Test Prep BUSINESS-ENVIRONMENT-AND-CONCEPTS Online Practice Questions and Exam Preparation

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

• Question 251:

  Which one of the following financial instruments generally provides the largest source of short-term credit for small firms?

  A. Installment loans.
  B. Commercial paper.
  C. Trade credit.
  D. Bankers' acceptances.
  C. Trade credit.

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  Choice "c" is correct. Trade credit generally provides the largest source of short-term credit for small firms. Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 252:

  When applying value chain analysis, a firm sends its production manager to visit the operations of its major supplier in an attempt to determine if there are cost-savings capabilities that could be implemented at the supplier's warehouse. The firm is performing which form of value chain analysis?

  A. Internal differentiation analysis.
  B. Internal costs analysis.
  C. Vertical linkage analysis.
  D. None of the above.
  C. Vertical linkage analysis.

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  Choice "c" is correct. Analyzing the vertical linkage of a firm means understanding the activities of the suppliers and buyers of the product and determining where value can be created external to the firm's operations. Choices "a", "b", and "d" are incorrect, per the above Explanation.

• Question 253:

  Bell Co. changed from a traditional manufacturing philosophy to a just-in-time philosophy. What are the expected effects of this change on Bell's inventory turnover and inventory as a percentage of total assets reported on Bell's balance sheet?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  C. Option C

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  Choice "c" is correct. In a just-in-time system, products are produced just-in-time to be sold. Therefore, JIT systems maintain a much smaller level of inventory when compared to traditional systems. Inventory turnover (cost of goods sold

  divided by average inventory) increases with a switch to JIT, and inventory as a percentage of total assets decreases.

  Choices "a", "b", and "d" are incorrect based on the above Explanation.

• Question 254:

  Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described below, the company can sell unlimited amounts of all instruments.

  A. 7.0 percent.
  B. 7.4 percent.
  C. 8.1 percent.
  D. 7.8 percent.

  A. 7.0 percent.

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  Choice "a" is correct. 7.0 percent cost of funds from retained earnings.

  The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return "lost" by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat

  subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.

  $7 / $100 = 7%

  Choices "b", "c", and "d" are incorrect, per the above Explanation/calculation.

• Question 255:

  If, in a competitive market, a price ceiling is imposed establishing a maximum price below the market equilibrium price, this price ceiling would result in:

  A. Shortages because the quantity demanded would exceed the quantity supplied.
  B. No effect on the quantity supplied or demanded.
  C. Surpluses because the quantity supplied would exceed the quantity demanded.
  D. Surpluses because the supply curve would shift to the right.
  A. Shortages because the quantity demanded would exceed the quantity supplied.

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  Choice "a" is correct. Setting a ceiling price below the price dictated by the market (as established by the equilibrium price) would create excess demand and a shortage. Choices "b", "c", and "d" are incorrect, per above Explanation.

• Question 256:

  Hedgehog International has numerous foreign exchange transactions. Management has elected to hedge transactions as a means of mitigating transaction exposure to exchange rate risk. What is the most effective means that Hedgehog International can use to avoid overhedging?

  A. Hedgehog should acquire parallel loans to provide a means for liquidating unneeded hedge securities.
  B. Hedgehog should acquire the maximum amount required to hedge known and projected transactions.
  C. Hedgehog should acquire the minimum amount required to hedge known transactions.
  D. Hedgehog should enter into a cross hedging agreement.
  C. Hedgehog should acquire the minimum amount required to hedge known transactions.

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  Choice "c" is correct. Hedgehog should only acquire the minimum amount of hedge contracts needed to offset the effect of known transactions. Choice "a" is incorrect. Parallel loans represent a swap contract for hedging long-term transaction exposure and are not specifically designed to mitigate the risk of overhedging. Choice "b" is incorrect. Acquisition of the maximum number of hedge contracts for known and projected transactions exposes the organization to greater risk of overhedging since projected transactions might not materialize. Choice "d" is incorrect. Cross hedging involves techniques related to currencies that do have hedge instruments available to mitigate risk and are not specifically designed to avoid overhedging.

• Question 257:

  All of the following are inventory carrying costs, except:

  A. Insurance.
  B. Opportunity cost on inventory investment.
  C. Obsolescence and spoilage.
  D. Inspections.
  D. Inspections.

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  Choice "d" is correct. Inspections. Inspections are part of order costs, not carrying costs.

  Choices "a" and "c" are incorrect. Inventory carrying costs include all costs associated with warehousing (storing) inventory (e.g., storage, insurance, obsolescence, and spoilage associated with holding inventory). Choice "b" is incorrect. The

  economic cost of holding inventory includes the implicit (opportunity) cost of foregoing a return on the money invested in inventory.

• Question 258:

  The following information applies to Brandon Company.

  

  Forty percent of purchases are paid for in cash at the time of purchase, and 30 percent is paid for in each of the next two months. Purchases for the previous November and December were $150,000 per month. Payroll is 10 percent of sales in the month it occurs, and operating expenses are 20 percent of the following months sales (July sales were $220,000). Interest payments were $20,000 paid quarterly in January and April. Brandon's cash disbursements for the month of April were:

  A. $152,000
  B. $200,000
  C. $248,000
  D. $254,000
  D. $254,000

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  Choice "d" is correct. Cash disbursements in April would include paying for purchases made in February and March. It would also include payroll expense and operating expenses. The calculation would be: Choices "a", "b", and "c" are incorrect, per above calculations.

  

• Question 259:

  The relevance of a particular cost to a decision is determined by:

  A. Riskiness of the decision.
  B. Number of decision variables.
  C. Potential effect on the decision.
  D. Accuracy of the cost.
  C. Potential effect on the decision.

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  Choice "c" is correct. The relevance of a particular cost to a decision is determined by potential effect on the decision. Relevant costs are expected future costs that vary with the action taken. All other costs are assumed to be constant and

  thus have no effect on the decision.

  The relevance of a particular cost to a decision is not determined by:

  A. Riskiness of the decision.

  B. Number of decision variables.

  D. Accuracy of the cost.

• Question 260:

  The discount rate set by the Federal Reserve is the:

  A. Rate that commercial banks charge for loans to each other.
  B. Rate that commercial banks charge for loans to the general public.
  C. Rate that the central bank charges for loans to commercial banks.
  D. Ratio of a bank's reserves to its demand deposits.
  C. Rate that the central bank charges for loans to commercial banks.

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  Choice "c" is correct. The discount rate refers to the rate established by the Federal Reserve for shortterm (often overnight) loans the Fed makes to member banks.

  Choice "a" is incorrect. The discount rate is the rate the Federal Reserve charges.

  Choice "b" is incorrect per above Explanation.

  Choice "d" is incorrect. This would be the bank's reserve ratio - not the discount rate.