ugba-10
Principles of Business
Spring 2015
Module 1 Exam Solution – Cover Sheet
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LAST, First, Middle
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1234-5678
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Test No.:
See question 38
This is your test version (ABCD) and unique ID number (0 to 9999)
Date:
1
This is the module number for this exam
Hour (Period):
101, 102, 103, etc.
This is your Discussion Section number – see below
Section
Day / Time
GSI Name
101
Tu 8-9A
Jeffrey Routh
102
Tu 9-10A
Jeffrey Routh
103
Tu 10-11A
Jonathan Heyne
104
Tu 11-12P
Jonathan Heyne
105
Tu 2-3P
Kelly Ling
106
Tu 5-6P
Kelly Ling
107
W 8-9A
Rajat Gulati
108
W 10-11A
Rajat Gulati
109
W 11-12P
Yekaterina Barilov
110
W 12-1P
Yekaterina Barilov
111
W 1-2P
Akshay Yadav
112
W 2-3P
Federico Merino
113
W 5-6P
Akshay Yadav
114
Th 8-9A
Federico Merino
115
Th 9-10A
Claire Bianchi
116
Th 10-11A
Claire Bianchi
117
Th 1-2P
Peter Trujillo
118
Th 5-6P
Peter Trujillo
UGBA 10 – Principles of Business
MODULE 1 EXAM – Spring 2015 2/20/2015
FINANCE & ACCOUNTING
Instructor: Professor Briginshaw
1) Jose is a recent college graduate who has been hired for an entry-level professional position in
the accounting department of a large corporation. Which of the following terms BEST describes
Jose's capacity as an accountant?
A) public accountant
B) private accountant
C) forensic accountant
D) advisory accountant
E) management accountant
Answer: B
Reference: Page 222 of custom text. Most private accountants are also management accountants,
but not all
2) The Federal Reserve fulfils all of the following functions except
a) The Government’s Bank
b) The Bankers Bank
c) Check Clearing
d) Management of Government spending
Answer: D.
Reference: The Fed is in charge of monetary policy. Government spending, being part of fiscal
policy, is within the remit of Congress. See page 271.
3) Who is the Secretary of the US Treasury?
a) Janet Yellen
b) Angela Merkel
c) Silvio Berlusconi
d) Jacob Lew
Answer: D NOTE: OFFICEHOLDER CHANGED to Steven Mnuchin (since February 2017)
4) A company's balance sheet showed $10,000 of total assets on Dec 31 2014. Its outstanding
debts (total liabilities) are $3,500. What is the balance sheet equity on December 31?
A) $500
B) $6,500
C) $13,500
D) $20,500
E) $27,500
Answer B
Explanation : A = L+SE => SE = A – L = 10 – 3.6 = 6.5
Reference: Custom text page 225
5) Which of the following does NOT represent a degree of competition in a private enterprise
system?
A) oligopoly
B) socialism
C) monopoly
D) perfect competition
E) monopolistic competition
Answer: B
Explanation: B) Socialism is not one of the four degrees of competition in a private enterprise
system. Competition is the economic condition in which there are certain demands that can be
met by more than one business, so businesses in the same industry compete for the same
resources or customers.
6) Which term refers to the pattern of short-term ups and downs in an economy?
A) aggregate output
B) business cycle
C) standard of living
D) balance of payments
E) demand and supply schedule
Answer: B
Explanation: B) The business cycle is the short-term pattern of economic expansions and
contractions.
7) A city of 150,000 people has a large commercial sector bringing in businesses from the
surrounding region. In 2007, there was 2.75 million square feet of commercial space available.
Five years later, after a building boom, there was 5.5 million square feet of commercial space
available.
Which effect will MOST likely occur?
A) The equilibrium price of commercial real estate will not be affected.
B) The increase in the supply of commercial real estate will lead to a corresponding increase in
its price.
C) The price of commercial real estate will decrease, absent a dramatic increase in demand.
D) The increase in the supply of commercial real estate will lead to an increase in resource
prices.
E) The increase in supply will cause a corresponding increase in demand.
Answer: C
Explanation: C) Since the supply of commercial real estate has dramatically increased, unless
there was a dramatic increase in demand, we would expect the price of commercial real estate to
decrease.
8) What is the term for an increase in prices across the economy?
A) Economic growth
B) GDP per capita.
C) Inflation
D) Deflation
Answer: C
9) Suppose General Motors owns an automobile plant in Brazil. How much of the total value of
goods and services produced by the plant will be included in US GDP?
a) All of the value of goods and services produced
b) The total profits earned by the plant
c) Only that portion of profits that are remitted in cash to General Motors
d) None of the value
Answer: D.
Explanation: Inclusion in GDP depends on geographic position of the factors - only plants within
the US border would be included. See page 21.
10) Which of the following describes a liability?
A) the potential profit from selling a firm's assets and settling all of its debts
B) a debt owed by a firm to an outside organization or individual
C) any economic resource expected to benefit a firm or an individual who owns it
D) any economic deficit expected to cost a firm or an individual who owns it
E) the amount of money originally invested in a business by its owners
Answer: B
Explanation: B) All debts owed to others are liabilities.
11) Which of the following describes assets such as patents and trademarks?
A) liquid assets
B) fixed assets
C) intangible assets
D) current assets
E) limited assets
Answer: C
Explanation: C) Intangible assets are nonphysical assets. See custom text p.227.
12) ABC Company has a net income of $5 million. ABC's number of outstanding shares of stock
is 4,000,000 shares. What is the company's earnings per share?
A) $1.29
B) $.77
C) $1.25
D) $.80
E) $18.75
Answer: C
Explanation: C) Earnings per share = Net Income/Number of Common Shares Outstanding;
therefore, in this scenario, $5m/4m = $1.25.
13) Bennequin Accounting has been hired by XYZ Manufacturing to help plan its merger with
ABC Distribution. Which of the following terms BEST describes the capacity for which
Bennequin has been hired?
A) regulatory accounting
B) corporate bookkeeping
C) company auditing
D) fraud investigation
E) management advisory
Answer: E
Explanation: E) In this capacity, private accountants help management make decisions. See page
221.
Contribution Margin
Use the following information about Freddy’s Pizza to answer the next two questions.
Freddy’s pizza pays $1000 fixed rent per month and each pizza costs $2 in ingredients. The
selling price of pizza is $4 per pizza.
14) What is the break even number of pizzas for Freddy’s pizza?
a) 400 pizzas
b) 267 pizzas
c) 667 pizzas
d) 500 pizzas
Answer: D
Profit = Unit CM x Q – F; Set Profit = 0 => Q
BE
= F/Unit CM = 1000/2 = 500
15) If Freddy’s sells 600 pizzas, what is the total contribution margin and what is the profit
(ignore taxes)?
Contribution margin Profit
a) $1200 $400
b) $2400 $200
c) $1200 $200
d) $200 -$800 (Loss)
Answer: C
Profit = Unit CM x Q – F = 2 x 600 – 1000 = $200
Financial Statement and ratio analysis:
Use the following information on Andrews Incorporated to answer the next two questions
Average stockholders' equity $10,000 Net income $ 3,000
Average total assets $25,000 Net sales $30,000
Current assets $10,000 Total liabilities $15,000
Current liabilities $5,000
16) What is the Return on Equity for Andrews?
a) 2 b) 2.5 c) 10% d) 30%
Answer: D
Explanation: RoE = net income/equity = 3000/10000 = 30%, see HBS reading page 2
17) What is the Financial Leverage Ratio for Andrews?
a) 2 b) 2.5 c) 10% d) 30%
ANSWER: B
Explanation: Financial Leverage Ratio = Average Total Assets/Average Stockholders’ Equity =
25,000/10,000 = 2.5
Reference: HBS reading page 4
18) Little Mike’s Cheese is a cheese shop. In January, Mike’s Cheese finds some excellent
cheese called Cambazola from Italy. They buy $1000 worth on credit, taking delivery in
January, to pay Cambazola in 30 days (i.e. they will pay the supplier $1000 in February). In
February they start to sell the cheese, and deliver 70% of the cheese to their favorite customers
for a 100% markup in February. The customers buy on credit and will pay in March. What is
the Revenue, Income and Cash flow for Little Mike’s Cheese in February?
Revenue Income Cash flow
a) 1400 700 -1000
b) 400 -300 0
c) 1400 -300 700
d) 1400 700 700
Answer: A
Explanation: Cost = 0.7 x 1000 = 700
revenue = 700+(700*1) = 1400
income = 1400-700 = 200
cash flow = 0 – 1000 = -1000 (no customers pay, but the store must pay for the Cheese)
19) Which of the following statements BEST describes why U.S. Treasury securities are
considered to be risk-free investments?
A) They are backed by the U.S. government.
B) They have a guaranteed rate of return.
C) They are easily sold.
D) They are readily available for purchase.
Answer: A
Explanation: A) The other reasons here are all true, but only because of the backing of the U.S.
government.
20) When thinking about exchange rates, an expensive dollar relative to the Japanese Yen is best
for
a) European tourists visiting the USA
b) US exporters selling into Japan
c) Japanese companies seeking to sell imports into the USA
d) Japanese tourists visiting Europe
Answer: C – a given number of dollars buys more in yen
Reference: custom text page 278
21) A cow rancher uses money to buy a fence for his ranch. Which function of money does this
illustrate?
A) stabilization of value
B) foundation of banking
C) medium of exchange
D) store of value
E) measure of worth
Answer: C
Custom text page 261
22) Which of the following federal laws made transactions between banks significantly more
efficient?
A) the Check Clearing for the 21st Century Act
B) the Bank Secrecy Act
C) the USA Patriot Act
D) the Federal Reserve Act
E) the Economic Emergency Recovery Act
Answer: A
Explanation: A) It made electronic clearing of checks legal. See pages 275-6.
23) Which of the following reasons is the primary motivator for a commercial bank to acquire
new depositors?
A) A new deposit account will make more funds available to pay the interest on other deposit
accounts.
B) A new deposit account will make more funds available to pay the bank's employees.
C) A new deposit account will make more funds available to give out in loans.
D) A new deposit account will make more funds available to give out in dividends to its
investors.
E) A new deposit account will make more funds available to facilitate brokerage transactions.
Explanation: C) A commercial bank makes its profits from investments and loans derived from
its depositors' cash.
24) Which of the following statements BEST describes why an increase in the discount rate often
results in a decrease in the money supply?
A) An increase in the discount rate will lower the overall values of loans from the Federal
Reserve Banks to individual banks.
B) An increase in the discount rate will lower the overall values of loans from individual banks
to other financial institutions.
C) An increase in the discount rate will lower the overall number of banks issuing loans to
individuals.
D) An increase in the discount rate will lower the overall number of loans from the Federal
Reserve Banks to individual banks.
E) An increase in the discount rate will lower the overall number of loans from the Federal
Reserve Banks to individuals.
Answer: A
Explanation: A) An increase in the discount rate increases the amount of money each local bank
will pay to the Federal Reserve bank to borrow money, so they will borrow less thus tightening
money supply. This in turn drives lower lending from banks to other institutions (B) and
individuals (C). Since money supply is measured in dollars it is the value of the loans which is
more relevant than the number (D) of loans. E is incorrect as the Fed does not lend to
individuals. See page 272.
25) Which of the following is the federal government agency that regulates U.S. securities
markets?
A) New York Stock Exchange
B) Federal Reserve
C) Commerce Department Answer:
D) Securities and Exchange Commission
E) Treasury Department
Answer: D
Ref: Textbook page 321-322.
26) Albert has some stocks and is carefully watching the stock market. Which of the following
should he pay attention to in order to find out the performance of the more technology related
companies?
A) Standard & Poor's 500
B) the NYSE index
C) Dow Jones Industrial Average (Dow 30)
D) Moody's Stock List
E) the NASDAQ
Answer: E
Explanation: E) The Nasdaq has more technology related stocks as noted in lecture 6.
27) Which of the following represents the correct risk ranking of 3 investment alternatives,
starting from the lowest risk and ending with the highest risk?
a) common stocks, short term treasury bills, high grade corporate bonds
b) short term treasury bills, common stocks, high grade corporate bonds
c) short term treasury bills, high grade corporate bonds, common stocks
d) high grade corporate bonds, common stocks, short term treasury bills
Answer: C.
Reference: Lecture 7 and page 310.
28) If you purchased a share of GE stock for $34.82, then sold it one year later for $36.50, what
would the price appreciation be?
A) $1.68 B) $2.68 C) $33.82 D) $36.50 E) $67.24
Answer: A
Explanation: A) Price appreciation is an increase in the dollar value of an investment, thus you
would subtract $34.82 from $36.50. 36.50-34.82= $1.68
29) Don Dillon is a 24-year-old graphic designer. He eventually wants to get married, raise a
family, and buy a house. He knows that he has to start putting money away so that his goals can
someday become a reality. He has heard that investing is risky because you can lose money as
well as make money. So Don decides to play it safe and deposit money in a bank on a regular
basis. Why might this not be his best strategy?
A) Stock investments will always result in high returns.
B) It always pays to take chances with your money.
C) You can actually lose money with bank savings due to the effects of inflation and taxes.
D) People usually benefit from risky investments.
E) Most savings accounts are insured by the FDIC.
Answer: C
Explanation: C) The interest on your savings is taxed, which is partly how you can lose money.
Inflation can make the dollars in your savings account worth less over time. A, B, D may be
true, or not. E is an advantage of Don’s strategy.
30) Which of the following (if any) guarantees that employees belonging to a defined
contribution pension scheme will have sufficient money to fund their retirement?
A) Internal Revenue Service
B) Pension Benefit Guaranty Corporation
C) The Employer
D) Federal Deposit Insurance Corporation
E) There is no such guarantee
Answer: E
Reference: Lecture 7 – funds in a defined contribution scheme are dependent on employee
contributions and investment choices.
31) A person invests $100 for 2 years at the prevailing interest rate of 10%. The future value of
the investment is closest to….
a) $83 b) $100 c) $121 d) $141
Answer: C
Explanation: 100 x 1.1 = 110; 110 x 1.1 = $121
32) What is the meaning of “rebalancing” as it applies to investments for retirement?
a) Buying a variety of company stocks, rather than just one
b) Ensuring to “cash out” whenever leaving an employer
c) Selecting a Roth IRA, rather than a traditional IRA
d) Changing the balance between asset classes or investments, for example by selling a
proportion of common stocks in the retirement plan and “rebalancing” by buying bonds
Answer: D, see lectures 7 and 8
33) Which of the following statements is true about treasury bonds as investments?
A) Bonds are among the riskiest of all investments.
B) Bonds are suitable for investors who seek security.
C) Bonds will never become worth less than their purchase price.
D) Treasury bonds are sensitive to individual company performance.
Answer: B
Explanation: B) Bonds are quite secure but can fall in value (negating C) if interest rates rise
34) “The Everything Boom” reading suggests the main reason for current high asset prices is:
a) global central banks’ attempts to generate growth through low int rates and buying assets
b) a worldwide improvement in human motivation
c) technological progress
d) increased use of clean energy
Answer: A
Reference: Earnings boom page 2, first full paragraph. The author’s view is that the cause of the
high asset values is an excess of money supply (due to buying assets with created money) and
low interest rates. NOTE: READING DELETED
35) According to the “Brokers Fight Rule…” reading, the move to require brokers to be
“fiduciaries” has been most opposed by…
a) The Labor department
b) Individual investors
c) The Tea Party movement
d) The financial services industry
Answer: D, reading page 1 NOTE: READING DELETED
36) The following are all uses of cash in the Capsim finance screen except
a) Paying Dividends
b) Retiring Debt
c) Retiring Stock
d) Issuing Stock
Answer: D
Explanation: Stock issues bring cash into the company
37. I have carefully checked my Scantron. My Section number is correctly shown and I have
checked that my name is written in the Registrar’s form, last name first.
a. Yes
b. No
38. This is version “A”: fill in the “A” bubble for this question and write the letter and unique
exam identifier “A9876” in the “TEST NO.” box of your Scantron.
IMPORTANT NOTE: IN THE EVENT YOU DO NOT WRITE YOUR UNIQUE
IDENTIFIER (A9876) ON THE SCANTRON, IF YOUR IDENTIFIER DOES NOT
MATCH THAT SHOWN ABOVE OR IF IT HAS BEEN USED BY ANOTHER
STUDENT, YOU WILL AUTOMATICALLY SCORE ZERO ON THIS TEST.
