Question 1

Which of the following, if True, would weaken the argument of Domino Grace's management?

Accepted Answer

B) Derivative investments sound like a pretty good idea, but the possibility of new government regulation in Choice B makes them sound less promising. Choice A makes it sound as though Domino Grace will need to offer derivatives (or something else complex and exotic) to keep up. Choice C points out a similarity between derivatives and traditional investments. There's nothing in there that makes derivatives sound worse than what Domino Grace is doing now. Choice D makes a transition to derivatives sound easier. Choice E doesn't help because we don't know what those opinions are or what difference they would make.

Question 2

A senior manager argues that the negative perception associated with mounting credit card debt will affect StarMart. Which of the following would be the most effective measure StarMart could take to address this potential problem?

Accepted Answer

E) Getting into the credit business is a risky proposition when credit card companies are unpopular. Having fair policies is a good step toward dealing with the potential for negative feedback. Extending credit only to those who are capable of paying their bills, Choice E, is a good way to avoid making the problem of mounting debt even worse. Choice A would be an invitation to run up large bills and then ignore them. Choices B and C attempt to shift the blame elsewhere, but this would just make StarMart look less ethical. Choice D might make more people sign up for the card, but it wouldn't help address the issue of mounting credit card debt.

Question 3

Greenmax's Chief Financial Officer likes the idea of expanding into markets in the southern hemisphere because he argues that this will help the company generate a consistent year-round cash flow. Which of the following, if True, would strengthen the CFO's argument?

Accepted Answer

E) Since the southern hemisphere has its hottest months during the times of the year when it is coolest in the northern hemisphere, selling Greenmax products to countries in both hemispheres would help generate even levels of sales revenue year-round. Choice A would support the idea that international markets can generate increased revenue, but not consistent year-round cash flow. Choice B argues against expanding into the southern hemisphere, since broadly speaking, most of the world's developed countries are in the northern hemisphere. Choice C says that the U.S. market is tapped but doesn't address the issue of whether expanding to the southern hemisphere would help, whereas Choice D suggests that Greenmax would face an uphill climb as it took on established brands there.

Question 4

The statements above most strongly suggest that if all subprime loan borrowers had taken out the loan that was most appropriate for their needs, then what would have been the outcome?

Accepted Answer

C) Subprime loans cost more than conventional loans, but most people who took out subprime loans could have gotten conventional loans. So if everyone had gotten the most appropriate loan, most of the people who took out subprime loans would have gotten lower rates and therefore paid less in interest, Choice C. Choices A and B go too far. There might have been some people who were better off with these loans. Choices D and E are possible events, but there's no evidence that either would have happened most of the time.

Question 5

Which of the following, if True, would strengthen the case for Munschausen's seeking to acquire capital by debt financing?

Accepted Answer

C) A steady stream of revenue will help Munschausen to repay its debt financing according to a consistent schedule. Choice A would weaken the case for debt financing of Munschausen's international operations, because it would mean that the company would have little room to repay the debt. Choices B, D, and E would mean that Munschausen will have significant expenses, which would make it difficult to pay back debts.

Question 6

Which of the following, if True, would weaken the case for Munschausen's seeking to acquire capital by debt financing?

Accepted Answer

D) If Munschausen's business grows only slowly, this will make it very difficult to repay debts. Choices A and E are human resource issues that are not relevant to whether the company should seek to acquire capital by debt financing. Choices B and C would tend to strengthen the case for debt financing, since rapid growth or steady sources of revenue from selling its products in economies where consumers have strong purchasing power both would suggest that Munschausen could easily repay the debts.

Question 7

Gavin's committee is reviewing the current monetary policies of the Federal Reserve System, particularly with regard to a weak or strong U.S. dollar. The economy of Gavin's district is currently based primarily on manufacturing but is starting to see more and more factory closures due to international competition. Would a weak or strong dollar be in the best interests of Gavin's constituents? Explain.

Accepted Answer

The answer of Gavin's committee is reviewing the current monetary...

Question 8

Which of the following, if True, would strengthen the case for Munschausen's seeking to acquire capital by equity financing?

Accepted Answer

E) Financing by equity is preferable to debt financing because of the liability involved in indebtedness, so if Munschausen can get equity financing from investors, this would be a good option. Choices A and B would weaken the case that Munschausen could successfully acquire equity financing. Choices C and D are not relevant to whether Munschausen could or should acquire capital by equity financing.

Question 9

Gavin's district, like many others, is showing severe signs of inflation. What might his committee recommend to the Federal Reserve System in order to curb the current trend?

Accepted Answer

The answer of Gavin's district, like many others, is showing...

Question 10

Which of the following, if True, most weakens the CEO's argument?

Accepted Answer

D) Since the CEO bases his argument on trends from the past three years, new information suggesting that earlier trends may no longer apply to the current economic environment weakens his argument. Choice A slightly strengthens the CEO's argument as it suggests that the yuan has been a better investment over the long term, albeit only a slightly better one. It's not known whether American public approval of foreign governments, Choice B, will affect the company's determination to increase its profits. Choice C is irrelevant, as the relative amounts of money currently invested do not have an impact on future investment strategies. Choice E is only tangentially related to the CEO's argument, as it is unreasonable to assume that the mere act of shifting investments between markets will always cause similar profit increases, or that what works for a competing firm will also work for Douglas & Reynolds.

Question 11

Which of the following, if True, would weaken the case for Munschausen's seeking to acquire capital by equity financing?

Accepted Answer

D) This would mean that Munschausen would not be able to get capital through its stock, and it would also decrease the chances that it would be able to get investment capital by other means. Choices A, C, and E would strengthen the case that Munschausen could acquire capital by equity financing. Choice B would weaken the case only if Munschausen could not provide a consistent return on investments.

Question 12

Which of the following, if True, would strengthen the argument of Domino Grace's management?

Accepted Answer

C) Derivatives might sound like a good idea, but they are complex. Can Domino Grace's employees handle them? If Choice C is True, the answer is more likely to be "yes, they can" and so Choice C strengthens the argument. Choice A says that higher revenues would be good, but that adds nothing. The question here is how to get higher revenues. Choice B weakens the argument slightly by suggesting that management might have a financial interest in doing something risky. Choice D doesn't help because the issue at hand is Domino Grace. Choice E is a reason to avoid derivatives.

Question 13

Taking out a subprime loan to buy a house is most likely to be a reasonable financial decision when which of the following is True?

Accepted Answer

D) Can a subprime loan ever be a good idea? Sure. If you need a subprime loan because you can't qualify for a conventional one, then you're probably a high-risk buyer. But if you're about to come into more money in the near future, Choice D, then it might be worth getting a bad rate now if you reasonably think you'll be able to afford it later. Choice A: Not being able to get a regular loan doesn't mean that a subprime loan is a good idea. Maybe you really can't afford it. Choice B: Wanting a house desperately isn't a reason to take out a high-interest loan. Choices C and E tell us nothing about the buyer and his or her ability to pay.

Question 14

A recent report to the House reveals that unemployment continues to be high and that the economy is "sluggish." At the same time, the discount rate is very close to zero, and the reserve requirement for banks was recently lowered to an all-time low. What actions might the Federal Reserve System do in order stimulate the economy?

Accepted Answer

The answer of A recent report to the House reveals...

Question 15

A senior manager argues that the negative perception associated with mounting credit card debt will affect StarMart. Which of the following would be the LEAST effective measure StarMart could take to address this potential problem?

Accepted Answer

D) All of the choices are reasonable ways for StarMart to help consumers avoid excessive debt except Choice D, which would encourage customers to spend themselves into deep credit card debt. This might yield short-term profits, but it would not be a good response to the manager's concern.

Question 16

Gizmo's marketing director argues that because the global economy is interconnected, if Gizmo continues to be profitable in the United States, it should be able to invest that money to do well internationally. Which of the following, if True, would most weaken her argument?

Accepted Answer

B) The marketing director is neglecting the fact that the currency exchange rate between countries fluctuates. This means that if the U.S. dollar becomes weak against the local currency, finances in U.S. currency will not go as far in that country. Choice A would strengthen the marketing director's argument, because Gizmo could set up the same production methods overseas as it uses in the United States. Choices C, D, and E are incorrect because Gizmo could implement special cultural training, develop a detailed business plan, and plan specialized marketing strategies, respectively, and still parlay its domestic financial success to international success.

Question 17

Suppose that investments in derivatives generated $5 million of revenue for Domino Grace during this calendar year. The managers who proposed offering derivatives contend that this statistic demonstrates that offering derivatives increased Domino Grace revenues this calendar year by $5 million. Which of the following points out a flaw in this argument?

Accepted Answer

D) The investments generated money, but it must have taken some effort and resources to generate that money. If those efforts and resources had been devoted to some other project, then that project could have made some money, too. The managers ignore this and so commit this flaw in Choice D. Choices A and B would have been bogus claims, but the managers don't make those claims. Choice C goes too far. Choice E doesn't describe a flaw because the statistic describes what Domino Grace earned and not what the investors made on these investments.

Question 18

There is discussion of a bill raising insurance on bank deposits. Why would these premiums need to be raised?

Accepted Answer

The answer of There is discussion of a bill raising...

Question 19

Gavin has asked one of aides to investigate whether the International Monetary Fund would be able to provide his district with a loan to foster international trade with the products made within his district. What would his aide most likely say?

Accepted Answer

The answer of Gavin has asked one of aides to...

Quiz 15: Money and Banking