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27 Dec 2024, 00:15
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Question 1
B
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
15%
(low)
Question Stats:
79% (02:33) correct
21%
(02:14) wrong
based on 195
sessions
History
Date
Time
Result
Not Attempted Yet
Question 2
A
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
15%
(low)
Question Stats:
79% (01:04) correct 21%
(01:09) wrong
based on 227
sessions
History
Date
Time
Result
Not Attempted Yet
Question 3
D
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
45%
(medium)
Question Stats:
61% (01:12) correct 39%
(01:00) wrong
based on 222
sessions
History
Date
Time
Result
Not Attempted Yet
Question 4
A
Be sure to select an answer first to save it in the Error Log before revealing the correct answer (OA)!
Difficulty:
25%
(medium)
Question Stats:
75% (00:51) correct 25%
(00:54) wrong
based on 212
sessions
History
Date
Time
Result
Not Attempted Yet
The system used in the United States for allocating investment capital has many strengths: flexibility, responsiveness, and high rates of corporate profitability. It does not, however, direct capital effectively within the economy to those companies that can deploy it most productively, nor within companies to the most productive investment projects. In fact, the external capital market-the system by which outside investors allocate their capital to particular companies-is, if anything, too responsive to immediate stock-market pressures. This is because publicly owned United States companies increasingly rely on institutional investors who invest in a large, diversified portfolio of stocks that they hold for a relatively short time. In contrast, German investors invest for the long term in a few selected companies, and thus are able to gather extensive information about a company's ongoing prospects. United States investors, with small stakes in many companies, are generally unable to do this kind of thorough research. Therefore, when making investment decisions, they simply try to anticipate short-term movements in stock prices by using easily measurable company attributes, such as current profits, to serve as proxies of a company's value. This short-term outlook is often disruptive for companies because their stock prices, which reflect investor interest, can fluctuate dramatically in response to variations in quarterly profits. Moreover, the system as a whole results in overinvestment in rapid-growth sectors of the economy, computer technology for instance, and underinvestment in slow-growth sectors.
The United States internal capital market-the system by which individual companies allocate their own investment capital-can be just as myopic, largely because it uses the same valuation methods that outside investors use. Capital allocation in the United States takes place largely through "by the numbers" exercises that require managers to justify projects quantitatively. Thus, to keep costs low and profits high, many United States companies underinvest in those intangible assets required for long-term competitiveness-research and development, employee training, and organizational development. These areas, where returns are difficult to measure, are usually treated as costs rather than investments during the budgeting process. Thus, a company concerned about its current stock price may decide to sacrifice an employee training program to maintain its current level of profitability.
The United States internal capital market-the system by which individual companies allocate their own investment capital-can be just as myopic, largely because it uses the same valuation methods that outside investors use. Capital allocation in the United States takes place largely through "by the numbers" exercises that require managers to justify projects quantitatively. Thus, to keep costs low and profits high, many United States companies underinvest in those intangible assets required for long-term competitiveness-research and development, employee training, and organizational development. These areas, where returns are difficult to measure, are usually treated as costs rather than investments during the budgeting process. Thus, a company concerned about its current stock price may decide to sacrifice an employee training program to maintain its current level of profitability.
The primary purpose of the passage is to
A, contrast the capital allocation systems used in the United States and Germany, showing the strengths and weaknesses of each
B. analyze the reasons for, and the effects of, the way capital is allocated in the United States
C. describe the essential differences between the external and internal capital markets in the United States
D. explain why United States companies should invest more in intangible rather than tangible assets
E. establish the validity of the connection between a company's current level of profitability and its stock price
A, contrast the capital allocation systems used in the United States and Germany, showing the strengths and weaknesses of each
B. analyze the reasons for, and the effects of, the way capital is allocated in the United States
C. describe the essential differences between the external and internal capital markets in the United States
D. explain why United States companies should invest more in intangible rather than tangible assets
E. establish the validity of the connection between a company's current level of profitability and its stock price
According to the passage, which of the following is true of the internal capital allocation system used in the United States?
A. It promotes investment decisions that can undermine a company's long-term competitiveness.
B. When working properly, it can reduce the volatility of a company's stock price.
C. It fails to allocate sufficient capital to investments that produce quantifiable returns.
D. It works best in high-growth sectors of the economy such as computer technology.
E. It has led to more refined and sophisticated ways of measuring intangible assets.
It can be inferred from the passage that German investors and United States investors differ in each of the following ways EXCEPT
A. the frequency with which they buy and sell stocks
B. the degree to which they make investment decisions based on a company's current profits
C. their degree of familiarity with the companies whose shares they own
D. their willingness to invest in small companies
E. their sensitivity to immediate market pressures
Which of the following best summarizes the function of the second paragraph of the passage?
A. It discusses a problem that is parallel to the one discussed in the first paragraph.
B. It provides an alternative to an approach described in the first paragraph.
C. It presents background information on a phenomenon introduced in the first paragraph.
D. It offers a specific application of a theoretical model described in the first paragraph.
E. It examines the underlying assumptions of an argument presented in the first paragraph.
RC Official Mock 5
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27 Dec 2024, 10:27
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The passage critiques the United States' system for allocating investment capital and argues that the system poorly directs capital both externally (across companies) and internally (within companies). Externally, U.S. investors emphasize short-term gains, often to the detriment of long-term planning, unlike German investors who focus on long-term prospects. Internally, U.S. companies prioritize easily measurable returns, neglecting intangible investments crucial for competitiveness, such as research, development, and training.
P1: External capital market in the United States, relies on institutional investors with short-term perspectives=> leads to overinvestment in rapid-growth sectors and underinvestment in slower-growth ones, contrasting with the German system where investors commit to fewer companies for the long term.
P2: Internal capital allocation practices of U.S. companies => mirrors the external system’s focus on measurable, short-term gains. Underinvestment in intangible assets that are critical for sustaining long-term competitiveness.
1: The primary purpose of the passage is to...
A: Contrast the capital allocation systems used in the United States and Germany, showing the strengths and weaknesses of each
Incorrect. While the passage mentions Germany's system, it does so only to contrast it briefly with the U.S. system, not to evaluate strengths and weaknesses equally.
B:analyze the reasons for, and the effects of, the way capital is allocated in the United States
Correct. The passage analyzes the shortcomings of both the external and internal capital allocation systems in the United States, discussing their causes (e.g., reliance on short-term metrics) and effects (e.g., poor investment in intangibles and underinvestment in certain sectors).
C: Describe the essential differences between the external and internal capital markets in the United States
Incorrect. The distinction between external and internal capital markets is discussed, but it is not the central focus of the passage.
D: explain why United States companies should invest more in intangible rather than tangible assets
Incorrect. The passage critiques the neglect of intangible assets but does not argue specifically for investing in them.
E. establish the validity of the connection between a company's current level of profitability and its stock price
Incorrect. The connection between stock prices and profitability is discussed as a consequence of the U.S. system, not as the primary focus of the passage.
Correct Answer: B
2: According to the passage, which of the following is true of the internal capital allocation system used in the United States?
A. It promotes investment decisions that can undermine a company's long-term competitiveness.
Correct. The passage states that U.S. companies underinvest in intangible assets, such as employee training, because they prioritize measurable short-term gains, which can undermine long-term competitiveness. (Reference: Paragraph 2).
B. When working properly, it can reduce the volatility of a company's stock price.
Incorrect. The passage does not suggest that the internal capital allocation system reduces stock price volatility; in fact, it emphasizes that the system is driven by short-term stock price considerations.
C. It fails to allocate sufficient capital to investments that produce quantifiable returns.
Incorrect. The system does allocate capital to projects with quantifiable returns but neglects those with intangible, harder-to-measure benefits.
D. It works best in high-growth sectors of the economy such as computer technology.
Incorrect. The passage does not indicate that the internal system performs best in high-growth sectors. This statement relates to the external system.
E. It has led to more refined and sophisticated ways of measuring intangible assets.
Incorrect. The passage argues the opposite—that the system has not developed effective methods for valuing intangible assets.
Correct Answer: A
3: It can be inferred from the passage that German investors and United States investors differ in each of the following ways EXCEPT...
A. the frequency with which they buy and sell stocks
Incorrect. The passage implies that German investors hold stocks for the long term, while U.S. investors frequently buy and sell stocks. (Reference: Paragraph 1).
B. the degree to which they make investment decisions based on a company's current profits
Incorrect. U.S. investors rely on short-term metrics like current profits, whereas German investors evaluate long-term prospects.
C. their degree of familiarity with the companies whose shares they own
Incorrect. German investors gather extensive information about companies they invest in, whereas U.S. investors, with smaller stakes in many companies, are less familiar with individual firms.
D. their willingness to invest in small companies
Correct. The passage does not provide any information about German or U.S. investors' willingness to invest in small companies.
E. their sensitivity to immediate market pressures
Incorrect. U.S. investors are highly sensitive to immediate market pressures, while German investors are less so, as they focus on long-term prospects.
Correct Answer: D
4: Which of the following best summarizes the function of the second paragraph of the passage?
A. It discusses a problem that is parallel to the one discussed in the first paragraph.
Correct. The second paragraph describes a problem—the internal capital allocation system—that is similar to the issue with the external system discussed in the first paragraph. Both are criticized for focusing excessively on short-term measurable outcomes.
B. It provides an alternative to an approach described in the first paragraph.
Incorrect. The second paragraph does not provide an alternative approach; it critiques the internal system similarly to the external system discussed earlier.
C. It presents background information on a phenomenon introduced in the first paragraph.
Incorrect. The second paragraph does not present background information but introduces a new, related problem.
D. It offers a specific application of a theoretical model described in the first paragraph.
Incorrect. The paragraph does not apply a theoretical model; it discusses a practical issue with internal capital allocation.
E. It examines the underlying assumptions of an argument presented in the first paragraph.
Incorrect. The paragraph does not analyze assumptions but continues the critique of short-term valuation methods.
Correct Answer: A
P1: External capital market in the United States, relies on institutional investors with short-term perspectives=> leads to overinvestment in rapid-growth sectors and underinvestment in slower-growth ones, contrasting with the German system where investors commit to fewer companies for the long term.
P2: Internal capital allocation practices of U.S. companies => mirrors the external system’s focus on measurable, short-term gains. Underinvestment in intangible assets that are critical for sustaining long-term competitiveness.
1: The primary purpose of the passage is to...
A: Contrast the capital allocation systems used in the United States and Germany, showing the strengths and weaknesses of each
Incorrect. While the passage mentions Germany's system, it does so only to contrast it briefly with the U.S. system, not to evaluate strengths and weaknesses equally.
B:analyze the reasons for, and the effects of, the way capital is allocated in the United States
Correct. The passage analyzes the shortcomings of both the external and internal capital allocation systems in the United States, discussing their causes (e.g., reliance on short-term metrics) and effects (e.g., poor investment in intangibles and underinvestment in certain sectors).
C: Describe the essential differences between the external and internal capital markets in the United States
Incorrect. The distinction between external and internal capital markets is discussed, but it is not the central focus of the passage.
D: explain why United States companies should invest more in intangible rather than tangible assets
Incorrect. The passage critiques the neglect of intangible assets but does not argue specifically for investing in them.
E. establish the validity of the connection between a company's current level of profitability and its stock price
Incorrect. The connection between stock prices and profitability is discussed as a consequence of the U.S. system, not as the primary focus of the passage.
Correct Answer: B
2: According to the passage, which of the following is true of the internal capital allocation system used in the United States?
A. It promotes investment decisions that can undermine a company's long-term competitiveness.
Correct. The passage states that U.S. companies underinvest in intangible assets, such as employee training, because they prioritize measurable short-term gains, which can undermine long-term competitiveness. (Reference: Paragraph 2).
B. When working properly, it can reduce the volatility of a company's stock price.
Incorrect. The passage does not suggest that the internal capital allocation system reduces stock price volatility; in fact, it emphasizes that the system is driven by short-term stock price considerations.
C. It fails to allocate sufficient capital to investments that produce quantifiable returns.
Incorrect. The system does allocate capital to projects with quantifiable returns but neglects those with intangible, harder-to-measure benefits.
D. It works best in high-growth sectors of the economy such as computer technology.
Incorrect. The passage does not indicate that the internal system performs best in high-growth sectors. This statement relates to the external system.
E. It has led to more refined and sophisticated ways of measuring intangible assets.
Incorrect. The passage argues the opposite—that the system has not developed effective methods for valuing intangible assets.
Correct Answer: A
3: It can be inferred from the passage that German investors and United States investors differ in each of the following ways EXCEPT...
A. the frequency with which they buy and sell stocks
Incorrect. The passage implies that German investors hold stocks for the long term, while U.S. investors frequently buy and sell stocks. (Reference: Paragraph 1).
B. the degree to which they make investment decisions based on a company's current profits
Incorrect. U.S. investors rely on short-term metrics like current profits, whereas German investors evaluate long-term prospects.
C. their degree of familiarity with the companies whose shares they own
Incorrect. German investors gather extensive information about companies they invest in, whereas U.S. investors, with smaller stakes in many companies, are less familiar with individual firms.
D. their willingness to invest in small companies
Correct. The passage does not provide any information about German or U.S. investors' willingness to invest in small companies.
E. their sensitivity to immediate market pressures
Incorrect. U.S. investors are highly sensitive to immediate market pressures, while German investors are less so, as they focus on long-term prospects.
Correct Answer: D
4: Which of the following best summarizes the function of the second paragraph of the passage?
A. It discusses a problem that is parallel to the one discussed in the first paragraph.
Correct. The second paragraph describes a problem—the internal capital allocation system—that is similar to the issue with the external system discussed in the first paragraph. Both are criticized for focusing excessively on short-term measurable outcomes.
B. It provides an alternative to an approach described in the first paragraph.
Incorrect. The second paragraph does not provide an alternative approach; it critiques the internal system similarly to the external system discussed earlier.
C. It presents background information on a phenomenon introduced in the first paragraph.
Incorrect. The second paragraph does not present background information but introduces a new, related problem.
D. It offers a specific application of a theoretical model described in the first paragraph.
Incorrect. The paragraph does not apply a theoretical model; it discusses a practical issue with internal capital allocation.
E. It examines the underlying assumptions of an argument presented in the first paragraph.
Incorrect. The paragraph does not analyze assumptions but continues the critique of short-term valuation methods.
Correct Answer: A
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