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

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

• Question 271:

  A firm's target or optimal capital structure is consistent with which one of the following?

  A. Minimum cost of debt.
  B. Minimum risk.
  C. Minimum cost of equity.
  D. Minimum weighted average cost of capital.
  D. Minimum weighted average cost of capital.

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  Choice "d" is correct. Minimum weighted average cost of capital is consistent with a firm's target or optimal capital structure.

  Choice "a" is incorrect. Minimum cost of debt is a component of minimum weighted average cost of capital.

  Choice "b" is incorrect. Minimum risk results in a cost of capital heavily weighted in equity.

  Choice "c" is incorrect. Minimum cost of equity results in a cost of capital heavily weighted in debt.

• Question 272:

  In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine effective January 1, 1997. The following information is being considered by Gunning Industries.

  A. $(7,959)
  B. $(10,680)
  C. $(13,265)
  D. $(35,000)

  C. $(13,265)

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  Choice "c" is correct. $(13,265) overall discounted cash flow impact of working capital investment.

  

• Question 273:

  To which of the following rights is a stockholder of a public corporation entitled?

  A. The right to have annual dividends declared and paid.
  B. The right to vote for the election of officers.
  C. The right to a reasonable inspection of corporate records.
  D. The right to have the corporation issue a new class of stock.
  C. The right to a reasonable inspection of corporate records.

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  Choice "c" is correct. Stockholders have a right to inspect certain corporate records.

  Choice "a" is incorrect. Declaration of dividends is within the directors' discretion. There is no absolute right of shareholders to receive annual dividends.

  Choice "b" is incorrect. Officers are appointed by the directors; they are not elected by the shareholders.

  Choice "d" is incorrect. Shareholders do not have a right to force the corporation to issue a new class of stock.

• Question 274:

  The benefits of debt financing over equity financing are likely to be highest in which of the following situations?

  A. High marginal tax rates and few noninterest tax benefits.
  B. Low marginal tax rates and few noninterest tax benefits.
  C. High marginal tax rates and many noninterest tax benefits.
  D. Low marginal tax rates and many noninterest tax benefits.
  A. High marginal tax rates and few noninterest tax benefits.

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  Choice "a" is correct. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few noninterest tax benefits (because

  there is little or no reason to depart from debt financing).

  Choice "b" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few noninterest tax benefits.

  Choice "c" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high (because interest on debt is deductible for tax purposes) and if there are few, not many, noninterest tax benefits.

  Choice "d" is incorrect. The benefits of debt financing over equity financing are likely to be highest if marginal tax rates are high, not low (because interest on debt is deductible for tax purposes), and if there are few, not many, noninterest tax

  benefits.

• Question 275:

  The length of time required to recover the initial cash outlay of a capital project is determined by using the:

  A. Discounted cash flow method.
  B. Payback method.
  C. Net present value method.
  D. Accounting rate of return method.
  B. Payback method.

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  Choice "b" is correct. The payback method measures the time required to recover the initial investment.

  Choice "a" is incorrect. Discounted cash flows are used for several methods of capital budgeting; this is a generic term. Choice "c" is incorrect. The NPV method does not measure the length of time required to recover the initial cash outlay. Choice "d" is incorrect. The accounting rate of return does not measure the time to recover the initial investment.

• Question 276:

  A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:

  A. An increase in real GDP and a decrease in the price level.
  B. A decrease in real GDP and an increase in the price level.
  C. A decrease in real GDP and a decrease in the price level.
  D. An increase in real GDP and an increase in the price level.
  B. A decrease in real GDP and an increase in the price level.

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  Choice "b" is correct. An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level.

  Choice "a" is incorrect. Real GDP would decrease, not increase.

  Choice "c" is incorrect. The price level would increase, not decrease.

  Choice "d" is incorrect. Real GDP would decrease, not increase.

• Question 277:

  Which of the following would lead to the most inflation?

  A. Both aggregate demand and aggregate supply increase.
  B. Both aggregate demand and aggregate supply decrease.
  C. Aggregate demand increases and aggregate supply decreases.
  D. Aggregate demand decreases and aggregate supply increases.
  C. Aggregate demand increases and aggregate supply decreases.

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  Choice "c" is correct. Choice "c" contains both demand-pull inflation (when the aggregate demand curve shifts right) and cost-push inflation (when the aggregate supply curve shifts left). An increase in aggregate demand causes output to rise

  and the price level to rise. A decrease in aggregate supply causes output to fall and the price level to rise. Thus, an increase in aggregate demand and a decrease in aggregate supply is the most inflationary.

  Choice "a" is incorrect. If aggregate supply increases, the price level will fall (reducing inflation).

  Choice "b" is incorrect. If aggregate demand decreases, the price level will fall (reducing inflation).

  Choice "d" is incorrect per above Explanation.

• Question 278:

  Jackson Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average 150 units at a price of $300 each. Assuming that all sales are on credit and 60 percent of customers take the discount and pay on Day 10 while the rest of the customers pay on Day 30, the amount of Jackson's accounts receivable is:

  A. $990,000
  B. $900,000
  C. $810,000
  D. $450,000
  C. $810,000

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  Choice "c" is correct. $810,000 accounts receivable.

  

  Choices "a", "b", and "d" are incorrect, per the above calculation.

• Question 279:

  A preferred stock is sold for $101 per share, has a face value of $100 per share, underwriting fees of $5 per share, and annual dividends of $10 per share. If the tax rate is 40 percent, the cost of funds (capital) for the preferred stock is:

  A. 4.2 percent.
  B. 6.2 percent.
  C. 10.0 percent.
  D. 10.4 percent.
  D. 10.4 percent.

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  Choice "d" is correct. The stock is issued for a net of $96 per share ($101 less $5 underwriting fee). Because preferred stock dividends are not tax deductible, the cost to the company is $10/share (the tax rate is a distractor). Therefore, the cost of the preferred stock is:

  

  Choices "a", "b", and "c" are incorrect, per the above calculation.

• Question 280:

  CyberAge outlet, a relatively new store, is a cafe that offers customers the opportunity to browse the Internet or play computer games at their tables while they drink coffee. The customer pays a fee based on the amount of time spent signed on to the computer. The store also sells books, tee shirts, and computer accessories. CyberAge has been paying all of its bills on the last day of the payment period, thus forfeiting all supplier discounts. Shown below are data on CyberAge's two major vendors, including average monthly purchases and credit terms.

  

  Should CyberAge use trade credit and continue paying at the end of the credit period?

  A. No, if the cost of alternative short-term financing is more.
  B. Yes, if the firm's weighted average cost of capital is equal to its weighted average trade credit.
  C. No, if the cost of alternative long-term financing is more.
  D. Yes, if the cost of alternative short-term financing is more.
  D. Yes, if the cost of alternative short-term financing is more.

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  Choice "d" is correct. Yes, CyberAge should use trade credit and continue paying at the end of the credit period, if the cost of alternative short-term financing is more. Choices "a", "b", and "c" are incorrect, per the above Explanation.