Economic Factors and Business Information practice questions

Answer: C) Total shareholders' equity minus preferred stock, divided by common shares outstanding

Book value per share equals common shareholders' equity (total equity minus preferred stock) divided by common shares outstanding. It is the net worth per share on the balance sheet, unlike dividend yield, P/E, or EPS.

• AIncorrect. This is dividend yield: the yearly dividend divided by the current price.
• BIncorrect. This is the price-to-earnings (P/E) ratio, which is based on market price, not accounting net worth.
• CCorrect. Book value is the accounting net worth (assets minus liabilities). Taking out the preferred stock claim leaves the common equity, which is then divided by the number of common shares outstanding.
• DIncorrect. This is earnings per share (EPS), an income-statement measure, not a balance-sheet net worth measure.

Answer: A) Lagging indicator

• ACorrect. It changes after the economy does.
• BIncorrect. It moves late.
• CIncorrect. It moves late.
• DIncorrect. It measures labor.

Answer: A) Uses more leverage

• ACorrect. More financing comes from debt than equity.
• BIncorrect. The ratio would be zero.
• CIncorrect. That is a liquidity measure, not leverage.
• DIncorrect. That isn't what the ratio measures.

Answer: A) Fixed-rate bonds

• ACorrect. Fixed payments lose purchasing power.
• BIncorrect. TIPS adjust for inflation.
• CIncorrect. These often rise with inflation.
• DIncorrect. It often keeps pace.

Answer: B) 2.5%

Dividend yield is the yearly dividend divided by the current market price: $1.50 ÷ $60 = 2.5%.

• AIncorrect. This reads the $1.50 dollar dividend as if it were a percentage, without dividing by the share price.
• BCorrect. Dividend yield = annual dividend ÷ current price = $1.50 ÷ $60 = 0.025, or 2.5%.
• CIncorrect. The division is right ($1.50 ÷ $60 = 0.025), but the decimal is misplaced when converting to a percentage. 0.025 equals 2.5%, not 25%.
• DIncorrect. This divides the price by the dividend ($60 ÷ $1.50 = 40), which reverses the ratio.

Answer: B) About 95%

• AIncorrect. That's one standard deviation.
• BCorrect. Within three standard deviations is about 99.7%.
• CIncorrect. That's too low.
• DIncorrect. Some returns fall outside.

Answer: C) Assumes convertible securities and options are turned into shares

• AIncorrect. It uses earnings.
• BIncorrect. Basic EPS already subtracts them.
• CCorrect. More shares spread the same earnings.
• DIncorrect. It counts potential shares.

Answer: B) Disinflation

Disinflation is a slowdown in the rate of inflation while prices keep rising. Deflation is an actual fall in the price level.

• AIncorrect. Deflation means the general price level is falling (negative inflation). Here prices still rose 3.4%.
• BCorrect. Inflation is still positive, so prices are rising, but the rate dropped from 6.5% to 3.4%. A slowing rate of inflation is disinflation.
• CIncorrect. Reflation is a rise in inflation, usually driven by policy, after a period of very low inflation or deflation. Here the inflation rate is falling.
• DIncorrect. Stagflation is high inflation combined with stagnant growth and high unemployment. Inflation that is easing does not fit that description.

Answer: A) Investing activities

• ACorrect. These are the three categories.
• BIncorrect. That isn't a category.
• CIncorrect. That falls under operating.
• DIncorrect. That isn't a separate category.

Answer: C) 20

• AIncorrect. Recheck the division.
• BIncorrect. That is the earnings yield.
• CCorrect. $40 ÷ $2 = 20.
• DIncorrect. That is EPS.