories is generally much easier than forecasting for early-stage ventures.

4. Sales forecasts usually are based on either a single specific scenario or weighted averages of several possible realizations.

5. The weighted average of a set of possible outcomes or scenarios is known as expected values.

6. A customer-driven or “bottom-up” approach to forecasting sales is used primarily to forecast industry sales growth rates.

7. Sales forecasting accuracy is usually highest during a venture’s startup stage in its life cycle.

5. “Public or seasoned financing” typically occurs during the survival stage of a venture’s life cycle.

8. The volatility of a firm’s cash balance will steadily decreases as the firm progresses from the survival stage to the rapid-growth stage.

9. “First-round financing” usually occurs during a venture’s rapid-growth life cycle stage.

10. Sales forecasting accuracy is usually lowest during a venture’s development stage in its life cycle.

11. “Internally generated funds” is the cash produced from operating a firm over a specified time period.

12. The rate at which a firm can grow sales based on the retention of business profits is known as sustainable sales growth rate.

13. A firm’s maximum sustainable sales growth rate occurs at a retention ratio of 100%.

14. When using the beginning of period equity base, the sustainable sales growth rate is equal to ROE times the retention ratio.

15. The sustainable sales growth rate is equal to ROA times the retention ratio.

16. “Financial capital needed” (FCN) is the amount of funds needed to acquire assets necessary to support a firm’s sales growth.

17. The cost of obtaining additional funds, such as additional interest expenses from borrowing funds, may be explicit and impact AFN.

18. The added costs associated with obtaining equity capital are based on investor expected rates of return and are explicit costs which affect AFN.

19. “Additional funds needed” (AFN) is the gap remaining between the financial capital needed and that funded by spontaneously generated funds and retained earnings.

20. Increases in accounts receivable and accounts payable that accompany sales increases are called “spontaneously generated funds”.

21. “Spontaneously generated funds” are increases in accounts receivable and accounts payable that accompany sales increases.

22. Increases in accounts payable and notes payable are examples of spontaneously generated funds.

23. A firm with a positive growth rate in sales will require some additional funds, assuming the existing ratios will not be changed.

24. An increase in accounts receivable will require additional financing unless the increase is offset by an equal decrease in another asset accoun

25. The percent of sales forecasting method must project all cost and balance sheet items at the same growth rate as sales.

26. The “constant-ratio forecasting method” is a variant of the “percent-of- sales forecasting method.”

27. The constant ratio forecasting method makes projections based on the assumption that certain costs and some balance sheet items are best expressed as a percentage of sales.

Multiple-Choice Questions

1. Which of the following is not a step in forecasting sales for a seasoned firm?
a. forecast future growth rates based on possible scenarios and the probabilities of those scenarios.
b. attempt to corroborate the projected sales growth rates analyzing both industry growth rates and the firm’s own past market share.
c. refine the sales forecast by using the sales force as a direct contact with both existing and potential customers.
d. take into consideration the likely impact of major operating changes within the firm on the sales forecas
e. consider the effects of changes in the firm’s debt/equity blend on the sales forecasts.

2. Which of the following statements is incorrect?
a. forecasting sales is the first step in creating projected financial
statements
b. financial forecasting tends to be more accurate for mature ventures
than for early-stage ventures
c. forecasting is relatively unimportant for early-stage ventures with
little historical financial data
d. a and b
e. a and c

3. During which round of financing is a venture typically most accurate in forecasting sales?
a. seasoned financing
b. mezzanine financing
c. first round financing
d. startup financing
e. seed financing

4. During which life cycle stage is a venture typically most accurate in forecasting sales?
a. rapid growth stage
b. startup stage
c. development stage
d. early-maturity stage
e. survival stage
5. Public or seasoned financing is generally associated with which one of the following life cycle stages:
a. development stage
b. startup stage
c. survival stage
d. rapid-growth stage
e. early-maturity stage

6. A “new” venture usually begins its sales forecast by first:
a. forecasting industry sales and expressing the venture’s sales as a percent of industry sales
b. using a “bottom-up” market-driven approach
c. extrapolating past sales
d. working with existing and potential customers

7. An “expected value” is:
a. a simple average of a set of scenarios or possible outcomes
b. a weighted average of a set of scenarios or possible outcomes
c. the highest scenario value or outcome
d. the lowest scenario value or outcome

8. Lola is in the process of forecasting the sales growth rate for an early-stage venture specializing in the production of durable running shoes. Lola predicts a .2 probability of an 80% growth in sales, a .3 probability of a 60% growth in sales, a .4 probability of a 40% growth in sales, and a .1 probability of a 10% decrease in sales. What is the expected sales growth rate of the venture?
a. 47%
b. 49%
c. 51%
d. 53%

9. Which one of the following life cycle stages would generally be associated with the second lowest sales forecasting accuracy?
a. early-maturity
b. rapid-growth
c. survival
d. start-up
e. development

10. Internally generated funds which are available for distribution to owners of for reinvestment back into the business to support future growth can be characterized by which of the following?
a. operating income
b. operating cash flow
c. net income
d. net cash flow
e. pre-tax income

11. Which of the following is not part of the financial forecasting process used to project financial statements?
a. forecast sales
b. forecast tax rates
c. project the income statement
d. project the balance sheet
e project the statement of cash flows

12. A firm projects net income to be $500,000, intends to pay out $125,000 in dividends, and had $2 million of equity at the beginning of the year. The firm’s sustainable growth rate is:
a. 5%
b. 18.75%
c. 6.25%
d. 4.69%
e. none of the above

13. A firm has net income of $320,000 on sales of $3,200,000. Its assets total $2,000,000; the equity at the beginning of the year was $1,600,000 and dividends paid were $80,000. What is the sustainable growth rate?
a. 5%
b. 15%
c. 6.25%
d. 4.69%
e. none of the above

14. A sales growth rate based on the retention of profits is referred to as the:
a. real sales growth rate
b. sustainable sales growth rate
c. spontaneous sales growth rate
d. nominal sales growth rate
e. weighted average sales growth rate

15. Which one of the following ratios is not part of the “standard” return on equity (ROE) model?
a. net profit margin
b. asset turnover
c. equity multiplier
d. retention rate

16. If beginning of period common equity is $200,000 and end of period common equity is $300,000, the sustainable growth rate is:
a. 33%
b. 40%
c. 50%
d. 67%
e. 75%

17. Use the following information to estimate a venture’s sustainable growth rate: Net income = $200,000; Total assets = $1,000,000; equity multiple based on beginning common equity = 2.0 times; and Retention rate = 25%.
a. 50%
b. 25%
c. 20%
d. 10%
e. 5%

18. If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 3.5 times, and a retention rate = 50%, the sustainable growth rate would be:
a. 10%
b. 17.5%
c. 35%
d. 40%
e. 20.5%

19. If a venture has a return on assets (ROA) = 10%, an equity multiplier based on beginning equity = 4.0 times, and a dividend payout ratio of 60%, the sustainable growth rate would be:
a. 10%
b. 16%
c. 20%
d. 24%
e. 40%

20. If a venture has a return on assets (ROA) = 12%, an equity multiplier based on beginning equity = 3.0 times, and a sustainable growth rate of 18%, the retention rate would be:
a. 10%
b. 20%
c. 30%
d. 40%
e. 50%

21. A venture’s common equity was $50,000 at the end of last year. If the venture’s common equity at the end of this year was $60,000, what was its sustainable sales growth rate?
a. 5%
b. 10%
c. 15%
d. 20%
e. 25%

22. A venture’s common equity account increased by $100,000 the past year and ended the year at $500,000. What was its sustainable sales growth rate?
a. 5%
b. 10%
c. 15%
d. 20%
e. 25%

23. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $100,000; common equity at the beginning of the year = $500,000; and the retention rate = 50%.
a. 10%
b. 15%
c. 20%
d. 25%
e. 30%

24. Determine a venture’s sustainable growth rate based on the following information: sales = $1,000,000; net income = $150,000; common equity at the end of last year = $520,000; and the dividend payout percentage = 20%.
a. 10%
b. 16%
c. 20%
d. 24%
e. 30%

25. Determine a firm’s “financial policy” multiplier based on the following information: sustainable growth rate = 20%; net profit margin = 10%; and asset turnover = 2 times.
a. 1.00
b. 1.25
c. 1.50
d. 1.75
e. 2.00

26. Determine a firm’s “return on assets” percentage based on the following information: sustainable growth rate = 20%; total assets $500,000; beginning of year common equity $200,000; and dividend payout percentage = 60%.
a. 10.0%
b. 12.5%
c. 15.0%
d. 17.5%
e. 20.0%

27. The financial funds needed to acquire assets necessary to support a firm’s sales growth is called: a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed

28. The increase in accounts payables and accruals that occur with a sales increase is called:
a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed

29. The financial funds still needed to finance asset growth after using spontaneously generated funds and any increase in retained earnings is called:
a. spontaneously generated funds
b. additional funds needed
c. addition in retained earnings
d. financial capital needed

30. Which one of the following would increase a firm’s need for additional funds?
a. an increasing profit margin
b. a decreasing expected sales growth rate
c. an increase in accruals
d. an increasing dividend payout rate
e. a decrease in assets

31. Your firm recorded sales for the most recent year of $10 million generated from an asset base of $7 million, producing a $500,000 net income. Sales are projected to grow at 20%, causing spontaneous liabilities to increase by $200,000. In the most recent year, $200,000 was paid out as dividends, and the current payout ratio will continue in the upcoming years. What is your firm’s AFN?
a. $200,000
b. $600,000
c. $840,000
d. $960,000
e. $1,400,000

32. Which of the following is a forecasting method used to project financial statements?
a. percent-of-sales method
b. percent-of-expenses method
c. GNP-ratio method
d. a and b
e. a, b, and c

33. When projecting financial statements, one would first , and then proceed to :
a. project of the balance sheet, forecast sales.
b. forecast sales, project the income statement
c. forecast sales, project the balance sheet
d. forecast sales, project the statement of cash flows

CHAPTER 10

VALUING EARLY-STAGE VENTURES

True–False Questions

1. The valuation approach involving discounting present value cash flows for risk and delay is called discounted cash flow (DCF).

2. The stepping stone year is the first year before the explicit forecast period.

3. The terminal or horizon value is the value of a venture at the end of its explicit forecast period.

4. The “stepping stone” year is the second year after the explicit forecast period when valuing a venture.

5. The explicit forecast period is the two to ten year period in which the venture’s financial statements are explicitly forecas

6. The maximum dividend valuation method involves explicitly forecasted dividends to provide surplus cash which is positive.

7. The easiest way to value a venture is to discount the projected maximum dividend/issue stream.

8. The pseudo dividend method treats surplus cash as a free cash flow to equity.

9. The reversion value of a venture is the present value of the venture’s terminal value.

10. A venture’s reversion value is the present value of ongoing expenses.

11. The “reversion value” is the future value of the terminal value.

12. The “terminal” value is the value of the venture at the beginning of the explicit forecast period.

13. As used in this textbook, the “terminal” value is the same as the “horizon” value.

14. Finding the present value of the horizon value produces the venture’s reversion value.

15. Surplus cash is the cash remaining after required cash, all operating expenses, and reinvestments are made.

16. Surplus cash is the cash remaining after required cash, all operating expenses, reinvestments, and dividends payouts are made.

17. Required cash is the amount of cash required to operate a venture through its day-to-day business.

18. Surplus cash is the amount of cash required to pay scheduled dividends for next quarter.

19. The capitalization or “cap” rate is the spread between the discount rate and the growth rate of cash flow in the terminal value period.

20. Pre-money valuation is the present value of a venture prior to a new money investmen

21. Post-money valuation is the pre-money valuation of a venture plus all monies previously contributed by the venture’s founders.

22. “Net operating working capital” is current assets other than surplus cash less non-interest-bearing current liabilities.

23. “Equity valuation cash flow” is defined as: net sales + depreciation and amortization expense – change in net operating working capital (excluding surplus cash) – capital expenditures + net debt issues.

24. The “pseudo dividend method” (PDM) is a valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash.

25. A “post-money” valuation differs from a “pre-money” valuation by the cost of financial capital.

26. Applying the “maximum dividend method” (MDM) and the “pseudo dividend method” (PDM) result in different valuation estimates.

27. The “maximum dividend method” assumes that all surplus cash will be paid out as dividends.

28. A pseudo dividend involves excess cash that does not need to be invested in a venture’s assets or operations, and may be invested elsewhere for a period of time.

29. The pseudo dividend method treats equity infusions and withdrawals in a “just in time” fashion.

30. The pseudo dividend method treats surplus cash either as stripped out while not in use or as employed outside the venture and stored in a zero NPV investmen

31. The wider the capitalization or “cap” rate (i.e., the discount rate minus the growth rate in the terminal period), the higher the terminal value.

Multiple-Choice Questions

1. The present value of the venture’s expected future cash flows is called?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value

2. The value today of all future cash flows discounted to the present at the investor’s required rate of return is called?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value

3. The value of the venture at the end of the explicit forecast period is called the horizon value, or what?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value

4. The present value of the terminal value is called?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value

5. The present value of a set of future flows plus the current undiscounted flow is called?
a. going-concern value
b. present value
c. terminal value
d. reversion value
e. net present value

6. The calculation of equity valuation cash flows nets the cash impact of all other balance sheet and income accounts to focus on the ______ account as the repository of any remaining cash flow.
a. cash
b. debt
c. equity
d. non-interest-bearing liabilities
e. net income

7. Equity valuation cash flow = Net income plus
a. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues
b. Depreciation and amortization expense plus the change in net operating working capital plus minus capital expenditures plus net debt issues
c. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures minus net debt issues
d. Depreciation and amortization expense minus the change in net operating working capital plus minus capital expenditures plus net debt issues
e. Depreciation and amortization expense minus the change in net operating working capital plus capital expenditures plus net debt issues

8. In a wildly successful first year in business that started and ended with no required cash, your firm has operating income of $989,000, net income of $637,000, current assets of $900,000, current liabilities of $659,000, net capital expenditures were $690,000, and depreciation was $460,000. The firm has never financed itself with deb What is your equity valuation cash flow?
a. $648,000
b. $900,000
c. $2,028,000
d. $166,000

9. Your firm has been in business for two years. In its first year, the firm ended with $227,000 of current assets, long-term assets of $143,000, $70,000 in surplus cash, current liabilities of $52,000, and long-term assets of $68,000. At the end of the second year, current assets were $279,000, long-term assets of $195,000, surplus cash of $90,000, current liabilities of $62,000, and long-term assets of $78,000. What is your firm’s change in net operating working capital?
a. $22,000
b. $62,000
c. $42,000
d. $244,000
e. $32,000

10. The equity valuation method involving explicitly forecasted dividends to provide surplus cash of zero is called?
a. maximum dividend method
b. pseudo dividend method
c. sustainable growth method
d. dividend payout method

11. The equity valuation method involving zero explicitly forecasted dividends and an adjustment to working capital to strip surplus cash is called?
a. maximum dividend method
b. pseudo dividend method
c. sustainable growth method
d. dividend payout method

12. “Just in time” capital injections by equity investors is a reference to
a. sustainable growth
b. the present value of the terminal value
c. equity investors’ providing money only when needed
d. dividend payout

13. The maximum dividend method is
a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

14. The pseudo dividend method is
a. the cleanest for valuing assets, but creates problems valuing surplus cash
b. the cleanest for valuation purposes but its dividend-laden financial statements can dramatically understate the firm’s cash position
c. the cleanest for cash planning, but creates problems valuing the venture by discounting the dividends
d. calculated by directly discounting the cash flow statement’s projected dividend flow to investors, but ignores risks associated with periodic gluts of surplus cash

15. “Required cash” is?
a. the cash needed to pay interest expense
b. a valuation method for early stage ventures
c. cash needed to cover a venture’s day-to-day operations
d. cash available to pay as a dividend

16. Most discounted cash flow valuations involve using cash flows from an:
a. historical period, an explicit forecast period, and a terminal value
b. historical period and a terminal value
c. historical period and an explicit forecast period
d. explicit forecast period and a terminal value

17. Which one of the following equity valuation methods records surplus cash on the balance sheet but assumes that the surplus cash is paid out over time for valuation purposes?
a. maximum dividend method
b. pseudo dividend method
c. sustainable growth method
d. return on equity method

18. When estimating the terminal value of a venture using an equity valuation method, a perpetuity growth equation is often applied that uses the capitalization rate for discounting purposes. This “cap” rate is measured as the:
a. equity discount rate minus the perpetuity growth rate
b. equity discount rate plus the perpetuity growth rate
c. risk-free rate plus the perpetuity growth rate
d. risk-free rate minus the perpetuity growth rate

19. A venture’s going-concern value is the:
a. present value of the expected future cash flows
b. net present value of the current and expected future cash flows
c. future value of the expected cash flows
d. net future value of the current and expected cash flows

20. The purpose of the stepping stone year is?
a. to assure that there is sufficient required cash
b. to assure that future dividends are constant
c. to assure that investment flows are consistent with terminal growth rates
d. to allow for a final year of higher-than-sustainable growth

21. When estimating the terminal value of a cash flow perpetuity, which one of the following is not a component?
a. the next period’s cash flow
b. a constant discount rate
c. a constant growth rate
d. the payback period

22. Which one of the following components is not a component of the equity valuation cash flow?
a. NOPAT
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. capital expenditures
e. net debt issues

23. What is the difference between pre-money valuation and post-money valuation?
a. size of the capitalization rate
b. amount of money injected by new investors
c. revision value
d. amount of money previously contributed by founders
e. amount of money previously contributed by venture investors

24. To calculate a terminal value, one divides the next period’s cash flow by the:
a. constant discount rate plus a constant growth rate
b. constant discount rate plus a variable growth rate
c. constant discount rate minus a constant growth rate
d. constant growth rate minus constant discount rate
e. constant growth rate plus a variable discount rate

25. The MDM equity valuation method is an abbreviation for:
a. minimum dividend method
b. maximum discount method
c. maximum dividend method
d. minimum discount method
e. Montgomery design method

26. The PDM equity valuation method is an abbreviation for:
a. pseudo dividend method
b. proximate dividend method
c. pseudo discount method
d. proximate discount method
e. pre-money discount method

27. Estimate a venture’s equity valuation cash flow based on the following information: net income = $6,372; depreciation = $4,600; change in net operating working capital = $2,415; capital expenditures = $6,900; and new debt issues = $1,000.
a. $6,487
b. $5,487
c. $4,487
d. $3,787
e. $5,787

28. Estimate a venture’s terminal value based on the following information: current year’s net income = $20,000; next year’s expected cash flow = $26,000; constant future growth rate = 7%; and venture investors’ required rate of return = 20%.
a. $156,846
b. $285,714
c. $200,000
d. $150,000
e. $428,571

29. Estimate a venture’s required rate of return based on the following information: terminal value = $400,000; current year’s net income = $20,000; next year’s expected cash flow = $25,000; and a constant growth rate = 7%.
a. 6%
b. 7%
c. 8%
d. 9%
e. 10%

30. Estimate a venture’s constant growth rate (g) based on the following information: terminal value = $400,000; current year’s net income = $20,000; next year’s expected cash flow = $25,000; and a required rate of return of 20%.
a. 2%
b. 4%
c. 6%
d. 8%
e. 10%

31. Which one of the following components is not a component of the equity valuation cash flow calculation?
a. net income
b. depreciation and amortization expense
c. change in net operating working capital (without surplus cash)
d. capital expenditures
e. net equity repurchases

32. Estimate a venture’s terminal value based on the following information: current year’s net sales = $500,000; next year’s expected cash flow = $16,000; constant future growth rate = 10%; and venture investors’ required rate of return = 20%.
a. $156,846
b. $285,714
c. $200,000
d. $150,000
e. $160,000

33. Estimate a venture’s cash flow expected next year based on the following information: current year’s net sales = $400,000; terminal value = $500,000; constant future growth rate = 10%; and venture investors’ required rate of return = 20%.
a. $20,000
b. $40,000
c. $50,000
d. $60,000
e. $80,000

CHAPTER 11

VENTURE CAPITAL VALUATION METHODS

True–False Questions

1. The venture capital valuation method estimates the venture’s value by projecting both intermediate and terminal/exit flows to investors.

2. Venture investors returns depend on the venture’s ability to generate cash flows or to find an acquirer for the venture.

3. The value of the venture’s equity is equal to the value the financing contributed in the first venture capital round.

4. A direct application of the earnings-per-share ratio to venture earnings is known as the direct comparison valuation method.

5. The venture capital valuation method which capitalizes earnings using a cap rate implied by a comparable ratio is known as direct capitalization.

6. Failure to account for any additional rounds of financing and its accompanying dilution in order to meet projected earnings will result in the investor’s not receiving an adequate number of shares to ensure the required percent ownership at the time of exi

7. Almost without exception, professional venture investors demand that some equity or deferred equity compensation be structured into any valuation.

8. If a venture issues debt prior to the exit period, the initial equity investors will still receive first claims on the venture’s net worth at exit time.

9. The utopia discount process allows the venture investors to value their investment using only the business plan’s explicit forecasts, discounting it at a bank loan interest factor.

10. The internal rate of return is the simple (non-compounded) interest rate that equates the present value of the cash inflows received with the initial investmen

11. The basic venture capital method estimates a venture’s value using only terminal/exit flows to all the venture’s owners.

12. The basic venture capital method estimates a venture’s value using only terminal/exit flows to founders.

13. Post-money valuation of a venture is the pre-money valuation plus money injected by new investors.

14. Staged financing is financing provided in sequences of rounds rather than all at one time.

15. In staged financing, the expected effect of future dilution is borne by both founders and the investors currently seeking to inves

16. The capitalization rate is the sum of the discount rate and the growth rate of the cash flow in the terminal value period.

17. The internal rate of return (IRR) is the compound rate of return that equates the present value of the cash inflows received with the initial investmen

18. The discount rate that one applies in a multiple scenario valuation will usually be lower than the discount rate that would be applied to the business plan cash flows.

19. All of the scenarios in a multiple scenario analysis must have exit cash flows in the same year.

20. The discount rate applied in an Expected PV approach should be the same rate across scenarios.

21. The expected present value method incorporates the present values of different scenarios, as well as their probabilities, into the valuation process.

Note: The following TF questions relate to Learning Supplements 11A and 11B:

1. The return on book equity equals the sustainable growth rate when all earnings are paid out in the form of dividends.

2. A price-earnings ratio is related to the level and growth of earnings.

3. The Venture Capital ShortCut (VCSC) method is a post-money version of the Delayed Dividend Approximation (DDA).

4. The VSCS and DDA methods are “just-in-time” capital methods which do not assess capital charges for idle cash.

5. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VCSC and DDA methods will typically give lower valuations than the MDM and PDM.

6. The VSCS is like a post-money version of the DDA.

7. For the typical business plan having current and early cash outflows and later-stage cash inflows, the VSCS will give a higher valuation than the DDA.

8. The DDA and VCSC methods give the same valuation.

Multiple-Choice Questions

1. The return to venture investors directly depends on which of the following?
a. venture’s ability to generate cash flows
b. ability to convince an acquirer to buy the firm
c. the amount of its short-term liabilities
d. both a and b
e. all of the above

2. To obtain the percent ownership to be sold in order to expect to provide the venture investor’s target return, one must consider the:
a. cash investment today and the cash return at exit multiplied by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV
b. cash investment today and the cash return at exit discounted by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV
c. cash investment today and the cash return at exit multiplied by the venture investor’s target return, then divide today’s cash investment by the venture’s NPV
d. cash investment today and the cash return at exit discounted by the venture investor’s target return, then multiply today’s cash investment by the venture’s NPV

3. The value of the existing venture without the proceeds from the potential new equity issue is known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate

4. The value of the existing venture plus the proceeds from the potential new equity issue is known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d . the capitalization rate

5. Financing provided in sequences of rounds rather than all at one time is
known as?
a. pre-money valuation
b. post money valuation
c. staged financing
d. the capitalization rate

[Note: Use the following information for Problems 6 through 11.]

A potential investor is seeking to invest $500,000 in a venture, which currently has 1,000,000 million shares held by its founders, and is targeting a 50% return five years from now. The venture is expected to produce half a million dollars in income per year at year 5. It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $10,000,000.

6. What is the percent ownership of our venture that must be sold in order to provide the venture investor’s target return?
a. 33.33%
b. 75.94%
c. 12.76%
d. 15.00%

7. What is the number of shares that must be issued to the new investor in order for the investor to earn his target return?
a. 3,156,276
b. 1,578,138
c. 4,156,276
d. 2,578,138

8. What is the issue price per share?
a. $0.1939
b. $0.1203
c. $0.3168
d. $0.1584

9. What is the pre-money valuation?
a. $120,300
b. $316,800
c. $158,400
d. $193,900

10. What is the post-money valuation?
a. $658,354
b. $499,954
c. $408,377
d. $249,977

11. What is the value of the venture in year five using direct capitalization?
a. $500,000
b. $5,000,000
c. $1,000,000
d. $100,000

12. For early stage ventures, which of the following is a strong reason for having an equity component in employee compensation?
a. the expected deferred and tax-preferred compensation allows the venture to pay a lower current compensation to employees
b. as a way to motivate employees to strive for the same goal of high equity value
c. because any dividends received as part of the equity compensation reduces taxable income
d. both a and b
e. all of the above

13. During the exit period, which of the following will have last crack at the venture’s wealth?
a. banks giving loans to the venture
b. convertible debt holders of the venture
c. initial equity investors of the venture
d. participating preferred equity holders

14. Suppose your venture’s expected mean cash flows are $(85,000) initially, followed by expected mean cash flows at the end of the first, second, and third years of $40,000, $40,000, and $35,000. What is the internal rate of return?
a. 13.9%
b. 14.7%
c. 16.2%
d. 17.2%
e. 19.2%

15. A P/E multiple refers to:
a. price/expectations multiple
b. price/earnings multiple
c. profit/EBIT multiple
d. profit/earnings multiple
e. price/EBITDA multiple

16. Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and earnings per share for the target firm = $3.00.
a. $10.00
b. $20.00
c. $30.00
d. $40.00
e. $50.00

17. Estimate the value of a privately-held firm based on the following information: total market value (or capitalization value) of a comparable firm = $200,000; net income of a comparable firm = $40,000; number of shares outstanding for the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target firm = 10,000.
a. $5.00
b. $7.50
c. $10.00
d. $12.50
e. $15.00

18. Determine the market value of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of “comparable” firm = $500,000.
a. $4 million
b. $7.5 million
c. $10 million
d. $12.5 million
e. $15 million

19. Determine the net income of a “comparable” firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; stock price of “comparable” firm = $30.00; and 300,000 shares of stock outstanding for the comparable firm.
a. $450,000
b. $500,000
c. $550,000
d. $600,000
e. $700,000

20. Determine the future value of a target venture which has net income expected to be $40,000 at the end of four years from now. A comparable firm currently has a stock price of $20.00 per shares; 100,000 shares outstanding; and net income of $50,000.
a. $1.0 million
b. $1.4 million
c. $1.6 million
d. $2.0 million

21. Which of the following financing rounds dilutes the ownership founders?
a. first-round
b. second-round
c. incentive ownership round
d. a and b
e. a, b, and c

22. The utopian approach to valuation ignores which of the following venture scenarios:
a. black hole scenarios
b. living dead scenarios
c. both a and b
d. neither a or b

23. Which of the following is not a variation of the venture capital valuation method?
a. venture capital method
b. expected present value
c. utopian discount process
d. none of the above

Following are MC questions relating to Learning Supplements 11A and 11B:

1. When a firm has growth that only meets, rather than exceeds, the cost of capital, we would expect its price-earnings multiple to be approximately equal to:
a. the reciprocal of its required return on equity
b. its earnings per share
c. its book-to-market ratio
d. its debt-to-value ratio

2. The two “just-in-time” capital methods are:
a. DDA and VCSC
b. DDA and PDM
c. VSCS and MDM
d. MDM and PDM

3. For the typical venture investing project, the valuation will be highest under:
a. DDA
b. PDM and MDM
c. VCSC
d. initial book value of equity

CHAPTER 12

PROFESSIONAL VENTURE CAPITAL

True–False Questions

1. In addition to having personal financial stakes in their portfolio of investments, professional venture capitalists have raised funds from other investors to invest in the portfolio.

2. The establishment of the Small Business Administration was the first major government foray into venture investing.

3. Created by the Small Business Administration, Small Business Investment Companies possess important tax advantages and were eligible to borrow amounts up to four times their equity base from the governmen

4. Initially, Small business Investment Companies access to borrowed funds appeared attractive. This was because venture investing and debt service commitments are an ideal mixture of financing for start-ups.

5. Professional venture capital, as we know it today, did not exist before World War II.

6. Most venture investing came from wealthy individuals and families prior to World War II.

7. The beginning of professional venture capitalists began with the formation of American Research and Development in 1966.

8. In 1958 the Small Business Administration created Small Business Investment Companies.

9. The first major government foray into venture investing came with the formation of the Small Business Administration (SBA) in 1947.

10. The American Research and Development (ARD) company was formed in 1946.

11. Internet financing led the record level of venture investing in the 1999-2000 time period.

12. The phrase “two and twenty shops” refers to investment management firms having a contract that gives them two percent carried interest and 20 percent of assets annual management fee.

13. When the venture fund calls upon the investors to deliver their investment funds, it reflects the deal flow.

14. The deal flow reflects the flow of business plans and term sheets involved in the venture capital investing process.

15. In the venture investing context, due diligence describes the process of investigating a potentially worthy concept or plan.

16. The summary of the investment terms and conditions accompanying an investment proposed by the venture capitalist is known as the statement of strengths and weaknesses.

17. “Carried interest” is the portion of profits paid to the professional venture capitalist as incentive compensation.

18. The term “capital call” refers to the flow of business plans and term sheets involved in the venture capital investing process.

19. Pension funds are the dominant source of funds for venture investing.

20. Individuals and families are more important suppliers of venture capital relative to finance and insurance firms.

21. Endowments and foundations are more important suppliers of venture capital relative to individuals and families.

22. “Due diligence,” in venture investing context, is the process of ascertaining the viability of a business plan.

23. When a syndicate of VCs invests in a venture, the investor in charge of organizing the due diligence process is known as the “lead investor.”

24. SLOR stands for “standard letter of recognition.”

25. SLOR stands for “standard letter of rejection.”

26. A “term sheet” is a summary of the investment terms and conditions accompanying an investment by venture capitalists.

27. Term sheets consist of the terms and conditions accompanying an investment, as stipulated by the founders of the venture.

28. Two typical issues addressed in a term sheet are valuation and the size and staging of financing.

29. Term sheets may contain demands regarding the voting rights of shares issued to venture investors.

30. Once the venture capital firm has received exit proceeds from a venture in the form of cash or securities, some method of returning the proceeds (less the carried interest) must be determined.

31. Annual VC investments, as indicated in Figure 12.1, reached an all-time high in the year 2000.

32. According to Figure 12.4, individuals and families were the largest supplier of venture capital in 2009.

Multiple-Choice Questions

1. The beginning of professional venture capitalists is considered to have occurred:
a. prior to World War II
b. 1946
c. 1956
d. 1966
e. after the Vietnam War

2. The beginning of professional venture capitalists is considered to have begun with the establishment or formation of:
a. Small Business Administration
b. Small Business Investment Companies
c. American Research and Development organization
d. Professional Venture Capitalists organization

3. Which of the following was the largest source of venture capital funds in 2009 (as reported in Figure 12.4)?
a. pension funds and corporations
b. individuals and families
c. endowments and foundations
d. finance and insurance

4. Venture Capital firms tend to specialize in publicly identified niches because of the potential for value-added investing by venture capitalists. Which is not one of these niches?
a. industry type
b. venture stage
c. size of investment
d. management style
e. geographic area

5. As venture firms attract money from investors, it is placed in a fund. Important issues that must be put in place with the establishment of the fund include all of the following except:
a. determine the general partners
b. establishing a fee structure
c. a profit sharing arrangement
d. establish its governance
e. the management team assigned to each borrower

6. All of the following are typically part of a venture fund’s typical compensation and incentive structure except:
a. some percent annual fee on invested capital
b. a percent share of any profits to the managing general partner
c. carried interest
d. salary for the general partners

7. When evaluating the prospects of a new venture, venture capital firms consider which of the following?
a. characteristics of the proposal
b. characteristics of the entrepreneur/team
c. nature of the proposed industry
d. both b and c
e. all of the above

8. When screening prospective new ventures, venture capital firms consider their own funds’ requirements. Which of the following is not one of the venture firm’s requirements relating to its own funds?
a. investor control
b. rate of return
c. size of investment
d. probable stock listing exchange for the mature venture
e. financial provisions for investors

9. When evaluating the prospects of a new venture, venture capital firms consider the characteristics of the entrepreneur and its team. Which of the following is not part of the review of the entrepreneur/team?
a. its background and experience
b. its managerial capabilities
c. management’s stake in the firm
d. the VC firms’ ability to cash out
e. the capability to sustain an effort

10. When screening prospective new ventures, venture capital firms must consider the nature of the proposed industry. Which of the following is not part of the screening of the proposed industry?
a. market attractiveness
b. managerial references
c. potential size
d. technology
e. threat resistance

11. Professional venture investing usually involves setting up a venture capital firm as a:
a. proprietorship
b. corporation
c. partnership
d. S corporation

12. After a new professional venture capital fund is organized, the fund managers:
a. conduct due diligence and actively invest
b. solicit investments and obtain commitments
c. arrange harvest or liquidation
d. identify prospective venture investments and then solicit investments

13. After determining the next fund’s objectives and policies, the “professional venture investing cycle’s” next step is:
a. solicit investments in new fund
b. organize the new fund
c. obtain commitments for a series of capital calls
d. conduct due diligence and actively invest
e. arrange harvest or liquidation

14. The term “carried interest” refers to:
a. interest not currently paid but which must be paid in the future by a professional venture capitalist
b. interest transported directly to a bank
c. interest owed on a loan in default
d. the portion of profits paid to the professional venture capitalist as incentive compensation

15. If an investment management firm is known to be a “two and twenty shop”, this implies that the firm:
a. receives an annual 2% fee on invested capital, and a 20% carried interest
b. receives an annual 20% fee on invested capital, and a 2% carried interest
c. receives an annual 2% fee on gross operating profits, and a 20% carried interest
d. receives an annual 20% fee on gross operating profits, and a 2% carried interest

16. A venture fund calls upon its investors to deliver their investment funds. This is known as:
a. due diligence
b. deal flow
c. a capital call
d. carried interest
e. a SLOR

17. All of the following are typical issues addressed in a term sheet except?
a. valuation
b. board structure
c. registration rights
d. management fees
e. employment contracts

18. Term sheets are usually drafted by:
a. the mangers of the venture seeking VC funding
b. the VC fund seeking to fund the venture
c. management and founders
d. it is usually done by an third party, in order to
ensure the fair treatment of both parties

19. In a syndicate of venture investors, the investor who is responsible for governing the process of due diligence is:
a. the primary investor
b. the lead investor
c. a small group of secondary investors
d. the investor in charge of issuing SLORs for the syndicate
e. it is a democratic process that is shared by all investors in the group

20. A summary of the investment terms and conditions accompanying an investment is referred to as a:
a. term sheet
b. business plan
c. fund created by professional venture capitalists
d. due diligence in venture investing
e. capital call

21. When screening possible investments, a venture capital firm might issue an SLOR which stands for:
a. standard letter of rejection
b. standing letter of reconciliation
c. standard letter of reassessment
d. senior letter of reference

22. Which of the following is not one of the four likely outcomes of the venture firm’s screening process?
a. seek the lead investor position
b. seek a non-lead investor position
c. close the capital fund
d. refer the venture to more appropriate financial market participants
e. issue a standard letter of rejection

Note: The following MC questions relate to Figure 12.3 Elements of a Venture Capital Fund Placement Memorandum

1. In a Venture Capital Fund Placement Memorandum, which of the following is not a front matter declaration?
a. description of limited manner of the offering
b. targeted fund size
c. imposition of confidentiality
d. notice of lack of SEC registration
e. declaration of the highly risky nature of investment

2. In a Venture Capital Fund Placement Memorandum, which of the following is not part of the offering summary?
a. objective of formation
b. declaration of general partner
c. management fee
d. minimum capital restrictions
e. targeted fund size

3. In a Venture Capital Fund Placement Memorandum, which of the following is not part of the fund overview?
a. fund size
b. investment focus
c. fund management
d. portfolio size
e. general partners’ capital contributions

4. In a Venture Capital Fund Placement Memorandum, all of the following are part of the executive summary except?
a. special limited partners
b. general partners’ capital contributions
c. limitation of liability
d. allocation of gains and losses
e. imposition of confidentiality

5. In a Venture Capital Fund Placement Memorandum, all of the following are included in the summary of terms except?
a. indemnification
b. objective
c. liquidation
d. valuation
e. expenses

CHAPTER 13

OTHER FINANCING ALTERNATIVES

True–False Questions

1. Despite the high risk and costs of using a facilitator or up-front fee solicitor to obtain financing, many start-ups never-the-less seek them as a source of funds due to the length of time it takes to raise new funds.

2. Collateral plays an important role in determining the willingness to lend and the amount and terms of the loan, making it the most important factor in the lending process.

3. Commercial loan officers have the expertise to project new venture’s business successes, and thus are as willing to make funds available to entrepreneurs on the same basis as other businesses.

4. Because investors and commercial lenders both seek returns on the funds given to start-up firms, entrepreneurs can obtain financing as easily from either source.

5. Because of loan restrictions, obtaining funding from commercial lenders is prohibitive for entrepreneurs.

6. Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms.

7. Among start-ups, it is widely understood that bank debt (outside of Small Business Administration loans), is not a very realistic source of financing for ventures with less than two years operating results.

8. Compensation received by commercial loan officers makes them more likely to finance early-stage ventures.

9. Warrants allow lenders to buy equity at a specified price.

10. Warrants are a debt instrument frequently used by commercial banks when financing entrepreneurial ventures.

11. Credit cards issued to start-ups have proven to be an alternative source of start-up financing.

12. The returns to venture bank lenders are generated solely from interest payments made by borrowers plus the return of the loan principal.

13. Commercial banks receive a portion of their returns from warrants in addition to the receipt of interest and the repayment of the principal that was len

14. By an act of Congress, the Small Business Administration (SBA) was created for the purpose of fostering the initiation and growth of small businesses.

15. The Small Business Administration was created by an Act of Congress in 2003.

16. Microloans in the SBA credit program are intended for very small businesses with a maximum amount of $35,000 to be used for general purposes.

17. The SBA’s role in its microloan credit program is to approve the loans and guarantee up to 85% of the loan value.

18. Microloans in the SBA credit program are made by not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs).

19. The SBA’s venture capital credit program works through Community Development Financial Institutions (CDFIs).

20. The 7(a) loan traditionally has been the SBA’s primary loan program

21. SBA 7(a) loans are made usually for 1 to 3 years in amounts up to $5,000,000, require collateral, and can be used for most business purposes.

22. The SBA approves the standard 7(a) loan and guarantees up to 85% of the loan value.

23. For the 504 loan, the SBA approves and guarantees the development company’s portion of the debt but does not guaranteed the debt of the participating commercial bank.

24. Factoring is the sale of payables to a third party at a discount to their face value.

25. In a factoring arrangement, the third party makes its money by purchasing the receivables at a discount from the total amount due on the receivables.

26. With venture leasing, one component of the return to the lessor is the opportunity to take an equity interest in the venture.

27. Receivables lending is the use of receivables as collateral for an equity issue.

28. Factoring is the selling of receivables to a third party at a discount from their face value.

29. Direct public offerings have recently become a serious challenge to traditional venture capital firms.

30. The Immigration and Nationality Act (INA) of 1990 provided an opportunity for foreign nationals to obtain a “green card” through the EB-5 immigrant visas program.

31. A foreign national may seek Lawful Permanent Resident (LPR) status by investing $1 million in the U.S. that will preserve or create at least 100 jobs for U.S. workers.

Multiple-Choice Questions

1. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The ability of the entrepreneur to repay borrowed funds is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

2. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The money the entrepreneur has invested in the business, which is an indication how much is at risk if the business should fail is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

3. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The guarantees, or additional forms of security (such as assets), the entrepreneur can provide the lender is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

4. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The focus on the intended purpose of the loan is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

5. When assessing the creditworthiness of new entrepreneurs, lending institutions review the “Five C’s”. The general impression the entrepreneur makes on the potential lender or investor is known as:
a. capacity
b. capital
c. collateral
d. conditions
e. character

6. All of the following are common loan restrictions except?
a. limits on total debt
b. limits on total equity
c. restrictions on dividends or other payments to owners and/or investors
d. restrictions on additional capital expenditures
e. performance standards on financial ratios

7. Unlike traditional commercial banks, venture banks typically provide debt to start-ups that have already received equity financing from professional venture capital firms. In return for providing additional debt financing, these venture banks receive in return all of the following except?
a. interest payments
b. repayment of principal
c. implementation of loan restrictions
d. tax breaks on the interest
e. right to buy equity at a specific price

8. Bank debt is not a realistic source of financing for start-ups due to all of the following reasons except?
a. a large portion of the assets are intangible and provide no collateral
b. payables either don’t yet exist or its history is inadequate
c. the start-up’s dependence on a small number of irreplaceable people is not a good match to demand deposits or other bank liabilities
d. receivables collection track record is incomplete
e. in the event of a default, it is now plausible for the bank to install a management team to help right the operations

9. A provision that allows lenders to acquire equity at a specific price is known as a(n):
a. factor
b. warrant
c. venture lease
d. equity carve-out

10. Personal credit cards have proven to be a source of financing for start-up firms for all of the following reasons except?
a. credit card debt is not based on the firm’s ability to repay, but rather the individual card holder’s ability to repay
b. teaser rates afford initial low cost borrowing
c. balance transfer at below-prime rates
d. credit card debt can create problems if the firm doesn’t generate cash flows to cover credit card payments once low introductory rates expire

11. In the context of new ventures, what does SBA stand for?
a. Standard Business Arrangement
b. Small Business Association
c. Small Business Administration

12. By an act of Congress, the Small Business Administration (SBA) was created in which one of the following years?
a. 1953
b. 1968
c. 1973
d. 1985
e. 1993

13. Which is not a duty of the Small Business Administration?
a. provide capital and credit to entrepreneurial start-ups
b. guaranteeing general business loans
c. provide equity financing for start-ups
d. help create new jobs in small businesses
e. help small firms obtain Federal contracts

14. Which of the following is not a Small Business Administration program?
a. loan guaranty programs
b. certified and preferred lender programs
c. low documentation loan programs
d. energy and conservation loan programs
e. certified financial planner funding programs

15. Which of the following is not a source of debt funding for a start-up firm?
a. accounts payable
b. vendor financing
c. factoring
d. trade notes
e. leasing

16. Venture banks seek loan returns from:
a. interest received
b. principal repayments
c. warrants being exercised
d. all of the above
e. none of the above

17. Which one of the following is not a current Small Business Administration (SBA) credit program?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

18. In which of the following credit programs does the SBA approve and guarantee a not-for-profit Certified Development Company’s portion of the debt?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

19. In which of the following credit programs does the SBA approve a loan and guarantees up to 85% of loan value?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

20. In which of the following credit programs is the SBA role in the loan one of providing a direct loan to a community organization, which reloans the funds in small amounts?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

21. In which of the following credit programs does the SBA borrow money to be lent Small Business Investment Companies (SBICs) and guarantees payment to investors?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

22. Commercial banks, credit unions, and/or financial services firms are lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

23. Commercial banks, jointly with not-for-profit Certified Development Companies, are lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

24. Not-for-profit or government-affiliated Community Development Financial Institutions (CDFIs) are lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

25. Small Business Investment Companies (SBICs) are lenders in which of the following SBA credit programs?
a. 7(a) loan
b. 504 loan
c. microloan
d. venture capital loan
e. credit card loan

26. Concerning factoring, all of the following are true except:
a. factors prefer business over consumer accounts
b. factoring is done at a discount to the third party purchaser
c. factoring discounts are often a function of the riskiness of the receivables
d. factoring speeds the inflow of cash to the seller of the receivables
e. receivable lending is the process of factoring

27. The use of receivables as collateral for a loan is known as:
a. capital leasing
b. warehouse financing
c. receivables lending
d. a microloan
e. venture leasing

28. Selling receivables to a third party at a discount from their face value is referred to as:
a. factoring
b. receivables lending
c. venture banking
d. vendor financing
e. mortgage lending

29. Which of the following is/are not a type of leasing arrangement?
a. factoring
b. capital lease
c. venture lease
d. mortgage lease
e. both a and d

30. Arranging for partial ownership as a component of the expected return to a lessor is known as:
a. venture leasing
b. capital leasing
c. investment leasing
d. none of the above

CHAPTER 14

SECURITY STRUCTURES AND DETERMINING ENTERPRISE VALUES

True–False Questions

1. Preferred stock is the equity claim senior to common stock providing preference on dividends but not liquidation proceeds.

2. For preferred noncumulative stock, all previously unpaid preferred dividends must be paid before any common stock dividend is paid.

3. Convertible preferred stockholders have the right to convert a preferred share into a specified number of common shares at any time after the expiration date.

4. If a share of preferred stock has a $10 par value, and the stock has a 2:1 conversion ratio, then the conversion price would be $5.

5. By issuing preferred stock, and thus forfeiting bankruptcy rights from the use of debt, the venture and its investors can benefit by committing to an internal reorganization as opposed to bankruptcy reorganization.

6. A call option is the obligation to purchase a specific asset at a pre-determined price.

7. Options generally have no effect on the value of a venture capital investmen

8. For American and Bermudan embedded options, the exercise price can change over time as specified in the security agreemen

9. An American-style option is an option that can be exercised only at the expiration date

10. A European-Style Option may only be exercised on a specific date.

11. A warrant is a call option issued by a company granting the holder the right to buy common stock at a specific price at a specific time.

12. An option granting the right to sell a stock at $10 when that stock currently has a market price $8 is “in the money.”

13. If a call option can be bought for $12 and the stock’s market value is $12, it’s said to be “at the money”.

14. As the underlying stock price increases in value, a put option to sell it becomes more valuable.

15. The value of a warrant can be directly derived from the value of a call option.

16. A preemptive right is a right for existing owners to buy sufficient shares to preserve their ownership share.

17. Convertible debt is debt that converts into preferred stock.

18. An option is a right to buy or sell additional shares of stock.

19. A warrant is a type of call option.

20. An option not currently worth exercising is said to be an out of the money option.

21. Owning a put option on a stock is the same as selling a call option on that same stock.

22. The enterprise method of valuation can be executed with either an after-tax or before-tax weighted cost of capital as long as the rate is applied to the appropriate enterprise cash flows.

23. Entity valuation allows us to answer the question of how much debt a venture needs to issue to achieve a target capital structure (D/V).

24. The concept of an enterprise value is that it is the combined value of all of venture’s financing, typically equity plus all of the deb

25. The enterprise value includes the value of the debt, equity, and warrant pieces of a venture.

Note: The following TF questions relate to Learning Supplements 14A and 14B:

1. An alternative approach to the Enterprise Valuation method adds the tax shield from paying interest back into the flows and discounts at a before-tax weighted average cost of capital.

2. Warrant valuation (as presented in this text) is similar to option valuation except that one applies a dilution factor to the option value to arrive at a warrant value.

3. The unadjusted Black and Scholes model is a model for determining the value of a warrant to buy a new share.

4. The Black and Scholes model requires the stock price as an inpu

5. The Black and Scholes model requires the inflation rate as an inpu

6. The Black and Scholes model requires an exercise price as an inpu

Multiple-Choice Questions

1. Which of the following have the least senior claim on a venture’s asset?
a. common Stock
b. preferred stock
c. convertible preferred stock
d. convertible debt
e. American-style option

2. The right for existing owners to maintain their ownership share by purchasing sufficient shares to keep their percentage share of the firm is called:
a. stock option
b. stock warrant
c. preemptive right
d. participating stock
e. paid-in-kind preferred stock

3. Which of the following stock can be structured to assure the shareholder that they will share in the payment of any dividends to common stockholders?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock

4. Which of the following provides the option to transform preferred stock into common stock?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock

5. Which of the following offers the option where the dividend obligation can be satisfied in cash or by issuing additional par amounts of the preferred security?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock

6. Which of the following requires that all previously unpaid preferred dividends must be paid prior to any common dividend?
a. paid in kind preferred stock
b. cumulative preferred stock
c. participating preferred stock
d. convertible preferred stock
e. non-cumulative preferred stock

7. Which of the following is never a component of a preferred stock’s security structure?
a. the right to participate in any dividends paid to common stock shareholders
b. payment of dividends in the form of additional shares of preferred stock
c. the option for the holder to convert preferred stock into common stock
d. the option for the venture to call outstanding preferred stock
e. none of the above; all of these may be included in the structure of
preferred stock

8. A round of financing where shares sell for a lower price than previous rounds is known as a:
a. down round
b. recessive round
c. reset round
d. a and c

9. Which of the following are components of common equity?
a. common stock
b. preferred stock
c. a and b
d. none of the above

10. Convertible debt has all of the following except:
a. bankruptcy rights
b. regular dividend payments
c. it can be structured to provide senior interest in specific assets
d. a tax shield due to interest expense
e. a security interest in the firms’ assets

11. Which of the following is not a type of option?
a. call option
b. put option
c. warrant
d. LBO

12. The right to buy a specified asset at a specified price on a specified date is called:
a. a forward contract
b. an American-style put option
c. an American-style call option
d. a European-style call option
e. a European style put option

13. The right to sell a specified asset at a specified price up until a specified date is called:
a. a forward contract
b. an American-style put option
c. an American-style call option
d. a European-style call option
e. a European style put option

14. An option that can be exercised at any time until its expiration is called a:
a. forward contract
b. lookback option
c. American-style option
d. European-style option
e. Bermuda-style option

15. An option that can be exercised only at its expiration date is called a:
a. forward contract
b. lookback option
c. American-Style option
d. European-Style option
e. Bermuda-Style option

16. An option that can be exercised only at a specific set of dates is called a:
a. forward contract
b. lookback option
c. American-Style option
d. European-Style option
e. Bermuda-Style option

17. Which of the following is an example of a call option which is out of the money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.

18. Which of the following is an example of a call option which is in the money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.

19. Which of the following is an example of a put option which is out of the money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.

20. Which of the following is an example of a put option which is in the money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to buy at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12.

21. Which of the following is an example of a put option which is at the money?
a. The option to sell at $11, the stock is worth $12.
b. The option to buy at $13, the stock is worth $12.
c. The option to sell at $12, the stock is worth $12.
d. The option to sell at $13, the stock is worth $12.
e. The option to buy at $11, the stock is worth $12

22. Generally speaking, warrants are call options that allow the holder to purchase what type of security at a specific price?
a. common stock
b. preferred stock
c. convertible debt
d. none of the above

23. To calculate the enterprise valuation cash flow, one begins with which of the following items from the income statement?
a. net sales
b. operating profit
c. (earnings before interest and taxes) × (1 – enterprise tax rate)
d. net income
e. net income times the enterprise tax rate

24. When consistent assumptions are used, we
a. get the same value for equity under the enterprise and equity methods of valuation
b. we get a higher value of equity under the equity method of valuation
c. we get a lower value of equity under the equity method of valuation
d. we get equity values that cannot be compared across the equity and enterprise methods of valuation

Note: The following MC questions relate to Learning Supplement 14B:

1. The Black and Scholes model is intended to be used to value
a. stocks
b. bonds
c. options
d. futures contracts

2. Which of the following is not an input to the Black and Scholes model?
a. earnings per share
b. stock price
c. risk free rate
d. volatility

3. N(h) in the Black and Scholes model involves the use of
a. the number of shares issued
b. the next time that a venture capitalist will invest money
c. the normal distribution cumulative density function
d. the number of times that the venture will have to raise money

CHAPTER 15

HARVESTING THE BUSINESS VENTURE INVESTMENT

True–False Questions

1. The process of exiting the privately held business venture to unlock the owners’ investment value is known as harvesting.

2. When harvesting a venture, the methodical distribution of assets directly to the owners is known as a systematic liquidation.

3. When harvesting a venture, the outright purchase of the going concern by managers, employees, or external buyers is known as going public.

4. When harvesting a venture, the two-step public equity registration and sale is known as an outright sale.

5. When an initial business plan is prepared, attention should be paid to the investors’ and founders’ desire for eventual liquidity by anticipating a harvest for the venture investors.

6. An advantage of an exit strategy that pays out the venture’s investment value over several years can make it more difficult for entrepreneurs to start a new venture because adequate capital has not been released from the existing venture.

7. When an industry is in decline, systematic liquidation is typically the most attractive harvest strategy.

8. Exit values for many mature ventures are usually determined by (1) discounted cash flow (DCF) methods or (2) relative valuation models based on some form of multiples analysis.

9. In determining a harvest value, non-monetary items such as culture, managerial succession, and employee retention are not factored in.

10. Harvesting is the process of exiting the privately held business venture to unlock the owners’ investment value.

11. Valuation methods that estimate a firm’s worth using value-related multiples of comparable firms are sometimes known as “relative value methods.”

12. The two discounted cash flow (DCF) methods covered in this text are the enterprise method and the debt funds method.

13. One method of harvesting a venture is through systematic distribution of assets directly to the owners.

14. One method of harvesting a successful venture is through systematic distribution of assets directly to lenders.

15. Other than when the venture is operating in a declining industry, it is difficult to think of cases where the disadvantages of liquidation outweigh the advantages.

16. A special type of harvesting process where the firm’s top management continues to run the firm and has a substantial equity position in the reorganized firm is known as a leveraged buyou

17. A leveraged buyout (LBO) takes place when the purchase price of a firm is financed largely with debt financial capital.

18. Ultimately for harvesting purposes, we need to decide on the venture’s value at exit and how that exit value pie will be divided up among investors.

19. An “initial public offering” is the only method used by entrepreneurs when exiting a venture.

20. A management buyout (MBO) is a special type of leveraged buyout (LBO).

21. A leveraged buyout (LBO) is a special type of management buyout (MBO).

22. ESOP stands for “employee stock ownership plan.”

23. An obligatory disclaimer disavowing any intent to act as an offer to sell, or solicit an offer to buy securities is known as a red herring.

24. The sale of new shares of common stock is a secondary offering.

25. The sale of used shares of common stock is a secondary market offering.

26. Most companies choose “best efforts” agreements in order to minimize the inherent risks of going public.

27. IPO underpricing results in a direct loss to the venture’s owners.

28. While not a direct loss to a venture, underpricing can represent a significant opportunity cost to the venture’s owners.

29. A “lockup provision” prohibits insiders from selling their existing shares for a specified period of time.

30. In a typical venture’s life cycle, the rapid-growth stage involves managing ongoing operations, maintaining and adding value, and obtaining seasoned financing.

31. In a typical venture’s life cycle, the examining of exit opportunities often occur during the rapid-growth stage.

Multiple-Choice Questions

1. Which of the following is not a way to harvest a venture?
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public

2. When registering equity and selling it via an IPO of new shares followed by a secondary offering of existing shares, this venture harvesting process is known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public

3. The acquisition of the venture by family members, managers, or outside buyers is a venture harvesting process known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public

4. The distribution of the venture’s cash flows directly to the owners is a venture harvesting process known as:
a. systematic liquidation
b. outright sale
c. chapter 11 bankruptcy
d. going public

5. Which of the following is not an advantage of a systematic liquidation?
a. maintaining control throughout the harvest period
b. harvesting of the investment value can be spread out over a number of years
c. the taxation treatment of liquidation proceeds as ordinary income
d. the time, effort, and costs of finding a buyer for the venture can be avoided

6. Which of the following is not a disadvantage of a systematic liquidation?
a. the treatment and taxation of liquidation proceeds as ordinary income rather than capital gains
b. the commitment of the entrepreneur’s resources and focus on a dying venture rather than on other more lucrative ventures
c. the harvesting of the investment gets spread out over a number of years
d. the acceleration of the venture’s rate of decline as other industry participants respond to the reduction in investment

7. A venture can be harvested in which of the following ways?
a.. systematic liquidation, outright sale, going public
b. outright sale, going public, acquisition
c. going public, acquisition
d. acquisition, systematic liquidation

8. Which of the following is not a candidate for a leveraged buyout?
a. a venture with stable and adequate operating cash flows
b. a venture with a high amount of equity relative to debt
c. a venture with the ability to protect market share
d. a venture with a high debt ratio

9. Which of the following is the premium that would be applied to venture valuation due to an investor’s majority ownership of a venture?
a. proxy premium
b. control premium
c. influence premium
d. liquidity premium
e. illiquidity premium

10. Shares registered with the Securities and Exchange Commission and state securities regulators and sold to the public are known as:
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering

11. In an outright sale of a venture, the venture can be sold to:
a. family members
b. managers
c. employees
d. outside (external) buyers
e. all of the above

12. The sale of new securities is known as:
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering

13. The sale of used shares is known as:
a. primary offering
b. secondary offering
c. initial public offering
d. shelf offering

14. The NYSE participates in:
a. the sale of new securities to private investors
b. primary offerings
c. secondary offerings
d. b and c

15. In the investment banking process, which of the following is a duty of the investment bank?
a. to be the targeted investors for a firm’s securities
b. to provide banking services such as checking accounts to firms
c. to find buyers for a firm’s securities
d. both a and b
e. all of the above

16. Based on the following information, estimate the percentage appreciation on stock bought by the venture investors: founders’ purchase price $.50; venture investors’ purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 800%

17. Based on the following information, estimate the percentage appreciation on stock bought by the founders: founders’ purchase price $1.00; venture investors’ purchase price $2.00; current stock price $10.00; founders holding period = 5 years; venture investors holding period = 3 years.
a. 100%
b. 400%
c. 600%
d. 900%

18. Assume that a venture is expected to have an EBITDA of $1,500,000 at the end of five years from now. If the venture’s value is expected to be $12,000,000, what “valuation multiple” was being assumed?
a. 1 time
b. 4 times
c. 8 times
d. 10 times
e. 12 times

19. A venture is expected to have an exit value of $10,000,000 two years from now. If venture investors invest $2,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?
a. 10%
b. 20.2%
c. 25%
d. 28.8%
e. 32%

20. A venture is expected to have an exit value of $10,000,000 five years from now. If venture investors invest $1,000,000 now, and expect a 20% compounded rate of return on their investment, what portion of the exit value would they need?
a. 10.5%
b. 20.1%
c. 24.9%
d. 28.8%
e. 32.5%

21. If venture investors invest $1,000,000 now, will receive 50% of the exit value, and expect a 20% compounded rate of return on their investment, what will be the amount of the exit value at the end of two years?
a. $1,000,000
b. $1,440,000
c. $2,880,000
d. $5,000,000
e. $5,760,000

22. If venture investors invest $1,000,000 now, will receive 25% of the exit value, and expect a 20% compounded rate of return on their investment, what is the approximate expected exit value at the end of five years?
a. $1,000,000
b. $2,490,000
c. $4,980,000
d. $7,470,000
e. $9,950,000

23. If venture investors invest $6,750,000 now, will receive 32% of the exit value, and expect a 22% compounded rate of return on their investment, what is the exit value at the end of seven years?
a. $27,153,298
b. $39,931,321
c. $69,552,505
d. $84,854,057
e. $103,521,949

24. The difference between what the investment bank gets from selling securities to public investors and what they pay to the issuing firm is known as:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread

25. A type of agreement with an investment bank employing only marketing and distribution efforts without the actual transfer of securities ownership to the investment banking syndicate is called:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread

26. An agreement with an investment bank that involves the purchase and distribution of new securities is known as:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread

27. The investment banks process of ascertaining, to the extent possible, an issuing firm’s financial condition and investment intent is known as:
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread

28. The arrangement where an underwriter has the option of selling additional shares when the issue is heavily oversubscribed is known as
a. green shoe
b. red herring
c. best efforts
d. lockup

29. Which of the following describes when a syndicate’s offering price is less than the market price immediately following the offering?
a. IPO underpricing
b. due diligence
c. firm commitment
d. best efforts
e. underwriting spread

30. In the aftermarket trading for the venture’s securities, an order that is to be executed as soon as possible at the prevailing market price is known as a:
a. put order
b. market order
c. limit order
d. stop order

31. In the aftermarket trading for the venture’s securities, an order that converts to a market order once a certain price is achieved is known as a:
a. put order
b. market order
c. limit order
d. stop order

32. An order to purchase stock that can be executed only at a specified price or better is called a:
a. market order
b. limit order
c. stop order
d. stock order
e. private order

33. Which of the following is not a type of trading order?
a. market order
b. limit order
c. stop order
d. none of the above

34. The letters IPO stand for:
a. investment pricing organization
b. initial public offering
c. institutional pricing overhead
d. immediate pricing opportunity

35. The negotiated period around an equity securities offering during which insiders are prohibited from selling their existing shares is called:
a. a seasoned offering
b. an unseasoned offering
c. underpricing
d. an underwriting spread
e. a lockup provision

36. An initial public offering (IPO) involves:
a. sale of new securities to private investors
b. sale of used securities to the public
c. a venture’s first offering of SEC-registered securities to the public
d. all of the above
e. none of the above

37. The type of agreement with an investment bank involving the investment bank’s underwritten purchase and resale of securities is called:
a. firm commitment
b. best efforts commitment
c. due diligence
d. making a red herring disclaimer
e. a private placement

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Chapters 8 Through 18

ECO 450 Week 6 Quiz

CHAPTER 8
Social Security and
Social Insurance
TRUE/FALSE QUESTIONS
1. The Social Security pension system is a fully funded retirement plan.
2. Social Security pension benefits are transfers from workers to retirees.
3. Social Security pensions are financed by voluntary contributions by workers.
4. The gross replacement rate measures the ratio of taxes paid per year by workers to their annual Social Security pension when they retire.
5. In the year prior to retirement, a worker earned $20,000 and paid $5,000 in taxes on those earnings. His annual Social Security pension is $10,000 per year. Then it follows that his net replacement rate is 50 percent.
6. The gross replacement rate for Social Security pensions is the same for all workers independent of their preretirement earnings.
7. The annual growth in wages subject to Social Security taxes is 3 percent. Given the payroll tax rate, the growth in funds available to pay pension benefits is also 3 percent.
8. The asset-substitution effect of Social Security pensions discourages saving.
9. The availability of Social Security pensions to workers over normal retirement age results in an income effect unfavorable to work but no substitution effect.
10. The bequest effect of Social Security encourages workers to save less.
11. The normal retirement age for Social Security old-age pensions is 67 for people born in the United States in 1960 or later.
12. Workers in the United States can retire under Social Security at age 62 with lower pensions than they would receive at their normal retirement age.
13. As of 2009, retired workers between the ages of 62 and their normal retirement age were subject to an “earnings test” that reduced their pension by $1 for each $2 of earnings after a certain minimum level of earnings.
14. Reducing the replacement rate will have no effect on the tax rate necessary to finance pensions under a pay-as-you-go, tax-financed pension system.
15. Workers who quit their jobs are eligible for unemployment insurance benefits in the United States.
16. By 2050, the expected percentage of the U.S. population that is considered elderly will be less than 20%.
17. Social Security was created in 1965.
18. On average, the elderly are less likely to be poor when compared to the rest of the U.S. population.
MULTIPLE CHOICE QUESTIONS
1. The Social Security retirement system:
a. is a fully funded pension system.
b. is a tax-financed system that pays benefits from taxes that are invested to return principal and interest to workers when they retire.
c. is a tax-financed retirement system that finances pensions by taxing workers each year and transferring the bulk of revenues obtained directly to retirees.
d. does not use taxes on workers to pay pensions to retirees.
2. The gross replacement rate:
a. measures a worker’s monthly retirement benefit divided by monthly earnings before taxes in the year prior to retirement.
b. measures a worker’s monthly retirement benefit divided by monthly earnings after taxes in the year prior to retirement.
c. is an increasing function of gross monthly earnings prior to retirement.
d. is independent of gross monthly earnings prior to retirement.
3. A worker earns $2,000 per month before taxes. He pays $140 per month payroll tax on those wages. In addition, the income taxes on those wages are $360 per month. On retirement, the worker receives a Social Security pension of $750 per month. Which of the following statements is true?
a. The worker’s gross replacement rate is 50 percent.
b. The worker’s net replacement rate is 50 percent.
c. The worker’s net replacement rate is 38 percent.
d. The worker’s net replacement rate is 75 percent.
4. The growth in hourly wages over the past 50 years has averaged about 2 percent per year. How¬ever, the growth in Social Security pensions has far exceeded this 2-percent rate. The growth in tax revenue to finance Social Security benefits in excess of 2 percent per year can be accounted for by:
a. increases in payroll tax rates.
b. use of other taxes beside the payroll tax to pay Social Security benefits.
c. an increase in the number of workers paying Social Security taxes.
d. either (a) or (b)
e. either (a) or (c)
5. Given the structure and level of gross replacement rates and the expected future growth of labor earnings subject to the payroll tax, the tax rates used to tax payrolls were increased in the 1980s because:
a. the number of retirees per worker will increase.
b. the number of retirees per worker will decrease.
c. wages are expected to decline.
d. the size of the work force is expected to increase.
6. Which of the following is likely to increase the net federal debt as a share of GDP?
a. a federal budget surplus.
b. a federal budget deficit.
c. a recession.
d. either b or c.
7. The asset-substitution effect of the Social Security retirement system leads all workers to:
a. save more for retirement.
b. save less for retirement.
c. save absolutely nothing for retirement.
d. work more
8. Which of the following is a consequence of a growing federal budget deficit in the United States?
a. A decrease in the federal debt outstanding.
b. An increase in the federal debt outstanding.
c. A decrease in the portion share of federal government expenditures that must be allocated to interest in the future.
d. An increase in national saving.
9. The induced-retirement effect of the Social Security pension system induces workers to:
a. save less for retirement.
b. save more for retirement.
c. reduce savings for retirement to zero.
d. work more after retirement.
10. Unemployment insurance benefits are:
a. financed by payroll taxes levied on workers.
b. financed by payroll taxes levied on employers.
c. both (a) and (b)
d. financed by sales taxes.
11. Which of the following is true about the Social Security pension system in the United States?
a. Pensions received by retired workers are based entirely on their contributions to the Social Security pension trust fund and the investment return on that fund.
b. Pensions received by married retirees with dependents are greater than that received by those without dependents.
c. Gross replacement rates are inversely related to preretirement earnings.
d. both (b) and (c)
12. Which of the following can decrease tax rates necessary to pay pensions for a pay-as-you-go pension system?
a. an increase in replacement rates
b. a decrease in the retirement age
c. an increase in the size of the work force
d. an increase in the number of retirees
13. Unless legislation is introduced to change the normal retirement age, people born in 1960 or later will be able to retire with full Social Security benefits at age:
a. 62.
b. 65.
c. 66.
d. 67.
14. The earnings test for retirees:
a. increases their incentive to work.
b. is applied to all retirees.
c. is applied only to retirees below normal retirement age.
d. reduces pension benefits by $1 for each $2 of earnings.
e. both (c) and (d)
15. A nation has 40 million current retirees and a work force of 100 million. Which of the following is true?
a. The replacement rate is 40 percent.
b. The replacement is 2.5.
c. The dependency ratio is 0.4.
d. The dependency ratio is 2.5.
16. Social Security tax rates can be reduced if:
a. taxable wages decline.
b. the retirement age is lowered.
c. the retirement age is raised.
d. the work force decreases in size.
17. A retiree subject to the earnings test under Social Security:
a. can earn as much as he or she chooses without losing Social Security pension benefits.
b. has his or her Social Security pension benefits reduced by one dollar for each dollar of labor earnings.
c. has his or her Social Security pension benefits reduced immediately by one dollar for each three dollars of labor earnings.
d. has his or her Social Security pension benefits reduced by one dollar for each two dollars of earnings after a certain minimum amount per year.
18. A pay-as-you-go social security retirement system is:
a. exemplified by the current U.S. social security system.
b. exemplified by the current Chilean social security system.
c. designed to have retirees set aside a contribution specifically for themselves during their earlier working life.
d. both (a) and (b).
19. Approximately, what percentage of beneficiaries of U.S. Social Security are retired workers?
a. 50%
b. 60%
c. 70%
d. 80%
20. The Social Security Act was implemented in the United States in:
a. 1927.
b. 1935.
c. 1947.
d. 1965.

CHAPTER 9
Government and Health Care

TRUE/FALSE QUESTIONS
1. In the United States the government pays the health bills of 90 percent of the population.
2. The American system of health care is financed by a mix of private and government insurance programs that pay over 80 percent of the health care bills for U.S. citizens.
3. Spending per person on health care in the United States is less than in the United Kingdom where national health insurance finances health expenditures.
4. Government spending on health care is declining as a percent of total government spending.
5. Medicare is a government program of health insurance for the elderly.
6. Exclusion of employer-provided health insurance to employees is an indirect subsidy to private provision of health insurance.
7. Third-party payments for health care services increase the quantity of health care demanded by reducing out-of-pocket costs to patients.
8. An increase in coinsurance and deductibles for health insurance can contribute to a reduction in expenditures on health care.
9. Half of Americans do not have health insurance coverage.
10. Under national health insurance in Great Britain, the price system is used to ration health care.
11. Approximately 16 percent of GDP was allocated to provision of health care in the United States as of 2006.
12. Individuals in the United States, on average, pay 50 percent of their health care costs out-of-pocket, and the remaining 50 percent is paid by insurance, governments, and charity.
13. Asymmetric information in the market for health care occurs when sellers of medical care are better informed about cost and quality of care than buyers.
14. Because of third-party payment for services in the market for health care, the price paid by buyers is less than the payment sellers receive, and the marginal social cost of health care exceeds its mar¬ginal social benefit.
15. Medicaid costs are paid entirely by the federal government.
16. Healthcare expenditures in the U.S. are projected to be 20% of GDP by 2017.
17. Asymmetric information can occur when the provider of a service is better informed than the consumer of the service.
18. A risk averse individual prefers to pay certain modest costs in exchange for possible unforeseen high costs.
MULTIPLE CHOICE QUESTIONS
1. Most of the medical bills of Americans in the United States are paid by:
a. the patients.
b. private and government health insurance.
c. charities.
d. Medicaid.
2. Since 1960, expenditures on health care as a percent of GDP has:
a. been cut in half.
b. nearly tripled.
c. remained the same.
d. doubled.
3. The government program that provides the health insurance to the poor in the United States is called:
a. national health insurance.
b. Medicare.
c. Medicaid.
d. employer-provided health insurance.
4. Which of the following programs accounts for the greatest amount of government expenditures on public health in the United States?
a. Medicare
b. worker’s compensation
c. the Public Health Service
d. medical research
5. Which of the following subsidizes private provision of health insurance?
a. Medicare
b. Medicaid
c. the Public Health Service
d. tax exclusion of the value of employer-provided health insurance to workers
6. Which of the following could help decrease the rate of increase of spending on health care in the United States?
a. a reduction in the deductibles on private health insurance policies
b. an increase in the coinsurance rate on health insurance and subjecting a larger volume of ser¬vices to coinsurance
c. extension of Medicaid insurance to all persons who are poor
d. a reduction in the coinsurance rate on health insurance and subjecting a smaller volume of ser¬vices to coinsurance
7. Which of the following is an example of the “moral hazard of health insurance”?
a. an increase in the number of surgeries prescribed for benign prostate disease beyond the point at which the marginal benefit equals the marginal cost
b. a decreased willingness of individuals to go to the doctor for minor ailments because of increases in coinsurance rates
c. an underallocation of resources to medical care because of monopoly power of hospitals
d. experience rating of health insurance groups by health insurers
8. A third-party payment system for health care:
a. results because of externalities in the production of health care services.
b. encourages more than the efficient amount of resources to be allocated to health care.
c. encourages patients and health care providers to economize on the use of health care resources.
d. means that patients pay the full price for health care services they consume.
9. Which of the following services is typically not covered under private health insurance and Medicare in the United States?
a. treatment for heart attack
b. surgery
c. office visits to physicians
d. long-term care services
10. Under national health insurance as operated in Great Britain,
a. the British system pays fees equal to half of the costs of services provided to them.
b. general practice physicians are paid on a per-patient rather than on a per-unit-of-service basis.
c. patients requiring surgery can pick their surgeons and can usually obtain the surgery in a matter of days, even if it is not an emergency.
d. there are no government limits on health care spending by hospitals.
11. Which of the following is true about the Medicaid program in the United States?
a. It is a program of health insurance for the elderly.
b. Its costs are paid entirely by the federal government.
c. It is a program of health insurance for the poor.
d. Its costs have been declining in recent years.
12. In the United States, individuals pay approximately what percent of the cost of their medical care directly to providers?
a. 100 percent
b. 50 percent
c. 15 percent
d. zero
13. The percent of total health care costs in the United States paid for by governments is approximately:
a. 90 percent.
b. 45 percent.
c. 25 percent.
d. 10 percent.
14. The system of third-party payment for medical care in the United States has which of the following effects in the market for health care?
a. It improves efficiency in the market.
b. It causes the marginal social benefit of health care to exceed its marginal social cost.
c. It causes the marginal social cost of health care to exceed its marginal social benefit.
d. It results in less than the efficient quantity of health care services.
15. Which of the following is true about the Medicare program in the United States?
a. It is only available to those who pass a means test.
b. It is available to all citizens over the age of 65.
c. The costs are completely financed by fees paid by insurees.
d. It places no limits on reimbursement to medical care providers.
16. What would be the effect of having no health insurance available?
a. The quantity of healthcare would be set at where the marginal benefit and marginal cost are equal.
b. Excess demand for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit exceeds the marginal cost.
c. Excess supply for healthcare would be the result because the quantity supplied would be at a level where the marginal benefit would be below the marginal cost.
d. the quantity of healthcare would be at an inefficient level.
17. The elderly are what proportion of beneficiaries of Medicare?
a. 95%
b. 85%
c. 77%
d. 70%
18. What is the moral hazard associated with third party payment for health services?
a. The recipient of the service is not as informed as the provider of the service.
b. The recipient of services tends to decline more services than they should.
c. The recipient of services tends to have more services than what is needed relative to the efficient level of services.
d. There is no moral hazard.
19. Which is not reason for excalating healthcare costs in the U.S.?
a. Increase in malpractice insurance.
b. Cross-subsidization of patients who cannot pay for healthcare or insurance.
c. Overuse of new technology.
d. Both (b) and (c).
20. If the quantity of healthcare is more than the efficient quantity, what is the consequence?
a. Some will not have access to healthcare that would have access at the efficient level.
b. The healthcare will suffer in quality.
c. Capital could be more efficiently spent elsewhere leading to less overall productivity.
d. Lower marginal costs and marginal benefits.

ECO 450 Week 7 Quiz

CHAPTER 10
Introduction to
Government Finance
TRUE/FALSE QUESTIONS
1. Taxes simultaneously ration and finance government goods and services.
2. The federal government finances only half of its expenditures with taxes.
3. The benefit principle argues that the means of financing government goods and services should be linked to the benefits received from those goods and services.
4. Horizontal equity is achieved when individuals of the same economic capacity pay the same amount of taxes over a given period.
5. A flat-rate income tax is a proportional tax on an income base.
6. The marginal tax rate will eventually exceed the average tax rate if the tax rate structure is propor¬tional.
7. The marginal tax rate for a payroll tax is 7 percent on all wages up to $60,000 per year. The marginal tax rate for wages in excess of $60,000 per year is zero. The payroll tax is therefore a regressive tax.
8. Tax evasion would be less of a problem if tax rates were lowered.
9. The user charge for a congestible public good should be zero at all times.
10. Zero prices for price-excludable government services provide benefits only to the poor.
11. The gasoline tax is an example of a general tax on consumption.
12. For a proportional tax, the marginal tax rate is always equal to the average tax rate.
13. Tax avoidance is an illegal activity in the United States.
14. An increase in marginal tax rates is likely to increase tax evasion.
15. Most studies indicate that state-run lotteries are equivalent to a progressive tax on gambling.
16. Government activity requires the reallocation of resources from government to private use.
17. A flat income tax (i.e. a fixed amount paid by every taxpayer) is an example of a selective tax.
18. The average tax rate and marginal tax rate are the same under a progressive tax rate structure.
MULTIPLE CHOICE QUESTIONS
1. According to the benefit principle,
a. taxes should be distributed according to ability to pay.
b. user charges are an ideal source of finance for government goods and services.
c. the progressive income tax represents the ideal way of distributing taxes among citizens.
d. flat-rate taxes are always the best kind.
2. If horizontal equity is achieved in taxation,
a. vertical equity will also be achieved.
b. individuals of equal economic capacity will pay equal taxes.
c. a flat-rate tax will be used.
d. the tax system will not result in losses in efficiency in markets.
3. The tax base of a payroll tax is:
a. consumer expenditures.
b. interest income.
c. labor income.
d. both (b) and (c)
4. A 5-percent retail sales tax on all consumer purchases in a state is imposed. The sales tax is:
a. a flat-rate tax.
b. a tax with a regressive rate structure.
c. levied on an income base.
d. all of the above
5. A tax on the value of real estate holdings is a:
a. selective tax on wealth.
b. general tax on wealth.
c. general tax on income.
d. selective tax on income.
6. An excise tax is a:
a. general consumption tax.
b. selective consumption tax.
c. general wealth tax.
d. selective tax on wealth.

7. A proportional income tax has an average tax rate that:
a. always is less than the marginal tax rate.
b. always exceeds the marginal tax rate.
c. equals the marginal tax rate at first and then becomes less than the marginal tax rate.
d. always equals the marginal tax rate.
8. A payroll tax taxes a worker’s wages at 14 percent until the worker earns $60,000 per year. All labor earnings in excess of $60,000 are not subject to tax. The tax rate structure of the payroll tax is therefore:
a. proportional.
b. progressive.
c. regressive.
d. flat-rate.
9. A bridge becomes congested after 100 vehicles per hour use it on any day. To achieve efficiency, a toll:
a. that charges all users of the bridge, no matter how many vehicles use it per hour, should be imposed.
b. on additional users in excess of 100 per hour should be imposed.
c. on all users should be imposed, if more than 100 users per hour are expected.
d. is not required.
10. A government prints money to finance its expenditures. As a result,
a. the economy can operate at a point outside its production possibility curve.
b. inflation will occur.
c. consumers will give up private goods to finance the increased government expenditures.
d. both (b) and (c)
11. Taxes are likely to affect:
a. market equilibrium.
b. political equilibrium.
c. the distribution of income.
d. all of the above
12. Taxes:
a. are voluntary payments to governments.
b. are unlikely to affect market supply and demand.
c. never affect efficiency in the allocation of resources.
d. are compulsory payments associated with certain activities.
13. A tax on real estate is a:
a. general wealth tax.
b. general consumption tax.
c. selective wealth tax.
d. selective income tax.
14. The marginal tax rate will eventually exceed the average tax rate for a:
a. proportional tax.
b. regressive tax.
c. progressive tax.
d. flat-rate tax.
15. Marginal tax rates were reduced in 2001. Other things being equal, this is likely to:
a. increase tax evasion.
b. decrease tax evasion.
c. have no effect on tax evasion.
d. increase tax avoidance.

16. What is an example of a normative criterion that a government must trade-off in its method of
taxation?
a. Equity
b. Efficiency
c. Administrative ease
d. all of the above
17. Tax avoidance is:
a. a means of tax evasion.
b. a means of decreasing taxes paid by adjusting behavior.
c. a political process explicitly for the reduction of taxation.
d. a means to avoid tax owed.
18. If the marginal tax rate is 20% under a proportional tax rate structure, the average tax rate:
a. should be 20%.
b. should be above 20%.
c. should be below 20%.
d. cannot be determined.
19. If the average tax rate under a progressive tax rate structure is 35%, a possible marginal tax rate is:
a. 30%.
b. 25%.
c. 42%.
d. not able to be determined.
20. Which of the following countries has the highest average tax rate relative to GDP?
a. Japan
b. Sweden
c. Iceland
d. United Kingdom

ECO 450 Week 8 Quiz

CHAPTER 11
Taxation, Prices, Efficiency,
and the Distribution of Income
TRUE/FALSE QUESTIONS
1. A lump-sum tax results in both income and substitution effects.
2. A consumer currently pays $500 a year retail sales taxes. She would be better off if she paid the same amount annually as a lump-sum tax.
3. Clothing is sold in perfectly competitive markets where no externalities prevail. An excise tax on clothing will result in a market price for clothing that equals the marginal social benefit and mar¬ginal social cost of service.
4. Assuming that the income effects are negligible and that beer is sold in a competitive market, a 10 cent per can tax on beer that causes a 10,000 can per month decline in sales will result in an excess burden of $1,000 per month.
5. A tax on land results in an income effect on landlords but no substitution effect. Then it follows that the excess burden of a tax on land will be zero.
6. The excess burden of a tax on interest income is $5 billion per year. Total interest income per year is $50 billion. The tax currently collects $15 billion in revenue per year. The efficiency-loss ratio of the tax is therefore 0.33.
7. A payroll tax results in a difference between the gross wages paid by employers and the net wages received by workers.
8. If the market supply of labor services is perfectly inelastic, a tax on labor income will reduce the net wages received by workers by the full amount of the tax per labor hour.
9. If a $10 per unit tax is levied on the output of a monopolist, more of that tax will be shifted to con¬sumers than would be the case if the same good were produced by a competitive industry.
10. A study indicates that taxes in the United States reduce the Gini coefficient for the nation by 10 percent. This implies that taxes make the income distribution more equal.
11. A lump-sum tax only results in income effects.
12. An income tax is an example of a price-distorting tax.
13. The more price-elastic the demand of a taxed item, the lower the excess burden of a tax on the sale of that item.
14. If the tax on the sale of gasoline is doubled from 20 cents per gallon to 40 cents per gallon, the excess burden of the tax will quadruple.
15. If the compensated elasticity of supply of labor is zero, then a tax on labor earnings will have zero excess burden.
16. Lump-sum taxes do not prevent prices from equaling the marginal social cost and benefit of any goods and services.
17. Lump-sum taxes can vary in amount based on income level.
18. A lump-sum tax can distort prices and affect consumption behavior.
MULTIPLE CHOICE QUESTIONS
1. A lump-sum tax:
a. distorts market prices so that they do not simultaneously equal MSB and MSC.
b. can result in price changes but does not prevent prices from simultaneously being equal to MSB and MSC.
c. results in substitution effects that change prices.
d. results in both substitution effects and income effects that change prices.
2. The current price of compact discs, which are traded in perfectly competitive markets, is $10. A $1 per unit tax is levied on the discs. Annual record sales decline from five million to four million as a result of the tax. Assuming that the income effect of the tax-induced price change is negligible, the excess burden of the tax will be:
a. $500,000 per year.
b. $1 million per year.
c. $2 million per year.
d. $2.5 million per year.
3. The elasticity of supply of land is zero. A tax on land results only in an income effect to landlords. Then it follows that a 10-percent tax on land rents will:
a. have a positive excess burden.
b. be shifted forward to tenants.
c. be paid entirely by landlords.
d. have zero excess burden.
e. both (c) and (d)
4. Currently, a 10-cent per gallon tax is levied on gasoline consumption. The tax is increased to 20 cents per gallon. The excess burden of the tax will:
a. remain the same.
b. double.
c. increase four times.
d. decline.
5. The supply of new cars is perfectly elastic. A $400 per car tax is levied on buyers. As a result of the tax,
a. the price received by sellers will fall by $400.
b. the price paid by buyers, including the tax, will increase by $400.
c. the quantity of cars sold per year will be unchanged.
d. the excess burden of the tax will be zero.
e. both (c) and (d)
6. Other things being equal, the more inelastic the demand for a taxed good,
a. the greater the portion of the tax paid by sellers.
b. the greater the excess burden of the tax.
c. the greater the portion of the tax paid by buyers.
d. the less the portion of a tax on sellers that can be shifted to buyers.
7. The market supply of labor is perfectly inelastic. However, the income effect of tax-induced wage changes are believed to be substantial. Then it follows that a tax on labor income will:
a. have zero excess burden.
b. have positive excess burden.
c. be paid entirely by workers as a reduction in net wages.
d. both (a) and (c)
e. both (b) and (c)
8. Suppose an economy is comprised of only two markets: one for food and the other for housing. A tax on food used to finance transfer payments is likely to:
a. decrease the price of food.
b. increase the price of housing.
c. decrease the price of housing.
d. have no effect on either the price of food or housing.
9. Differential tax incidence measures the effect:
a. that a tax and the expenditures it finances have on the distribution of income.
b. that one tax alone has on the distribution of income.
c. on the distribution of income of substituting one tax for another while holding the size and composition of the budget fixed.
d. on the distribution of income of substituting one tax for another while changing the kinds of government services financed.
10. Most studies of tax incidence assume that taxes on labor income and other input services are borne entirely by the workers and other input owners that supply the services. This implies that the:
a. supply of those input services is very elastic.
b. supply of those input services is of unitary elasticity.
c. supply of those input services is perfectly inelastic.
d. demand for those input services is perfectly elastic.
11. Most studies show that the price elasticity of demand for gasoline is –0.2. If the price elasticity of supply is 2, then a tax on gasoline will:
a. have no effect on the market equilibrium price of gasoline.
b. cause the market equilibrium price of gasoline to fall.
c. cause the market equilibrium price paid by buyers to rise.
d. cause the net price received by sellers to fall.
e. both (c) and (d)
12. The demand for medical care is very inelastic. If a 10-percent tax is levied on the sale of medical services and is collected from medical-care providers, then:
a. the incidence of the tax is likely to be borne entirely by medical-care providers.
b. most of the tax is likely to be shifted to those who purchase medical care.
c. the market equilibrium price of medical care will fall.
d. the excess burden of the tax is likely to be very high.
13. Which of the following is true about a lump-sum tax?
a. It prevents efficiency from being attained in competitive markets.
b. It causes substitution effects.
c. It causes income effects.
d. It causes both income effects and substitution effects.
14. Housing construction is generally believed to be an industry of constant costs. In the long run, which of the following is true if a $10 per square foot tax on housing construction is collected directly from builders?
a. The incidence of the tax will be borne by builders.
b. The excess burden of the tax will be zero.
c. The quantity of new construction supplied will be unaffected.
d. The tax will be fully shifted to buyers of new construction.
15. If the price elasticity of supply of labor is equal to 0.5 and the price elasticity of demand for labor is –2, then which of the following is likely to result from a tax on labor earnings?
a. The tax will be fully borne by workers.
b. Some of the tax will be shifted to employers as market equilibrium wages increase.
c. Market equilibrium wages will decline.
d. There will be no effect on market equilibrium wages.
16. If a lump-sum tax is imposed, the slope of the new budget line relative to the budget line prior to the tax:
a. remains unchanged.
b. increases.
c. decrease.
d. can increase and decrease in different regions.
17. Viewed from origin a price distorting tax creates a new budget line with a ______ slope relative to the budget line without the tax.
a. less steep
b. more steep
c. similar
d. varying
18. A $0.30 per unit tax is imposed on a good that reduces the quantity supplied and demanded by 1000 units. What is the deadweight loss (ignore price elasticities)?
a. $300.00
b. $100.00
c. $150.00
d. Cannot be determined.
19. If a per unit tax is imposed, but the quantity supplied and demanded does not change then:
a. the demand is perfectly inelastic.
b. the supply is perfectly inelastic.
c. there is no deadweight loss.
d. All of the above.
20. The efficiency-loss ratio relative to tax is:
a. the deadweight loss less the tax revenue.
b. the deadweight loss divided by the tax revenue reduced by one.
c. the excess burden divided by the tax revenue.
d. None of the above.

CHAPTER 12
Budget Balance and
Government Debt
TRUE/FALSE QUESTIONS
1. From 1950 to 2009, the federal government budget has been in balance in most years.
2. The high employment budget deficit implies that increases in economic activity will not eliminate the actual deficit.
3. Other things being equal, an increase in government borrowing is likely to increase interest rates.
4. If taxpayers anticipate future tax increases when government borrows to finance deficits, increased government borrowing will increase interest rates.
5. As of 2008, the amount of federal debt outstanding was equal to twice the annual GDP.
6. From 1950 to 1980, the value of the federal debt as a percent of GDP declined.
7. More than 50 percent of the federal debt in recent years has been outside debt.
8. An increase in market rates of interest tends to decrease the market value of outstanding govern¬ment debt.
9. Deficit finance postpones taxation from the present to the future.
10. The burden of the debt is borne by those who purchase government bonds.
11. The federal government budget recorded surpluses between 1998 and 2001.
12. State and local governments are usually required by state law to keep the budgets in balance.
13. If business and personal saving are constant, then a federal budget deficit will have no impact on national saving.
14. Other things being equal, a government surplus increases the supply of loanable funds available for investment.
15. State revenue bonds are backed by the taxing power of state governments.
16. A federal budget surplus can lead to more credit being available for productive activity.
17. A federal budget deficit can strain credit markets forcing the real rate of interest to decrease.
18. The U.S. deficit in the 1980s was structural in the sense that federal spending would exceed federal revenue even at a level of full employment.
MULTIPLE CHOICE QUESTIONS
1. The outstanding federal debt will decline in value if:
a. budget deficits continue.
b. the government runs a budget surplus.
c. the market rate of interest increases.
d. either (b) or (c)
2. The federal budget has been in deficit:
a. for every year between 1970 and 1997.
b. for every year between 1950 and 1997.
c. only since 1980.
d. for every year between 1960 and 1997.
3. The high employment deficit is estimated at $100 billion. Assuming that the economy is operating below full employment and that it will not overheat during the year,
a. the actual budget is not in deficit.
b. increasing GDP will eliminate the deficit.
c. increasing GDP will not eliminate the deficit.
d. the actual budget is in surplus.
4. An increase in government borrowing has no effect on the willingness of citizens to save or on the demand for credit. Increased borrowing to cover deficits will therefore:
a. reduce interest rates.
b. increase interest rates.
c. have no effect on interest rates.
d. not require increased taxes in the future.
5. As a result of government borrowing to cover deficits, citizens increase the supply of savings to provide themselves with funds to pay anticipated increases in future taxes. Then it follows that increased government borrowing will:
a. reduce private investment.
b. increase private investment.
c. have no effect of private investment.
d. increase interest rates.
e. both (a) and (d)
6. The total dollar value of the federal debt outstanding is:
a. more than 50 percent of GDP.
b. more than 100 percent of GDP.
c. less than 50 percent of GDP.
d. less than 10 percent of GDP.
7. The federal government, its agencies, and the Federal Reserve System:
a. are not permitted to hold outstanding federal debt.
b. hold 50 percent of the outstanding federal debt.
c. hold between 15 and 25 percent of the outstanding federal debt.
d. hold 75 percent of the outstanding federal debt.
8. The largest portion of the net federal debt outstanding is owed to:
a. foreigners.
b. U.S. citizens and companies.
c. federal government agencies.
d. state and local governments.
9. The debt of state and local governments is mostly:
a. internal.
b. external.
c. owed to citizens of other nations.
d. worthless.
10. Government borrowing will:
a. postpone taxation to the future.
b. increase government interest cost.
c. both (a) and (b)
d. eliminate taxes.
11. Which of the following is true about the federal government budget balance in the United States?
a. The federal budget has never had a surplus.
b. The federal budget had a surplus every year from 1970 to 2008.
c. The federal budget had a surplus from 1998 until 2001.
d. The federal budget had a deficit from 1998 until 2001.
12. Which of the following can contribute to a decrease in national saving?
a. a federal budget deficit
b. an increase in the state and local government aggregate surplus
c. a federal budget surplus
d. an increase in personal saving
13. Other things being equal, a government budget surplus:
a. increases the demand for loanable funds.
b. increases the supply of loanable funds.
c. is likely to increase market equilibrium interest rates.
d. is unlikely to affect market equilibrium interest rates.
14. If the federal government runs a surplus consistently, then which of the following is likely to occur?
a. National saving will decline.
b. The gross federal debt will increase.
c. The gross federal debt will decrease.
d. Market equilibrium interest rates are likely to rise as a result of the surpluses.
15. General obligation bonds of state and local governments are:
a. backed by revenue from public facilities such as sports stadiums.
b. backed by the taxing power of state and local governments.
c. usually used to finance transfer payments.
d. usually used to finance capital expenditures.
e. both (b) and (d)
16. A bond that is backed by the tolls collected from a bridge to be constructed from the proceeds of the bond is an example of:
a. a general obligation bond.
b. a non-obligation bond.
c. a revenue bond.
d. none of the above.
17. Evidence of “crowding out” in the market for loanable funds at a rate of 8% could be:
a. private investors who will borrow only at a rate lower than 8%.
b. private investors who are willing to accept a rate higher than 8% for borrowing.
c. a government surplus.
d. a social security surplus.
18. High-employment deficit or surplus is:
a. an extreme economic situation requiring emergency measures.
b. the amount of deficit or surplus available assuming current employment levels.
c. the amount of deficit or surplus available when employment is at its approximately full capacity.
d. the amount of deficit or surplus available when unemployment is at a relatively high level.
19. A government’s internal debt is:
a. debt owed to other government agencies.
b. debt owed to other governments.
c. debt owed to its citizens.
d. both (a) and (c).
20. The National Income and Product Accounts budget balance reflects:
a. an inflation-adjusted budget balance less social security surplus.
b. new debt resulting from a federal budget deficit.
c. the real budget balance.
d. the nominal budget balance.

ECO 450 Week 9 Quiz

CHAPTER 13
The Theory of Income Taxation
TRUE/FALSE QUESTIONS
1. The actual federal income tax currently taxes all income irrespective of its source or use at the same tax rate.
2. Comprehensive income excludes unrealized capital gains.
3. Under a comprehensive income tax, transfer payments received by Social Security recipients would be fully taxable.
4. Homeowners earn rental income-in-kind from their home that would be taxable under a compre¬hensive income tax.
5. A comprehensive income tax is a lump-sum tax.
6. A comprehensive income tax will result in a divergence between gross wages paid by employers and net wages received by workers.
7. A comprehensive income tax will always reduce work effort by taxpayers.
8. The substitution effect of a tax-induced decline in wages always leads workers to work less.
9. The market wage elasticity of labor is zero. If this is the case, the excess burden of a tax on labor income will also be zero.
10. Points on a compensated labor supply curve are always more elastic than points for corresponding wage levels on a regular labor supply curve.
11. Comprehensive income is the sum of annual consumption and the change in net worth.
12. A tax on interest income does not prevent credit market from efficiently allocating resources.
13. If an individual is subject to a 30-percent income tax, then the net interest on a certificate of deposit yielding 5 percent would be 3.5 percent after taxes.
14. Because a tax on interest income results in income and substitution effects, it is not possible to pre¬dict the effect it will have on saving.
15. Most empirical studies indicate that the interest elasticity of supply of savings is close to zero.
16. Income tax became a permanent fixture in the United States starting in the early nineteenth century.
17. The Haig-Simons definition of income is different from comprehensive income.
18. Comprehensive income equals consumption plus the change in net worth.
MULTIPLE CHOICE QUESTIONS
1. Comprehensive income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
2. A tax on labor income:
a. results only in an income effect that always decreases hours worked per year.
b. results in a substitution effect that always decreases hours worked per year.
c. results in an income effect that increases hours worked per year if leisure is a normal good.
d. both (a) and (b)
e. both (b) and (c)
3. The market supply of labor is perfectly inelastic. Then it follows that:
a. the substitution effect of wage changes is zero.
b. the income effect of wage changes is zero.
c. leisure is a normal good and the income effect of wage changes exactly offsets the substitution effect.
d. the excess burden of a tax on labor income will be zero.
4. The compensated labor supply curve:
a. will always be vertical.
b. will always be upward sloping.
c. will always be downward sloping.
d. reflects both the income and substitution effects of wage changes.
5. Using a regular labor supply curve instead of a compensated supply curve to calculate the excess burden of a tax on labor income will:
a. result in an accurate estimate of the excess burden.
b. overestimate the excess burden.
c. underestimate the excess burden.
d. accurately estimate the excess burden only if the market supply of labor is perfectly inelastic.
6. Most empirical research indicates that the market supply curve of labor hours by prime-age males is:
a. very elastic.
b. almost perfectly inelastic.
c. always upward sloping.
d. perfectly elastic.
7. A flat-rate tax on labor income will:
a. always reduce hours worked per year.
b. always increase hours worked per year.
c. either increase or decrease hours worked per year.
d. never have any effect on the amount of leisure hours per year.
8. A tax on interest income:
a. causes the gross interest rate paid by investors to exceed the net interest rate received by savers.
b. will always reduce saving.
c. will always increase saving.
d. is equivalent to a lump-sum tax.
9. If the market supply curve of savings is upward sloping, a tax on interest income will:
a. increase the amount of saving.
b. increase the market rate of interest.
c. decrease the market rate of interest.
d. have no effect on the market rate of interest.
10. If the supply of labor is perfectly inelastic, then the incidence of a payroll tax levied entirely on employers will be:
a. borne by employers as a reduction in profits.
b. split between workers and employers.
c. paid entirely by workers.
d. shifted forward to consumers.
11. Which of the following is true about comprehensive income?
a. Only labor income is included.
b. Only capital income is included.
c. Capital gains are not included.
d. Both realized and unrealized capital gains are included.
12. Which of the following will increase a person’s comprehensive income?
a. an increase in the market value of the person’s home
b. a decrease in the value of the person’s stock portfolio
c. a decrease in labor income
d. a decrease in consumption
13. A tax on labor income will:
a. increase the net wage received by workers.
b. decrease the net wage received by workers.
c. cause that net wage received by workers to decline below the gross wage paid by employers.
d. both (b) and (c)
14. If the return to savings, r, is subject to taxation at rate t, then in equilibrium a saver’s marginal rate of time preference will equal:
a. r
b. t
c. (1 + r)
d. [1 + r(1 – t)]
15. The higher the compensated elasticity of supply of savings,
a. the lower the excess burden of a tax on capital income.
b. the higher the excess burden of a tax on capital income.
c. the higher the excess burden of a tax on labor income.
d. both (b) and (c)
16. The Haig-Simons definition of income:
a. is the sum of annual consumption and realized capital gains.
b. is the sum of annual consumption and changes in net worth.
c. excludes corporation income.
d. is the sum of annual consumption and net worth.
17 Comprehensive income:
a. includes realized capital gains, but not unrealized capital gains
b. includes both realized and unrealized capital gains.
c. excludes cash from the sale of assets.
d. excludes increases in the value of assets.
18. Income-in-kind:
a. is exemplified by nonpecuniary returns.
b. is generally non-taxable because there is no monetary transaction.
c. is generally taxable.
d. both (a) and (b).
19. An example of a nonpecuniary return is:
a. job satisfaction.
b. unemployment benefits.
c. employer contributions to a retirement plan.
d. both (b) and (c).

20. Income from labor services (wages) account for what percentage of gross income in the U.S.?
a. 90%
b. 75%
c. 60%
d. 50%

CHAPTER 14
Taxation of Personal Income
in the United States
TRUE/FALSE QUESTIONS
1. Taxable income in the United States exceeds adjusted gross income.
2. Taxable income in the United States includes all capital gains earned, whether or not they are realized.
3. Taxable income in the United States amounts to less than 50 percent of personal income.
4. Tax preferences are really subsidies to certain activities.
5. A tax deduction allowed for an activity for which positive externalities are not likely to exist (such as home ownership) is likely to cause the marginal social cost of the activity to exceed its marginal social benefit.
6. The value of a personal exemption to a taxpayer varies with his or her marginal tax rate.
7. The U.S. personal income tax is not a progressive tax.
8. The highest statutory marginal tax rate under the federal personal income tax is 50 percent.
9. Under current rules, only real interest earned is subject to income tax.
10. Realized, long-term capital gains that reflect inflation are currently exempt from taxation.
11. The tax base under the personal income tax in the United States is the Haig-Simons definition of comprehensive income.
12. Tax credits vary with a person’s marginal tax rate.
13. The cuts in marginal tax rates initiated in 2001 are likely to reduce the excess burden of tax pref¬erences.
14. The earned income tax credit is a negative tax the subsidizes the earnings of low-income workers.
15. If a progressive income tax is replaced with an equal-yield, flat-rate tax, then work effort will unequivocally increase.
16. As of 2009, there is no marriage penalty for an adjusted gross income of $60,000.
17. Tax preferences are exclusions, exemptions, and deductions from the tax base.
18. Income-in-kind is not considered a tax preference.
MULTIPLE CHOICE QUESTIONS
1. Adjusted gross income, as defined by the United States Tax Code,
a. exceeds taxable income.
b. equals taxable income.
c. is less than taxable income.
d. is greater than comprehensive income.
2. Tax preferences:
a. are exclusions, exemptions, and deductions from the tax base.
b. are in the tax code by accident.
c. are extra taxes on certain taxpayers.
d. increase the amount of income that is taxable.
e. both (a) and (d)
3. Currently, the tax treatment of capital gains in the United States is such that:
a. all capital gains are taxed.
b. all realized capital gains are taxed.
c. most realized capital gains are taxed.
d. only capital gains adjusted for inflation are taxed.
4. The exclusion of interest of state and local bonds from taxation by the federal government:
a. decreases interest costs for state and local governments.
b. increases interest costs for state and local governments.
c. benefits lower-income taxpayers more than upper-income taxpayers.
d. discourages borrowing by local governments.
5. The value of personal exemptions in terms of taxes saved:
a. is the same for all taxpayers.
b. varies with family size.
c. varies with taxpayers’ marginal tax rates.
d. both (b) and (c)
6. A taxpayer is in a 33-percent tax bracket and itemizes deductions. He obtains a mortgage from a bank at 9-percent interest. The actual rate of interest he pays is:
a. 6 percent.
b. 9 percent.
c. 20 percent.
d. 25 percent.
7. Tax expenditures are:
a. expenditures made to collect taxes.
b. losses in revenue due to tax preferences.
c. less than 1 percent of tax revenue.
d. both (b) and (c)
8. Under the federal personal income tax rules prevailing as of 2009,
a. all interest expense is tax deductible.
b. the interest expense for mortgages on first and second homes is tax deductible.
c. the interest expense for mortgages only on first homes is tax deductible.
d. no interest is tax deductible.
9. The reduction in marginal tax rates will:
a. increase the excess burden of tax preferences.
b. increase tax expenditures.
c. decrease the excess burden of tax preferences.
d. have no effect of tax expenditures.
10. “Bracket creep” is no longer a problem in the United States because:
a. the tax brackets are indexed.
b. capital gains are now fully taxable.
c. only real interest is taxed.
d. capital gains are indexed.
11. Which of the following is true for the federal income tax in the United States?
a. All income irrespective of its source or use is taxed at the same rate.
b. Comprehensive income is the tax base.
c. The tax base is less than 50 percent of comprehensive income.
d. All realized and unrealized capital gains are included in the tax base.
12. Because of the Earned Income Tax Credit, the effective tax rate for the lowest-income taxpayers in the United States is:
a. only 15 percent.
b. higher than that paid by upper-income taxpayers.
c. zero.
d. negative.
13. The excess burden of tax preferences:
a. depends on average tax rates.
b. will be higher, the higher the marginal tax rate is.
c. will be lower, the higher the marginal tax rate is.
d. is independent of marginal tax rates.
14. A shift to an equal-yield, flat-rate personal income tax from the current progressive income tax rate structure will:
a. reduce the tax burden on upper-income groups.
b. increase the tax burden on upper-income groups.
c. increase the share of taxes paid by lower-income groups.
d. both (a) and (c)
15. Removing savings from the tax base of the personal income tax is likely to:
a. increase work effort.
b. decrease work effort.
c. lower market equilibrium interest rates by increasing the supply of loanable funds.
d. increase market equilibrium interest rates, thereby increasing the demand for loanable funds.
16. Which is a justification for tax preferences?
a. administrative difficulties
b. improving equity
c. encouraging private expenditures that create external benefits
d. all of the above
17. If the excess burden from tax is $10 million, lowering marginal tax rates should make the excess burden:
a. more than $10 million.
b. less than $10 million.
c. remain at $10 million.
d. none of the above is certain to occur
18. Which of the following is the result of The Economic Growth and Tax Relief Reconciliation Act enacted in 2001?
a. reduction of the highest marginal tax rate
b. increased the marriage penalty
c. created a new 40% tax bracket
d. both (a) and (c)
19. As of 2009, the highest marginal tax rate is:
a. 39.6%
b. 38%
c. 35%
d. 32.5%
20. Which is an example of an itemized deduction under the U.S. code as of 2009?
a. state and local income tax
b. state and local property tax
c. all medical expenses
d. both (a) and (b)

CHAPTER 17
Taxes on Wealth,
Property, and Estates
TRUE/FALSE QUESTIONS
1. Wealth is a flow.
2. A wealth tax is equivalent to a tax on the return to saving.
3. If the supply of savings is perfectly inelastic, a comprehensive wealth tax will increase the market rate of interest.
4. Assuming that the supply curve of savings is upward sloping, a comprehensive wealth tax will reduce annual investment.
5. As administered in the United States, the local property tax is mainly a tax on real estate.
6. The property tax in the United States is likely to reduce the equilibrium return to investment.
7. The town of Oz has raised its property tax rates considerably above the national average. Other things being equal, capital is likely to flow into Oz in the long run because of the tax.
8. If a real estate tax causes rents to rise, it cannot be fully capitalized.
9. A tax on the value of land is likely to be fully capitalized.
10. The local property tax is likely to result in less than the efficient amount of investment in real estate.
11. A general tax on wealth will cause efficiency loss in labor markets.
12. The local property tax, as administered in the United States, is a general tax on wealth.
13. The local property tax in the United States will reduce the return to real estate only in the long run.
14. Other things being equal, if the property tax rate is above the national average for a jurisdiction, capital can be expected to flow out of the region in that area.
15. If a local property tax increase is fully capitalized, property owners at the time of the increase can¬not shift any of the current or future tax increase to buyers if they sell the property.
16. A person who never saves any income and receives no gifts and inheritances will never accumulate wealth.
17. Wealth taxes are a relatively new form of taxation.
18. Total wealth definitions never include intangible personal property.
MULTIPLE CHOICE QUESTIONS
1. Wealth is:
a. a flow.
b. a stock.
c. the market value of accumulated assets.
d. both (b) and (c)
2. A comprehensive wealth tax base includes:
a. all real tangible, intangible, and human wealth, less any claims against those assets.
b. only real property.
c. only intangible assets.
d. only tangible assets.
3. If the interest elasticity of supply of savings is zero, a comprehensive wealth tax will:
a. increase the market rate of interest.
b. reduce the income of savers.
c. reduce the income of workers.
d. both (b) and (c)
4. If the supply curve of savings is upward sloping, a comprehensive wealth tax will:
a. increase the market rate of interest.
b. reduce the market rate of interest.
c. have zero excess burden.
d. have no effect on investment.
5. A comprehensive wealth tax will:
a. impair efficiency in labor markets.
b. impair efficiency in investment markets.
c. both (a) and (b)
d. have no excess burden.
6. Assuming that investors seek to maximize the return on their investment, the long-run effect of a national tax on real estate will be to:
a. reduce the return to investment in real estate only.
b. reduce the return to investment in all assets.
c. reduce wages only.
d. increase the return to all investors.
7. A local property tax, such as that used in the United States, is likely to:
a. increase investment in the economy.
b. cause a flow of investment among jurisdictions.
c. decrease the return to saving in all uses.
d. both (b) and (c)
8. If a property tax on real estate is capitalized,
a. the price of real estate will rise.
b. the price of real estate will fall.
c. the price of real estate will be unaffected.
d. the burden of the tax will be transferred to buyers of real estate.
e. both (b) and (d)
9. Suppose that the current market rate of interest is 10 percent. The market rent on a parcel of land is $6,000 per year. A 10-percent land tax is imposed. As a result of the tax, the price of the land parcel:
a. falls from $60,000 to $30,000.
b. increases from $30,000 to $60,000.
c. falls 10 percent.
d. falls 20 percent.
10. If a tax on real estate results in a decrease in the supply of housing, the tax will be:
a. fully capitalized.
b. only partially capitalized.
c. not capitalized at all.
d. borne entirely by renters.
11. If the supply of saving is not perfectly inelastic in the nation, then which of the following taxes will cause efficiency loss in capital markets?
a. a general wealth tax
b. a national tax on real estate
c. a consumption tax
d. both (a) and (b)
12. The local property tax in the United States is levied primarily on:
a. personal property.
b. intangible property.
c. business property.
d. real estate.
13. Which of the following would not be included in a comprehensive wealth tax base?
a. real estate
b. personal property
c. intangible assets
d. residential rents
14. If the supply of real estate is not perfectly inelastic, then the local real estate property tax differentials:
a. cannot be shifted to tenants.
b. can be shifted to tenants through increases in rents.
c. will be fully capitalized.
d. both (a) and (c)
15. If the supply of saving is not perfectly inelastic, then substituting a value-added tax for an equal-yield general wealth tax will:
a. decrease market equilibrium interest rates.
b. increase the efficiency loss in labor markets.
c. decrease the efficiency loss in labor markets.
d. decrease efficiency in capital markets.
e. both (a) and (b)
16. Intangible personal property includes:
a. stock in companies.
b. corporate bonds.
c. cash.
d. all of the above
17. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is perfectly inelastic?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen
18. If the annual amount of savings is $10 billion, what is the effect of a wealth tax assuming supply is responsive?
a. annual savings remains $10 billion
b. annual savings increases above $10 billion
c. annual savings falls below $10 billion
d. no particular effect is guaranteed to happen
19. From the point of view of the locality, increasing property taxes:
a. increases the price of locally produced goods.
b. decreases income of owners of land in the associated community.
c. does not affect buyers of locally produced goods fro outside of the community.
d. both (a) and (b)
20. Tax capitalization is:
a. a decrease in the value of a taxed asset at a level related to the discounted value of the future tax liability.
b. partially recognized when the supply of taxed asset is perfectly inelastic.
c. only partially recognized on assets like land.
d. both (b) and (c)

CHAPTER 18
Fiscal Federalism and State and
Local Government Finance
TRUE/FALSE QUESTIONS
1. A federal system of government allows a wider diversity of preferences for government-provided services to be accommodated when compared to nonfederal, centralized government.
2. Income redistribution is a service likely to be most effectively administered by the federal govern¬ment.
3. Economic stabilization can be easily supplied to citizens by local governments.
4. When each local government supplies goods and services to its citizens, the political equilibrium in each jurisdiction corresponds to the median most-preferred outcome of all national voters.
5. A federal system of government allows both centralized and decentralized collective choices.
6. Local tax bases are less elastic than national tax bases.
7. Tax exporting occurs if the price of goods produced in the state and purchased by out-of-state residents rises as a result of in-state taxes.
8. Matching categorical grants can be used to internalize interjurisdictional positive externalities.
9. Matching grants only result in income effects.
10. A matching grant will increase local government expenditures by more than an equal-value, general purpose grant.
11. A federal system of government only has a central government that supplies all public goods and services.
12. According to the Tiebout model of fiscal federalism, a system of many local governments improves the efficiency of allocation of resources to and among public goods.
13. If a local jurisdiction’s tax base is elastic, an increase in tax rates will decrease tax revenue.
14. Taxing hotel rooms and restaurant meals in a city with lots of tourism is an example of tax exporting.
15. Financing local schooling with the local property tax can guarantee equality of opportunity in education.
16. According to Tiebout, individuals will self-select into communities where the government budget best satisfies their own personal preferences.
17. Mobility between communities is not critical to the Tiebout model.
18. Interjurisdictional externalities are costs or benefits of local government goods and services to residents in other political jurisdictions.
MULTIPLE CHOICE QUESTIONS
1. Under a federal system of government,
a. all government goods and services are supplied by a central government.
b. all government goods and services are supplied by local governments.
c. both central and noncentral governments supply goods and services.
d. all public choices are made nationally.
2. Economic stabilization is most effectively provided by:
a. a central government.
b. state governments.
c. local governments.
d. regional governments.
3. A decentralized system of government:
a. tends to result in uniformity in the quantity and quality of government services in all jurisdic¬tions.
b. allows diversity in the quantity and quality of government goods and services.
c. conducts national elections on all issues.
d. is undemocratic.
4. The political equilibrium in a local jurisdiction for a given public good corresponds to the median most-preferred outcome of:
a. all national voters.
b. the President.
c. local voters.
d. both (a) and (c)
5. In general, local tax bases tend to be:
a. less elastic than national tax bases.
b. more elastic than national tax bases.
c. equally elastic when compared with national tax bases.
d. very inelastic.
6. According to the Tiebout model of local government expenditure,
a. all local governments will supply the same kinds and amounts of services.
b. mobile citizens respond to differences in taxes and expenditures by moving to the jurisdiction that maximizes their well-being.
c. the average costs of government services is constant.
d. tax rates do not influence a citizen’s choice of residence.
7. A categorical grant:
a. does not restrict the use of transferred funds.
b. usually specifies the use to which the funds must be applied.
c. is used rarely in the United States.
d. is not used at all in the United States.
8. A federal highway grant will provide funds for roads supplied by state and local governments if these governments pay 50 percent of the cost of the roads. This grant is an example of:
a. revenue sharing.
b. a matching categorical grant.
c. a general purpose grant.
d. a nonmatching block grant.
9. A grant received by a local government will:
a. not affect the political equilibrium in that jurisdiction.
b. change the political equilibrium in that jurisdiction.
c. always increase government expenditures in the recipient jurisdiction by the amount of grant.
d. both (b) and (c)
10. Matching grants:
a. will not increase government spending in recipient jurisdictions.
b. increase government expenditures in recipient jurisdictions more than nonmatching grants of an equal amount.
c. increase government expenditures in recipient jurisdictions less than nonmatching grants of an equal amount.
d. increase tax rates in recipient jurisdictions.
11. Which of the following is true about a federal system of government?
a. There is only one level of government.
b. There are several levels of government.
c. A central government directs local governments to supply all public goods at levels determined nationally.
d. There are only local governments.
12. The central economic problem of fiscal federalism is:
a. the division of taxing and expenditure functions among different levels of government.
b. the choice of the collective choice rule for central governments only.
c. the level of public goods to be provided by a central government only.
d. how to achieve an equitable distribution of income.
13. Which of the following is best supplied by local governments?
a. national defense
b. income redistribution
c. money
d. fire protection
14. Local public goods:
a. are pure public goods for the entire nation.
b. are those whose benefits are nonrival only for the population of a particular geographical area.
c. have benefits that are subject to exclusion by pricing for local consumers.
d. are best provided by a central government.
15. An increase in the local retail sales tax rate will increase revenue collected by a local government:
a. if the tax base is elastic.
b. if the tax base is unit elastic.
c. if the tax base in inelastic.
d. no matter what the value of the elasticity of the tax base.
16. Which is an example of a interjurisdictional externality?
a. residential property tax
b. local sales tax
c. wage tax on all workers in a community
d. both (b) and (c)
17. Mobility:
a. is not essential to the Tiebout model.
b. can hamper a jurisdiction’s ability to raise revenues.
c. may be part of the reason for the reliance on local property taxes for the raising of local government revenue.
d. both (b) and (c)
18. A local wage tax can:
a. create tax competition if a neighboring jurisdiction does not have such a tax.
b. export tax onto workers in the local jurisdiction who live outside of the local jurisdiction.
c. prevent tax competition among other local jurisdictions.
d. both (a) and (b)
19. Fiscal capacity:
a. decreases with the ability of the jurisdiction to export tax.
b. is a measure of the ability of a jurisdiction to finance government-provided services.
c. is always enhanced by mobility.
d. is not dependent on the wealth of the community.
20. What is generally the best measure of fiscal capacity for local governments?
a. income per capita
b. per capita retail sales
c. assessed valuation per capita
d. per capita expenditure

ECO 410 Week 11 Quiz – Strayer University New

ECO/410 Week 11 Quiz – Strayer

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Quiz 10 Chapter 19 and 20

Working Capital Management

19.1 Trident Brazil’s Operating Cycle

Multiple Choice

1) Working capital management involves the management of:
A) current and long-term assets.
B) current assets and current liabilities.
C) current liabilities and long-term assets.
D) current liabilities and long-term debt and equity.

2) The cash conversion cycle:
A) is a subset of the operating cycle.
B) occurs in the latter stages of the operating cycle.
C) is a subset of the accounts receivable period.
D) all of the above.

3) The proper order of events for the operating cycle is:
A) input serving period, accounts receivable period, inventory period, quotation period.
B) quotation period, accounts receivable period, inventory period, input servicing period.
C) quotation period, input servicing period, inventory period, accounts receivable period.
D) accounts receivable period, input servicing period, quotation period, inventory period.

4) TrinityApps Corporation (US) has bid a price on a project for a Korean firm, but the Korean firm has not yet placed an order. This portion of the operating cycle is best described as the:
A) quotation period.
B) input sourcing period.
C) cash conversion cycle.
D) accounts payable cycle.

5) The period in the cash cycle where the customer places the order, and the firm determines what materials for manufacture are NOT in inventory is called the ________ period.
A) quotation
B) input sourcing
C) accounts payable
D) accounts receivable

6) The accounts payable period of the operating cycle:
A) is equal to the inventory period.
B) may run concurrently but shorter than the inventory period.
C) may run concurrently but longer than the inventory period.
D) Any one of the above may be true.

True/False

1) Typically, the inventory period and the accounts payable period at least partially overlap in the firms operating cycle.

2) Typically, the inventory period and the accounts receivable period at least partially overlap in the firms operating cycle.

3) The operating cycle begins with the quotation period and ends with the accounts payable period.

19.2 Trident’s Repositioning Decisions

Multiple Choice

1) Of the following, which would NOT be a significant decision-making factor in a multinational firm’s repositioning decision-making?
A) the subsidiary’s tax environment (high or low)
B) the stability of the local currency
C) the ability to move capital in and out of the subsidiary’s country
D) All of the above are significant factors.

True/False

1) In a country with a relatively high tax rate, it make sense the the MNE to reposition cash flows TO that country.

2) The MNE would prefer to leave capital with a firm in a country with high growth prospects over the alternative of leaving capital with a firm in a country with low growth prospects (other factors equal).

19.3 Constraints on Repositioning Funds

Multiple Choice

1) Each of the following is listed by your authors as a constraint on repositioning funds by an MNE EXCEPT:
A) political constraints.
B) tax constraints.
C) transaction costs.
D) All of the above are listed by your authors.

True/False

1) Local liquidity needs sometimes impact a firm’s worldwide optimal cash position.

2) The constraints on repositioning of funds that occur when exchanging one currency for another are considered to be primarily political constraints.

3) Political constraints can block the transfer of funds either overtly or covertly. OVERT blockage occurs when dividends or other forms of fund remittances are severely limited, heavily taxed, or excessively delayed by the need for bureaucratic approval.

19.4 Conduits for Moving Funds by Unbundling Them

Multiple Choice

1) ________ allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.
A) Unbundling funds
B) Bundling funds
C) Coordinating funds
D) none of the above

2) Unbundling of funds by an MNE may be a useful practice for which of the following reasons?
A) An increase in the funds flow (charges) in any of the before-tax categories reduces the taxable profits of the foreign subsidiary if the host-country tax authorities acknowledge the charge as a legitimate expense.
B) An item-by-item matching of remittance to input, such as royalties for intellectual property, and fees for patents and advice, is equitable to the host country and foreign investor alike.
C) Unbundling facilitates allocation of overhead from a parent”s international division, so-called shared services, to each operating subsidiary in accordance with a predetermined formula.
D) All of the reasons listed above

True/False

1) If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

2) The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

19.5 International Dividend Remittances

Multiple Choice

1) In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:
A) interest rate differences between the two countries.
B) the negative impact on host country relations.
C) defection on the part of executives in the home headquarters.
D) MNEs must be concerned with all of the above.

True/False

1) Political risk may motivate parent firms to require foreign subsidiaries to remit all locally generated funds above that required to internally finance growth in sales and planned capital expansions.

19.6 Net Working Capital

Multiple Choice

1) One possible definition of net working capital (NWC) provided by your authors is:
A) NWC = A/R + inventory – A/P.
B) NWC = cash + A/P – inventory.
C) NWC = A/P + A/R – short-term loans.
D) NWC = A/R + inventory – long-term debt.

2) Which of the following actions will result in an increase in NWC?
A) an increase in A/P that exceeds an increase in A/R
B) a reduction in inventory
C) a reduction in A/P plus a smaller reduction in A/R
D) an increase in A/P and a smaller reduction in inventory

3) Which of the following statements is true?
A) A/R provide part of the funding for inventory.
B) A/P provide part of the funding for A/R and inventory.
C) Inventory pays for A/R and A/P.
D) None of the above is true.

TABLE 19.1
Use the information to answer following question(s).

TrinityApps Corporation Balance Sheet December 31, 20xx

4) Refer to Table 19.1. The NWC for TrinityApps is:
A) $80,000
B) $680,000
C) $35,000
D) $45,000

5) Refer to Table 19.1. If TrinityApps increases inventory by $10,000 and A/P also by $10,000, the net change in NWC is:
A) $20,000
B) $10,000
C) $0
D) none of the above

6) Refer to Table 19.1. NWC currently makes up what percentage of total firm value for TrinityApps?
A) 6.6%
B) 5.1%
C) 11.8%
D) 9.2%

Instruction 19.1:
Use the information to answer the following question(s).

Sunny Manufacturing Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.

7) Refer to Instruction 19.1. What is the amount of money Sunny Manufacturing will save on accounts payable if they accept the discount?
A) $400,000
B) $8,000
C) $33,333
D) $20,000

8) Refer to Instruction 19.1. What is the effective annual interest cost of supplier financing offered by Sun Chemical?
A) 7.3%
B) 9.5%
C) 10.4%
D) 22.9%

9) Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered by Sun Chemical?
A) Yes, Sunny Manufacturing will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.
B) No, Sunny Manufacturing will not have to pay any interest if they just pay in 45 days.
C) Yes, Sunny Manufacturing’s short term borrowing rate of 9.6% is less than Sun’s offered cost of carry of 22.9%.
D) No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better off paying the full amount in 45 days.

10) Days working capital is equal to:
A) days payables + days receivables – days inventory.
B) days inventory + days receivables – days payables.
C) days payables + days inventory + days receivables.
D) none of the above

11) Amundsen of Norway receives raw materials from their corporate parent in the U.S. with payment terms of net 60 days. Most of their sales are to firms in Norway where normal payment terms are net 30 days. This causes a problem for the subsidiary with working capital management because:
A) accounts receivable are so much longer than accounts payable.
B) accounts payable are so much longer than accounts receivable.
C) accounts receivable and accounts payable are equal.
D) This doesn’t really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.

True/False

1) In principle, the firm tries to minimize its NWC balance.

2) Other things equal, managers prefer a lower “days working capital” to a higher one.

3) The authors present empirical evidence that shows the days sales basis for working capital to be 30 days GREATER in the U.S. compared to a similar industry in Europe.

Essay

1) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.

19.7 International Cash Management

Multiple Choice

1) Other things equal, a firm would rather have ________ in a depreciating currency, and ________ in an appreciating currency.
A) accounts receivable; accounts payable
B) accounts receivable; accounts receivable
C) accounts payable; accounts receivable
D) none of the above

2) Which of the following is NOT a precautionary motive for holding cash?
A) Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region.
B) The firm has several short-term obligations in unhedged foreign currency-denominated contracts.
C) The firm must pay ordinary wages in two days.
D) All are precautionary motives.

3) Increases to cash flows can be anticipated if which of the following occurs?
A) A receivables contract is denominated in an appreciating foreign currency.
B) Sales are less than anticipated.
C) Days in accounts receivable increase by 15 days.
D) none of the above

4) A centralized depository benefits the firm primarily by:
A) reducing the cost of repatriating funds.
B) positioning profits where taxes are lowest.
C) reducing the total amount of capital employed within the total firm.
D) earning a higher rate of return than in domestic banking deposits.

5) The Clearing House Interbank Payment System (CHIPS) is:
A) the largest publicly operated payments system in the world.
B) owned and operated by the world’s seven largest central banks.
C) a computerized network that connects banks globally.
D) none of the above

6) An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is:
A) a centralized depository.
B) a reinvoicing center.
C) a cost center.
D) a syndicated bank.

7) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.
A) Syndicated banking
B) Centralized depositing
C) Multilateral netting
D) Debt cancellation

True/False

1) In an inflationary economy, demand for credit usually exceeds supply.

2) For disbursement purposes, it is to the benefit of the firm to minimize float.

3) Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does not.

4) A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

5) A reason for holding all precautionary balances in a central pool is that the total pool, if centralized, can be reduced in size without any loss in the level of protection.

6) A disadvantage of a centralized cash management system is that managers will not be able to get the lowest average rate available for the firm. Instead, it misses out on the really low borrowing rates.

Essay

1) Central depositories are used for international cash management. What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

19.8 Financing Working Capital

Multiple Choice

1) A precautionary cash balance:
A) is used to replace spoiled or damaged inventory.
B) is held to facilitate cash disbursements when receipts slow down.
C) is used for normal day-to-day operations.
D) is held for the benefit of a sister affiliate.

2) An in-house bank:
A) is a separate bank chartered to operate within a business firm.
B) is in fact a set of functions performed by the firm’s existing treasury department.
C) assesses the credit standing of the bank’s customers.
D) provides banking services for employees.

3) A foreign banking office that is separately incorporated in the host country is:
A) a correspondent bank.
B) a representative office.
C) a bank subsidiary.
D) an Edge Act corporation.

True/False

1) An Edge Act corporation is a subsidiary of a U.S. bank located outside of the U.S. and incorporated to engage in international banking and financing operations.

2) Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

3) Even though dividends are cash payments, firms typically must consider both cash flow and net income when making dividend distribution decisions.

Chapter 20 International Trade Finance

20.1 The Trade Relationship

Multiple Choice

1) The exporter-importer relationship to a corporation of a foreign importer that has not previously conducted business with the firm would be an:
A) unaffiliated known.
B) affiliated party.
C) unaffiliated unknown.
D) any of the above

2) Which of the following relationships between importing and exporting parties would require the least detailed contract to conduct business?
A) affiliated party
B) unaffiliated unknown party
C) known unaffiliated party
D) domestic supplier

3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an:
A) unaffiliated known party transaction.
B) unaffiliated unknown party transaction.
C) affiliated party transaction.
D) none of the above

True/False

1) Today, international trade is dominated by transactions between unaffiliated parties (known or unknown).

2) Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex.

3) An advantage of trading with an affiliated party for an MNE, compared to an unaffiliated party, could be reduced contracting costs and less to even no need to protect against nonpayment.

20.2 The Trade Dilemma

Multiple Choice

1) Which of the following is NOT a financial instrument that may be included in an international trade transaction?
A) Letter of Credit
B) Sight Draft
C) Order bill of lading
D) Federal funds transaction

True/False

1) The fundamental dilemma of foreign trade is being unwilling to trust a stranger in a foreign land.

20.3 Benefits of the System

Multiple Choice

1) The combination of a letter of credit, a sight draft, and an order bill of lading protect both parties in international transactions from which of the following?
A) the risk of noncompletion
B) the risk of foreign exchange risk (when combined with a various hedging techniques)
C) the risk that financing will not be available due to foreign exchange risk
D) All of these risks are reduced when using these trade implements.

True/False

1) If a foreign exchange transaction calls for payment in the importer’s currency, the exporter has the foreign exchange risk.

2) If a foreign exchange transaction calls for payment in the exporter’s currency, the importer has the foreign exchange risk.

3) In the case of international trade, the risk of nonpayment is essentially eliminated with the use of a letter of credit issued through a trustworthy bank.

20.4 Key Documents

Multiple Choice

1) Which of the following is NOT true regarding a letter of credit?
A) The importer and exporter agree on a transaction.
B) The importer applies to its local bank for the issuance of a letter of credit.
C) The exporter applies to its local bank for the issuance of a letter of credit.
D) The importer’s bank cuts a sales contract based on its assessment of the creditworthiness of the importer.

2) A/An ________ letter of credit is intended to serve as a means of arranging payment, but not as a guarantee of payment.
A) irrevocable
B) revocable
C) confirmed
D) unconfirmed

3) A/An ________ letter of credit is an obligation only of the issuing bank whereas other banks honor a/an ________ letter of credit.
A) irrevocable; unconfirmed
B) revocable; confirmed
C) confirmed; irrevocable
D) unconfirmed; confirmed

4) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.
A) exporter’s; portfolio risk
B) importer’s; blocked foreign exchange
C) exporter’s; blocked foreign exchange
D) none of the above

5) The draft is the instrument normally used in international commerce to:
A) transfer product.
B) prove ownership.
C) transfer title.
D) initiate the sale.

6) The ________ is the instrument normally used to actually effect payment in international commerce.
A) banker’s acceptance
B) bill of exchange
C) bill of lading
D) letter of credit

7) The person or company initiating the draft or bill of exchange is known as the:
A) maker.
B) drawer.
C) originator.
D) any of the above

8) The person or company to whom the draft or bill of exchange is addressed is the:
A) drawee.
B) drawer.
C) maker.
D) originator.

9) Drafts that have been accepted by banks become:
A) clean drafts.
B) nonmarketable.
C) banker’s acceptances.
D) none of the above

10) Which of the following purposes is NOT served by the bill of lading?
A) It acts as a receipt.
B) It acts as a contract.
C) It acts as a document of title.
D) It acts as all of the above.

11) The ________ is issued to the exporter by a common carrier transporting the merchandise.
A) bill of lading
B) draft
C) banker’s acceptance
D) line of credit

12) A straight bill of lading is most likely to be used under which of the following circumstances?
A) when the merchandise has not been paid for in advance
B) when the transaction is being financed by a bank
C) when the shipment is to an affiliate
D) none of the above

13) To become a negotiable instrument, a draft must conform to the following requirements EXCEPT:
A) it must be in writing and signed by the maker or drawer.
B) it must be payable to order or to bearer.
C) it must be written in English.
D) it must be payable on demand or at a fixed or determinable future date.

True/False

1) A letter of credit is an agreement by the bank to pay against documents rather than the actual merchandise.

2) The primary advantage of a letter of credit is that it reduces risk.

3) The major advantage of a letter of credit to the exporter is that the exporter does not receive any funds until the documents have arrived at a local port or airfield.

4) To constitute a true letter of credit transaction, the issuing bank must receive a fee or other valid business consideration for issuing the L/C.

5) To constitute a true letter of credit transaction, the bank’s L/C must contain a specified expiration date or a definite maturity.

6) To constitute a true letter of credit transaction, the bank’s commitment must be open-ended and cannot have a stated maximum amount of money.

7) A revocable L/C is intended to serve as a means of arranging payment but not as a guarantee of payment.

8) A sight draft is payable on presentation to the drawee; a time draft allows a delay in payment.

9) A draft is sometimes called a revocable letter of credit.

10) A time draft is payable on presentation to the drawee; the drawee must pay at once or dishonor the draft. A sight draft, allows a delay in payment.

11) The bill of lading is issued to the exporter by a common carrier transporting the merchandise. It serves three purposes: a receipt, a contract, and a document of title.

Essay

1) Explain what a letter of credit (L/C) is, who the principle parties are, what the principle advantage is, and how the L/C facilitates international trade.

20.5 Example: Documentation in a Typical Trade Transaction

Multiple Choice

1) In a typical international trade transaction, the order of activity would be which of the following?
A) The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The buyer’s bank submits payment to the manufacturer’s bank.
B) The domestic manufacturer ships to the buyer; The buyer’s bank submits payment to the manufacturer’s bank; The foreign buyer places an order; The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance.
C) The foreign buyer places an order; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The domestic manufacturer ships to the buyer; The buyer’s bank submits payment to the manufacturer’s bank.
D) The domestic manufacturer ships to the buyer; The manufacturer’s bank presents a draft and documents to the buyer’s bank for acceptance; The foreign buyer places an order; The buyer’s bank submits payment to the manufacturer’s bank.

True/False

1) Because of the risks involved in international trade, most transactions follow conventional methods and rarely require flexibility or creativity on the part of management.

Comment: Few international transactions are typical and often require flexibility or creativity on the part of management.

20.6 Government Programs to Help Finance Exports

Multiple Choice

1) The Export-Import Bank is an independent agency of the U.S. government established in 1934 to:
A) ship money abroad.
B) import agricultural products during the recession.
C) facilitate and stimulate foreign trade of the United States.
D) none of the above

2) In the United States, the Foreign Credit Insurance Corporation:
A) is a subsidiary of the Export-Import Bank.
B) provides letters of credit for U.S. importers.
C) provides letters of credit for U.S. exporters.
D) provides policies that protect U.S. exporters against default by foreign importers.

Instruction 20.1:
Use the information to answer the following question(s).

Cypress Systems Inc., of Florida, agrees to sell specialized hydroponic growing equipment to Landcaster’s of Australia. Because the two companies have never done business with each other, Cypress requires a banker’s acceptance as payment for the $1,000,000 order. The banker’s acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Cypress Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.

3) Refer to Instruction 20.1. What is the size of the discount (not including the commission fee) Cypress must take for receiving the proceeds of the sale today rather than waiting for six months?
A) $7,000
B) $5,000
C) $12,000
D) $14.000

4) Refer to Instruction 20.1. What is the size of the commission Cypress will pay the bank for the banker’s acceptance?
A) $7,000
B) $5,000
C) $12,000
D) $14,000

5) Refer to Instruction 20.1. What is the total Cypress can expect to receive if the firm takes payment today?
A) $993,000
B) $995,000
C) $988,000
D) $996,000

6) Refer to Instruction 20.1. ________ is an unsecured promissory note.
A) A banker’s acceptance
B) An overdraft
C) A securitized loan
D) Commercial paper

7) Rogue Spices Inc. has a Canadian receivables contract for $200,000 due in 270 days. The firm has been approached by a factoring firm that offers to purchase the receivables at a 12% per annum discount plus a 1% charge for a nonrecourse clause. What is the annualized percentage all-in-cost of this factoring alternative?
A) 14.82%
B) 13.00%
C) 12.00%
D) 9.09%

True/False

1) The Foreign Credit Insurance Association is a branch of the U.S. federal government.

2) The Export-Import Bank (also called Eximbank) is an independent agency of the U.S. government, established in 1934 to stimulate and facilitate the foreign trade of the United States.

3) Essentially, the Eximbank lends dollars to borrowers inside the United States for the purchase of U.S. goods and services.

4) Banker’s acceptances can be used to finance only international trade receivables but not domestic trade receivables.

Essay

1) What is a banker’s acceptance? How are they initiated? Why are they desirable for the exporter?

20.7 Forfaiting: Medium- and Long-Term Financing

Multiple Choice

1) ________ is a specialized technique to eliminate the risk of nonpayment by importers in instances where the importing firm and/or its government is perceived by the exporter to be too risky for open account credit.
A) Forfeiting
B) Marketable Bank Shares
C) Forfaiting
D) Banker’s Acceptances

True/False

1) In effect, the forfaiter functions both as a money market firm and a specialist in packaging financial deals involving country risk.

ECO 405 Week 11 Quiz – Strayer University New

ECO/405 Week 11 Quiz – Strayer

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Quiz 10 Chapter 14 and 15

Government Spending, Taxation, And The National Debt: Who Wins And Who Loses?

Multiple Choice Questions

1. The Fears Of People Concerning The Size Of Government Are
A. Always Without Any Foundation
B. Well-Founded In Some Instances And Not Well-Founded In Some Instances
C. Difficult To Appreciate
D. Due To Low Income And Low Educational Levels Of Many People
E. Based Solely On Economic Efficiency

2. The Fears Of People Concerning Distribution Of Taxes Are Related To
A. Equity Or Justice In Taxation
B. Ample Evidence That There Are Tax Inequities In The Tax System At All Levels Of Government
C. The Complete Lack Of Understanding That People Have About The Purpose Of Taxes
D. Both (A) And (B)
E. All Of The Above

3. Total Government Expenditures Currently Represent Approximately What Percentage Of Gdp?
A. 20%
B. 30%
C. 40%
D. 50%
E. 10%

4. A Cash Payment From The Government To An Individual, Based On Need, Is An Example Of A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

5. A Payment From The Government To A Federal Employee Is A
A. Transfer Payment
B. Government Purchase Of A Service
C. Government Purchase Of A Good
D. Transaction Payment
E. Government Receipt

6. An Efficient Level Of Government Expenditures Is That Level Where
A. Total Costs Are Minimized
B. Total Benefits Are Maximized
C. Marginal Benefits Are Equal To Marginal Costs
D. Marginal Benefits Are Greater Than Marginal Costs
E. Marginal Benefits Are Less Than Marginal Costs

7. Public Goods And Services Have Characteristics That Make Them
A. Possible To Exclude People From Consuming Them
B. Less Available For One Person When Another Consumes Them
C. Easy To Provide Through Private Markets
D. All Of The Above
E. None Of The Above

8. The Size Of Government Is Growing At
A. A Slower Rate Than The Rest Of The Economy
B. Approximately The Same Rate As The Rest Of The Economy
C. A Faster Rate Than The Rest Of The Economy
D. Twice The Rate Of The Rest Of The Economy
E. A Negative Rate

9. Assuming Negative Externalities In Production, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy To Consumers Equal To Marginal External Benefits
D. A Subsidy To Consumers Greater Than Marginal External Benefits
E. None Of The Above

10. Assuming Positive Externalities In Consumption, The Type Of Government Action That Could Bring About An Efficient Level Of Production Would Be
A. A Tax Levied On Each Unit Produced Equal To Marginal External Costs
B. A Tax Levied On Each Unit Produced Greater Than Marginal External Costs
C. A Subsidy On Each Unit Consumed Equal To Marginal External Benefits
D. A Subsidy On Each Unit Consumed Greater Than Marginal External Benefits
E. None Of The Above

11. Shifting Income From Those Who Are Relatively Productive To Those Who Are Relatively Unproductive, Say Through Taxes And Subsidies, Must Be Based On
A. Sound Economic Principles
B. The Laws Of Demand And Supply
C. The Values Of People As To What Constitutes A “Fair” Distribution Of Income
D. Marginal Cost And Marginal Benefit
E. Both (A) And (D)

12. A National Crime Lab Used To Prevent Criminal Activity Nationwide Is An Example Of A
A. Negative Externality
B. Positive Externality
C. Transfer Payment
D. Public Good
E. Private Good

13. Tax Equity Means That
A. All People Should Pay Equal Taxes
B. Only The “Rich” Should Pay Taxes
C. People In The Same Economic Circumstances Should Pay Equal Taxes, And People In Different Economic Circumstances Should Pay Unequal Taxes
D. The Distribution Of Income After Taxes Should Be Equal
E. None Of The Above

14. An Efficient Tax Would Be A Tax For Which
A. The Excess Burden” From Taxes Is Zero
B. Taxes Should Have A Neutral Effect On The Operation Of The Economy
C. Taxes Should Be Levied At Progressive Rates
D. (A) And (B)
E. All Of The Above

15. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Government Purchase Is
A. Greater Than The Benefit Of The Last Dollar Spent In The Private Sector
B. Less Than The Benefit Of The Last Dollar Spent In The Private Sector
C. Equal To The Benefit Of The Last Dollar Spent In The Private Sector
D. Paid For Out Of Current Tax Collections
E. None Of The Above

16. An Efficient Level Of Government Expenditures Is That Level At Which
A. Marginal Benefits Exceed Marginal Costs
B. Total Benefits Equal Total Costs
C. The Net Benefits To Society Are Maximized
D. The Total Costs Are Minimized
E. None Of The Above

17. Where Marginal Benefits Are Greater Than The Marginal Costs, Government Expenditures Should
A. Be Increased
B. Remain The Same
C. Be Decreased Then Increased To Their Original Level
D. Be Increased Then Decreased To Their Original Level
E. Do None Of The Above

18. Characteristics Of Public Goods And Services Include Which Of The Following?
A. The Demand For These Goods And Services Is Divisible On The Basis Of Individual Quantity Demanded
B. The Supply Of These Goods And Services Is Generally Not Divisible Into Small Units
C. These Goods And Services Are Easily Provided By The Market System
D. The Costs Of These Goods Fall On Other Than The Buyer
E. None Of The Above

19. Which Of The Following Is An Example Of A Public Good Or Service?
A. A Public Highway
B. Free Cheese Offered By The Government
C. Food Stamps
D. Social Security
E. Automobiles

Questions 20 – 24 Refer To The Graph Below.

20. Assuming No External Benefits Or Costs, The Efficient Price And Quantity Would Be
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

21. Suppose There Are External Benefits Associated With The Production Of The Good. The Efficient Price And Quantity Are
A. P2, Q2
B. P2, Q1
C. P1, Q1
D. P0, Q0
E. P0, Q2

22. If External Benefits Are Associated With The Consumption Of The Good, Consumers Could Be Induced To Purchase The Efficient Quantity If The Price Were Set At
A. P2
B. P1
C. P0
D. 0
E. None Of The Above

23. To Assure Consumers Purchase The Efficient Quantity When There Are Positive External Benefits, The Government Would Lower Price To
A. P2
B. P1
C. P2- P1
D. P0- P1
E. P0

24. Marginal External Benefits Are Represented On The Graph As The Distance
A. Ab
B. Q2a
C. Ea
D. Cf
E. Af

25. Which Of The Following Is The Major Tax Source Of The Federal Government?
A. Income Taxes
B. Excise Taxes
C. Property Taxes
D. Wealth Taxes
E. Sales Taxes

26. A Progressive Tax Rate Means That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Either (A) And (B)
E. May Fall, Rise, Or Remain The Same As Income Rises

27. In The Us, Major Sources Of Tax Revenues Are:
A. Income Taxes At The Federal Level, Property Taxes At The State Level
B. Sales Taxes At The Federal Level And Income Taxes And Property Taxes At The State Level
C. Income Taxes At The Federal Level And Income And Sales Taxes At The State Level
D. Income Taxes At The Federal Level And Payroll Taxes At The State Level

28. The Ability To Pay The Principle Of Taxation Suggests That People With More Income Should Pay More Taxes. This Means That
A. Progressive Income Rates Are Consistent With The Ability To Pay Principle
B. Proportional Income Rates Are Consistent With The Ability To Pay Principle
C. Regressive Income Rates May Or May Not Be Consistent With The Ability To Pay Principle Depending On The Rate Of Regression
D. Sales Taxes Are Consistent With The Ability To Pay Principle
E. None Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

30. Given Demand Curve D, If An Output Tax Per Unit Of P- P2 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. It Can Not Be Determined

31. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

32. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

33. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

Questions 34 – 38 Refer To The Graph Below.

34. The Demand Curve For This Product Can Be Described As
A. Perfectly Elastic
B. Perfectly Inelastic
C. Unitary Elastic
D. Hyper Elastic
E. Price Elastic

35. Given Demand Curve D, If An Output Tax Per Unit Of P- P1 Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

36. Which Of The Following Shifts Represents The Effect Of An Output Tax Levied On This Good?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

37. Which Of The Following Shifts Represents The Effect Of A Tax On This Good Levied Independent Of Output?
A. D To D1
B. D1 To D
C. S To S1
D. S1 To S
E. None Of The Above

38. Given Demand Curve D, If A Tax Independent Of Output Is Levied On This Good, How Much Of The Tax Will Be Shifted Forward?
A. None
B. One-Fourth
C. Half
D. All
E. Cannot Be Determined

39. An Output Tax Will Be Shifted Completely
A. Backward If Demand Is Price Inelastic
B. Forward If Demand Is Perfectly Price Inelastic
C. Forward If Demand Is Price Elastic
D. Backward, Regardless Of Elasticity
E. All Of The Above

40. A Tax Levied Independent Of Output, Such As A Tax Levied On Net Income Of Corporations, Will
A. Be Shifted If Demand Is More Elastic Than Supply
B. Be Shifted If Supply Is More Elastic Than Demand
C. Not Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
D. Be Shifted In The Short Run If The Most Profitable Output Has Been Selected Before The Tax
E. Do None Of The Above

41. Government Borrowing Is Argued To Have The Effect Of Raising Interest Rates—The “Crowding-Out Effect.” In Conjunction With Government Spending, Does Government Spending And Borrowing Have A Positive Or Negative Impact On The Economy?
A. Negative, Since Borrowing Exceeds Spending
B. A Positive Impact, Since Expenditures Often Exceed Borrowing
C. A Neutral Effect, Since The Budget Is Always In Balance
D. Government Spending And Borrowing Have A Minimal Effect On The Economy
E. Government Spending And Borrowing Must Be Considered Separately

42. The Gasoline Tax Is Often Used To Illustrate The Benefits Received Principle Of Taxation Because
A. Everyone Benefits From The Gasoline Tax
B. Those Who Pay The Tax Receive Benefits, Since The Revenues Are Used For Road And Highway Construction And Maintenance
C. The Amount We Pay Is Consistent With Our Incomes
D. Everyone Knows When They Pay The Tax
E. The Gasoline Tax Is A Poor Example Of The Benefits Received Principle

43. Vertical Equity Implies That
A. People In Different States Should Pay The Same Taxes
B. People With Comparable Incomes Should Pay The Same Taxes
C. People In Different Economic Circumstances Should Pay Different Amounts
D. Taxes Should Rise As The Size Of Your Family Increases
E. Taxes Should Be Based Upon How Tall The Taxpayer Is

44. Proportional Tax Rates Mean That The Ratio Of Tax Collection To Income
A. Falls As Income Rises
B. Rises, As Income Rises
C. Remains The Same As Income Rises
D. Rises As Income Falls
E. Falls As Income Falls

45. Regressive Tax Rates Mean That The Ratio Of Tax Collections To Income
A. Falls As Income Rises
B. Rises As Income Rises
C. Remains The Same As Income Rises
D. Remains The Same As Income Falls
E. Falls As Income Falls

46. The Us Federal Personal Income Tax Is An Example Of A(N)
A. Regressive Tax Rate Structure
B. Proportional Tax Rate Structure
C. Progressive Tax Rate Structure
D. More Regressive Than Proportional Tax Rate Structure
E. Equitable Tax Rate Structure

47. If Demand For A Product Is Perfectly Inelastic, An Output Tax Will Be Shifted
A. Completely Backward
B. Completely Forward
C. Completely To The Poor
D. Completely To The Rich
E. Completely To The Producer

48. A Tax That Is Shifted Forward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Producer Through Lower Sales
C. The Government
D. Foreign Investors
E. None Of The Above

49. A Tax That Is Shifted Backward Is A Tax That Falls On
A. The Consumer In The Form Of Higher Prices
B. The Owners Of Resources In The Form Of Lower Resource Prices
C. The Government
D. Foreign Investors
E. None Of The Above

50. At The Federal Level, The Largest Revenue Generating Tax Is The
A. Corporate Income Tax
B. Personal Income Tax
C. Property Tax
D. Sales Tax
E. Customs Duty

51. If The Ratio Of Tax Collections To Income Rises As Income Rises, Then The Tax Rate Is
A. Regressive
B. Proportional
C. Progressive
D. Regressive Then Proportional
E. None Of The Above

52. The Federal Government Lowered Tax Rates In
A. 1986 And 2001
B. 1986
C. 2001
D. Neither Year
E. 1909 And Has Raised Them Ever Since

53. Suppose There Are Two Individuals Who Each Earn $25,000 Per Year. One Individual Pays $2,500 In Taxes And The Other Pays $2,000. This Is A Violation Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. Vertical Equity
D. Horizontal Equity
E. None Of The Above

54. Suppose One Individual Earns $25,000 Per Year And Another Individual Earns $15,000 Per Year. If The Individual Earning $25,000 Per Year Pays $750 More Per Year In Taxes Than The Person Earning $15,000, This Is An Illustration Of
A. The Benefits Received Principle
B. The Ability To Pay Principle
C. The Equal Tax Treatment Principle
D. The Equitable Payment Doctrine
E. None Of The Above

55. If We Levy A Tax On Profits That Is Neither Shifted Neither Forward Nor Backward, It Is
A. An Output Tax
B. An Input Tax
C. A Tax Independent Of Output
D. A Tax Dependent On Output
E. None Of The Above

56. The Federal Tax System In The United States Can Be Described As
A. Regressive
B. Highly Progressive
C. Slightly Progressive
D. Proportional
E. None Of The Above

57. A Tax System That Will Not Alter The Distribution Of Income Is
A. Proportional
B. Regressive
C. Slightly Progressive
D. Very Progressive
E. None Of The Above
58. Which Of The Following Countries Has The Lowest Taxes Collected (As A Percent Of Gdp)?
A. The United States
B. Germany
C. Italy
D. France
E. The United Kingdom

59. The Highest Effective Federal Tax Rate In The United States Is Approximately
A. 10%
B. 15%
C. 20%
D. 24%
E. 34%
60. The Highest Effective Federal Tax Rate In The United States Falls On Which Income Category?
A. The Lowest Quintile
B. The Middle Quintile
C. The Top 10%
D. The Top 5%
E. The Top 1%

61. The Single Most Important Source Of Tax Revenue For The Local Governments In The United States Is The
A. Real Property Tax
B. Personal Income Tax
C. National Sales Tax
D. Cigarette Tax
E. Inheritance Tax

62. Enforcement And Collection Of Personal Income Taxes Is The Responsibility Of The
A. Treasury Department
B. Individual State Governments
C. Federal Reserve System
D. Internal Revenue Service
E. Department Of Labor

63. The Federal Government Uses Taxes To
A. Generate Revenue
B. Encourage Saving For Education And Retirement
C. Discourage Certain Behaviors
D. Promote The Purchase Of Houses
E. Do All Of The Above

64. The 1986 Tax Reform Act ________ The Number Of Tax Brackets And _______ The Highest Tax Bracket.
A. Increased; Increased
B. Increased; Decreased
C. Decreased; Increased
D. Decreased; Decreased
E. Decreased; Did Not Change

65. Since 2004, The Highest Personal Income Tax Bracket Has Been
A. 10%
B. 15%
C. 25%
D. 28%
E. 35%

66. The Economic Growth And Taxpayer Relief Reconciliation Act Passed By Congress And Signed By President George W. Bush Did Which Of The Following?
A. Immediately Cut Federal Tax Rates By One-Third
B. Gave A $300 Check To Each Taxpayer
C. Decreased The Tax On Income From Financial Investments
D. Decreased The Federal Budget Deficit
E. Increased The Number Of Personal Income Tax Brackets

67. The First Budget Surplus Since 1969 Occurred In
A. 1993
B. 1995
C. 1998
D. 1999
E. 2000

68. The Budget Surpluses Of The Late 1990’s And The Early 2000’s Could Be Attributed To Which Of The Following Government Policies?
A. The Value Added Tax Act
B. The Tax Reform Act Of 1986
C. The Economic Growth And Taxpayer Relief Reconciliation Act
D. Increased Government Debt
E. All Of The Above

69. If A Government Bond With A Maturity Value Of $10,000 Sells For $9,000 And Pays Annual Interest Of $1,000, What Is The Rate Of Interest On The Bond?
A. 1%
B. 10%
C. 11.1%
D. 88.9%
E. 90%

70. An Increase In Government Borrowing Will Cause Which Of The Following?
A. A Decrease In The Demand For Loanable Funds
B. A Decrease In The Supply Of Bonds
C. An Increase In The Interest Rate
D. An Increase In The Price Of Bonds
E. All Of The Above

71. Federal Debt Reduction Will Cause Which Of The Following?
A. A Decrease In The Interest Rate
B. An Increase In Private Investment
C. A Decrease In The Supply Of Bonds
D. An Increase In The Price Of Bonds
E. All Of The Above

72. The Federal Government Ended Its Most Recent Period Of Budget Surpluses And Returned To Deficits In
A. 1999
B. 2000
C. 2001
D. 2002
E. 2003

73. The Federal Deficit Was Increased In 2002 As A Result Of
A. The 2001 Recession
B. The War On Terrorism
C. The 2001 Tax Cut
D. Increased Defense Spending
E. All Of The Above

74. Retiring The Federal Debt Will
A. Decrease The Supply Of Government Bonds
B. Increase Government Bond Prices
C. Lower The Interest Rate On Government Bonds
D. Decrease The Demand For Money
E. Do All Of The Above

True / False Questions

75. The Fears That People Have Concerning Government Are Related To The Size Of Government And The Distribution Of Taxes.

76. Some Of The Fears That People Have Concerning Government Are Well-Founded And Some Are Not.

77. Government Expenditures Have Grown Faster Than The Gdp Since 1958, Representing About Fifty Percent Of Gdp Today.

78. Government Transfer Payments, Such As Public Assistance Payments And Social Security Payments, Have Been A Constant Percentage Of The Gdp Since 1960.

79. Government Purchases Of Goods And Services Have Remained A Constant Percentage Of The Gdp For The Last Two Decades.

80. Before An Intelligent Decision Can Be Made About Whether Government Is Too Large Or Small, The Benefits And Costs Must Be Weighed.

81. An Efficient Level Of Government Expenditures Is That Level Where Net Benefits To Society Are Maximized.

82. Public Goods And Services Can Be Supplied In The Market Because They Are Easily Divisible Into Small Units And Can Be Priced To The Individual Demander.

83. The Existence Of Externalities In Production Or Consumption Does Not Negate The Possibility That These Goods And Services Can Be Supplied Efficiently In The Market.

84. A Great Deal Of Government Activity Is Based On The Idea That People In Society Should Determine The Extent To Which The Distribution Of Income Should Be Altered.

85. The Major Tax Source Of The Federal Government Is The Highly Regressive Sales Tax.

86. The Federal Income Tax System Results In A Mildly Progressive Tax Structure.

87. The Major Tax Source Of State Governments Is The Property Tax.

88. Progressive Income Tax Rates Are Consistent With The Ability To Pay Principle Of Taxation But Are Inconsistent With The Tax Criterion Of Economic Efficiency.

89. The Relative Tax Treatment Doctrine Would Call For All Taxpayers To Pay Equal Taxes.

90. Since Gasoline Taxes Are Used Primarily To Finance Highways, Gasoline Taxes Can Be Defended On The Benefits Received Principle Of Taxation.

91. The Excess Tax Burden Is In The Form Of The Loss In Private Production That May Take Place If Incentives To Work And To Produce Are Discouraged.

92. A Tax Levied On Each Unit Produced Will Likely Be Shifted Forward And Backward Depending Upon The Elasticities Of Demand And Supply.

93. If An Output Tax Is Levied On A Product That Has A Perfectly Elastic Demand, The Tax Will Be Shifted Completely To The Consumer In The Form Of Higher Prices.

94. Federal Budget Deficits Occurred Throughout The 1970’s And 1980’s But In The Late 1990’s Deficits Turned Into Budget Surpluses.

95. The Tax Reform Act Of 1986 Increased The Highest Marginal Tax Rate To 50% From 38%.

96. In General, A Tax Levied On Net Income Of A Corporation Would Be Shifted To Consumers In The Short Run.

97. Tax Equity Would Probably Be Reduced If Federal Tax Exclusions, Such As Interest On State And Local Government Securities, Were Eliminated.

98. Demand For Public Goods And Services Is Not Generally Divisible On The Basis Of Individual Quantity Demanded.

99. The Tax Base Is What A Tax Is Levied On, Such As Income, Sales, Or The Value Of Property.

100. Regressive Tax Rates Mean That The Ratio Of Tax Collection To Income Rises As Income Rises.

101. Tax Equity Means That All People Should Pay Equal Taxes.

102. An Output Tax Will Be Shifted Completely Forward If Demand Is Price Elastic.

103. According To The Equimarginal Principle, The Efficient Level Of Government Expenditures Occurs When The Benefit Of The Last Dollar Spent For Each Purchase Is Greater Than The Last Dollar Of Cost.

104. When Marginal Benefits Equal Marginal Costs Then Net Benefits Are Maximized.

105. Horizontal Equity Means That People In Identical Economic Positions Should Pay Equal Taxes.

106. Transfer Payments Are Government Expenditures For Currently Produced Goods And Services.

107. In The Absence Of Externalities, Government Actions Are Needed To Ensure The Efficiency Of The Market System.

108. According To The Equal Tax Treatment Doctrine, People In Identical Economic Circumstances Should Pay Equal Taxes.

109. The Equal Tax Treatment Doctrine Pertains To Vertical Equity.

110. The Federal Tax System Is Much More Progressive Than Is Generally Believed.

111. The Economic Growth And Taxpayer Relief Reconciliation Act, The Job Creation And Worker Assistance Act, And The Jobs And Growth Tax Relief Act Each Reduced Effective Tax Rates On Income.

112. The United States Has Not Had A Federal Budget Surplus Since The 1960s.

113. The Personal Income Tax Is The Single Most Important Source Of Tax Revenue For The Federal Government Of The United States.

114. The Enforcement And Collection Of The Personal Income Tax Is The Responsibility Of The Internal Revenue Service.

115. There Are Currently 14 Tax Brackets Ranging From 11% To 50%.

116. The Federal Government Uses The Tax Code To Encourage Certain Behaviors.

117. Bond Prices And Interest Rates Are Inversely Related.

118. The First Budget Surplus Since 1969 Occurred In 1998.

119. A Budget Deficit Occurs When Tax Revenues Exceed Government Spending.

120. A Lower Interest Rate Encourages Private Investment Spending.

121. The National Debt Is The Sum Of Past Budget Deficits.

122. The Government Owes Almost One Third Of The National Debt To Itself.

123. An Increase In Government Borrowing Increases The Demand For Loanable Funds.

124. An Increase In Government Borrowing Increases The Supply Of Loanable Funds.

125. The Federal Budget Has Been In Deficit Each Year Since The Beginning Of The 1970s.

Chapter 15

Social Security And Medicare: How Secure Is Our Safety Net For The Elderly?

Multiple Choice Questions

1. Government Programs That Guarantee Citizens Financial Benefits For Events Beyond Their Personal Control And That Are Financed Through Tax Revenues Are Called
A. Social Insurance Programs
B. Entitlement Programs
C. Private Insurance Programs
D. Welfare Programs
E. Transfer Programs

2. The Largest Social Insurance Program In The United States Is
A. Temporary Assistance For Needy Families
B. Social Security
C. Medicaid
D. Federal Flood Insurance
E. Job Corps

3. The Most Significant Factor That Threatens The Financial Stability Of The Social Security System Is The
A. Increasing Number Of Young Workers
B. Relatively High Rates Of Social Security Taxes
C. Population Bulge Created By The “Baby Boom” Generation
D. Generosity Of Current Social Security Benefits
E. Threat Of Foreign Workers Entering The U.S. Due To Nafta

4. Which Of The Following Nations Was The First To Offer Its Citizens A Modern Social Insurance Program?
A. United States
B. Great Britain
C. Russia
D. Germany
E. Japan

5. In The United States, Social Security Was Established In When President Signed The Social Security Act Into Law.
A. 1903; Theodore Roosevelt
B. 1929; Herbert Hoover
C. 1965; Lyndon Johnson
D. 1865; Abraham Lincoln
E. 1935; Franklin Roosevelt

6. Which Of The Following Statements Is Concerning The Scope Of The Social Security Program?
A. Social Security Has Narrowed Its Scope Over Time To Focus On The Economic Stability Of The Individual
B. The Scope Of Social Security Has Remained Constant Throughout Its History
C. Social Security Has Broadened Its Scope Over Time To Focus On The Economic Stability Of The Family
D. The Scope Of Social Security Has Always Focused On The Family Unit
E. None Of The Above

7. How Many Americans Receive A Monthly Check From The Social Security Administration?
A. Fewer Than 10 Million
B. More Than 50 Million
C. About 27 Million
D. Roughly 38 Million
E. More Than 100 Million

8. As Originally Designed, Social Security Was To Be Financed As A
A. Private Insurance Program
B. Pure Income Transfer Program
C. Pay-As-You-Go Insurance Program
D. Fully-Funded Insurance Program
E. Means-Tested Benefits Program

9. How Are Social Security Tax Revenues Allocated Today?
A. They Are Used To Pay Today’s Social Security Beneficiaries, And Any Extra Is Placed Into The Social Security Trust Fund
B. All Of Today’s Revenues Are Placed In The Social Security Trust Fund To Pay For Tomorrow’s Beneficiaries
C. Tax Revenues Are Placed Into Accounts For Each Worker Who Will Draw Upon The Balance When They Retire
D. The Revenues Are Invested In Government Securities And In The Stock Market
E. No One Really Knows

10. Current Projections Estimate That The Social Security Trust Fund Will Be Completely Depleted
A. In Late 2003
B. During 2010-2020
C. In About 100 Years
D. Around 2100
E. Before 2040

11. Given The Way Social Security Is Financed, Which Of The Following Is ?
A. Social Security Results In A Transfer Of Income From The Old To The Young
B. Social Security Results In A Transfer Of Income From The Young To The Old
C. Social Security Has A Neutral Effect On The Nation’s Income Distribution
D. The Purchasing Power Of The Elderly Has Been Diminished By Social Security Taxes
E. (A) And (D)

12. Social Security Taxes Are
A. Paid Only By Workers
B. Levied On Salaries And Wages
C. Paid Only By Employers
D. Paid By Both Workers And Employers
E. (B) And (D)

13. Currently, The Total Combined Tax Rate Collected By Social Security Is
A. 21.6% Of Earnings
B. 15.3% Of Earnings
C. 7.65% Of Earnings
D. 6.20% Of Earnings
E. 1.45% Of Earnings

14. Which Of The Following Is Concerning Social Security’s Retirement Benefit Structure?
A. All Eligible Retired Workers Are Entitled To The Same Benefits
B. High Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Low Wage Workers
C. Retired Female Workers Are Entitled To Higher Benefits Than Retired Male Workers
D. Low Wage Workers Receive A Greater Percentage Of Past Earnings In Benefits Than Do High Wage Workers
E. Retired Workers Living In Cities Receive Larger Benefits Than Those Living In Rural Areas

15. Most Of Today’s College Student Population Will Be Eligible To Receive Full Social Security Retirement Benefits When They Reach The Age Of
A. 62
B. 65
C. 67
D. 70
E. 72

16. The Cost Of Living Adjustment (Cola) Employed By Social Security Is Based On The
A. Current Level Of Gdp
B. Local Rate Of Inflation
C. Consumer Price Index
D. Producer Price Index
E. Annual Poverty Threshold

17. How Many Elderly Households Receive Social Security Benefits?
A. More Than 90%
B. Less Than 50%
C. About 75%
D. Only About 15%
E. None Of The Above

18. Which Of The Following Statements Is ?
A. 20% Of Elderly Households Receive Social Security As Their Only Source Of Income
B. Approximately 90% Of Elderly Households Receive Social Security Benefits
C. Just Under 30% Of Elderly Households Receive Private Pension Benefits
D. For Nearly Two Thirds Of Elderly Households, Social Security Represents More Than 50% Of Total Income
E. None Of The Above. All Are

19. If People Choose To Work Fewer Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

20. If People Choose To Work More Hours Because The Social Security Tax Reduces Their Real Wage, Their Behavior Is Dominated By The
A. Substitution Effect
B. Bequest Effect
C. Income Effect
D. Wealth Effect
E. Real Wage Effect

21. Empirical Evidence Suggests That Social Security Has _______ The Overall Supply Of Labor.
A. Had No Effect On
B. Reduced
C. Increased
D. Stimulated
E. Done None Of The Above To

22. Social Security May Increase The Level Of Personal Saving Due To
A. The Retirement Effect
B. The Bequest Effect
C. The Wealth Substitution Effect
D. (A) And (B)
E. (B) And (C)

23. Empirical Studies Indicate That Social Security Has
A. Increased The Level Of Personal Savings
B. Had A Neutral Effect On The Level Of Personal Savings
C. Reduced The Level Of Personal Savings
D. Increased The Number Of Older Workers
E. Raised The Average Age At Which Workers Choose To Retire

24. The Effect Of Social Security On Personal Savings Is Important Because
A. The Level Of Savings Determines The Pool Of Investment Funds
B. Savings Are Necessary To Finance The Social Security Trust Fund
C. Personal Savings Are Negatively Related To Economic Growth
D. Savings Are A Major Source Of Income For All Elderly Households
E. The Level Of Savings Reflects The Magnitude Of Future Consumption

25. Why Can’t Social Security Rely On A Strict Pay-As-You-Go Financial Structure?
A. The Current Generation Of Workers Is Too Small To Support Future Retirees
B. A Pay-As-You-Go Financial Structure Is Inherently Unstable
C. The Current Generation Of Retirees Will Bankrupt The System Before The “Baby Boom” Retires
D. Inflation Erodes The Value Of Contributions That Must Be Saved To Pay Future Retirees
E. None Of The Above

26. The Most Simple And Direct Way To Postpone The Looming Social Security Financial Crisis Is To
A. Invest Social Security Taxes In The Stock Market
B. Raise Social Security Taxes And/Or Lower Benefits
C. Privatize The Social Security Administration
D. Eliminate The Social Security System And Force Everyone To Buy Private Insurance
E. Subsidize Social Security With General Tax Revenues

27. The Most Significant Argument Against Privatizing Social Security Is That
A. Benefits Would Have To Be Cut
B. It Has Not Worked In Other Countries
C. Future Benefits Levels Cannot Be Guaranteed
D. It Is Too Complicated To Be Practical
E. Taxes Would Have To Be Raised

28. Why Do Some People Favor Investing The Social Security Trust Fund In The Stock Market?
A. Because For Most Beneficiaries The Historic Return On Their Social Security Taxes Has Been Less Than What Would Have Been Earned If Those Dollars Were Invested In The Stock Market
B. Because Investment In The Stock Market Will Guarantee Higher Rates Of Return Over The Long Run For All Retirees
C. Because Investments In The Stock Market Carry Very Little Risk And Offer The Potential For Excessive Short-Run Gains With Little Or No Potential For Loss
D. Because The Stock Market Offers The Safest Form Of Investment
E. All Of The Above

Questions 29 – 33 Refer To The Graph Below.

29. The Results Of The Retirement Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

30. The Results Of The Bequest Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

31. The Results Of The Wealth Substitution Effect Are Illustrated On The Graph As A Movement From Point
A. E To F
B. A To C
C. E To G
D. F To E
E. None Of The Above

32. A Change In Consumption From Ce To Cf Could Be Caused By Which Of The Following?
A. The Bequest Effect
B. The Retirement Effect
C. The Wealth Substitution Effect
D. All Of The Above
E. None Of The Above

33. A Movement From Point E To Point F As A Result Of Social Security Would Result In Which Of The Following Costs To Society? A Long-Run Movement To
A. Ppc Cd Rather Than Gh
B. Ppc Gh Rather Than Cd
C. Point B Rather Than Point A
D. Point A Rather Than Point B
E. If To Cf

34. If I Start Saving More During My Working Life Because I Anticipate Retiring Earlier Thanks To Social Security, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

35. If I Spend More Each Year Because I Know That I Will Receive Social Security Payments When I Retire, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

36. If I Put Extra Into A Savings Account So That I Can Leave Assets To My Children To Compensate Them For Their Payments Into The Social Security System, I Am Exhibiting Which Of The Following Effects?
A. Retirement
B. Bequest
C. Wealth Substitution
D. Opportunity Cost
E. None Of The Above

37. If Inflation Increases, What Will Happen To The Social Security Cola? It Will
A. Expire
B. Increase
C. Decrease
D. Be Divided Among Social Security Recipients
E. Be Added To The Social Security Trust Fund

38. “An Agreement To Pay A Premium To A Company In Return For A Guarantee Of Financial Benefits In The Event Of An Undesired Circumstance” Defines
A. Social Insurance
B. Private Insurance
C. Private Investment
D. Asset Management
E. Retirement Savings

39. Social Insurance Uses Tax Revenues To Guarantee Citizens Financial Benefits For Events Including
A. Old Age
B. Disability
C. Poor Health
D. Death Of A Spouse
E. All Of The Above

40. If A Program’s Benefits Are Funded By Interest Earned On Accumulated Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. An Interest Scheme
D. A Pay-As-You-Go System
E. An Endowed System

41. If A Program’s Benefits Are Funded Out Of Current Payments, It Is Which Type Of System?
A. An Investment System
B. A Fully Funded Scheme
C. A Pyramid Scheme
D. A Pay-As-You-Go System
E. An Endowed System

42. When Was The Medicare Program Established?
A. 1935
B. 1945
C. 1955
D. 1965
E. 1975

43. Today, The Health Care Sector Of The U.S. Economy Accounts For About Percent Of National Income.
A. 3
B. 5
C. 8
D. 12
E. 18

44. A Person With Health Insurance Will Tend To
A. Have A Lower Demand For Health Care Services
B. Have A Much Greater Concern For Preventive Care
C. Buy A Lower Quantity Of Health Care At A Higher Price
D. Demand More Health Care Services Than A Person Without Insurance
E. Do None Of The Above

45. The Payment And Delivery Of Health Care Service Under A Managed Care System Is Based On
A. A Fee-For-Service Market Principle
B. A Prearranged Schedule Of Fixed Prices
C. The Ability To Pay Principle
D. Price Negotiation Between The Consumer And Provider
E. None Of The Above

46. The Medicare Program
A. Was Established As A Socialistic Takeover Of Health Care Providers
B. Has Reduced The Demand For Health Care Services
C. Affects Persons 65 And Older, Regardless Of Income
D. Enrolls All Poor People Regardless Of Age
E. Does None Of The Above

47. Part C Of The Medicare Program (Medicare + Choice)
A. Provides Health Care Plan Choices To The Beneficiaries Of Medicare
B. Restricts Medicare Beneficiaries To A Simple Fee-For-Service Health Care Plan
C. Provides Comprehensive Health Insurance Coverage For All Poor People
D. Is Only Available To Disabled Retirees Receiving Social Security
E. Does None Of The Above

48. A Potential Benefit Of Managed Care Plans To Medicare Enrollees Is That These Plans
A. Typically Require Less Cost Sharing
B. Provide A Higher Quality Of Health Care
C. Provide A Greater Quantity Of Health Care
D. Require Less Paper Work
E. Do All Of The Above

49. Part A Of The Medicare Program (Hospital Insurance) Is Financed Primarily By
A. A Monthly Premium
B. A 2.9% Tax Levied On Wages And Salaries
C. An Allocation From General Tax Revenues
D. User Fees Paid By Patients
E. Insurance Deductibles

50. What Percent Of The Average Health Care Dollar Spent In The United States Comes Directly From The Consumer?
A. 100
B. 83
C. 50
D. 34
E. 12

51. Which Of The Following Factors Has Contributed Most To The Tremendous Increase In Health Care Expenditures Experience In The U.S. During The Past Fifty Years?
A. Health Care Inflation
B. The Aging Of The Population
C. Increased Public Support For Health Care
D. Private Health Insurance
E. Growth In Medicaid

52. Which Of The Following Receives The Largest Share Of Expenditures Made On Health Care In The United States?
A. Physicians
B. Nursing Homes
C. Hospitals
D. Personal Health Care Product And Service Providers
E. Pharmacies

53. In A Fee-For-Service Health Care System, Consumers Pay The
A. Insurance Company A Fee Every Time They Use A Service
B. Full Cost Of The Services They Receive
C. Hmo When They Receive Care
D. Doctor A Small Payment Called A “Co-Pay.”
E. Prearranged, Fixed Fee For Services They Receive

54. How Are Payments To Health Care Providers Determined Under A Managed Care System? By The
A. Government
B. Market
C. Insurance Company And The Provider
D. Provider And The Consumer
E. Ama (American Medical Association)

55. Which Of The Following Is An Example Of A Managed Health Plan?
A. Hmo
B. Ppo
C. Pos
D. Physicians Network
E. All Of The Above

Questions 56 – 59 Refer To The Graph Below.

56. With A Market Allocation Of Medical Services, Equilibrium Quantity Will Be
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

57. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Demanded?
A. 0
B. 2,000
C. 2,800
D. 4,000
E. An Infinite Amount

58. If Medical Care Is Provided Free Of Charge, What Quantity Will Be Supplied?
A. 0
B. 50
C. 2,000
D. 2,800
E. 4,000

59. The Supply Of Medical Services In This Market Is
A. Elastic
B. Inelastic
C. Unit Elastic
D. Price Elastic
E. Infinite

60. Under Most Insurance Systems, Patients Are Responsible For Which Of The Following Payments For Health Care Services?
A. Deductible
B. Co-Insurance
C. Fee-For-Service Charges
D. All Of The Above
E. None Of The Above

61. A Patient May Be Required To Pay A Percentage Of The Cost Of Their Health Care Above The Fixed Fee They Pay. This Is Known As
A. The Deductible
B. Co-Insurance
C. Fee-For-Service
D. The Health Care Tax
E. Medicare Tax

62. If Your Insurance Company Agrees To Pay A Fixed Fee For You To Receive A Given Treatment (For Example, $5,000 For An Appendectomy), The Company Is Using Which Of The Following?
A. A Fee-For-Service System
B. A Managed Care System
C. A Co-Insurance System
D. A Prospective Payment System
E. A Social Insurance System

63. If Your Deductible Is $200 And You Pay Co-Insurance Of 20%, How Much Will You Have To Pay For A $3,000 Hospital Stay?
A. $200
B. $560
C. $600
D. $760
E. $800

64. If Your Deductible Is $400 And You Have Co-Insurance Of 25%, How Much Will You Have To Pay For A $5,000 Hospital Stay?
A. $400
B. $1,150
C. $1,250
D. $1,550
E. $1,650

Questions 65 – 69 Refer To The Graph Below.

65. If Patients Pay The Full Price For Office Visits, What Price Will Be Charged In The Market?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

66. If Patients Pay The Full Price For Of Office Visits, How Many Office Visits Will They Make?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

67. If A Third Party Guarantees A Maximum Patient Price Of $25, What Quantity Of Office Visits Will Patients Demand?
A. 0
B. 30
C. 50
D. 70
E. More Than 70

68. If A Third Party Guarantees A Maximum Patient Price Of $25, What Total Price Must Be Paid Per Office Visit To Assure The Quantity Of Office Visits Demanded Will Be Provided?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

69. If A Third Party Guarantees A Maximum Patient Price Of $25, How Much Must The Third Party Pay Per Office Visit?
A. $0
B. $25
C. $50
D. $75
E. More Than $75

70. Health Insurance Results In
A. An Increase In The Quantity Of Health Care Demanded
B. An Increase In The Quantity Of Health Care Provided
C. An Increase In The Total Cost Of Providing Health Care
D. All Of The Above
E. None Of The Above

71. The Medicare Modernization Act, Passed In 2003, Established
A. The First Long Term Care Coverage For Medicare Recipients
B. Lowered Deductibles For Most Medicare Recipients
C. Added A Prescription Drug Benefit To The Medicare Program
D. Instituted Stringent Price Controls On The Fees Doctors And Hospitals Can Charge
E. Restricted The Benefits That High Income Medicare Recipients Can Receive

72. The Prescription Drug Benefit That Is Part Of The Medicare Modernization Act Of 2003 Requires That Recipients Pay:
A. A Monthly Premium
B. A Co-Pay
C. A Deductible
D. All Of The Above
E. None Of The Above, These Benefits Are Provided To Recipients At No Charge

True / False Questions

73. Social Insurance Is Private Insurance Purchased By The Government.

74. Programs That Provide Citizens With Benefits For Events That Are Beyond An Individual Person’s Control Are Called Social Insurance Programs.

75. Both Social Security And Medicare Are Social Insurance Programs.

76. The Major Underlying Factor That Endangers Social Security’s Financial Stability Is The Population Bulge Created By The “Baby Boom” Generation.

77. The United States Was The First Nation To Provide Social Insurance Programs For Its Citizens.

78. The Original Design Of The Social Security System Called For A Pay-As-You-Go Financing Scheme.

79. The Social Security Act Was Signed Into Law By President Franklin Roosevelt In 1935.

80. Over Time, Social Security Has Evolved To Focus More On The Family And Less On The Individual.

81. Currently, About 20 Million Americans Receive Social Security Benefits.

82. All American Citizens Are Entitled To Receive Social Security And Medicare Benefits When They Retire.

83. Today, Social Security Is Financed Under A Pay-As-You-Go Financial System.

84. All Current Social Security Taxes Collected By The Government Are Used To Pay Current Beneficiaries, With Nothing Left Over.

85. Social Security And Medicare Are Financed Through A Flat Tax On Wages Paid Up To A Predetermined Limit.

86. Workers And Their Employers Share The Burden Of Social Security Taxes.

87. The Social Security Trust Fund Currently Has A Negative Balance.

88. Social Security Benefits Are Adjusted Each Year For Inflation Using The Consumer Price Index (Cpi).

89. About 50% Of All Elderly Households Receive Some Form Of Social Security Benefits.

90. Today, In The Aggregate, Social Security Accounts For Over 35% Of Senior Citizens’ Income.

91. Without Social Security, Nearly 50 Percent Of Elderly Households Would Live Below The Poverty Threshold.

92. The Substitution Effect Of Social Security Taxes Causes Some People To Work More Hours.

93. The Income Effect Of Social Security Taxes Causes Some People To Work Less Hours.

94. Studies Show That Social Security Has Caused Some Workers To Retire Earlier Than They Would If Social Security Did Not Exist.

95. The Bequest Effect Of Social Security Causes Some People To Save Less During Their Lifetimes.

96. The Empirical Evidence Suggests That, Overall; Social Security Causes People To Increase Their Personal Savings.

97. Because Social Security Increases Savings, More Funds Are Available For Investment In The Overall Economy.

98. Current Estimates Indicate That The Social Security Trust Fund Will Be Depleted Before 2040.

99. A Modest Increase In Taxes Could Postpone Social Security’s Financial Crisis For Decades.

100. Privatization Of The Social Security System Would Reduce The Financial Risks Faced By Retiring Workers.

101. Chile And Other Nations Have Successfully Privatized All Or Part Of Their Social Insurance Programs.

102. Oasdi Is Social Security’s Medical Insurance Program.

103. The Most Important Factor Explaining The Growth In Personal Health Care Expenditures On Hospital And Physician Services Is Higher Prices For These Services.

104. Third-Party Payments Increase The Efficiency Of Medical Markets.

105. A Dominant Feature Of The U.S. Health Care Industry Is Price Competition Among Providers.

106. Medicare And Medicaid Have Reduced The Demand For Health Care Services.

107. The Purpose Of A Prearranged Payment And Delivery System, Such As A Managed Care Plan, Is To Take Away Any Incentive For The Provider To Supply Unnecessary Care.

108. The Demand For Health Services Is Characterized By Well-Informed Consumers.

109. The Medicare Program Affects Persons Aged 65 And Older, Regardless Of Their Income Level.

110. A Consumer With Health Insurance Is Likely To Buy More Health Services Than One Who Is Not Insured.

111. A Reduction In The Price Of Medical Services Will Cause The Demand Curve To Shift To The Right.

112. Health Care Providers Are Paid The Amount Of A Patient’s Deductible By The Health Insurance Company.

113. The Amount A Patient Must Pay Above The Deductible Is Known As Co-Insurance.

114. Projections Indicate That The Medicare Hi Program Will Be Depleted Of Funds By 2025.

115. More Than 70% Of All Privately Insured Employees Are Covered By Managed Care Plans.

116. The Medicare Program Could Be Secured By An Increase In The Payroll Tax That Supports The Program.

117. The Medicare Program Could Be Secured By Increasing Premiums, Deductibles And Co Payments.

118. Medicare’s Fee-For-Service Plan Provides Incentives For Supplying Excessive Services.

119. Managed Care Plans Provide Incentives For Supplying Excessive Services.

120. Third-Party Payments For Health Care Increase The Quantity Of Services Demanded.

121. Third-Party Payments For Health Care Decrease The Price Consumers Pay For Services.

122. The Fee-For-Service Delivery And Payment System Is The Primary Means By Which Most Elderly Americans Receive Their Health Care.

123. Third-Party Payments For Health Care Result In Less Usage Of The Health Care System.

124. Managed Care Leads To Higher Costs Of Providing Health Care Services.

125. Investments Of Social Security Tax Payments Result In High Returns On The Contributions Made By Taxpayers.