Test Prep Test Prep Certifications BUSINESS-ENVIRONMENT-AND-CONCEPTS Questions & Answers

• Question 271:

  Universal Industries limits its operations to exports to foreign countries. What can be said about Universal's exposures to exchange rate risk?

  A. Universal is subject to potential transaction, economic and translation exposures to exchange rate risk.

  B. Universal is subject to potential transaction and economic exposures to exchange rate risk.

  C. Universal is subject to economic and translation exposures to exchange rate risk.

  D. Universal is subject transaction and translation exposures to exchange rate risk.

  Correct Answer: B

  Choice "b" is correct. Universal is subject to transaction risks associated with settlement of export transactions and is subject to economic risks associated with the satisfaction of domestic expenses denominated in domestic currencies with imported revenues denominated in a foreign currency. No translation exposure exists since there is no foreign investment or subsidiary. Choices "a", "c", and "d" are incorrect, per the above Explanation.

• Question 272:

  Atlas Worldwide Industries conducts business in a number of different countries and is trying to evaluate its economic exposure to exchange rate risk. Which of the following statements is not correct?

  A. Atlas will suffer an economic loss in the event it has net cash outflows of a foreign currency and the foreign currency appreciates.

  B. Atlas will enjoy an economic gain in the event it has net cash outflows of a foreign currency and the foreign currency depreciates.

  C. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency appreciates.

  D. Atlas will suffer an economic loss in the event it has net cash inflows of a foreign currency and the foreign currency depreciates.

  Correct Answer: C

  

  Choice "c" is correct. Atlas will benefit from an economic gain in the event that it has net cash inflows of a

  foreign currency and the foreign currency appreciates (the domestic currency depreciates). Atlas will

  collect a more valuable currency that can buy more of its domestic currency.

  Choices "a", "b", and "d" are incorrect because they are correct statements.

• Question 273:

  Which of the following methods is designed to measure transaction exposure in terms of the maximum one day loss related to holdings denominated in foreign currency?

  I. Measurement of currency variability.

  II. Measurement of currency correlations.

  III.

  Value at risk.

  A.

  I only.

  B.

  II only.

  C.

  III only.

  D.

  I, II, and III.

  Correct Answer: C

  Choice "c" is correct. The value at risk method seeks to quantify the exposure of business to a one day

  loss in the value of its positions in foreign currencies.

  Choices "a", "b", and "d" are incorrect, per above Explanation.

• Question 274:

  Which of the following methods of measuring transaction exposure to exchange rate risk uses standard deviation, coefficient of correlation and other formal statistical techniques?

  I. Measurement of currency variability.

  II.

  Measurement of currency correlations.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I and II.

  Correct Answer: C

  Choice "c" is correct. The currency variability approach uses standard deviations as a means of predicting future exchange rates while the currency correlation approach is often applied to circumstances involving multiple currencies and evaluates exposure in relation to the statistically computed degree of correlation between the movements of different currencies. Choices "a", "b", and "d" are incorrect, per above Explanation.

• Question 275:

  Which of the following is not correct about the purchasing power parity theory of explaining changes in exchange rates?

  A. Purchasing power of a common currency in different economies for similar products will remain the same.

  B. Inflationary forces on foreign and domestic currencies will cause the exchange rates to automatically adjust to ensure that a common currency will have identical or similar purchasing power in each economy for similar goods.

  C. Interest rates include a premium or discount that ensures purchasing power parity.

  D. The purchasing power parity theory is presented in both absolute and relative form.

  Correct Answer: C

  Choice "c" is correct. The purchasing power parity theory holds that inflation will cause exchange rates to automatically adjust to ensure that an equal amount of a common currency will purchase similar goods in separate economies. The International Fischer effect considers the premium or discount on interest rates as an indicator of inflation. Choice "a" is incorrect. The basic idea underlying the purchasing power parity theory is that the purchasing power of a common currency in different economies for similar products will remain the same and that inflation in any particular economy will cause exchange rates to adjust until parity is consistently achieved. Choice "b" is incorrect. The purchasing power parity theory holds that inflationary forces on foreign and domestic currencies will cause the exchange rates to automatically adjust to ensure that a common currency will have identical or similar purchasing power in each economy for similar goods. Choice "d" is incorrect. The purchasing power parity theory is presented as both an absolute theory of parity determination regardless of market imperfections and as a relative concept that considers market imperfections.

• Question 276:

  In evaluating the impact of relative inflation rates on the demand for a foreign currency, which of the following is true?

  A. Inflation is irrelevant to currency demand.

  B. As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency falls.

  C. As inflation associated with a foreign economy increases in relation to a domestic economy, demand for the foreign currency increases.

  D. As inflation associated with a foreign economy decreases in relation to a domestic economy, demand for the foreign currency falls.

  Correct Answer: B

  Choice "b" is correct. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency. Choice "a" is incorrect. Inflation, along with interest rates and trade restrictions are significant determinants of exchange rates. Choice "c" is incorrect. As inflation associated with a foreign currency increases in relation to a domestic economy, demand for the foreign currency falls. Inflation weakens the foreign currency in relation to the domestic currency and makes foreign products more expensive and reduces demand. Reduced demand for a foreign import will reduce the demand for its currency, not increase demand. Choice "d" is incorrect. As inflation associated with a foreign currency decreases in relation to a domestic economy, demand for the foreign currency rises. Inflation weakens the domestic currency in relation to the foreign currency and makes foreign products less expensive and increases demand. Increased demand for a foreign import will increase the demand for its currency, not decrease demand.

• Question 277:

  What is strategic planning?

  A. It establishes the general direction of the organization.

  B. It establishes the resources that the plan will require.

  C. It establishes the budget for the organization.

  D. It consists of decisions to use parts of the organization's resources in specified ways.

  Correct Answer: A

  Choice "a" is correct. Strategic planning is the creation of an overall strategic plan for an organization to achieve its overall "business objectives." The strategic plan will establish the general direction of the organization. Choice "b" is incorrect. Strategic planning will not establish the resources that the plan will require. The resources that the plan will require are part of the implementation of the strategic plan, not part of the plan itself. Choice "c" is incorrect. Strategic planning will not establish the budget for the organization. Budgets are even further down implementing the plan than are the resources that the plan will require. Choice "d" is incorrect. Strategic planning does not consist of decisions to use parts of the organization's resources in specified ways. Again, these decisions are part of the implementation of the strategic plan, not part of the plan itself.

• Question 278:

  A city ordinance that freezes rent prices may cause:

  A. The demand curve for rental space to fall.

  B. The supply curve for rental space to rise.

  C. The quantity demanded of rental space exceeds the quantity supplied.

  D. The quantity supplied of rental space exceeds the quantity demanded.

  Correct Answer: C

  Choice "c" is correct. A city ordinance that freezes rent prices (such as rent control and rent stabilization in New York City) may cause the quantity demanded for rental space to exceed the quantity supplied. This occurs if the rent controlled price is set below the market clearing price. At the controlled price, the quantity supplied will be constrained due to the low rent prices for the rent-controlled and rent-stabilized properties; builders will not want to build and rent properties for less than they are worth on the open market. The quantity demanded for the rental space will still be artificially high due to the city ordinance, which sets the controlled price below the market price. Thus, the quantity demanded will exceed the quantity supplied. New York City rent control is a perfect example of the effect of a price ceiling and the problems that it can cause. Choice "a" is incorrect. A city ordinance that freezes rent prices will not cause the demand curve for rental space to fall. Price changes cause movements along the demand curve, not shifts in the demand curve. Choice "b" is incorrect. A city ordinance that freezes rent prices will not cause the supply curve for rental space to rise. Price changes cause movements along the supply curve, not shifts in the supply curve. Choice "d" is incorrect. A city ordinance that freezes rent prices will not cause the quantity supplied to exceed the quantity demanded. This choice is backwards.

• Question 279:

  Which of the following inputs would be most beneficial to consider when management is developing the capital budget?

  A. Supply/demand for the company's products.

  B. Current product sales prices and costs.

  C. Wage trends.

  D. Profit center equipment requests.

  Correct Answer: D

  Choice "d" is correct. In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key insights into the capital requirements of the business that are not otherwise known. Choice "a" is incorrect. Supply and demand for company products is a crucial strategic input in forecasting the future capital requirements. Current year capital budgeting would not benefit as directly from this information, however, as profit center equipment requests. Choice "b" is incorrect. Current product sales prices and costs represent operating data most relevant to operating rather than capital budgeting. Choice "c" is incorrect. Wage trends represent operating data most relevant to operating than capital budgeting.

  Comments: Some people have questioned why the answer is not choice "a." However, the answer to the question is very clear. The question really is what are the best (most beneficial to consider) inputs to a capital budget. The "supply and demand for the company's products" is very indirect. The demand for the company's products may or may not result in the company spending any capital money because the demand may be able to be satisfied with the current capital equipment. But, equipment requests, if approved, will most likely result in spending money (assuming that the money in the budget is actually spent) and thus should go into the capital budget. The supply and demand might affect future capital budgets if the demand is not able to be satisfied with the current capital equipment. But the question asks for the best inputs for presumably the current capital budget.

• Question 280:

  Under which of the following conditions is the supplier most able to influence or control buyers?

  A. When the supplier's products are not differentiated.

  B. When the supplier does not face the threat of substitute products.

  C. When the industry is controlled by a large number of companies.

  D. When the purchasing industry is an important customer to the supplying industry.

  Correct Answer: B

  Choice "b" is correct. When there are few good substitutes for a supplier's product, the supplier has market power (think of a monopoly). As a result, the supplier is better able to control buyers and act as a price setter rather than a price taker. Choice "a" is incorrect. When supplier's products are not differentiated, buyers will be indifferent about which supplier they purchase from. In other words, if firms sell identical products (think of perfect competition) the product of one firm is a perfect substitute for the product of another firm. In this case, firms are price takers, not price setters. Choice "c" is incorrect. When there are a large number of firms, no one firm has much market power. This is the case of either perfect competition (if all firms sell identical products) or monopolistic competition (if all firms sell slightly differentiated products). Choice "d" is incorrect. If the purchasing industry is an important customer of the supplier, the purchasing industry (i.e. the buyer) will have some market power. This will diminish the ability of the supplier to influence or control the buyer.