PART 1

Question 1

Which of the following statements is CORRECT?

Answer

The New York Stock Exchange is an auction market with a physical location.

Capital market transactions involve only the purchase and sale of equity securities, i.e., common stocks.

If an investor sells shares of stock through a broker, then this would be a primary market transaction.

Consumer automobile loans are evidenced by legal documents called “promissory notes,” and these individual notes are traded in the money market.

While the distinctions are blurring as investment banks are today buying commercial banks, and vice versa, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

Question 2

Which of the following statements is CORRECT?

Answer

Capital market instruments include both long-term debt and common stocks.

An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.

The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.

If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

Question 3

You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

Answer

This is an example of an exchange of physical assets.

This is an example of a primary market transaction.

This is an example of a direct transfer of capital.

This is an example of a money market transaction.

This is an example of a derivatives market transaction

Question 4

 Which of the following statements is CORRECT?

Answer

While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.

A security whose value is derived from the price of some other “underlying” asset is called a liquid security.

Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.

Money markets are markets for common stocks and long-term debt.

The NYSE operates as an auction market, whereas the Nasdaq is a dealer market.

Question 5

Money markets are markets for

Answer

Foreign stocks.

Consumer automobile loans.

U.S. stocks.

Short-term debt securities.

Long-term bonds.

Question 6

Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?

Answer

Corporations generally find it relatively difficult to raise large amounts of capital.

Less of a corporation’s income is generally subjected to taxes than would be true if the firm were a partnership.

Corporate shareholders escape liability for the firm’s debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.

Corporate investors are exposed to unlimited liability.

Corporations generally face relatively few regulations.

Question 7

You recently sold 200 shares of Apple stock to your brother. The transfer was made through a broker, and the trade occurred on the NYSE. This is an example of:

Answer

An over-the-counter market transaction

A futures market transaction.

A primary market transaction.

A secondary market transaction.

A money market transaction.

Question 8

Which of the following statements is CORRECT?

Answer

If expected inflation increases, interest rates are likely to increase.

If individuals in general increase the percentage of their income that they save, interest rates are likely to increase.

If companies have fewer good investment opportunities, interest rates are likely to increase.

Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

Interest rates on long-term bonds are more volatile than rates on short-term debt securities like T-bills.

Question 9

Which of the following statements is CORRECT?

Answer

The maximum federal tax rate on personal income in 2010 was 50%.

Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.

Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.

The maximum federal tax rate on corporate income in 2010 was 50%.

Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

Question 10

Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

Answer

The company purchases a new piece of equipment.

The company repurchases common stock.

The company pays a dividend.

The company issues new common stock.

The company gives customers more time to pay their bills.

Question 11

 Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

Answer

The company’s operating income declined.

The company’s expenditures on fixed assets declined.

The company’s cost of goods sold increased.

The company’s depreciation and amortization expenses declined.

The company’s interest expense increased.

Question 12

Which of the following statements is CORRECT?

Answer

The primary difference between EVA and accounting net income is that when net income is calculated, a deduction is made to account for the cost of common equity, whereas EVA represents net income before deducting the cost of the equity capital the firm uses.

MVA gives us an idea about how much value a firm’s management has added during the last year.

MVA stands for market value added, and it is defined as follows:

MVA = (Shares outstanding)(Stock price) + Book value of common equity.

EVA stands for economic value added, and it is defined as follows:

EVA = EBIT(1 – T) – (Investor-supplied op. capital) x (A – T cost of capital).

EVA gives us an idea about how much value a firm’s management has added over the firm’s life.

Question 13

Which of the following statements is CORRECT?

Answer

All corporations other than non-profit corporations are subject to corporate income taxes, which are 15% for the lowest amounts of income and 35% for the highest amounts of income.

The income of certain small corporations that qualify under the Tax Code is completely exempt from corporate income taxes. Thus, the federal government receives no tax revenue from these businesses.

All businesses, regardless of their legal form of organization, are taxed under the Business Tax Provisions of the Internal Revenue Code.

Small businesses that qualify under the Tax Code can elect not to pay corporate taxes, but then their owners must report their pro rata shares of the firm’s income as personal income and pay taxes on that income.

Congress recently changed the tax laws to make dividend income received by individuals exempt from income taxes. Prior to the enactment of that law, corporate income was subject to double taxation, where the firm was first taxed on the income and stockholders were taxed again on the income when it was paid to them as dividends.

Question 14

Which of the following factors could explain why Regal Industrial Fixtures had a negative net cash flow last year, even though the cash on its balance sheet increased?

Answer

The company repurchased 20% of its common stock.

The company sold a new issue of bonds.

The company made a large investment in new plant and equipment.

The company paid a large dividend.

The company had high amortization expenses.

Question 15

Which of the following statements is CORRECT?

Answer

The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity.

The balance sheet gives us a picture of the firm’s financial position at a point in time.

The income statement gives us a picture of the firm’s financial position at a point in time.

The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

Question 16

Which of the following statements is CORRECT?

Answer

Net cash flow (NCF) is defined as follows: 

NCF = Net income –  Depreciation and Amortization.

Changes in working capital have no effect on free cash flow.

Free cash flow (FCF) is defined as follows:

FCF = EBIT(1 – T)

        + Depreciation and Amortization

        – Capital expenditures required to sustain operations

        – Required changes in net operating working capital.

Free cash flow (FCF) is defined as follows:

FCF = EBIT(1 – T)+ Depreciation and Amortization + Capital expenditures.

Net cash flow is the same as free cash flow (FCF).

Question 17

Analysts following Armstrong Products recently noted that the company’s operating net cash flow increased over the prior year, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

Answer

The company issued new long-term debt.

The company cut its dividend.

The company made a large investment in a profitable new plant.

The company sold a division and received cash in return.

The company issued new common stock.

Question 18

If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT?

Answer

Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.

The lower the company’s EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.

Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.

The lower the company’s TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.

Question 19

Which of the following statements is CORRECT?

Answer

If a firm has the highest price/earnings ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.

If a firm has the highest market/book ratio of any firm in its industry, then, other things held constant, this suggests that the board of directors should fire the president.

Other things held constant, the higher a firm’s expected future growth rate, the lower its P/E ratio is likely to be.

The higher the market/book ratio, then, other things held constant, the higher one would expect to find the Market Value Added (MVA).

If a firm has a history of high Economic Value Added (EVA) numbers each year, and if investors expect this situation to continue, then its market/book ratio and MVA are both likely to be below average.

Question 20

A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

Answer

Use cash to increase inventory holdings

Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment

Use cash to repurchase some of the company’s own stock.

Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash

Question 21

Cordelion Communications is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Cordelion pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?

Answer

The times interest earned ratio will decrease.

The ROA will decline.

Taxable income will decrease.

The tax bill will increase.

Net income will decrease.

Question 22

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.

Answer

The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30.

The division’s basic earning power ratio is above the average of other firms in its industry.

The division’s total assets turnover ratio is below the average for other firms in its industry.

The division’s debt ratio is above the average for other firms in the industry.

The division’s inventory turnover is 6, whereas the average for its competitors is 8.

Question 23

Considered alone, which of the following would increase a company’s current ratio?

Answer

An increase in accounts payable.

An increase in net fixed assets.    

An increase in accrued liabilities.

An increase in notes payable.

An increase in accounts receivable.

Question 24

Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?

Answer

The total assets turnover decreases.

The TIE declines.

The DSO increases.

The EBITDA coverage ratio increases.

The current and quick ratios both decline.

Question 25

Companies A and C each reported the same earnings per share (EPS), but Company A’s stock trades at a higher price. Which of the following statements is CORRECT?

Answer

Company A trades at a higher P/E ratio.

Company A probably has fewer growth opportunities.

Company A is probably judged by investors to be riskier.

Company A must have a higher market-to-book ratio.

Company A must pay a lower dividend.

PART 2

1. At the end of 10 years, which of the following investments would have the highest future value? Assume that the effective annual rate for all investments is the same and is greater than zero.

Answer 

Investment A pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).

Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments).

Investment D pays $2,500 at the end of 10 years (just one payment).

Investment E pays $250 at the end of every year for the next 10 years (a total of 10 payments).

2. Which of the following statements is CORRECT?

Answer 

An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.

The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.

If a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.

If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.

The proportion of the payment that goes toward interest on a fully amortized loan increases over time.

3. Which of the following statements is CORRECT?

Answer 

If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

The cash flows for an annuity due must all occur at the ends of the periods.

The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

4. Which of the following statements regarding a 30-year monthly payment amortized mortgage with a nominal interest rate of 8% is CORRECT?

Answer 

Exactly 8% of the first monthly payment represents interest.

The monthly payments will decline over time.

A smaller proportion of the last monthly payment will be interest, and a larger proportion will be principal, than for the first monthly payment.

The total dollar amount of principal being paid off each month gets smaller as the loan approaches maturity.

The amount representing interest in the first payment would be higher if the nominal interest rate were 6% rather than 8%.

5. A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today. The nominal interest rate is 6%, semiannual compounding. Which of the following statements is CORRECT?

Answer 

The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.

The periodic interest rate is greater than 3%.

The periodic rate is less than 3%.

The present value would be greater if the lump sum were discounted back for more periods.

The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.

6. You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?

Answer 

If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant.

A rational investor would be willing to pay more for DUE than for ORD, so their market prices should differ.

The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD.

The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE.

The present value of ORD exceeds the present value of DUE, while the future value of DUE exceeds the future value of ORD.

7. Which of the following statements is CORRECT?

Answer 

Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature.

A sinking fund provision makes a bond more risky to investors at the time of issuance.

Sinking fund provisions never require companies to retire their debt; they only establish “targets” for the company to reduce its debt over time.

If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued.

8. Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows:

T-bond = 7.72% A = 9.64%

AAA = 8.72% BBB = 10.18%

The differences in rates among these issues were most probably caused primarily by:

Answer 

Tax effects.

Default risk differences.

Maturity risk differences.

Inflation differences.

Real risk-free rate differences.

9. Which of the following statements is CORRECT?

Answer 

All else equal, long-term bonds have less interest rate price risk than short-term bonds.

All else equal, low-coupon bonds have less interest rate price risk than high-coupon bonds.

All else equal, short-term bonds have less reinvestment rate risk than long-term bonds.

All else equal, long-term bonds have less reinvestment rate risk than short-term bonds.

All else equal, high-coupon bonds have less reinvestment rate risk than low-coupon bonds.

10. Which of the following statements is CORRECT?

Answer 

Long-term bonds have less interest rate price risk but more reinvestment rate risk than short-term bonds.

If interest rates increase, all bond prices will increase, but the increase will be greater for bonds that have less interest rate risk.

Relative to a coupon-bearing bond with the same maturity, a zero coupon bond has more interest rate price risk but less reinvestment rate risk.

Long-term bonds have less interest rate price risk and also less reinvestment rate risk than short-term bonds.

One advantage of a zero coupon Treasury bond is that no one who owns the bond has to pay any taxes on it until it matures or is sold.

11. Which of the following statements is CORRECT?

Answer 

If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

Other things held constant, a corporation would rather issue noncallable bonds than callable bonds.

Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond.

Reinvestment rate risk is worse from an investor’s standpoint than interest rate price risk if the investor has a short investment time horizon.

If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.

12. Which of the following statements is CORRECT?

Answer 

The total yield on a bond is derived from dividends plus changes in the price of the bond.

Bonds are riskier than common stocks and therefore have higher required returns.

Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.

The market value of a bond will always approach its par value as its maturity date approaches, provided the bond’s required return remains constant.

If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.

13. Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 15 years. Which of the following statements is CORRECT?

Answer 

One year from now, Bond A’s price will be higher than it is today.

Bond A’s current yield is greater than 8%.

Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price.

Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price.

14. Which of the following statements is CORRECT?

Answer 

If the risk-free rate rises, then the market risk premium must also rise.

If a company’s beta is halved, then its required return will also be halved.

If a company’s beta doubles, then its required return will also double.

The slope of the security market line is equal to the market risk premium, (rM rRF)

Beta is measured by the slope of the security market line.

15. Recession, inflation, and high interest rates are economic events that are best characterized as being

Answer 

company-specific risk factors that can be diversified away.

among the factors that are responsible for market risk.

risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers.

irrelevant except to governmental authorities like the Federal Reserve.

systematic risk factors that can be diversified away.

16. Assume that the risk-free rate is 5%. Which of the following statements is CORRECT?

Answer 

If a stock’s beta doubled, its required return under the CAPM would also double.

If a stock’s beta doubled, its required return under the CAPM would more than double.

If a stock’s beta were 1.0, its required return under the CAPM would be 5%.

If a stock’s beta were less than 1.0, its required return under the CAPM would be less than 5%.

If a stock has a negative beta, its required return under the CAPM would be less than 5%.

17. Which of the following is most likely to occur as you add randomly selected stocks to your portfolio, which currently consists of 3 average stocks?

Answer 

The expected return of your portfolio is likely to decline.

The diversifiable risk will remain the same, but the market risk will likely decline.

Both the diversifiable risk and the market risk of your portfolio are likely to decline.

The total risk of your portfolio should decline, and as a result, the expected rate of return on the portfolio should also decline.

The diversifiable risk of your portfolio will likely decline, but the expected market risk should not change.

18. Which of the following statements is CORRECT?

Answer 

Suppose the returns on two stocks are negatively correlated. One has a beta of 1.2 as determined in a regression analysis using data for the last 5 years, while the other has a beta of -0.6. The returns on the stock with the negative beta must have been negatively correlated with returns on most other stocks during that 5-year period.

Suppose you are managing a stock portfolio, and you have information that leads you to believe the stock market is likely to be very strong in the immediate future. That is, you are convinced that the market is about to rise sharply. You should sell your high-beta stocks and buy low-beta stocks in order to take advantage of the expected market move.

You think that investor sentiment is about to change, and investors are about to become more risk averse. This suggests that you should re-balance your portfolio to include more high-beta stocks.

If the market risk premium remains constant, but the risk-free rate declines, then the required returns on low-beta stocks will rise while those on high-beta stocks will decline.

Paid-in-Full Inc. is in the business of collecting past-due accounts for other companies, i.e., it is a collection agency. Paid-in-Full’s revenues, profits, and stock price tend to rise during recessions. This suggests that Paid-in-Full Inc.’s beta should be quite high, say 2.0, because it does so much better than most other companies when the economy is weak.

19. Stock A’s beta is 1.7 and Stock B’s beta is 0.7. Which of the following statements must be true, assuming the CAPM is correct.

Answer 

In equilibrium, the expected return on Stock B will be greater than that on Stock A.

When held in isolation, Stock A has more risk than Stock B.

Stock B would be a more desirable addition to a portfolio than A.

In equilibrium, the expected return on Stock A will be greater than that on B.

Stock A would be a more desirable addition to a portfolio then Stock B.

20. Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?

Answer 

If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

If one stock has a higher dividend yield, it must also have a higher dividend growth rate.

The two stocks must have the same dividend growth rate.

The two stocks must have the same dividend yield.

The two stocks must have the same dividend per share.

21. Merrell Enterprises’ stock has an expected return of 14%. The stock’s dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT?

Answer 

The stock’s dividend yield is 8%.

The current dividend per share is $4.00.

The stock price is expected to be $54 a share one year from now.

The stock price is expected to be $57 a share one year from now.

The stock’s dividend yield is 7%.

22. Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25). The stock sells for $32.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Answer 

6.01%

6.17%

6.33%

6.49%

6.65%

23. You, in analyzing a stock, find that its expected return exceeds its required return. This suggests that you think

Answer 

the stock should be sold.

the stock is a good buy.

management is probably not trying to maximize the price per share.

dividends are not likely to be declared.

the stock is experiencing supernormal growth.

24. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

A B

Price $25 $25

Expected growth (constant) 10% 5%

Required return 15% 15%

Answer 

Stock A has a higher dividend yield than Stock B.

Currently the two stocks have the same price, but over time Stock B’s price will pass that of A.

Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s.

The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Stock A’s expected dividend at t = 1 is only half that of Stock B.

25. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

Answer 

Stock B must have a higher dividend yield than Stock A.

Stock A must have a higher dividend yield than Stock B.

If Stock A has a higher dividend yield t

 

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Fundamental Economic Concepts

Explain why limited productive resources and unlimited wants result in scarcity, opportunity costs and trade offs for individuals, businesses and governments.
Wants are unlimited, the total resources of a society including natural resources, human resources, capital goods and entrepreneurship are limited resulting in scarcity.  All wants cannot be filled, trade-offs are inevitable when deciding what to produce.

Define scarcity as a basic condition which exists when unlimited wants exceed limited productive resources

Scarcity exists because human wants exceed the capacity of available resources. This basic problem of scarcity is faced by all individuals, organizations, businesses and governments.

Define and give examples of productive resources (Factors of Production) as land (natural), labor (human), capital (capital goods), entrepreneurship

Land = natural resources; 
Labor = people with their education, skills and abilities;
Capital = the goods and services used to make other consumer goods and services;
Entrepreneurs = individuals who take the risk and combine the productive resources (factors of production) to produce goods and services and profit by selling these to consumers. 

Identify strategies for allocating scarce resources

See Chart.  The different strategies include, price, contests, force, sharing, lottery, command, 1st come 1st served, personal characteristics.

Define opportunity cost as the next best alternative given up when individuals, businesses and  governments confront scarcity by making choices.

Opportunity cost is what you give up to obtain something else, one good or service for another.  Governments often have to decide on one good or service at the expense of another.  Trade-off is giving up one benefit or advantage in order to gain another one that may be better.

Provide examples of how rational decision making entails comparing the marginal benefits and the marginal costs of an action.

We make choices to satisfy needs or to seek happiness!  We look at the options, compare costs, benefits, and the trade-offs involved with each choice and reach a decision. 
Marginal Cost = the additional cost of producing one more unit.
Marginal Benefit = the additional satisfaction or utility of consuming one more unit.

Illustrate by means of a production possibilities curve the trade-offs between two options

Production Possibilities Curve

A table or graph that shows the full employment capacity of an economy in the form of possible combinations of two goods, or two bundles of goods, that could be produced with a given amount of productive resources and level of technology. 

Moving from point B to C indicates that this society now prefers to build more consumer goods and less capital goods.  This is the trade-off when choosing a different combination of goods

Explain that rational decisions occur when the marginal benefits of an action equal or exceed the marginal costs.

Economic decisions are made on the basis of comparing marginal costs and marginal benefits.  There are not many all or none decisions.  Almost all decisions are marginal, we don’t typically make a decision between studying all day or watching TV all day, we choose between studying a little more and watching a little less TV or vice versa.

Explain how specialization and voluntary exchange between buyers and sellers increase the satisfaction of both parties.  Provide examples of how individuals and businesses specialize

Division of Labor refers to the practice of dividing the work to make something into separate tasks.  Workers become specialized in different tasks.  We earn a living by doing tasks, taking our wages to purchase goods and services from other workers.  Division of Labor and Specialization is the basis for an economy to exist.  3 benefits are doing it better, no time required to switch tasks, create more effective ways to do the task.

Explain that both parties gain as a result of voluntary, non-fraudulent exchange.

We don’t make all of our electronic devices, countries do not make all of the goods and services they need.  Specialization is the basis of trade and interdependence among individuals, businesses, cities, regions and countries.   Wisconsin = dairy   Florida = oranges.

Compare and contrast different economic systems, and explain how they answer the three basic economic questions of what to produce, how to produce and for whom to produce.

Every society must contend with the problem of scarcity.  Every society, regardless of its political structure, must develop an economic system to determine how to use its limited productive resources to answer the three basic economic questions. 

What goods and services will be produced?

How will goods and services be produced?

Who will consume the goods and services?

The way a society answers these questions determines its economic system.

Three types of economic systems exist to answer these questions.

Traditional – In a traditional economy, economic decisions are based on custom and historical precedent.

Command – In a centralized command economy, government planning groups make the basic economic decisions.  They determine such things as which goods and services to produce, their prices, and wage rates. 

Market – In a decentralized market economy, economic decisions are guided by the changes in prices that occur as individual buyers and sellers interact in the market place (which it is also referred to as a price system).  Other names for market systems are free enterprise, capitalism, and laissez-faire. 

Compare command, market, and mixed economic systems with regard to private ownership, profit motive, consumer sovereignty, competition, government regulation

Economic systems are characterized by how they answer the three basic economic questions
Command (centralized) Economy   –  the issues of production and distribution are resolved through central planning and control

Market (decentralized) Economy  – market prices are determined by consumers and producers, all pursuing their own self-interest.

Mixed Economy  –  there are no pure market or command economies, most economies today contain both command and market characteristics

Profit Motive  –  the desire to make money causes people to work hard to produce goods and services.

Consumer Sovereignty  –  people are free to choose without government interference or regulation

Competition  –  consumers compete with other consumers for goods and services, producers compete with other producers for consumers.

Governmental Regulation –  the government intervention in the decisions of consumer and producers in the market.

Evaluate how well each type of system answers the three economic questions and meets the broad social and economic goals of freedom, security, equity, growth, efficiency and stability

Economic Freedom  –  freedom of choice by consumers and producers.

Economic Security  –  protection against some risks as consumers and producers

Economic Equity  –  Fairness? Right or wrong? Equal opportunity? Equal distribution of wealth and income?

Economic Growth  –  an increase in the production of goods and services over time, measured by real GDP, 3 to 4 % is a reasonable and sustainable yearly growth rate.     

Economic Efficiency  –  allocation of resources so that no one is hurt at the expense of someone else gaining, lower costs to produce.

Economic Stability  –  maintain stable prices, full employment and economic growth

 Describe the roles of government in a market economy.

Government establishes the rules of the game, gov’t involved in the market, public goods, gov’t as a business (national defense), environmental concerns, monetary system.

Explain why government provides public goods and services, redistributes income, protects property rights and resolves market failures.
Public Goods and Services – Those goods and services that cannot be easily be restricted to those who pay for them.  Shared consumption and non-exclusion determine what a public good is.

Income Redistribution – The re-allocation of wealth and income, 3/4ths of national income is wages.

Property Rights – legal ownership of resources, government’s role is to protect property rights.

Market Failures – private police or military, imperfect information in the market, pollution costs.

Provide examples of government regulation and deregulation and their effects on consumers and producers.

Comparing the expected costs of a new policy or a change in an existing policy to the expected benefits.

Explain how productivity, economic growth and future standards of living are influenced by investment in factories, machinery, new technology and the health, education and training of people.

Define productivity as the relationship of inputs to outputs

The quantity of output per unit of input, an increase in productivity can be more goods and services created with the same amount of resources or the same amount of goods and services with less resources.  More productive workers lead to a higher standard of living.

Provide illustrations of investment in equipment and technology and explain their  relationship to economic growth

Improvements in education, experience, skill level of the workforce (human capital), greater amounts of physical capital, improved technology.

Provide examples of how investment in education can lead to a higher standard of living

High investments in education, physical and human capital equals higher productivity, low inflation, political stability and free trade.

Microeconomic Concepts

Describe how households, businesses, and governments are interdependent and interact through flows of goods, services, and money.

Illustrate by means of a circular flow diagram, the Product market; the Resource (factor) market; the real flow of goods and services between and among businesses, households, and government; and the flow of money.

b. Explain the role of money as a medium of exchange and how it facilitates exchange.

Money – anything used to buy and sell goods and services.  3 functions of money:

Medium of exchange – generally accepted as a form of payment.

Store of value – retains value over time.

Unit of account – value is measured in units of money.

Explain how the Law of Demand, the Law of Supply, prices, and profits work to determine production and distribution in a market economy.
 Define the Law of Supply and the Law of Demand.
Law of Supply – all other factors being equal, as the price of a good or service increases, the quantity of goods and services offered by suppliers increases and vice versa.
Law of Demand – all other factors being equal, as the price of a good or service increases the quantities consumers demand for the good or service will decrease and vice versa.

 Describe the role of buyers and sellers in determining market clearing price.
The market clearing price (equilibrium) results in neither shortages or surpluses.  Transactions in a market economy are voluntary  so they must benefit both buyers and sellers.

c. Illustrate on a graph how supply and demand determine equilibrium price and quantity.

                                                                                                   Market Equilibrium

d. Explain how prices serve as incentives in a market economy.

a. The price and quantity exchanged are determined by supply and demand, prices provide incentives for both buyers and sellers.  Prices provide information to consumers and producers about market conditions on supply and demand.

Explain how markets, prices, and competition influence economic behavior.
Identify and illustrate on a graph factors that cause changes in market supply and demand.

Factors that cause changes in market supply – explain how they affect supply
Cost of inputs
Productivity
Technology
Taxes and Subsidies
Expectations
Government regulations
Change in the number of sellers
Weather/natural disasters

Price                                                                                                  Price

               Increase in Supply                                           Decrease in Supply

Factors that cause changes in market demand – explain how they affect demand
Consumer income/wealth
Consumer tastes and preferences (advertising)
Change in the price of substitute goods
Change in the price of complementary goods
Change in expectations
Change in number of consumers

  Price                                                                Price

             Increase in Demand                              Decrease in Demand

b. Explain and illustrate on a graph how price floors create surpluses and price ceilings create shortages.

Price floor –  a legally established minimum priced – examples are farm products and minimum wage laws.  Too much milk produced, too many workers seeking a higher minimum wage.  Designed to help suppliers, some will not be able to sell their goods because of lack of demand.

Price ceiling – legally established maximum price, an example would be rent control. Too many renters, not enough apartments.  Designed to help consumers, the quantity demanded tends to exceed the quantity supplied.

c. Define price elasticity of demand and supply.

Price elasticity of demand – a way of measuring how much quantity demanded will change in response to a change in price.

Price elasticity of supply – a way of measuring how much quantity supplied will change in response to change in price.

Explain the organization and role of business and analyze the four types of market structures in the U.S. economy.

 Compare and contrast three forms of business organization—sole proprietorship, partnership, and corporation.
Sole proprietorship – a business owned by one person.

Advantages-  ease of start-up, ease of management, owner gets all profits, full control, easy to stop, business itself is exempt from tax on income.
Disadvantages- unlimited liability, difficulty in raising financial capital, amount of work, limited life.

Partnership – a business jointly owned by two or more people.
Advantages- ease of start-up, each partner brings a skill, larger pool of capital, lack of special taxes on partnerships.
Disadvantages- each partner is responsible for the business, unlimited liability (unless LLP or limited liability partnership), limited life, potential for conflict.   

Corporation – a business organization that is owned by stock holders and recognized by law as a separate legal entity having all the rights of an individual.  
Advantages- ease of raising financial capital thru the sale of stock or bonds, limited liability of owners, unlimited life, ease of transferring ownership. 
Disadvantages- difficult to start, owners/shareholders often have little or no power to run the corporation, more legal requirements, double taxation.

b. Explain the role of profit as an incentive for entrepreneurs.

Entrepreneurs are willing to risk their resources in order to sell them for financial gain or profit, and are successful when providing goods and services valued by consumers.  Successful entrepreneurs are willing to assume risk, have unique skills, discipline to work long and hard to earn income, learn skills valued by others. 

 Identify the basic characteristics of monopoly, oligopoly, monopolistic competition, and pure competition.
Monopoly – a market structure in which there is a single supplier of a good or service that there is no close substitute for.  Example – public water.

Oligopoly – a market structure in which a few, relatively large firms account for all or most of the production or sale of a good or service in a market, barriers to new producers are high.  Examples are cars, airlines, and movie studios.

Monopolistic competition – a market structure where slightly different products are sold by a large number of relatively small producers, barriers to new firms are low. An example would be jeans and gas stations.

Pure competition – a market structure theory in which a large number of relatively small firms produce and sell identical products, there are no barriers to enter the market and it is easy to exit from the market, the best example would be agricultural products like wheat.

Macroeconomic Concepts

Illustrate the means by which economic activity is measured.

Explain that overall levels of income, employment, and prices are determined by the spending and production decisions of households, businesses, government, and net exports.

Define Gross 29. Domestic Product (GDP), economic growth, unemployment, Consumer Price Index (CPI), inflation, stagflation, and aggregate supply and aggregate demand.

Gross Domestic Product (GDP) – the market value of all goods and services produced in a calendar year.

Economic Growth – an increase in real output as measured by real GDP or per capita real GDP

Unemployment – the number of people in the civilian workforce over the age of 16 without jobs who are actively seeking work.

Consumer Price Index (CPI) – a price index that measures the cost of a fixed basket of consumer goods and services, compares the costs from other time periods and is used to measure inflation.

Inflation – a rise in the general or average price level of all goods and services in an economy, (caused by demand-pull or cost-push)

Stagflation – a decline in real GDP combined with a rise in the average price level
Aggregate Supply (AS) – the value of output (real GDP) that would be produced at different price levels in a nation’s economy.

-3-

Aggregate Demand (AD)  –  the value of output (real GDP) that would be demanded at different price levels in a nation’s economy.

Explain how economic growth, inflation, and unemployment are calculated.

Economic growth is measured by GDP, Inflation is measured by CPI, the polling of 50,000 households to create an unemployment rate (total unemployed divided by the total workforce)

Bureau of Economic Analysis– (economic growth)

Bureau of Labor Statistics– (inflation, unemployment)

 Identify structural, cyclical, and frictional unemployment.
Structural Unemployment – skills of workers do not match up with the skills required by employers.

Cyclical Unemployment – caused by the fluctuations in the overall rate of economic activity or a phase in the business cycle.

Frictional Unemployment – some are always unemployed, often it is the choice of the worker for a variety of reasons.

 Define the stages of the business cycle, include peak, contraction, trough, recovery, expansion as well as recession and depression.

Business cycle – changes in the overall rate of national economic activity with alternating periods of expansion and contraction, varying in duration and severity and measured by real GDP

Peak – the height of economic expansion, real GDP stops rising.

Contraction – a period of economic Decline Marked by falling GDP.

Trough – the lowest point in an

Economic contraction, real GDP

stops falling.

Recovery – the period following a

recession during which real

GDP rises.

Expansion – a period of economic growth

as measured by a rise in real GDP.

Recession – a decline in national economic activity, measured by a decline in real GDP for at least two consecutive quarters (6 months).

Depression – a severe and prolonged economic contraction.
 Describe the difference between the national debt and government deficits.
National Debt – the public debt, all of the annual budgets deficits added together.
Government Deficits – the government spends more money (expenditures) in a fiscal year than it takes in (revenue) during that time.

Explain the role and functions of the Federal Reserve System.

 Describe the organization of the Federal Reserve System.

Chairman, Board of governors, FOMC, 12 district banks.

 Define monetary policy.

Monetary Policy – changes in the money supply, availability and cost of credit set by the Fed to promote economic growth, price stability and full employment.

Describe how the Federal Reserve uses the tools of monetary policy to promote price stability, full employment, and economic growth.
Open Market Operations – the buying and selling of government securities (T-bonds, T-notes- T-bills) by the Fed, to increase money supply – buy back bonds, to decrease money supply – sell bonds.  
Discount Rate – the interest rate the Fed charges banks that borrow money from the Fed.
Federal Funds Rate – the overnight lending interest rate between banks utilizing federal funds (funds on reserve in a bank).
Reserve Requirements – the fraction of bank deposits required by the Fed to be kept on hand.  Banks must have this money (federal funds) available in their vault.

Explain how the government uses fiscal policy to promote price stability, full employment, and economic growth.

 Define fiscal policy.
Fiscal Policy – the spending (expenditures) and tax collection (revenue) of the government to influence economic activity.

 Explain the government’s taxing and spending decisions.
Government taxation – revenue raised through taxes to pay for expenditures.
Government expenditures – goods and services purchased by the government with tax revenues or borrowed money.

INTERNATIONAL ECONOMICS

Fundamental Economic Concepts

Explain how specialization and voluntary exchange between buyers and sellers increase the satisfaction of both parties. 
*Provide examples of how individuals and businesses specialize

Division of Labor refers to the practice of dividing the work to make something into separate tasks.  Workers become specialized in different tasks.  We earn a living by doing tasks, taking our wages to purchase goods and services from other workers.  Division of Labor and Specialization is the basis for an economy to exist.  3 benefits are doing it better, no time required to switch tasks, create more effective ways to do the task.

Explain that both parties gain as a result of voluntary, non-fraudulent exchange.

We don’t make all of our electronic devices, countries do not make all of the goods and services they need.  Specialization is the basis of trade and interdependence among individuals, businesses, cities, regions and countries.   Wisconsin = dairy   Florida = oranges.

INTERNATIONAL ECONOMICS

Explain why individuals, businesses and governments trade goods and services.
Define and distinguish between absolute advantage and comparative advantage

Comparative Advantage – the ability to produce a good or service at a lower opportunity cost than some other producer (the economic basis for specialization and trade)

Absolute Advantage –. the ability to produce more units of a good or service than some other producer, using the same quantity of resources.

Explain that most trade takes place because of comparative advantage in the production of a good or service
COMPARATIVE ADVANTAGE – every country should produce and trade the good in which it has a comparative advantage.  The good or service in which the opportunity cost is lowest.  Staying with comparative advantage yields the biggest gains in trade

 BENEFITS OF TRADE – international trade equals increased competition, increased variety of goods available to consumers, spreads new technology and production methods, helps low-income countries.    

Explain the difference between balance of trade and balance of payments
Balance of Trade – a comparison of imports and exports of goods and services.

Balance of Payments – the record of all transactions in trading good and services between countries and is expressed in monetary terms (dollars)

Explain why countries sometimes erect trade barriers and sometimes advocate free trade

 define trade barriers as tariffs, quotas, embargoes, standards and subsidies
Tariff – a tax on imported goods and services.

Quotas – a limit on the quantity of a product that may be imported or exported.

Embargoes – to impose certain conditions before granting consent to import a good or service.

Standards – expectations of minimal levels of quality that must be met or extra safety standards.

Subsidies – financial assistance from government to an enterprise or business, often considered to be beneficial to the public.

Identify costs and benefits of trade barriers over time
Designed to prevent imports and protect domestic industries and producers, protectionism is an attempt to protect a nation’s economy, trade barriers may save jobs in one area and at the same time destroy jobs in another area.

List specific examples of trade barriers
Tariffs, import quotas, non-tariff barriers like additional administrative requirements, regulations or unnecessary procedures.

List specific examples of trading blocks such as the EU, NAFTA, ASEAN

EU – European Union

NAFTA – North American Free Trade Agreement [US/Canada/Mexico

ASEAN – Association of Southeast Nations

MERCOSUR – Common Market of the South [Latin America]

Other players on the world stage:

BRIC – Brazil, Russia, India, China

GATT – General Agreement of Tariffs and Trade

WTO – World Trade Organization

IMF – International Monetary Fund

World Bank

Evaluate arguments for and against free trade.
The arguments most often heard AGAINST free trade…

Keep jobs in America, keep our money in our country, national security, other nations treat their workers unfairly, other nations dump cheap stuff in our country, other countries keep our products from being sold in their country.

The argument FOR free trade…. 

Lower prices for goods, more variety in goods and services, higher standard of living because of increased income as a result of lower prices.

Explain how changes in exchange rates can impact the purchasing power of  individuals in the United States and in other countries.

Exchange rate is the amount of one country’s currency that is equal to one unit of another country’s currency (Dollar vs. yen).  Exchange rates are determined by supply and demand.  All countries typically want to be paid in their country’s currency.

Define exchange rate as the price of one nation’s currency in terms of another nation’s currency

Exchange Rate – the price of one nation’s currency in terms of another nation’s currency.

Locate information on exchange rates – process skill

Rate at which one currency may be converted into another. The exchange rate is used when simply converting one currency to another (such as for the purposes of travel to another country), or for engaging in speculation or trading in the foreign exchange market. There are a wide variety of factors which influence the exchange rate, such as interest rates, inflation, and the state of politics and the economy in each country – also called rate of exchange or foreign exchange rate or currency exchange rate.

Interpret exchange rate tables – process skill

1 to 1

USD

GBP

CAD

EUR

AUD

MXN

USD

1

0.62116

0.99310

0.76360

0.95497

12.94772

GBP

1.60988

1

1.59878

1.22931

1.53739

20.845083

CAD

1.00695

0.62548

1

0.76891

0.96160

13.037616

EUR

1.30958

0.81346

1.30055

1

1.25061

16.954413

AUD

1.04716

0.65045

1.03993

0.79961

1

13.554086

MXN

0.07723

0.05897

0.07669

0.05898

0.07376

1

Explain why, when exchange rates change, some groups benefit and others lose.

When demand for a country’s currency rises faster than the supply of its currency, the value of the currency will rise

Personal Finance Concepts

Apply rational decision making to personal spending and savings choices.

Decision making – rational consumers seeking their own happiness or utility will make choices, everyday consumers consider their options and trade-offs and try to make the choice that brings them the greatest satisfaction.

Explain that people respond to positive and negative incentives in predictable ways

Incentives are costs and benefits that motivate a decision or action by consumers, workers or firms in an economy.  Incentives matter in each and every decision.  Concerns like higher and lower prices, wages and interest rates.

Use a rational decision making model to select one option over another

P – What is the PROBLEM?

What decision are you trying to make?
What is the issue at han

 

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Question 1 1 / 1 point

__________ is the exploitation of an organization’s telephone, dial, and private branch exchange (PBX) system to infiltrate the internal network in order to abuse computing resources.

War driving

Line dialing

PBX driving

War dialing

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Question 2 1 / 1 point

__________ cryptography is the most common method on the Internet for authenticating a message sender or encrypting a message.

Symmetric

Hash-based

Private-key

Public-key

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Question 3 1 / 1 point

__________ is a lightweight Knoppix version cut to 50 MB for a business-card-sized CD.

Gnoppix

GeeXboX

Morphix

Damn Small Linux

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Question 4 1 / 1 point

The __________ utility tests the integrity of an ODBC data source.

odbcping

ASPRunner

FlexTracer

DbEncrypt

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Question 5 1 / 1 point

In the TCP/IP stack, the __________ layer is where applications and protocols, such as HTTP and Telnet, operate.

Internet

network

transport

application

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Question 6 1 / 1 point

Attackers can use a simple test to find out if an application is vulnerable to an OLE DB error. They can fill in the username and password fields with __________.

a pound sign

two dashes

a single quotation mark

double quotes

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Question 7 1 / 1 point

__________ allow attackers to pass malicious code to different systems via a web application.

SQL injection attacks

XSS vulnerabilities

Authentication hijacking attacks

Command injection flaws

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Question 8 1 / 1 point

A __________ is a trusted entity that signs certificates and can vouch for the identity of the user and the user’s public key.

verification authority

certification authority

validation authority

registration authority

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Question 9 1 / 1 point

Null sessions require access to TCP port __________.

139

141

345

349

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Question 10 1 / 1 point

__________ is a command-line utility provided by Microsoft with SQL Server 2000 (and Microsoft SQL Server 2000 Desktop Engine) that allows users to issue queries to the server.

ODBC

SQLP

OSQL

SRS

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Question 11 1 / 1 point

The __________ file is used to determine which TTY devices the root user is allowed to log in to.

/usr/securetty

/etc/securetty

/var/securetty

/home/securetty

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Question 12 1 / 1 point

__________ can monitor a Simple Mail Transfer Protocol (SMTP) server regularly after connecting to it.

CheckOK

SMTPCheck

SMTPMon

SLCheck

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Question 13 1 / 1 point

__________ is a method of gaining access to sensitive data in a Bluetooth-enabled device.

Bluebugging

Bluesnarfing

BTKeylogging

Blueprinting

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Question 14 1 / 1 point

__________ is a simple form of attack aimed directly at the application’s business logic.

Authentication hijacking

Parameter tampering

Cookie poisoning

Session poisoning

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Question 15 1 / 1 point

Once the Oracle database server has been traced, the first port of call is made to the __________ listener.

SQL

TNS

TCP

PL/SQL

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Question 16 1 / 1 point

__________ is a common and easy form of SQL injection. The technique involves evading the logon forms.

Command injection

SELECT bypass

INSERT injection

Authorization bypass

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Question 17 1 / 1 point

__________ gathering is the process of accumulating information from resources like the Internet that can later be analyzed as business intelligence.

Competitive intelligence

Tracerouting

Passive information

Footprinting

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Question 18 1 / 1 point

__________, formerly called AppTapp, is a tool for jailbreaking and installing nonsanctioned third-party applications on the iPhone.

iFuntastic

iNdependence

iActivator

AppSnapp

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Question 19 1 / 1 point

Firefox 2.0.0.11 cannot correctly interpret single quotation marks and spaces during authentication. This is called the __________ value of an authentication header.

registration

site

domain

realm

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Question 20 1 / 1 point

Private data stored by Firefox can be quickly deleted by selecting __________ in the Tools menu.

Clear History

Clear Private Data

Delete Private Data

Delete History

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Question 21 1 / 1 point

A(n) __________ is a custom command in Linux that is a substitute for a formal command string.

user string

system link

alias

link

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Question 22 1 / 1 point

A __________ is a device that cannot function in any capacity.

block

brick

rock

cage

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Question 23 0 / 1 point

__________ involves plotting the tables in the database.

Database enumeration

Database footprinting

Table footprinting

Table enumeration

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Question 24 1 / 1 point

A __________ is a device that receives digital signals and converts them into analog signals, and vice versa.

firewall

proxy

hub

modem

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Question 25 1 / 1 point

Which of the following types of tools would be most effective in cracking UNIX passwords?

Ophcrack

KerbCrack

John the Ripper

RainbowCrack

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Question 26 1 / 1 point

SQL Server, like other databases, delimits queries with a __________.

colon

period

semicolon

comma

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Question 27 1 / 1 point

__________ is a unique 15- or 17-digit code used to identify a mobile station to a GSM network.

IMEI

SIMID

SIM

PhoneID

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Question 28 1 / 1 point

Which of the following password attacks is conducted using nontechnical means?

hybrid

brute force

social engineering

rainbow tables

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Question 29 1 / 1 point

In __________-level hijacking, the attacker obtains the session IDs to get control of an existing session or to create a new, unauthorized session.

network

data link

transport

application

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Question 30 1 / 1 point

Which of the tools listed below can be used to execute code on remote Windows systems?

X.exe

PsExec

Rsync

Ghost

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Question 31 1 / 1 point

Kaspersky is used as __________.

a hacking tool against PDAs

a hacking tool against IPHONEs

a hacking tool against IPODs

an antivirus for Windows Mobile

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Question 32 1 / 1 point

__________ viruses search all drives and connected network shares to locate files with an EXE or SCR extension.

W32/Madang-Fam

W32/Hasnot-A

W32/Fujacks-AK

W32/Fujacks-E

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Question 33 1 / 1 point

What is the difference between online and offline password attacks?

Online attacks are conducted against people using the Internet, and offline attacks are conducted against people on private networks.

Online attacks target passwords or their representations as they traverse a network, and offline attacks focus on stored passwords.

Online attacks are used to gain access to systems, and offline attacks are used to knock systems off the network.

Offline attacks target passwords or their representations as they traverse a network, and online attacks focus on stored passwords.

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Question 34 0 / 1 point

__________ synchronizes the information between a Palm device and a desktop PC.

HotSync

ActiveSync

PocketSync

PalmSync

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Question 35 1 / 1 point

__________ is a type of computer architecture in which multiple processors share the same memory and are each assigned different tasks to perform.

Xcode

Multitasking

Cocoa

Symmetric multiprocessing

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Question 36 1 / 1 point

__________ hackers are information security professionals who specialize in evaluating, and defending against, threats from attackers.

Gray-hat

Black-hat

Consulting

Ethical

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Question 37 1 / 1 point

An __________ share is a hidden share that allows communication between two processes on the same system.

SMC

IPC

EPC

SMB

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Question 38 1 / 1 point

The __________ method appends data in the URL field.

POST

GET

APPEND

URL

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Question 39 1 / 1 point

__________ is a lightweight substitute for telnet that enables the execution of processes on other systems, eliminating the need for manual installation of client software.

PsExec

Alchemy Remote Executor

Emsa FlexInfo Pro

RemoteApp

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Question 40 1 / 1 point

__________ is a back-end GPL tool that works directly with any RFID ISO-reader to make the content stored on the RFID tags accessible.

RFDump

RFReader

RFReceiver

RFExplorer

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Question 41 1 / 1 point

__________ is a parallelized login cracker that supports numerous protocols for attack.

ADMsnmp

SING

Hydra

John the Ripper

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Question 42 1 / 1 point

IT __________ are designed to evaluate an organization’s security policies and procedures.

ping sweeps

vulnerability assessments

penetration tests

security audits

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Question 43 1 / 1 point

__________ is the act of gathering information about the security profile of a computer system or organization, undertaken in a methodological manner.

Tracerouting

Passive information gathering

Footprinting

Competitive intelligence gathering

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Question 44 1 / 1 point

__________ is a command-line interface for Microsoft SQL Server that allows an attacker to execute commands on the underlying operating system, execute SQL queries, and upload files to a remote server.

SQLExec

Absinthe

Sqlninja

SQLSmack

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Question 45 1 / 1 point

__________ occurs when hackers break into government or corporate computer systems as an act of protest.

Hacktivism

Cyber terrorism

Cybercrime

Suicide hacking

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Question 46 1 / 1 point

Mac OS X includes __________, a collection of frameworks, APIs, and accompanying runtimes that allows for a host of open-source web, database, scripting, and development technologies.

Cocoa

Coffee

Bean

Xcode

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Question 47 1 / 1 point

__________ is usually employed when the attacker discerns that there is a low probability that these reconnaissance activities will be detected.

Social engineering

Direct information gathering

Active reconnaissance

Inactive reconnaissance

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Question 48 1 / 1 point

__________ is a programming language that permits website designers to run applications on the user’s computer.

Java

Ruby

Python

Smalltalk

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Question 49 1 / 1 point

_________ hijacking is a hacking technique that uses spoofed packets to take over a connection between a victim and a target machine.

ACK

Blind

TCP/IP

Network-level

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Question 50 1 / 1 point

In order for traffic to get back to the attacker during session hijacking, a process called __________ is used that allows the sender to specify a particular route for the IP packet to take to the destination.

desynchronization

source routing

spoofing

TCP routing

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Question 51 1 / 1 point

__________ is a worm for Windows XP that downloads and executes malicious files on the compromised computer and spreads through removable storage devices.

HTTP W32.Drom

W32/VBAut-B

W32/QQRob-ADN

W32/SillyFDC-BK

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Question 52 1 / 1 point

The Java-based __________ worm spreads through Bluetooth and affects unprotected Mac OS X 10.4 systems.

OSX/Leap-A

AppHook.B

Inqtana.A

BTHook-A

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Question 53 1 / 1 point

__________ is a virus targeted against mobile personal digital assistant devices.

Skulls

Brador

Doomboot.A

Podloso

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Question 54 1 / 1 point

The __________ stores confidential information that is accessible only from inside the organization.

public website

confidential website

private website

external website

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Question 55 1 / 1 point

__________ is the unauthorized alteration of routing tables.

Route poisoning

Routing table spoofing

Routing table poisoning

Route spoofing

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Question 56 1 / 1 point

__________ automatically scans a computer, looking for cookies created by Internet Explorer, Mozilla Firefox, and Netscape Navigator, and then displays the data stored in each one.

Cookie Viewer

Cookie Explorer

Cookie Browser

Cookie Manager

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Question 57 1 / 1 point

__________ is a tool that administrators can use to test the reliability of their critical systems and determine what actions they must take to fix any problems.

DbEncrypt

AppDetective

Selective Audit

AppRadar

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Question 58 1 / 1 point

The __________ script allows a remote user to view the code of server-side scripts.

Showlogin.asp

Showcode.asp

RemoteAccess.asp

Remotelogin.asp

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Question 59 1 / 1 point

__________ is a method in which a sniffer is used to track down a conversation between two users.

A man-in-the-middle (MITM) attack

Session hijacking

IP spoofing

Network tapping

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Question 60 1 / 1 point

__________ is a small utility that lists all USB devices currently connected to a computer, as well as all previously used USB devices.

MyUSBOnly

USB Blocker

USB CopyNotify!

USBDeview

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Question 61 1 / 1 point

After gaining access, what is the attacker’s next goal?

Cover their tracks.

Start denial-of-service attacks.

Find ways to maintain access.

None of the above.

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Question 62 1 / 1 point

__________ is an HTTP authentication brute-force program. It attempts to guess passwords for basic HTTP authentication by logging in to a web server.

Authforce

ObiWaN

Hydra

Cain & Abel

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Question 63 1 / 1 point

__________ record the parts of the website visited and can contain identifying information.

Logs

Records

Cookies

Certificates

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Question 64 1 / 1 point

Web applications have a three-layered architecture consisting of presentation, logic, and __________.

application

data layers

transport

HTTP

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Question 65 1 / 1 point

__________ is a Linux security feature that enables a user to choose the directory that an application can access.

Chroot

Sandbox

Jailroot

Rootjail

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Question 66 1 / 1 point

There are several aspects to security, and the owner of a system should have confidence that the system will behave according to its specifications. This is called __________.

confidentiality

reusability

accountability

assurance

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Question 67 1 / 1 point

The __________ command displays the ARP table and is used to modify it.

ifconfig -arp

arp-table

netstat -arp

arp

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Question 68 0 / 1 point

__________ detects and monitors Bluetooth devices in a wireless network. It provides information about the features of each device and the services provided by it.

Bluetooth Network Scanner

BlueFire Mobile Security

BlueAuditor

BlueWatch

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Question 69 1 / 1 point

Which of the following statements best describes a penetration test?

A penetration test is using a password cracker to gain access to a system.

A penetration test is an attempt to simulate methods used by attackers to gain unauthorized access to a computer system.

A penetration test is the act of hacking computer systems; it is used by criminals to attack legitimate organizations.

A penetration test is an audit of an organization’s security policies and procedures.

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Question 70 1 / 1 point

Which website can an ethical hacker visit to see web pages from 2002?

Feedback

Question 71 1 / 1 point

__________ provides a complete view for monitoring and analyzing activity within USB host controllers, USB hubs, and USB devices.

USB PC Lock

USBlyzer

Advanced USB Monitor

Virus Chaser USB

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Question 72 1 / 1 point

The __________ is due to a canonicalization error in IIS 4.0 and 5.0 that allows an attacker to use malformed URLs to access files and folders located on the logical drive that includes web folders.

canonicalization vulnerability

::$DATA vulnerability

Unicode directory traversal vulnerability

Msw3prt IPP vulnerability

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Question 73 1 / 1 point

A __________ attack adds numbers or symbols to a dictionary file’s contents to crack a password successfully.

brute-force

dictionary

hybrid

parameter manipulation

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Question 74 1 / 1 point

Only __________ scan is valid while scanning a Windows system.

SYN

Null

FIN

Xmas

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Question 75 1 / 1 point

Ethical hackers use their knowledge and skills to __________.

learn the details of computer systems and enhance their capabilities

attack government and commercial businesses

develop new programs or reverse-engineer existing software to make it more efficient

defend networks from malicious attackers

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Question 76 1 / 1 point

Tripwire protects against Trojan horse attacks by __________.

blocking the port that the Trojan program is listening on

removing any Trojan horse programs found on the system

detecting unexpected changes to a system utility file that may indicate it had been replaced by a Trojan horse

quarantining any Trojan horse programs discovered on the system

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Question 77 1 / 1 point

The ISAPI extension responsible for IPP is __________.

msisapi.dll

msw3prt.dll

msipp5i.dll

isapiipp.dll

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Question 78 1 / 1 point

__________ is a protocol used to create, modify, and terminate sessions such as VOIP.

SMS

SIP

GSMA

GPRS

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Question 79 1 / 1 point

A(n) __________ is a specific way to breach the security of an IT system through a vulnerability.

hole

exposure

exploit

threat

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Question 80 1 / 1 point

__________ is a portable, battery-powered device that mediates interactions between RFID readers and RFID tags.

RSA blocker tag

RFID Firewall

RFID Guardian

Kill switch

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Question 81 1 / 1 point

Which of the statements below correctly describes a dictionary attack against passwords?

It is an attack that tries every combination of characters until a correct password is identified.

It is an attack that uses a list of words to guess passwords until a correct password is identified.

It is an attack that uses a list of words and appends additional numbers or characters to each word until a correct password is identified.

It is an attack that uses precomputed values until a correct password is identified.

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Question 82 0 / 1 point

The __________ are the agreed-on guidelines for a penetration test.

rules of engagement

project scope statements

test requirements

service-level agreements (SLAs)

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Question 83 1 / 1 point

The Network News Transport Protocol service uses port __________.

110

119

135

139

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Question 84 1 / 1 point

A(n) __________ is the logical, not physical, component of a TCP connection.

ISN

socket

port

SYN

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Question 85 1 / 1 point

__________ reconnaissance is a hacker’s attempt to scout for or survey potential targets and then investigate the target using publicly available information.

Active

Passive

Public

Open

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Question 86 1 / 1 point

A __________, also called a packet analyzer, is a software program that can capture, log, and analyze protocol traffic over the network and decode its contents.

sniffer

recorder

logger

tapper

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Question 87 1 / 1 point

__________ is, simply enough, looking through an organization’s trash for any discarded sensitive information.

Trash diving

Trash carving

Dumpster searching

Dumpster diving

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Question 88 1 / 1 point

__________ is a secure method of posting data to the database.

URL

SQL

GET

POST

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Question 89 1 / 1 point

How do you defend against privilege escalation?

Use encryption to protect sensitive data.

Restrict the interactive logon privileges.

Run services as unprivileged accounts.

Run users and applications on the least privileges.

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Question 90 1 / 1 point

When an ethical hacker uses nslookup, which protocol are they querying?

DNS

HTTPS

SMB

NTP

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Question 91 1 / 1 point

Bluetooth-enabled devices communicate via short-range, ad hoc networks known as __________.

piconets

uninets

btnets

pans

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Question 92 1 / 1 point

The act of hiding data within or behind other data is known as __________.

encoding

encryption

steganography

fuzzing

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Question 93 1 / 1 point

A __________ occurs when a connection between the target and host is in the established state, or in a stable state with no data transmission, or the server’s sequence number is not equal to the client’s acknowledgment number, or the client’s sequence number is not equal to the server’s acknowledgment number.

synchronization state

blind hijacking

source routing

desynchronization state

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Question 94 1 / 1 point

__________ are software applications that run automated tasks over the Internet.

Zombies

Spiders

Bots

Crawlers

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Question 95 1 / 1 point

Which of the following definitions best describes a wrapper?

A wrapper is a packet-crafting technique used to perform stealthy port scans.

A wrapper is an encryption tool used to hide messages inside image files.

A wrapper is a method of hiding a virus inside an executable file.

A wrapper is a tool used to bind a Trojan to a legitimate file.

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Question 96 1 / 1 point

In a hit-and-run attack, __________.

the attacker constantly injects bad packets into the router

the attacker mistreats packets, resulting in traffic congestion

the attacker injects a few bad packets into the router

the attacker alters a single packet, resulting in denial of service

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Question 97 1 / 1 point

__________ is a command-line TCP/IP packet assembler/analyzer.

Hping2

Firewalk

WUPS

Blaster Scan

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Question 98 1 / 1 point

The __________ tool traces various application calls from Windows API functions to the Oracle Call Interface.

ASPRunner

FlexTracer

odbcping

SQL Query Analyzer

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Question 99 1 / 1 point

With the __________ tool, you can ping multiple IP addresses simultaneously.

Fping

Nmap

Nessus

Unicornscan

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Question 100 1 / 1 point

Attackers use a technique called __________ to exploit the system by pretending to be legitimate users or different systems.

identity theft

impersonation

spoofing

flooding

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Question 101 1 / 1 point

__________ is a Microsoft-proprietary protocol that authenticates users and computers based on an authentication challenge and response.

LMLAN

Kerberos

NTLM

NTLAN

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Question 102 1 / 1 point

__________ reconstructs a device’s Bluetooth PIN and link key from data sniffed during a pairing session.

Blooover

Hidattack

BTCrack

Cabir and Mabir

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Question 103 1 / 1 point

This type of port scanning technique splits a TCP header into several packets so that the packet filters cannot detect what the packets intend to do.

UDP scanning

IP fragment scanning

inverse TCP flag scanning

ACK flag scanning

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Question 104 1 / 1 point

__________ is an application that, when installed on a system, runs a background process that silently copies files from any USB flash drive connected to it.

USB Switchblade

USBDumper

USB Hacksaw

USB Copy ’em all

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Question 105 1 / 1 point

__________ is an application that identifies all Bluetooth-enabled devices, their communications, and their connectivity within a given area.

BlueSweep

BlueWatch

BlueKey

BlueFire Mobile

View Feedback

Question 106 1 / 1 point

__________ URLs, or intranets, are private links that only a company’s employees use.

Internal

Private

Organizational

Domain

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Question 107 1 / 1 point

In Internet Explorer, the __________ zone is a security zone for sites that the user has designated as safe to visit.

user sites

legal sites

white list

trusted sites

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Question 108 1 / 1 point

Which of the following is not a category of security assessment?

security audit

rootkit detection

vulnerability assessment

penetration testing

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Question 109 1 / 1 point

A hacker has successfully used a tool to intercept communications between two entities and establish credentials with both sides of the connection. The two remote ends of the communication never notice that the attacker is relaying the information between the two. This is called a(n) __________ attack.

man-in-the-middle

interceptoring

MAC poisoning attack

firewalking

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Question 110 1 / 1 point

__________ is a cable modem hacking program. It performs the task of uncapping by incorporating all the uncapping steps into one program.

Yersinia

OneStep: ZUP

Zebra

Solar Winds MIB Browser

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Question 111 1 / 1 point

Information on all Linux accounts is stored in the __________ and /etc/shadow files.

/etc/conf

/etc/passwd

/etc/password

/conf/passwd

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Question 112 1 / 1 point

Which type of penetration test is conducted with absolutely no prior knowledge of the target environment?

white-box testing

gray-box testing

red-hat testing

black-box testing

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Question 113 1 / 1 point

Redirections for URLs are handled with the __________ URL handler, which can cause errors in older versions of Internet Explorer.

goto:

mdir:

mhtml:

redir:

View Feedback

Question 114 1 / 1 point

Traceroute uses the __________ field in an IP packet to determine how long it takes to reach a target host and whether that host is reachable and active.

IHL

flags

TOS

TTL

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Question 115 1 / 1 point

Which of the following is not a Microsoft Internet Information Services vulnerability?

::$DATA vulnerability

UFS integer overflow vulnerability

Showcode.asp vulnerability

WebDAV/RPC exploits

View Feedback

Question 116 1 / 1 point

Which of the following statements best describes the rules of engagement for a penetration test?

The rules of en

 

"Looking for a Similar Assignment? Get Expert Help at an Amazing Discount!"

To complete this assignment review the following resources Web resource: Haislmaier, E. (2011, January 20). Obamacare and insurance rating rules: Increasing costs and destabilizing markets. The Heritage Foundation. Retrieved fromhttp:// a detailed case study analysis of the given case, using the process described in Appendix A of your textbook Strategic Management of Health Care Organizations.

Your completed Case Study Analysis Report will include the following sections:

•Executive summary

•Body of the case report

oKey issues

oSituational analysis

oStrategy formulation

oRecommendation

oImplementation strategies

oBenchmarks for success and contingency plans

Where not all pertinent information is given in the case itself, search for that information through the South University online library, or perform a Web search for the required information. Note: Do not search for information beyond the date of the case.

For the Situational Analysis you are encouraged to provide visual presentation of data in your situational analysis and use the analysis tools from your textbook and other analysis tools you have used in your program, such as trend analysis, stakeholder analysis, etc.

Present your Case Study Analysis report in a Word document, formatted in the headings and sub-headings given above.

Submit your report in two steps: First, a preliminary report with the key issues, situational analysis, and strategy formulation. Then the complete report with recommendation, implementation strategies, benchmarks, and the executive summary.

Key Issues: Key issues are complete and clearly explained.12

Situational Analysis

External environment analysis includes detailed service area competitive analysis.12

Internal environment analysis includes strengths and weaknesses with respect to resources, competencies, an capabilities. The SWOT analysis must include all 4 elements Strengths, Weaknesses, Opportunities and Threats12

Directional strategies are defined.12

Strategy Formulation: Adaptive, market entry, and competitive strategies are developed and supported with rationale.

12

Recommendation: Alternatives are practical, specific, and related to key issues.

12

Implementation Strategies: Service delivery and support strategies are linked to directional, adaptive, and market entry and competitive strategies.

12

Benchmarks for Success: Measurements for success are clearly identified.

12

Expressed ideas clearly in writing, used appropriate visual presentation of data, and presented the case study analysis report in the specified format.

12

Applied the correct APA style, usage, grammar, and punctuation.

12

APPENDIX A of Strategic Management of Health Care Organizations.

Analyzing Strategic Health Care Cases

How do students of management gain experience in strategic thinking and making strategic decisions in health care organizations? One way is to work their way up the organization, holding a variety of positions, experimenting as they develop their decision-making skills, and observing other leaders as they deal with issues and develop strategies. Then, when the opportunity presents itself, they combine what they have learned from others and their own management philosophy, and do the best they can. Unfortunately, learning by experimenting and observing others may be risky in rapidly changing environments and in the often unique situations that health care managers and leaders face.

Hospitals, HMOs, long-term care facilities, public health organizations, and other health services prefer to trust important decision making to experienced managers and leaders. Case studies have been successfully used as a surrogate method to provide aspiring managers and leaders with experience in strategic thinking, strategic planning, and making decisions without undue risk. The best case studies, such as those in this text, contain real situations actually faced by managers and leaders in health care organizations and are documented in a way that makes them useful in providing experience for future strategic decision makers. Because many future health care decision makers are not familiar with how to analyze cases, this appendix has been included, not to prescribe how cases should always be solved, but to offer some initial direction on how to surface and address the real issues presented in the cases.

An Overview of Case Analysis

Case analysis provides the student of health care an exciting opportunity to act in the role of a key decision maker. From hospitals to community blood centers to physicians’ offices, students have the chance to learn about a variety of health and medical organizations and to practice decision-making skills through analyzing cases.

The decisions required to “solve” cases represent a wide range of complexity, so that no two cases are addressed in exactly the same manner. However, the strategic thinking maps presented in this text provide frameworks to aid in strategically thinking about case issues. The fundamental task of the case analyst is to make decisions that will serve as a map to guide the organization into the future. Therefore, most case instructors will expect a comprehensive plan for the organization that addresses relevant current issues and provides a viable and reasonably complete strategy for the future. In order to achieve this goal, the case analyst typically should:

•surface and summarize the key issues,

•analyze the situation,

•develop an organizational strategy,

•develop an implementation plan, and

•set some benchmarks to measure success.

These categories represent the major elements of strategy development and make appropriate section headings for a case analysis written report or presentation. First, using the strategic thinking map presented in Chapter 1 (Exhibit 1–1), it is important to do some serious strategic thinking about the external environment of the organization–the political/legal, economic, social/cultural, technological, and competitive situations faced by the case characters. After gaining knowledge of the issues in the general and industry environments, the service area competitors should be assessed. Next, it is important to relate the resources, competencies, and capabilities of the organization to the external environment, which will require a thorough and objective analysis of the competitively relevant strengths and weaknesses. The value chain provides a useful tool for uncovering these strengths and weaknesses. These strengths and weakness must be evaluated as to their potential to create competitive advantages or disadvantages for the organization. External issues and the organization’s competitive advantages and disadvantages provide the basis for strategy formulation. In addition, to create the strategy for a health care organization it is necessary to understand its unique mission, vision, values, and strategic goals (directional strategies).

Once the situational analysis is complete, strategic alternatives can be generated as possible solutions to the issues identified in the case. Consideration must be given to the possible adaptive strategies, market entry strategies, and competitive strategies that provide the means for achieving the organization’s mission and goals and lead to the accomplishment of its vision. The effectiveness of the

chosen alternative for each type of strategy must be evaluated. In addition, at least some thought must be given to the likely outcomes resulting from the different choices. After the evaluation, a recommendation needs to be made from among the alternatives.

Nothing will happen, of course, unless the strategy can be implemented. Therefore, the case analyst must address how the strategy will be carried out. The development of a feasible implementation plan should include specific service delivery and support strategies and, where possible, action plans. These areas are important because they create value for the organization and translate strategy into organizational and individual actions–the work to be done.

Finally, the case analyst should consider how the success of the proposed strategy should be measured. Returning to the mission, vision, values, and goals will provide an initial measure of success. Other measures will include fit with the changing environment, internal changes (development of competitive advantages and lessening of competitive disadvantages), and other more specific measures such as financial measures, market share, growth, and so on.

Although the approach outlined here is logical, it is important to remember that a case should be approached and appreciated as a unique opportunity for problem solving. Cases that everyone agrees have only one solution are not good decision-making aids. Moreover, managers in health care organizations rarely face problems where the solution is obvious to everyone. This does not mean that there are no good and bad answers or solutions in case analysis; some are better than others on the basis of the logic presented. Sometimes the issues presented in a case are not even problems (defined as a negative occurrence that needs to be addressed). Often the greatest challenge facing an organization is recognizing and acting on an opportunity rather than solving a problem. The evaluation of a case analysis is often based more on the approach and logic employed than the precise recommendation offered.

Cases, Strategic Management, and Health Care Organizations

Cases add realism that is impossible to achieve in traditional lecture classes. Realism results from the essential nature of cases, although students may complain that cases fail to provide all the information necessary for decision making. The complaint is valid because cases rarely provide everything that is needed. However, decision makers in health care organizations rarely have all the information they want or need when they face decisions. Risks must be taken in case analysis just as in actual decision making.

Risk Taking in Case Analysis

Any decision about the future involves uncertainty. Decision making under conditions of uncertainty requires that means be devised for dealing with the risks faced by leaders. Cases are valuable aids in this area because they allow the analysts to practice making decisions in low-risk environments. Decisions in a poor case analysis may be embarrassing, but at least they will not result in the closure of a hospital or medical practice. At the same time, the lessons learned by solving cases and participating in discussions will begin to build problem-solving skills.

Solving Case Problems

Solving a case is much like solving any problem. First, information is gathered and issues are defined; the competitive situation is analyzed; alternatives are generated, evaluated, selected, and implemented. Although the person solving the case seldom has the chance to implement a decision, he or she should always keep in mind that recommendations must be tempered by the limitations imposed on the organization in terms of its resources, competencies, and capabilities (although strategies to improve these areas may be required). As the success or failure of the recommendation is analyzed, lessons are learned that can be applied to future decision making.

Alternative Perspectives: Passion or Objectivity

Different hypothetical roles can be assumed when analyzing cases. Some prefer to think of themselves as the chief executive officer or leader to impose a perspective on the problems presented in the case, providing the case analyst with the liberty to become a passionate advocate for a particular course of action. Others prefer to observe the case from the detached objectivity of a consultant who has been employed by the organization to solve a problem.

Either the leader or the consultant perspective may be assumed, but the first offers some unique advantages. To answer the questions from the leader’s perspective, it is important to get inside the decision maker’s head–to feel the excitement and fear of doing new and innovative things in the dynamic and complex health care environment. However, the passion and frustration of the leader suggest why some case analysts prefer to assume the objective posture of a consultant. Not being in the front line can sometimes suggest alternatives that cannot be seen by those directly involved in making the payroll and paying the bills. The consultant can more easily play the devil’s advocate and point out how actions are at odds with current theory. Although the fun and excitement of case analysis is enhanced by assuming the decision maker’s role, the options might be expanded through a more objective and detached outlook of an outsider. There are no absolutely correct or incorrect answers to complex cases. The most important lesson is to learn problem-solving and strategic management skills.

Reading the Case

Effective case analysis begins with data collection. This means carefully reading the case, rereading it, and sometimes reading it yet again. Rarely can anyone absorb enough information from the initial reading of a comprehensive case to adequately solve it. From the very first reading of the case, the analyst should start to list the external issues and the organization’s internal strengths and weaknesses. For example, when a significant issue is discovered it should be marked for more detailed examination. “Is the issue financial? Do the primary issues appear to be those of human resources, capital investment, or marketing?” Perhaps there are few, if any, apparent issues with negative consequences. The strategic issue facing the organization may be one to be exploited or it may have both positive and negative aspects. For example, managed care has created some interesting positive and negative consequences for many health care organizations.

Listing the possible strengths and weakness in the initial reading provides some perspective concerning the organization’s resources, competencies, and capabilities. This list will provide a basis for further investigation and provide a guide for additional information gathering. Once the situation has been reviewed, a better evaluation of the issues facing the organization can be made. An effective way of summarizing the results is through the use of an internal/external strategy matrix (refer to Exhibit 7–1 on page 249) showing the long- and short-term competitive advantages and disadvantages as well as external issues.

Gathering Information

The information required to successfully analyze a case comes in two forms. The first type of information is given as part of the case and customarily includes history of the hospital, long-term care facility, or home-health care agency; its organizational structure; its management; and its financial condition. Gathering this information is relatively easy because the author of the case has typically done the work.

A second type of information is “obtainable.” This information is not provided in the case or by the instructor but is available from secondary sources in the library, familiar magazines and related publications, or through an Internet site. Obtainable secondary information helps with understanding the nature of the service category, the competition, and even some managers, past and present, who have made an impact on the service category.

If the case does not include service category information or competitor information, the instructor may expect the class to do some detective work before proceeding. Students should investigate to find out what is happening in the service category and learn enough about trends to position the problems discussed in the case in a broader health care context. The culture of the organization or the style of the chief executive officer may constitute relevant information. Some instructors do not want students to investigate beyond the date of the case or to gather additional service category data. Therefore, students must ask the instructor’s preference.

Case Analysis Using the Strategic Thinking Maps

The strategic thinking maps presented in this text provide a means of thinking through strategic management issues and serve as road maps to case analysis. They are useful for analyzing cases and succinctly presenting strategic management decisions in written reports and presentations. The following discussion provides some tips for using the strategic thinking maps in each of the major elements of case analysis–surfacing the issues, situational analysis, development of the strategy, and development of the implementation plan.

Tips on Surfacing the Issues

The discussion and questions presented in the “Managing Strategic Momentum” section of each chapter are designed to surface present and potential issues. In case analysis, issues include not only problems but also situations where things may be working well but improvements are possible. The problem may actually be an opportunity that can be capitalized on by the organization if it acts consciously and decisively. With careful analysis, patterns can be detected and discrepancies between what actually is and what ought to be become more apparent. In other words, fundamental issues, not mere symptoms, begin to emerge.

Problems vs. Symptoms

It is important to realize that the things observed in an organization and reported in a case may not be the real or essential issues. Often what analysts observe are the symptoms of more serious core problems. For example, increasing interest rates and cash-flow discrepancies appear to be problems in many case analyses. In reality, the issue is the fundamental absence of adequate financial planning. The lack of planning is simply manifested as a cash-flow problem, and rising interest rates certainly complicate cash flow.

Frequently, hospitals conclude that they have operational problems in the area of marketing when bed occupancy rates decline. Someone may suggest that the marketing department is not doing a good job of convincing physicians to use the hospital. Sometimes people will complain that the hospital is not spending enough on advertising. The real issue, however, might be fundamental changes in the demographics of the market area or an outdated services mix that no amount of advertising will overcome. In organizations as complex as health care, problems may have more than a single cause, so the analyst must not be overly confident when a single, simple reason is isolated. In fact, the suggestion of a simple solution should increase rather than decrease skepticism.

Using Tools

Identifying key issues requires that information be carefully examined and analyzed. Often, quantitative tools are helpful. Financial ratio analysis of the exhibits included in the case will sometimes be helpful in the identification of the real problems. In arriving at the final determination of core problems, the analyst should try not to slip into “paralysis by analysis” and waste more time than is necessary on identifying problems. At the same time, premature judgments must be avoided because then real issues may be missed. One general guideline is that when research and analysis cease to generate surprises, the analyst can feel relatively, though not absolutely, sure that adequate research has been conducted and the key issues have been identified.

Check Facts

The issue discovery process should not become myopic. There may be a tendency on the part of individuals interested and experienced in accounting and finance to see all problems in terms of accounting and finance. A physician approaching the same case will likely focus on the medical implications. This approach is too limited a view for effective strategic decision makers. Strategic analysis effectively transcends a single function. Insistence on approaching case analysis exclusively from the viewpoint of the analyst’s expertise and training is not likely to produce an accurate overall picture of the situation facing the organization; nor is this approach likely to improve the organization’s performance.

Information, either given or obtained, must never be accepted at face value. If a CEO states that the hospital delivers outstanding quality care, it should not be accepted as a statement of fact without some thought. For example, a character in the case may voice an opinion that is not grounded in fact. The ratios on a long-term care facility’s financial statements may look strange, but are they? Before jumping to such a conclusion, analysts should look at the financial ratios in a historical perspective. Even better, they should look at the history (as well as similar ratios) of other long-term care facilities of the same size during the same time period.

Relevant Issues

Once the issues are identified, they must be precisely stated and their selection defended. The best defense for the selection of the key issues is the data set used to guide the issue discovery process. The reasons for selection of the issues should be briefly and specifically summarized along with the supportive information on which judgments have been based. The issue statement stage is not the time for solutions. Focusing on solutions at this point will reduce the impact of the issue statement. If the role of consultant has been assumed, the issue statement must be convincing, precise, and logical to the client organization, or credibility will be reduced. If the role of the strategic decision maker has been selected, the student must be equally convincing and precise. The strategic decision maker should be as certain as possible that the correct issues have been identified to pursue the appropriate alternatives.

The statement of the issues should relate only to those areas of strategy and operations where actions have a chance of producing results. The results may be either increasing gains or cutting potential losses. Long- and short-range aspects of issues should be identified and stated. In strategic analysis the emphasis is on long-range issues rather than merely handling emergencies and holding things together. However, in some situations, immediate problems have to be solved and then a strategy developed to avoid similar situations in the future (combination strategy).

It is important for students to keep in mind that most strategic decision makers can deal with only a limited number of issues at a single time. Therefore, identify key result areas that will have the greatest positive impact on organizational performance.

Tips on Analyzing the Situation

Situational analysis is one of the most important steps in analyzing a case. In most instances instructors will expect comprehensive external and internal environmental analyses. For external environmental analysis, the case analyst may want to use and present a variety of tools including a trend analysis, stakeholder analysis, the development of a scenario, and service area competitive analysis. Whatever method is used, a clear picture and assessment of the external environment should be presented. Chapters 2 and 3 provide strategic thinking maps for assessing the external environment.

For the internal environment, it is important that the case analyst understands the strengths and weaknesses of the organization in terms of its resources, competencies, and capabilities. Therefore, the case analyst may want to use the value chain, as discussed in Chapter 4, to map resources, competencies, and capabilities and assess their strategic relevance using the criteria of value, rareness, imitability, and sustainability.

Understanding the mission is a good starting point to assess the directional strategies. If a mission statement is included in the case, the analyst should ask “Does it serve the purpose of communicating to the public why the organization exists? Does it provide employees with a genuine statement of what the organization is all about?” In addition, the other directional strategies (vision, values, and strategic goals) should be evaluated as to their appropriateness to the organization and its environment. The vision and goals provide a profile of the future and targets to focus organizational actions. Sometimes the case will indicate what the health care organization plans to achieve in the next year and where it hopes to be in three years, or even in five years. As with mission statements, if the vision and goals are not explicitly stated, there is a need to speculate about them because they will be the standards against which the success or failure of a particular strategy will be evaluated. Moreover because strategic planning is futuristic and no one can predict the future with complete accuracy, vision and goals should always be adaptable to the changing conditions taking place in the organization and in the service category. Sometimes an organization will have to face a major strategic problem simply because it was unwilling to alter its vision and goals in light of changing conditions.

Tips on Formulating the Strategy

After the situational analysis, a recommended course of action–the strategy–must be developed. Thus, adaptive, market entry, and competitive strategies for the organization must be recommended and defended. Exhibit 6–4 (p. 201) provides a strategic thinking map depicting the various alternatives for each of the types of strategy in the strategy formulation process.

Effective Alternatives

If obtaining and organizing information have been done well, the generation of strategic alternatives will be a challenging yet attainable task. Good alternatives possess specific characteristics:

1. They should be practical or no one will seriously consider them. Alternative courses of action that are too theoretical or abstract to be understood by those who have to accomplish them are not useful.

2. Alternatives should be specific.

3. Alternatives should be related to the key issue they are intended to address. If the strategic alternatives generated do not directly address key issues, the analyst should ask how important the issues are to the case analysis; rethinking the issues may be required. Exhibit 6–1 (p. 199) is helpful in demonstrating how the strategic alternatives relate to external and internal issues.

4. Alternatives should be usable. A usable alternative is one that can be reasonably accomplished within the constraints of the financial and human resources available to the organization.

5. Alternatives should be ones that can be placed into action in a relatively short period of time. If it takes too long to implement a proposed solution, it is likely that the momentum of the recommended action will be lost.

Alternative Evaluation

Alternatives should be evaluated according to both quantitative and qualitative criteria. Financial analysis provides one basis for examining the impact of different courses of action. However, a good alternative course of action is more than merely the one with the highest payoff. It may be that the culture of the organization cannot accommodate some of the more financially promising alternative courses of action. For the adaptive strategies, one or more of the decision-making tools discussed in Chapter 7 should be used–External/Internal Strategy matrix, PLC analysis, BCG portfolio analysis, extended portfolio matrix analysis, SPACE analysis, or program evaluation. For the market entry and competitive strategies, matching the external conditions appropriate for the strategies with the internal requirements of the strategies as discussed in the text with internal strengths and weaknesses and external conditions described in the case provide a basis for selecting and defending these strategies (Chapter 7).

The case analyst should be able to map the strategies selected in the strategy formulation process. Strategy maps similar to the one presented in Exhibit 7–22 (p. 284) show the ends–means decision logic for each strategic initiative and provide an excellent overview of the strategy of the organization.

Tips on Developing Implementation Strategies

Once a strategic alternative has been selected, an action plan is required. Action planning moves the decision maker from the realm of strategy to operations. Now the question becomes, “How does the group accomplish the work in the most effective and efficient way possible?”

The task of case analysis does not require that the analyst actually implements a decision; however, because the strategies must be implementable, it is necessary that thought be given to how each strategy would be put into action. Therefore, value adding service delivery and support strategies must be developed as well as action plans. This process is a continuation of the ends–means linkage started in strategy formulation–the implementation strategies are the means to achieve the overall organizational strategies.

Each element of the value chain should be addressed comparing the results of the internal analysis with the requirements of the selected strategy. Matching the present situation with the requirements of the strategy provides a basis to maintain the value chain element or change it to meet the needs of the strategy. Exhibits 8–9 (p. 322) and 9–6 (p. 358–9) provide examples of what instructors might expect for presenting the value adding strategies.

Next, action plans for the major organizational units affected by the strategy should be developed. Objectives, action plans, and budgets should be addressed if enough detail is provided in the case. Finally, the responsibility for accomplishing the different groups of tasks must be clearly assigned to the appropriate individuals in the organization. Although this is not always possible in case analysis, it is important that consideration be given to how, in a real organization, the recommendations would be accomplished. If, in the process of thinking about getting the different activities completed, it becomes apparent that the organization lacks the resources or the structure to accomplish a recommendation, another approach should be proposed.

The process of developing action plans for important organizational units–whether a highly focused unit, such as a pharmacy, or a broadly focused unit, such as a hospital division for a health system–should not be neglected. Organizations sometimes spend large amounts of money and resources developing strategic plans only to discover that they are not prepared to implement them in an effective manner.

Making Recommendations

Making good recommendations is a critical aspect of successful case analysis. If recommendations are theoretically sound and justifiable, people will pay attention to them. If they are not, little is likely to result from all the work done to this point.

One effective method for presenting recommendations is to relate each one to organizational strengths. Or, if necessary, a recommendation may be related to addressing a weakness. If the organization has sufficient financial strength, the recommendations should highlight how each alternative will capitalize on the strong financial condition. If, on the other hand, the resources are limited, it will be important to avoid recommendations that rely on resources that are not available or there should be a combination strategy to gain new resources.

It will be particularly useful to ask the following questions when making recommendations:

• Does the health care organization have the financial resources needed to make the recommendation work?

• Does the organization have the personnel with the right skills to accomplish what will be required by each recommendation?

• Does the organization have methods to monitor whether or not the recommendations are being accomplished?

• Is the timing right to implement each recommendation? If not, when will the timing be right? Can the organization afford to wait?

Finalizing the Report

Preparation and presentation is the final activity in most case analyses. The report can be

 

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(9-5) Required return

1). If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks

a. the stock is experiencing supernormal growth.

b. the stock should be sold.

c. the stock is a good buy.

d. management is probably not trying to maximize the price per share.

e. dividends are not likely to be declared.

(9-1) Preemptive right

2). The preemptive right is important to shareholders because it

a. allows managers to buy additional shares below the current market price.

b. will result in higher dividends per share.

c. is included in every corporate charter.

d. protects the current shareholders against a dilution of their ownership interests.

e. protects bondholders, and thus enables the firm to issue debt with a relatively low interest rate.

(9-2) Classified stock

3). Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

a. All common stocks fall into one of three classes: A, B, and C.

b. All common stocks, regardless of class, must have the same voting rights.

c. All firms have several classes of common stock.

d. All common stock, regardless of class, must pay the same dividend.

e. Some class or classes of common stock are entitled to more votes per share than other classes.

(9-5) Constant growth model

4). If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a. The expected return on the stock is 5% a year.

b. The stock’s dividend yield is 5%.

c. The price of the stock is expected to decline in the future.

d. The stock’s required return must be equal to or less than 5%.

e. The stock’s price one year from now is expected to be 5% above the current price.

(9-7) Corporate valuation model

5). Which of the following statements is CORRECT?

a. To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.

b. To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital.

c. To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital.

d. To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.

e. The corporate valuation model requires the assumption of a constant growth rate in all years.

(9-8) Preferred stock concepts

6). Which of the following statements is CORRECT?

a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights.

b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm’s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock.

c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock.

d. One of the disadvantages to a corporation of owning preferred stock is that 70% of the dividends received represent taxable income to the corporate recipient, whereas interest income earned on bonds would be tax free.

e. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.

(9-5) Expected total return

7). If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?

a. 7.54%

b. 7.73%

c. 7.93%

d. 8.13%

e. 8.34%

Chapter 10 – Multiple Choice

(10-6) Internal vs. external common

8). Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock. Which of the following actions would REDUCE its need to issue new common stock?

a. Increase the dividend payout ratio for the upcoming year.

b. Increase the percentage of debt in the target capital structure.

c. Increase the proposed capital budget.

d. Reduce the amount of short-term bank debt in order to increase the current ratio.

e. Reduce the percentage of debt in the target capital structure.

(10-5) Cost of equity: CAPM

9). When working with the CAPM, which of the following factors can be determined with the most precision?

a. The market risk premium (RPM).

b. The beta coefficient, bi, of a relatively safe stock.

c. The most appropriate risk-free rate, rRF.

d. The expected rate of return on the market, rM.

e. The beta coefficient of “the market,” which is the same as the beta of an average stock.

(10-9) Risk and projects

10). LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

a. Project B, which is of below-average risk and has a return of 8.5%.

b. Project C, which is of above-average risk and has a return of 11%.

c. Project A, which is of average risk and has a return of 9%.

d. None of the projects should be accepted.

e. All of the projects should be accepted.

(10-5) Cost of RE: CAPM

11). O’Brien Inc. has the following data: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm’s cost of equity from retained earnings based on the CAPM?

a. 11.30%

b. 11.64%

c. 11.99%

d. 12.35%

e. 12.72%

(10-5) Cost of RE: CAPM

12). Scanlon Inc.’s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of equity from retained earnings?

a. 9.67%

b. 9.97%

c. 10.28%

d. 10.60%

e. 10.93%

(10-5) Bond-yield-plus-risk premium

13). A. Butcher Timber Company hired your consulting firm to help them estimate the cost of equity. The yield on the firm’s bonds is 8.75%, and your firm’s economists believe that the cost of equity can be estimated using a risk premium of 3.85% over a firm’s own cost of debt. What is an estimate of the firm’s cost of equity from retained earnings?

a. 12.60%

b. 13.10%

c. 13.63%

d. 14.17%

e. 14.74%

(10-7) WACC

14). You were hired as a consultant to Giambono Company, whose target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any new stock. What is its WACC?

a. 8.98%

b. 9.26%

c. 9.54%

d. 9.83%

e. 10.12%

(Comp.) Cost of capital concepts

15). Which of the following statements is CORRECT?

a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity.

b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.

c. If a company assigns the same cost of capital to all of its projects regardless of each project’s risk, then the company is likely to reject some safe projects that it actually should accept and to accept some risky projects that it should reject.

d. Because no flotation costs are required to obtain capital as retained earnings, the cost of retained earnings is generally lower than the after-tax cost of debt.

e. Higher flotation costs tend to reduce the cost of equity capital.

(Comp.) Capital components

16). Which of the following statements is CORRECT?

a. The component cost of preferred stock is expressed as rp(1 – T). This follows because preferred stock dividends are treated as fixed charges, and as such they can be deducted by the issuer for tax purposes.

b. A cost should be assigned to retained earnings due to the opportunity cost principle, which refers to the fact that the firm’s stockholders would themselves expect to earn a return on earnings that were paid out rather than retained and reinvested.

c. No cost should be assigned to retained earnings because the firm does not have to pay anything to raise them. They are generated as cash flows by operating assets that were raised in the past, hence they are “free.”

d. Suppose a firm has been losing money and thus is not paying taxes, and this situation is expected to persist into the foreseeable future. In this case, the firm’s before-tax and after-tax costs of debt for purposes of calculating the WACC will both be equal to the interest rate on the firm’s currently outstanding debt, provided that debt was issued during the past 5 years.

e. If a firm has enough retained earnings to fund its capital budget for the coming year, then there is no need to estimate either a cost of equity or a WACC.

Chapter 11 – Multiple Choice

(11-2) NPV

17). Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

a. A project’s NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the WACC.

b. The lower the WACC used to calculate it, the lower the calculated NPV will be.

c. If a project’s NPV is less than zero, then its IRR must be less than the WACC.

d. If a project’s NPV is greater than zero, then its IRR must be less than zero.

e. The NPV of a relatively low-risk project should be found using a relatively high WACC.

(11-3) IRR

18). Which of the following statements is CORRECT?

a. One defect of the IRR method is that it does not take account of cash flows over a project’s full life.

b. One defect of the IRR method is that it does not take account of the time value of money.

c. One defect of the IRR method is that it does not take account of the cost of capital.

d. One defect of the IRR method is that it values a dollar received today the same as a dollar that will not be received until sometime in the future.

e. One defect of the IRR method is that it assumes that the cash flows to be received from a project can be reinvested at the IRR itself, and that assumption is often not valid.

(11-8) Payback

19). Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows.

a. The longer a project’s payback period, the more desirable the project is normally considered to be by this criterion.

b. One drawback of the payback criterion for evaluating projects is that this method does not properly account for the time value of money.

c. If a project’s payback is positive, then the project should be rejected because it must have a negative NPV.

d. The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.

e. If a company uses the same payback requirement to evaluate all projects, say it requires a payback of 4 years or less, then the company will tend to reject projects

(11-5) NPV and IRR

20). Which of the following statements is CORRECT?

a. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the IRR.

b. The NPV method assumes that cash flows will be reinvested at the risk-free rate, while the IRR method assumes reinvestment at the IRR.

c. The NPV method assumes that cash flows will be reinvested at the WACC, while the IRR method assumes reinvestment at the risk-free rate.

d. The NPV method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

e. The IRR method does not consider all relevant cash flows, particularly cash flows beyond the payback period.

(Comp.) Miscellaneous concepts

21). Which of the following statements is CORRECT?

a. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.

b. The discounted payback method eliminates all of the problems associated with the payback method.

c. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project’s acceptability.

d. To find the MIRR, we discount the TV at the IRR.

e. A project’s NPV profile must intersect the X-axis at the project’s WACC.

(11-7) NPV profiles

22). Which of the following statements is CORRECT? Assume that all projects being considered have normal cash flows and are equally risky.

a. If a project’s IRR is equal to its WACC, then, under all reasonable conditions, the project’s NPV must be negative.

b. If a project’s IRR is equal to its WACC, then under all reasonable conditions, the project’s IRR must be negative.

c. If a project’s IRR is equal to its WACC, then under all reasonable conditions the project’s NPV must be zero.

d. There is no necessary relationship between a project’s IRR, its WACC, and its NPV.

e. When evaluating mutually exclusive projects, those projects with relatively long lives will tend to have relatively high NPVs when the cost of capital is relatively high.

Chapter 12 Multiple choice

(12-1) Sunk costs

23). Which of the following statements is CORRECT?

a. A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.

b. A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.

c. A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.

d. Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s NPV.

e. A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.

(12-1) Relevant cash flows

24). Which of the following factors should be included in the cash flows used to estimate a project’s NPV?

a. All costs associated with the project that have been incurred prior to the time the analysis is being conducted.

b. Interest on funds borrowed to help finance the project.

c. The end-of-project recovery of any additional net operating working capital required to operate the project.

d. Cannibalization effects, but only if those effects increase the project’s projected cash flows.

e. Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.

(12-1) Incremental cash flows

25). Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

a. A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.

b. A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm’s current products.

c. A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.

d. A firm has spent $2 million on research and development associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.

e. A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm’s other products.

(12-4) Risk analysis

26). Taussig Technologies is considering two potential projects, X and Y. In assessing the projects’ risks, the company estimated the beta of each project versus both the company’s other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following data:

Project X

Project Y

Expected NPV

$350,000

$350,000

Standard deviation (?NPV)

$100,000

$150,000

Project beta (vs. market)

1.4

0.8

Correlation of the

project cash flows with

cash flows from currently

existing projects

Cash flows are not

correlated with the

cash flows from

existing projects

Cash flows are highly

correlated with the

cash flows from

existing projects

Which of the following statements is CORRECT?

a. Project X has more stand-alone risk than Project Y.

b. Project X has more corporate (or within-firm) risk than Project Y.

c. Project X has more market risk than Project Y.

d. Project X has the same level of corporate risk as Project Y.

e. Project X has the same market risk as Project Y since its cash flows are not correlated with the cash flows of existing projects.

(12-4) Project’s effect on firm risk

27). A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?

a. Increase the estimated IRR of the project to reflect its greater risk.

b. Increase the estimated NPV of the project to reflect its greater risk.

c. Reject the project, since its acceptance would increase the firm’s risk.

d. Ignore the risk differential if the project would amount to only a small fraction of the firm’s total assets.

e. Increase the cost of capital used to evaluate the project to reflect its higher-than-average risk.

(12-2) Annual CF

28). As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data. What is the Year 1 cash flow?

Sales revenues $13,000

Depreciation $4,000

Other operating costs $6,000

Tax rate 35.0%

a. $5,950

b. $6,099

c. $6,251

d. $6,407

e. $6,568

Chapter 13 – Multiple Choice

(13-5) Flexibility option

29). Which one of the following is an example of a “flexibility” option?

a. A company has an option to invest in a project today or to wait for a year before making the commitment.

b. A company has an option to close down an operation if it turns out to be unprofitable.

c. A company agrees to pay more to build a plant in order to be able to change the plant’s inputs and/or outputs at a later date if conditions change.

d. A company invests in a project today to gain knowledge that may enable it to expand into different markets at a later date.

e. A company invests in a jet aircraft so that its CEO, who must travel frequently, can arrive for distant meetings feeling less tired than if he had to fly a commercial airline.

(13-6) Risk and project selection

30). Langston Labs has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk, and Langston evaluates low-risk projects with a WACC of 8%, average-risk projects at 10%, and high-risk projects at 12%. The company is considering the following projects:

Project Risk Expected Return

A High 15%

B Average 12%

C High 11%

D Low 9%

E Low 6%

Which set of projects would maximize shareholder wealth?

a. A and B.

b. A, B, and C.

c. A, B, and D.

d. A, B, C, and D.

e. A, B, C, D, and E.

(Comp.) Real options

31). Which one of the following will NOT increase the value of a real option?

a. Lengthening the time during which a real option must be exercised.

b. An increase in the volatility of the underlying source of risk.

c. An increase in the risk-free rate.

d. An increase in the cost of obtaining the real option.

e. A decrease in the probability that a competitor will enter the market of the project in question.

(Comp.) Real options

32). Gleason Research regularly takes real options into account when evaluating its proposed projects. Specifically, it considers the option to abandon a project whenever it turns out to be unsuccessful (the abandonment option), and it evaluates whether it is better to invest in a project today or to wait and collect more information (the investment timing option). Assume the proposed projects can be abandoned at any time without penalty. Which of the following statements is CORRECT?

a. The abandonment option tends to reduce a project’s NPV.

b. The abandonment option tends to reduce a project’s risk.

c. If there are important first-mover advantages, this tends to increase the value of waiting a year to collect more information before proceeding with a proposed project.

d. A project can either have an abandonment option or an investment timing option, but never both.

e. Investment timing options always increase the value of a project.

(13-2) Growth option: NPV

33). Tutor.com is considering a plan to develop an online finance tutoring package that has the cost and revenue projections shown below. One of Tutor’s larger competitors, Online Professor (OP), is expected to do one of two things in Year 5: (1) develop its own competing program, which will put Tutor’s program out of business, or (2) offer to buy Tutor’s program if it decides that this would be less expensive than developing its own program. Tutor thinks there is a 35% probability that its program will be purchased for $6 million and a 65% probability that it won’t be bought, and thus the program will simply be closed down with no salvage value. What is the estimated net present value of the project (in thousands) at a WACC = 10%, giving consideration to the potential future purchase?

WACC = 10.0% 0 1 2 3 4 5

Original project: -$3,000 $500 $500 $500 $500 $500

Future Prob.

Buys 35% $6,000

Doesn’t buy 65% $0

a. $161.46

b. $179.40

c. $199.33

d. $219.26

e. $241.19

Chapter 14 – Multiple Choice

(14-2) Business risk

34). An increase in the debt ratio will generally have no effect on which of these items?

a. Business risk.

b. Total risk.

c. Financial risk.

d. Market risk.

e. The firm’s beta.

(14-3) Optimal capital structure

35). Based on the information below, what is the firm’s optimal capital structure?

a. Debt = 40%; Equity = 60%; EPS = $2.95; Stock price = $26.50.

b. Debt = 50%; Equity = 50%; EPS = $3.05; Stock price = $28.90.

c. Debt = 60%; Equity = 40%; EPS = $3.18; Stock price = $31.20.

d. Debt = 80%; Equity = 20%; EPS = $3.42; Stock price = $30.40.

e. Debt = 70%; Equity = 30%; EPS = $3.31; Stock price = $30.00.

(14-5) Leverage and cap. struct.

36). Which of the following events is likely to encourage a company to raise its target debt ratio, other things held constant?

a. An increase in the corporate tax rate.

b. An increase in the personal tax rate.

c. An increase in the company’s operating leverage.

d. The Federal Reserve tightens interest rates in an effort to fight inflation.

e. The company’s stock price hits a new high.

(14-3) Target capital structure

37). The firm’s target capital structure should do which of the following?

a. Maximize the earnings per share (EPS).

b. Minimize the cost of debt (rd).

c. Obtain the highest possible bond rating.

d. Minimize the cost of equity (rs).

e. Minimize the weighted average cost of capital (WACC).

(14-5) Leverage and cap. struct.

38). Which of the following statements is CORRECT, holding other things constant?

a. Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.

b. An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.

c. If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely lead to lower debt ratios for corporations.

d. An increase in the company’s degree of operating leverage would tend to encourage the firm to use more debt in its capital structure so as to keep its total risk unchanged.

e. An increase in the corporate tax rate would in theory encourage companies to use more debt in their capital structures.

(14-2) Capital struct. concepts

39). Which of the following statements is CORRECT?

a. In general, a firm with low operating leverage also has a small proportion of its total costs in the form of fixed costs.

b. There is no reason to think that changes in the personal tax rate would affect firms’ capital structure decisions.

c. A firm with a relatively high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else equal.

d. If a firm’s after-tax cost of equity exceeds its after-tax cost of debt, it can always reduce its WACC by increasing its use of debt.

e. Suppose a firm has less than its optimal amount of debt. Increasing its use of debt to the point where it is at its optimal capital structure will decrease the costs of both debt and equity.

(14-2) Break-even analysis

40). Longstreet Inc. has fixed operating costs of $470,000, variable costs of $2.80 per unit produced, and its product sells for $4.00 per unit. What is the company’s break-even point, i.e., at what unit sales volume would income equal costs?

a. 391,667

b. 411,250

c. 431,813

d. 453,403

e. 476,073

(14-2) Break-even analysis

41). Southwest U’s campus book store sells course packs for $15 each, the variable cost per pack is $9, fixed costs to produce the packs are $200,000, and expected annual sales are 50,000 packs. What are the pre-tax profits from sales of course packs?

a. $ 72,900

b. $ 81,000

c. $ 90,000

d. $100,000

e. $110,000

(14-2) Break-even analysis

42). Your uncle is considering investing in a new company that will produce high quality stereo speakers. The sales price would be set at 1.5 times the variable cost per unit; the variable cost per unit is estimated to be $75.00; and fixed costs are estimated at $1,200,000. What sales volume would be required to break even, i.e., to have EBIT = zero?

a. 28,880

b. 30,400

c. 32,000

d. 33,600

e. 35,280

Chapter 15 – Multiple Choice

(15-3) Dividend payout

43). In the real world, dividends

a. are usually more stable than earnings.

b. fluctuate more widely than earnings.

c. tend to be a lower percentage of earnings for mature firms.

d. are usually changed every year to reflect earnings changes, and these changes are randomly higher to lower, depending on whether earnings increased or decreased.

e. are usually set as a fixed percentage of earnings, e.g., at 40% of earnings, so if EPS = $2.00, then DPS would equal $0.80. Once the percentage is set, then dividend policy is on “automatic pilot” and the dividend actually paid depends strictly on earnings.

(15-6) Stock split

44). You own 100 shares of Troll Brothers’ stock, which currently sells for $120 a share. The company is about to declare a 2-for-1 stock split. Which of the following best describes your likely position after the split?

a. You will have 200 shares of stock, and the stock will trade at or near $120 a share.

b. You will have 200 shares of stock, and the stock will trade at or near $60 a share.

c. You will have 100 shares of stock, and the stock will trade at or near $60 a share.

d. You will have 50 shares of stock, and the stock will trade at or near $120 a share.

e. You will have 50 shares of stock, and the stock will trade at or near $600 a share.

(15-1) Investors’ div. preferences

45). Myron Gordon and John Lintner believe that the required return on equity increases as the dividend payout ratio is lowered. Their argument is based on the assumption that

a. investors are indifferent between dividends and capital gains.

b. investors require that the dividend yield plus the capital gains yield equal a constant.

c. capital gains are taxed at a higher rate than dividends.

d. investors view dividends as being less risky than potential future capital gains.

e. investors prefer a dollar of expected capital gains to a dollar of expected dividends because of the lower tax rate on capital gains.

(15-5) Factors in div. policy

46). Which of the following would be most likely to lead to a decrease in a firm’s dividend payout ratio?

a. Its earnings become more stable.

b. Its access to the capital markets increases.

c. Its research and development efforts pay off, and it now has more high-return investment opportunities.

d. Its accounts receivable decrease due to a change in its credit policy.

e. Its stock price has increased over the last year by a greater percentage than the increase in the broad stock market averages.

(Comp.) Dividend theories

47). Which of the following statements about dividend policies is CORRECT?

a. Miller and Modigliani argued that investors prefer dividends to capital gains because dividends are more certain than capital gains. They call this the “bird-in-the-hand” effect.

b. One reason that companies tend to favor distributing excess cash as dividends rather than by repurchasing stock is that dividends are normally taxed at a lower rate than gains on repurchased stock.

c. One advantage of dividend reinvestment plans is that they allow shareholders to delay paying taxes on the dividends that they choose to reinvest.

d. One key advantage of the residual dividend model is that it enables a company to follow a stable dividend policy.

e. The clientele effect suggests that companies should follow a stable dividend policy.

(Comp.) Repurchases and DRIPS

48). Which of the following statements is CORRECT?

a. One disadvantage of dividend reinvestment plans is that they increase transactions costs for investors who want to increase their investment in the company.

b. One advantage of dividend reinvestment plans is that they enable investors to postp

 

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