our business plan for your proposed start up firm envisions first year revenues of 1 551966

Your business plan for your proposed start-up firm envisions first-year revenues of $120,000, fixed costs of $30,000, and variable costs equal to one-third of revenue.

a. What are expected profits based on these expectations?

b. What is the degree of operating leverage based on the estimate of fixed costs and expected profits?

c. If sales are 10% below expectation, what will be the decrease in profits?

d. Show that the percentage decrease in profits equals DOL times the 10% drop in sales.

e. Based on the DOL, what is the largest percentage shortfall in sales relative to original expectations that the firm can sustain before profits turn negative? What are break-even sales at this point?

f. Confirm that your answer to (e) is correct by calculating profits at the break-even level of sales. 20. The following problems appeared on past CFA examinations.

a. The supply-side view stresses that:

i. Aggregate demand is the major determinant of real output and aggregate employment.

ii. An increase in government expenditures and tax rates will cause real income to rise.

iii. Tax rates are a major determinant of real output and aggregate employment.

iv. Expansionary monetary policy will cause real output to expand without causing the rate of inflation to accelerate.

b. In macroeconomics, the crowding-out effect refers to:

i. The impact of government deficit spending on inflation.

ii. Increasing population pressures and associated movements toward zero population growth.

iii. A situation where the unemployment rate is below its natural rate.

iv. The impact of government borrowing on interest rates and private investment.

c. Based on historical data and assuming less-than-full employment, periods of sharp acceleration in the growth rate of the money supply tend to be associated initially with:

i. Periods of economic recession.

ii. An increase in the velocity of money.

iii. A rapid growth of gross domestic product.

iv. Reductions in real gross domestic product.

d. If the exchange rate value of the British pound goes from U.S.$1.80 to U.S.$1.60, then the pound has:

i. Appreciated and the British will find U.S. goods cheaper.

ii. Appreciated and the British will find U.S. goods more expensive.

iii. Depreciated and the British will find U.S. goods more expensive.

iv. Depreciated and the British will find U.S. goods cheaper.

e. The consumer price index is:

i. Ameasure of the increase in the prices of the goods that are included in the calculation of GDP.

ii. The ratio of the average price of a typical market basket of goods compared to the cost of producing those goods during the previous year.

iii. A comparison of the cost of a typical bundle of goods during a given period with the cost of the same bundle during a prior base period.

iv. Computed in the same manner as the GDP deflator.

f. Changes in which of the following are likely to affect interest rates?

I. Inflation expectations.

II. Size of the federal deficit.

III. Money supply.

i. I and II only.

ii. II and III only.

iii. I and III only.

iv. I, II, and III.

g. According to the supply-side view of fiscal policy, if the impact of tax revenues is the same, does it make any difference whether the government cuts taxes by either reducing marginal tax rates or increasing the personal exemption allowance?

i. No, both methods of cutting taxes will exert the same impact on aggregate supply.

ii. No, people in both cases will increase their saving expecting higher future taxes and thereby offset the stimulus effect of lower current taxes.

iii. Yes, the lower marginal tax rates alone will increase the incentive to earn marginal income and thereby stimulate aggregate supply.

iv. Yes, interest rates will increase if marginal tax rates are lowered, whereas they will tend to decrease if the personal exemption allowance is raised.

h. If the Federal Reserve wanted to reduce the supply of money as part of an antiinflation policy, it might:

i. Increase the reserve requirements.

ii. Buy U.S. securities on the open market.

iii. Lower the discount rate.

iv. Buy U.S. securities directly from the Treasury.