Lindenwood University Business Law Cluster Winter Quarter, 2011

Transcription

1 Lindenwood University Business Law Cluster Winter Quarter, 2011 QUIZ 1 RESULTS Overall Results Some people very close to A s with No curve High in Consumer Finance was 17 (85% - 2 people) - High in Investments was 18 & 19 (90-95% - 3 ppl) - High in Business Law was 15 (75% - 1 person) Significant range existed however in the raw scores; 5 Quiz 1 Finance

2 5 Quiz 1 Investments Quiz 1 Business Law

3 Applied curve on all three classes --- Fin Invest Bus Law A 14 to to to 20 B 10 to to to 11 C < 10 < 12 < 10 A B C After the curve, 7 of 23 students consistently scored the same grade on all three courses - All 3 A's 3 students - All 3 B's 2 students - All 3 C's 2 students - 14 of 23 students only varied by ONE letter grade (B, A, B; etc) - Only 2 of 23 students varied by TWO letter grades (C, A, B; etc) This suggests that questions captured substantive knowledge of the students, and with consistency of results

4 QUIZ 1 ANSWER KEY Consumer Finance Q 1. Answer D. Personal finance management is important because it is aimed at fulfilling financial goals. Chapter 1, p. 7. Q 2. Answer D. Average propensity to consume is the percentage of each dollar of income that on average a person spends for current needs and current consumption. Chapter 1, p. 4. This is a question where there are two closely related answers, a) the dollars of income spent for current consumption, and d) percentage of income spent on current consumption. The best answer is the percentage of income spent on current consumption --- once you realize that an average is really the 50 th percentile, any answer with percentage in it becomes more apparent. Q 3, Answer A. Inflation refers to rising prices. Chapter 1, p. 30. Q 4, Answer D. Income is directly related to all three possible answers, location, age, education. Chapter 1, p The text also adds that career choice is another factor of income determination, and I stressed in class that individual work effort is also a factor. Q 5, Answer C. Net worth = Assets Liabilities. Chapter 2, p. 41. Q 6, Answer E. Solvency ratio = net worth / total assets. Chapter 2, p. 54. This is really a two part accounting question. First, we need to solve for net worth, as all we are given is assets and liabilities. We know that NW = A L. Solving, NW = 87,000 10,000 = 77,000. Second, solvency ratio = NW / A = 77,000 / 87,000 = 88.5%. Q 7, Answer C. This is a FV question. Chapter 2, page, The only wrinkle here is that we know FV, and just have to solve for N. There are several ways to solve this question. The easiest way is with a financial calculator. PV = 5,000; 7% = I; 10,000 = FV; Solve for N. On the financial calculator, answer is years, rounded to 10. The authors of the text suggests that this be solved through the rule of 72, chapter 2, p. 65. The rule of 72 is also in my teaching outline. N = 72 / I = 72 / 7 = 10.28, rounded to 10.

5 You could also solve this by using Appendix A, p. 543, but it is a bit more involved. We know that FV = PV * FV factor; 10,000 = FV factor; then 10,000 / 5,000 = FV factor = 2; So we are looking for a FV factor of 2.00 Looking down the 6% and 8% columns, generates a fv factor of 2 at 10 years for 8% but not 6%. Averaging the fv factors for 7% would generate a fv factor of , very close to 2. The next row at 12 years have fv factors of 2+ for both 6% and 8%, so you know that will average beyond the most likely answer using appendix a would then be 10 years. Q 8, Answer D. This is a FV Question. PV = 100,000; N = 5 years; I = 6%; FV on the financial calculator = 133, On Appendix A, p. 543, FV = PV * FV factor; FV = 100,000 * 1.34 = 134,000, and D is the closest answer to that. Q 9. Answer B. I and E statement examines your financial performance. Chapter 2, p. 46. This is a question that has two close answers, B) financial performance; and C) financial position. The text at p. 46 notes that the balance sheet examines the financial POSITION at a given point in time, whereas the I & E statement measures the various financial statements across time, normally a year. The text then notes that the I & E statement allows you to compare and evaluate, which are PERFORMANCE related concepts. Thus, performance is the better answer than position. Q 10, Answer A. The balance sheet describes a family s wealth and financial position at a certain point in time. Chapter 2, p. 40. Q 11, Answer B. Money Market Deposit Accounts are typically federally insured. Chapter 4, p Money Market funds on the other hand are not federally insured. I noted this important difference in both clusters in a discussion of money market funds breaking the buck in the 2008 recession. The teaching outline also notes the distinction. Q 12, Answer A. If interest rates are compounded semi-annually (or at anything other than an annual rate, actually), the effective rate of interest (or EAR) will be above the nominal or stated interest rate. Chapter 4, p There is an example on this very point on p. 132, with wording in italics that appear to be taken directly by the authors and made into this question and answer. Q 13, Answer C. The federal income tax is progressive in nature, with a higher marginal tax rate applied on higher taxable incomes. Chapter 3, p. 76. Question 14, Answer C. The question asks for the savings in taxes through a $5,000 donation to charity. This is a fairly easy question with the answer being solved by: 28% marginal tax rate * 5,000 = 1,400. Thinking through this a bit more, charitable deductions are one of the itemized deductions. Chapter 3, p. 83. The only reason $20,000 is listed as the total itemized deduction is because if the total itemized deduction was less than $15,000 or so, it would have been better to take a standard deduction for any and all tax filing status (single, married, etc). If the total itemized deduction were under the standard deduction amount, a charitable deduction

6 would not have produced ANY tax savings, since the tax filers would have save more with the standard deduction. So, the question effectively excluded the possibility of the standard deduction by stating the total itemized deductions > the standard deduction. Q 15, Answer A. This is a process of elimination question. Interest, dividends, and capital gains have no income taxes withheld. Self employment income also has no withholding on it, so tips would be the only form of income in the answer that could have withholding. Withholding taxes are discussed in chapter 3, p As to the specific answer on Tips forms of income, employers are required to withhold an estimated amount for employees receiving tips (such as waitresses). Q 16, Answer C. The average tax rate is the tax liability / taxable income. Chapter 3, p. 77; also see my outline. Aside from the text book reference, this answer is the only one that makes any sense, since no other answer has taxable income in the denominator. Q 17, Answer D. A person who leases a car may be required to pay for unreasonable wear and tear at the end of the lease as well additional mileage, so D) both b and c are correct. At your option, you may be able to purchase a vehicle at residual value, but are never absolutely mandated or required to do so, so answer A is not correct. Q 18, Answer B. PMI is usually required when the down payment is 20% or less. Chapter 5, p As the text also notes on the same page (also in the teaching outline), PMI must end under federal law when the mortgage is paid down to 78% of the original value. Thus, anything to far off of 78% is not likely to be a correct answer. The 75% figure in Answer A is the rule-of-thumb for down payments of regular home mortgages, not PMI. Q 19, Answer B. Interest rate and principal payments do not vary in a fixed rate mortgage. Chapter 5, p Also note that the class lectures extensively covered fixed rate and adjustable rate mortgages (ARMs). Q 20, Answer D. Chapter 5, p covers affordability ratios. The question involves a two part solution. First, total loan payments are not to exceed 35% of monthly gross income. 4,000 *.35 = 1,400. Second, total loan payments = monthly mortgage + car payments + student loan payments. So, 1,400 = mortgage ; rearranging, the max monthly mortgage = = 850.

7 Investments Q 1, Answer B. Chapter 1, p. 16 defines liquid assets as cash, savings accounts, and money markets. Chapter 2, p. 41 also notes that liquid assets are held in the form of cash. Q 2, Answer E. Chapter 1, p discusses savings and investment planning. Basically, savings is a form of investment, but savings accounts (cash, CDs, MM) are typically on the lower end of the risk and return investment profile. So, right away, Answer E appears correct, since most investments have different levels of risk and return than savings. But process of elimination works for all other answers length of time held, dollar outlay, depreciation, voting rights, could all occur with either traditional forms of savings as well as other forms of investments. So, with either thought process, Answer E, the level of risk and expected return is the most likely. Q 3, Answer E. Chapter 1, p The four parts of a business cycle of depression, expansion, recession, and recovery are specifically noted in a graph on page 30. Since depression is a term that is usually reserved for the Great Depression of , I normally use the terms of expansion and then peak; post peak; trough and recession; and recovery. I think I used my verbiage in class. Either way, answer E, stagnation is not included. Stagnation is an important economic concept, but the business cycle is usually moving up or down, and is normally not considered to be stagnate. Stagnation would only occur at a peak or trough when the economy has it its max or min, and it is more common to refer to those times as peaks and troughs. Q 4, Answer B. T bills are quite liquid and can be sold in the open market prior to maturity. Some of the other answers are ridiculous, while answer C is the rule for many CD s, at least if you want to cash the asset in without a penalty. CD s and T bills are noted at chapter 4, p Q 5, Answer D. Capital gains occurs on any asset whenever it is sold for more than its purchase price. Chapter 3, p. 81. Q 6, Answer E. all of the answers are various forms of investment vehicles, so all of the above, E, is correct. Chapter 11, p Q 7, Answer D. All of the noted types of markets and exchanges are examples of securities markets. Chapter 11, p Q 8, Answer C. A stop loss order is executed for a SALE when an asset drops in price to or below a specified level. Chapter 11, p The other close answer is B, a limit order. But such a limit order can be a buy OR a sale. The question involves only a sale. Class lectures and the teaching outline also covered the stop loss order. Q 9, Answer E. All of the answers are characteristics of effective and good portfolio strategies, and all are specifically noted at chapter 11, p. 382.

8 Q 10, Answer D. The SEC regulates securities markets. Chapter 11, p Q 11, Answer C. A market order is executed at the best price when entered. This is normally the current price, but since there is a spread occurring at any one time between the ask and the bid price, dealers are generally required to obtain the best price among several alternative offers on the security that may simultaneously exist. Chaoter 11, p Q 12, Answer C. Margin buying is buying with borrowed funds. Chapter 11, p. 370, lecture notes, and class lectures. Q 13, Answer B. Selling stocks that you have borrowed is a short sale. Chapter 11, p. 370, lecture notes, class notes. During the lectures, I stressed this is a high risk strategy (as is buying on Margin), but potentially can be profitably used when the markets are specific stocks are severely over-priced and are ripe for a fall. Q 14, Answer E. A collection of assets is called a portfolio. Chapter 11, p Q 15, Answer A. A diversified portfolio has dissimilar risk and return characteristics of the securities within the portfolio. Chapter 11, p I also stressed this definition in class lectures, noting that this is the text s definition of diversification. Q 16, Answer C. Diversification reduces portfolio risk and tends to provide acceptable levels of return. Chapter 11, p Additionally, none of the other choices may any real sense. Q 17, Answer C. Answers a, b, d, e, all are part of good LT investment strategies, while answer C only goes to ST activities of immediate financial needs to pay bills. See generally, Chapter 11, p Q 18, Answer E. meeting investment objectives and needs is really the only answer that makes any sense for portfolio management. Investor objectives are discussed in chapter 11, p Q 19, Answer E. all of the answers are appropriate items for an investment inventory worksheet. Chapter 11, p Q 20, Answer D. An 80% stock portfolio is appropriate for someone who is not in need immediate cash and who has a long holding period to absorb the highly volatile periods inherent with stocks. A young single worker saving for retirement fits that description nicely, while none of the other examples are appropriate for such an aggressive allocation. See, chapter 11, p on discussions of asset allocation and the chapter 11 allocation power point.

9 Business Law Q 1, Answer A. The US Constitution is the supreme law of the land. Chapter 1, p. 12. Q 2, Answer B. Stare Decisis is the development of precedental case law to be followed in later cases. Chapter 1, p. 14. Q 3, Answer B. A, C, and D are all good characteristics of contracts formation, so by the process of elimination, B should be the answer. Answer B is obviously wrong in any event, in that courts do not have any power to initially approve of contract formation. Courts are only involved after something goes wrong with the contract execution or performance. Chapter 1, p. 11. Also, see Chapter 9 throughout. Q 4, Answer A. This question tries to draw out the critical distinction between express and implied K s, focusing on the primary feature of express K s. An express contract must be somehow stated in words (either oral or in writing). Chapter 9, p It does not have to be in writing or signed, unless some other more specific requirement exists (like the statute of frauds for UCC, or RE K s). It does not have to be immediately performed. While contracts are normally performed for some type of mutual benefit, that is not a distinguishing characteristic of express K s. The best answer is the simplest one in this instance, being in words. Q 5, Answer B. Answers C, D, E are obviously wrong, so we are down to two possible answers right away. A is incorrect because with a void K, the K is simply null and void, with no option existing to avoid liability. It is void ab initio (for all time), with no option to avoid. Answer B is correct in that a voidable K allows an option to avoid liability. The Q really calls for knowledge of void vs voidable. Chapter 9, p Q 6, Answer C. This question calls for an understanding of objective intent, and especially the reasonable person standard. Chapter 10, p Objective intent is measured by whether an outsider observing the party s words and conduct would reasonably conclude that the parties intended something. No answer other than C clearly states the definition of objective intent. Q 7, Answer D. The definition of a counter offer is most clearly stated in answer D, a CO operates as both a rejection of an offer as well as constituting a new offer. Chapter 10, p Q 8, Answer B. This Q asks for knowledge of what detrimental reliance. Chapter 11, p Q 9, Answer D. This Q calls for an understanding of the elements of consideration. See, Chapter 11, p The answer would have been easier and more obvious had it been stated as being bargained for and having something of value (class lecture and text both frame the elements of C in this manner). But a contract does involves a bargained for exchange that generates a legal obligation to each party, and consideration should also

10 be viewed in the context legal detriments and obligations. Additionally, the other answers make little sense, so process of elimination, again. What is the best answer? Q 10, Answer C. This is an illegal purpose, making the contract null and void. Chapter 11. P The other three answers all state that the K is enforceable, which is obviously wrong. Q 11, Answer B. All answers other than B state things that are NOT consideration. Chapter 11, p B correctly states that consideration involves a change in duties and payments. Q 12, Answer A. The only obviously correct answer is A. The other answers all hinge on knowledge of the void vs voidable distinction for various forms of competency. Chapter 12, p Q 13, Answer A. The only obviously correct answer as to the minor rule is Answer A. the other answers make no sense or are simply not a correct formulation of the minor rule. Chapter 12, p Q 14, Answer D. This involves intoxication, Chapter 12, p D correctly states the rule on intoxication. The other answers miss the point. Q 15, Answer A. Chapter 13, discuss mutual and unilateral mistake. The Question states a mutual mistake. Either party can rescind in such an instance. Q 16, Answer E. All answers are elements of a fraud. Chapter 13, p Q 17, Answer A. A misrepresentation of a material fact is necessary to establish fraud. Chapter, p Q 18, Answer D. the SOF makes certain forms of contracts unenforceable if not in writing. The close answer is B, where the K s are voidable, as a K still may be executed if neither party objects, but the SOF is essentially a defense to use if some K s are not in writing. The general rules of the SOF is stated in D however, and thus is the best answer. Q 19, Answer B. The only obvious answer is B, guarantee K s involve the promise to pay debt of another if the other person does not pay. Chapter 14, p Q 20, Answer D. The only answer that states the parol evidence rule is D. None of the other answers may much sense in fact, as they do not relate in any way to parol evidence. Chapter 14, p. 226.