Business Analysis and Valuation Question Bank - 1968 Verified Questions

Business Analysis and Valuation

Question Bank

Course Introduction

Business Analysis and Valuation focuses on the frameworks and tools necessary to critically assess a companys financial statements, business strategies, and overall economic performance. The course covers topics such as financial statement analysis, strategic analysis, forecasting, and valuation techniques including discounted cash flow and market-based approaches. Students learn to integrate accounting, finance, and strategy concepts to make informed investment and business decisions. Emphasis is placed on real-world applications, case studies, and the role of analysis in mergers and acquisitions, credit evaluation, and equity valuation.

Recommended Textbook

Managerial Economics and Business Strategy 8th Edition by Michael Baye

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14 Chapters

1968 Verified Questions

1968 Flashcards

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Page 2

Chapter 1: The Fundamentals of Managerial Economics

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143 Verified Questions

143 Flashcards

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Sample Questions

Q1) If marginal costs exceed marginal benefits, then:

A) the firm ends up with a net loss.

B) the firm's average costs exceed average benefits.

C) the firm should decrease its production level.

D) None of the statements associated with this question are correct.

Answer: C

Q2) A firm will maximize the present value of future profits by maximizing current profits when the:

A) growth rate in profits is constant.

B) growth rate in profits is larger than the interest rate.

C) interest rate is larger than the growth rate in profits and both are constant.

D) growth rate and interest rate are constant and equal.

Answer: C

Q3) Basic principles that comprise good management include:

A) identifying goals and constraints.

B) recognizing the nature and importance of profits.

C) understanding incentives.

D) All of the statements associated with this question are correct.

Answer: D

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Chapter 2: Market Forces: Demand and Supply

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Sample Questions

Q1) Given a linear demand function of the form Q_X^d = 1000.5P_X, find the inverse linear demand function.

A) P_X = 200 - 2Q_X.

B) P_X = 100 - 0.5Q_X.

C) P_X = 100 - 2Q_X.

D) P_X = 100Q_X - 0.5P_X.

Answer: A

Q2) Given a linear supply function of the form Q_X^S = -10 + 5P_X, find the inverse linear supply function.

A) P_X = 2 + 0.2Q_X.

B) P_X = -10 + 0.2Q_X.

C) P_X = -10 + 5Q_X.

D) P_X = 2 + 5Q_X.

Answer: A

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4

Chapter 3: Quantitative Demand Analysis

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Sample Questions

Q1) For a given set of data and a regression equation, the greater the R-square:

A) the greater the t-value.

B) the lower the t-value.

C) the greater the adjusted R-square.

D) the lower the adjusted R-square.

Answer: C

Q2) Suppose the demand for good x is ln Q_x^d = 21 - 0.8 ln P_x - 1.6 ln P_y + 6.2 ln M + 0.4 ln A_x. Then we know goods x and y are:

A) substitutes.

B) complements.

C) normal goods.

D) inferior goods.

Answer: B

Q3) Your firm's research department has estimated the elasticity of demand for toys to be -0.7. As the manager of a local chain of toy stores, determine the impact of an 8 percent increase in toy prices on your total revenues.

Answer: Since the elasticity of demand for toys is less than 1 in absolute value, an increase in toy prices will increase your total revenues.

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Page 5

Chapter 4: The Theory of Individual Behavior

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Sample Questions

Q1) A cash gift causes the budget line to:

A) shift to the right in a parallel fashion.

B) shift to the left in a parallel fashion.

C) rotate clockwise.

D) None of the statements is correct.

Q2) If sugar and Nutrasweet are substitutes, then we can be certain that an increase in the price of sugar will lead to an increase in the consumption of:

A) Nutrasweet only.

B) sugar only.

C) sugar and Nutrasweet.

D) None of the statements is correct.

Q3) What is the horizontal intercept of the budget line, given that M = $1,000, P_X = $50, and P_Y = $40?

A) 2000.0

B) 20.0

C) 25.0

D) 11.11

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6

Chapter 5: The Production Process and Costs

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Sample Questions

Q1) The feasible means of converting raw inputs such as steel, labor, and machinery into an output are summarized by:

A) Land.

B) Production.

C) Capital.

D) Technology.

Q2) For given input prices, isocosts closer to the origin are associated with:

A) lower costs.

B) the same costs.

C) higher costs.

D) initially lower, then higher costs.

Q3) If the marginal product per dollar spent on capital is less than the marginal product per dollar spent on labor, then in order to minimize costs the firm should use:

A) less capital and more labor.

B) less labor and more capital.

C) less labor and less capital.

D) more labor and more capital.

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Chapter 6: The Organization of the Firm

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Sample Questions

Q1) Suppose a new contracting environment that requires clearing fewer legal hurdles is considered. This new contract will result in:

A) an increase in the marginal cost and a longer optimal contract.

B) an increase in the marginal cost and a shorter optimal contract.

C) a decrease in the marginal cost and a longer optimal contract.

D) a decrease in the marginal cost and a shorter optimal contract.

Q2) Sydney Roofers Incorporated recently purchased 100 pounds of standard roofing nails from Lowes, a nationwide hardware and building supplies store. This transaction most likely involves:

A) spot exchange.

B) vertical integration.

C) contract.

D) contract or vertical integration.

Q3) Which of the following forms of payment is NOT an incentive plan?

A) Commission plans for salespeople

B) Paying waitresses low wages, but allowing them to collect tips

C) Bonuses for managers that increase with profits

D) Straight hourly wages for construction workers

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8

Chapter 7: The Nature of Industry

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Sample Questions

Q1) An industry consists of three firms with equal annual sales. What is the industry's C₄?

A) 0.58

B) 0.75

C) 1.00

D) There is not sufficient information to compute the industry C₄.

Q2) Suppose the market for good X has a four-firm concentration ratio of 0.50. Furthermore, assume that total sales in the industry are $1.2 million. Based on this information, we know that sales for the largest four firms in the industry equal (in aggregate):

A) $600,000.

B) $60,000.

C) $2,400,000.

D) $240,000.

Q3) The idea of improving cash flow by exploiting the cyclical nature of different product lines is represented in:

A) vertical integration.

B) horizontal integration.

C) cointegration.

D) conglomerate integration.

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Chapter 8: Managing in Competitive, Monopolistic, and

Monopolistically Competitive Markets

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Sample Questions

Q1) Which of the following statements is NOT correct about monopoly?

A) A monopolist generally faces a downward-sloping demand curve.

B) Monopolists always make positive profits in the long run.

C) A monopoly may make negative profits in the short run.

D) There is no close substitute for a monopoly's product.

Q2) A monopoly has two production plants with cost functions C₁ = 50 + 0.1Q₁² and C₂ = 30 + 0.05Q₂². The demand it faces is Q = 500 - 10P. What is the profit-maximizing price?

A) $12.5 per unit

B) $6.25 per unit

C) $31.25 per unit

D) $18.75 per unit

Q3) Compute the marginal revenue when the price elasticity of demand is -0.10.

A) -9P, meaning marginal revenue is negative and 9 times greater than price.

B) 9P, meaning marginal revenue is positive and 9 times greater than price.

C) -3P, meaning marginal revenue is negative and 3 times greater than price.

D) 3P, meaning marginal revenue is positive and 3 times greater than price.

Q4) What market can you think of, besides that for VCRs, that has shown short-run profits but, over time, has seen profits disappear due to entry?

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Chapter 9: Basic Oligopoly Models

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Sample Questions

Q1) The market for widgets consists of two firms that produce identical products. Competition in the market is such that each of the firms independently produces a quantity of output, and these quantities are then sold in the market at a price that is determined by the total amount produced by the two firms. Firm 2 is known to have a cost advantage over firm 1. A recent study found that the (inverse) market demand curve faced by the two firms is P = 280 - 2(Q₁ + Q₂), and costs are C₁(Q₁) = 3Q₁ and C₂(Q₂) = 2Q₂.

a. Determine the marginal revenue for each firm.

b. Determine the reaction function for each firm.

c. How much output will each firm produce in equilibrium?

d. What are the equilibrium profits for each firm?

Q2) When MCI announced a price discount plan designed to induce small firms to use its services, the price of its stock immediately declined. Why do you think the stock market reacted negatively to MCI's plan to attract new customers?

Q3) Compare and contrast the output levels and profits for the Cournot, Stackelberg, and Bertrand models. Use the following cost and demand conditions for your comparison, and suppose there are two firms: P = 1,500 - 10Q. Each firm has a marginal cost of $20 and fixed costs of zero.

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Page 11

Chapter 10: Game Theory: Inside Oligopoly

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Sample Questions

Q1) If you advertise and your rival advertises, you each will earn $4 million in profits. If neither of you advertises, you will each earn $10 million in profits. However, if one of you advertises and the other does not, the firm that advertises will earn $1 million and the non-advertising firm will earn $5 million. If you and your rival plan to hand your business down to your children (and this "bequest" goes on forever), then a Nash equilibrium is for each firm to:

A) not advertise until the rival does, and then to advertise forever.

B) never advertise.

C) always advertise.

D) advertise until the rival does not advertise, and then not advertise forever.

Q2) It is easier to sustain tacit collusion in an infinitely repeated game if:

A) the present value of cheating is lower than collusion.

B) there are many players.

C) the interest rate is higher.

D) the present value of cheating is lower than collusion and the interest rate is higher.

Q3) Based on your knowledge of one-shot and repeated games, would you expect tipping behavior to differ depending on whether a person is eating in a hometown diner or in a restaurant located in Timbuktu? Explain.

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Chapter 11: Pricing Strategies for Firms With Market Power

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Sample Questions

Q1) Suppose P = 20 - 2Q is the market demand function for a local monopoly. The marginal cost is 2Q. The firm currently uses a standard pricing strategy. Which of the following will allow the firm to enhance the profits?

A) Engage in two-part pricing.

B) Engage in commodity bundling.

C) Engage in randomized pricing.

D) Engage in two-part pricing and engage in commodity bundling.

Q2) Suppose a manager is interested in implementing third-degree price discrimination. The manager knows that the price elasticity of demand for Group 1 is -2 and the price elasticity of demand for Group 2 is -1.2. Based on this information alone we can conclude that the price charged to Group 2 will be:

A) the same as the price charged to Group 1.

B) lower than the price charged to Group 1.

C) higher than the price charged to Group 1.

D) There is insufficient information to determine whether Group 2 will have a higher, lower, or the same price as Group 1.

Q3) A monopolist is profit maximizing where the elasticity of demand is -2 and price is $4. What is the monopolist's marginal cost?

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13

Chapter 12: The Economics of Information

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Sample Questions

Q1) At Econ Tech, the average grade in a course that all students know to be a "blow-off" course is the same as the average grade in the toughest math course. Why?

Q2) _______ occurs when people smoke more after buying life insurance.

A) Adverse selection

B) Moral hazard

C) Asymmetric information

D) Cournot and Bertrand competition

Q3) A peach farmer must decide how many peaches to harvest for the world peach fair. He knows that there is a 25 percent chance that the world price will be $3, a 50 percent chance that it will be $3.50, and a 25 percent chance that it will be $4. His cost function is C(Q) = 0.05Q². The farmer's maximum expected profit is:

A) $61.25.

B) 0.

C) $122.50.

D) None of the answers are correct.

Q4) Explain why a used car that is only six months old and has been driven only 5,000 miles typically sells for 20 percent less than a new car with the same options.

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Page 14

Chapter 13: Advanced Topics in Business Strategy

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Sample Questions

Q1) Smyth Industries operated as a monopolist for the past several years, earning annual profits amounting to $50 million, which it could have maintained if Jones Incorporated did not enter the market. The result of this increased competition is lower prices and lower profits; Smyth Industries now earns $10 million annually. The managers of Smyth Industries are trying to devise a plan to drive Jones Incorporated out of the market so Smyth can regain its monopoly position (and profit). One of Smyth's managers suggests pricing its product 50 percent below marginal cost for exactly one year. The estimated impact of such a move is a loss of $1 billion. Ignoring antitrust concerns, is it in Smyth Industries' interest to remain as a duopolist or engage in predatory pricing?

A) Engage in predatory pricing since $210 million is greater than $200 million.

B) Remain as a duopolist since $210 million is greater than $0.

C) Engage in predatory pricing since $1.05 billion is greater than $1 billion.

D) Remain as a duopolist since $210 million is greater than $100 million.

Q2) A two-way network linking 15 users creates how many potential network connections?

A) 225

B) 100

C) 210

D) 300

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Page 15

Chapter 14: A Managers Guide to Government in the Marketplace

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Sample Questions

Q1) Which cost measures the pollution cost to society?

A) Internal cost

B) External cost

C) Social cost

D) External cost and social cost

Q2) In highly concentrated markets, an increase in the HHI of more than

raises potential concerns.

A) 5 points

B) 10 points

C) 30 points

D) 50 points

Q3) When the government imposes an effective price ceiling on a monopolist, what will be sure to happen in the short run?

A) The dollar price will increase.

B) The dollar price will fall.

C) There will be a shortage of the product.

D) There will be a surplus of the product.

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Page 16