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

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

• Question 321:

  In evaluating a capital budget project, the use of the net present value model is generally not affected by the:

  A. Method of funding the project.
  B. Initial cost of the project.
  C. Amount of added working capital needed for operations during the term of the project.
  D. Amount of the project's associated depreciation tax allowance.
  A. Method of funding the project.

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  Choice "a" is correct. The method of funding the project has no effect on the net present value model. NPV uses a hurdle rate to discount cash flows. If the NPV is positive, the project is acceptable. The method of financing the project, and the

  cost, are independent of the process of screening the project for acceptability.

  Choice "b" is incorrect. The initial cost is one of the most important items in the calculation of NPV.

  Choice "c" is incorrect. Added working capital requirements and salvage value affect cash flow. All cash flows are used in the NPV model. Choice "d" is incorrect. The tax depreciation allowance will provide a "tax shield" or tax savings that

  impacts cash flow and must be considered in NPV analysis.

• Question 322:

  Andrew Corporation is evaluating a capital investment that would result in a $30,000 higher contribution margin benefit and increased annual personnel costs of $20,000. The effects of income taxes on the net present value computation on these benefits and costs for the project are to:

  A. Decrease both benefits and costs.
  B. Decrease benefits but increase costs.
  C. Increase benefits but decrease costs.
  D. Increase both benefits and costs.
  A. Decrease both benefits and costs.

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  Choice "a" is correct. The effects of income taxes on the net present value computations will decrease both benefits and costs for the project. Net present value computations focus of the present value of cash flows. Income taxes decrease

  both the benefit and the cost of cash flows.

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

• Question 323:

  In 1992, Anchor, Chain, and Hook created ACH Associates, a general partnership. The partners orally agreed that they would work full time for the partnership and would distribute profits based on their capital contributions. Anchor contributed $5,000; Chain $10,000; and Hook $15,000. For the year ended December 31, 1993, ACH Associates had profits of $60,000 that were distributed to the partners. During 1994, ACH Associates was operating at a loss. In September 1994, the partnership dissolved. In October 1994, Hook contracted in writing with Ace Automobile Co. to purchase a car for the partnership. Hook had previously purchased cars from Ace Automobile Co. for use by ACH Associates partners. ACH Associates did not honor the contract with Ace Automobile Co. and Ace Automobile Co. sued the partnership and the individual partners.

  A. Ace Automobile Co. would lose a suit brought against ACH Associates because Hook, as a general partner, has no authority to bind the partnership.
  B. Ace Automobile Co. would win a suit brought against ACH Associates because Hook's authority continues during dissolution.
  B. Ace Automobile Co. would win a suit brought against ACH Associates because Hook's authority continues during dissolution.

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  Choice "b" is correct. A partner's authority to bind the partnership continues after dissolution to persons who have extended credit to the partnership previously and who are without notice of the dissolution. The facts state that Hook had previously purchased cars for the partnership from Ace, and presumably the purchases were on credit. Since nothing in the facts indicates that Ace was given notice of the dissolution, the partnership will be bound.

• Question 324:

  Economic theory identifies two basic types of goods: inferior goods and superior goods. As consumer income rises, a lower percentage of earnings are expended on inferior goods while a higher percentage of earnings are spent on superior goods. Overall strategies for achieving organizational missions would most likely match with types of goods as follows:

  A. Cost leadership strategies for superior goods, differentiation strategies for inferior goods.
  B. Cost leadership strategies for inferior goods, differentiation strategies for superior goods.
  C. Cost leadership strategies would most likely be used for both inferior and superior goods.
  D. Differentiation strategies would most likely be used for both inferior and superior goods.
  B. Cost leadership strategies for inferior goods, differentiation strategies for superior goods.

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  Rule: Overall strategies are divided into two different types that are defined as follows:

  Cost leadership: Organization seeks to capture market share through maintaining the lowest cost.

  Differentiation: Organization seeks to capture market share by demonstrating product value.

  Choice "b" is correct. Organizations that sell economically inferior goods (necessities such as cotton swabs, light bulbs, etc.) are more likely to posture themselves as cost leaders than organizations that sell economically superior goods

  (luxuries such as cruise packages, fine china, jewelry, etc.) who will likely seek to differentiate the value of their product as part of their strategy. Choice "a" is incorrect. Economically inferior products would likely be associated with cost

  leadership, not differentiation while economically superior products would likely be associated with differentiation. Choice "c" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while

  economically superior products would likely be associated with differentiation. Choice "d" is incorrect. Economically inferior products would likely be associated with cost leadership, not differentiation while economically superior products

  would likely be associated with differentiation.

• Question 325:

  Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?

  A. Stockholders may be entitled to vote on corporate matters but limited partners are prohibited from voting on any partnership matters.
  B. Stock of a corporation may be subject to the registration requirements of the federal securities laws but limited partnership interests are automatically exempt from those requirements.
  C. Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership.
  D. A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.
  D. A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.

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  Choice "d" is correct. Both a limited partnership and a corporation:

  1.

  Can only be created by statute, and

  2.

  Each must file a copy of its certificate with the proper state agency.

  Choice "a" is incorrect. There are instances in which limited partners do vote on certain partnership matters (e.g., approve new general or limited partners).

  Choice "b" is incorrect. Limited partnership interests are not automatically exempt from the federal securities laws.

  Choice "c" is incorrect. Limited partners do not owe a fiduciary duty to the limited partnership.

• Question 326:

  In 1990, Amber Corp., a closely held corporation, was formed by Adams, Frank, and Berg as incorporators and stockholders. Adams, Frank, and Berg executed a written voting agreement which provided that they would vote for each other as

  directors and officers. In 1994, stock in the corporation was offered to the public. This resulted in an additional 300 stockholders. After the offering, Adams holds 25%, Frank holds 15%, and Berg holds 15% of all issued and outstanding stock.

  Adams, Frank, and Berg have been directors and officers of the corporation since the corporation was formed. Regular meetings of the board of directors and annual stockholders meetings have been held.

  For this question refer to the formation of Amber Corp. and the rights and duties of its stockholders, directors, and officers.

  A. Adams, Frank, and Berg must be elected as directors because they own 55% of the issued and outstanding stock.
  B. Adams, Frank, and Berg must always be elected as officers because they own 55% of the issued and outstanding stock.
  C. Adams, Frank, and Berg must always vote for each other as directors because they have a voting agreement.
  C. Adams, Frank, and Berg must always vote for each other as directors because they have a voting agreement.

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  Choice "c" is correct. Shareholders in a voting agreement must vote their shares in accordance with the agreement. There is no requirement that majority shareholders be elected as directors or officers.

• Question 327:

  Anson Industries, a vertically integrated producer and retailer of high end audio visual equipment has mapped out its overall business process as beginning with product development followed by product testing then raw materials purchasing

  then manufacturing and assembly, and, finally, sales and service.

  Finance staff at Anson Industries are trying to evaluate the efficiency and the effectiveness of each process and the relationship between each process. This evaluation is often referred to as:

  A. Process improvement.
  B. Continuous quality improvement.
  C. Value chain analysis.
  D. Benchmarking.
  C. Value chain analysis.

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  Choice "c" is correct. The process of developing macro level flow charts of business processes that produce products or services and then identifying the value added by each process is referred to as value chain analysis.

  Choice "a" is incorrect. Process improvement represents the results of total quality management efforts.

  Choice "b" is incorrect. Continuous quality improvement represents an unswerving focus on customer satisfaction and quality, not necessarily the specific steps associated with value chain analysis.

  Choice "d" is incorrect. Benchmarking relates to determining best practices and, often, using those practices as standards.

• Question 328:

  The sales manager at Ryan Company feels confident that if the credit policy at Ryan's was changed, sales would increase and, consequently, the company would utilize excess capacity. The two credit proposals being considered are as follows:

  

  Currently, payment terms are net 30. The proposal payment terms for Proposal A and Proposal B are net 45 and net 90, respectively. An analysis to compare these two proposals for the change in credit policy would include all of the following factors, except the:

  A. Cost of funds for Ryan.
  B. Current bad debt experience.
  C. Impact on the current customer base of extending terms to only certain customers.
  D. Bank loan covenants on days sales outstanding.
  B. Current bad debt experience.

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  Choice "b" is correct. Because the bad debt percentage is the same under either of the two proposals, there is no differential cost associated with bad debt. Because it is not a differential cost, it is not considered in comparing the two

  alternatives.

  Choice "a" is incorrect. Because Proposal A and B have different net collection dates, Proposal B will cause a greater amount of accounts receivable with a corresponding increase in working capital. The cost to fund this will be greater for

  Proposal B, so this is a legitimate concern.

  Choice "c" is incorrect. Customers may feel they should be given the extended terms. If this is granted, the additional working capital need will be even greater. Choice "d" is incorrect. Banks may require that days sales outstanding cannot

  exceed a certain number of days. If so, it will be harder to meet this covenant with Proposal B.

• Question 329:

  A company obtained a short-term bank loan of $500,000 at an annual interest rate of eight percent. As a condition of the loan, the company is required to maintain a compensating balance of $100,000 in its checking account. The checking account earns interest at an annual rate of three percent. Ordinarily, the company maintains a balance of $50,000 in its account for transaction purposes. What is the effective interest rate of the loan?

  A. 7.77 percent.
  B. 8.50 percent.
  C. 9.44 percent.
  D. 8.56 percent.
  D. 8.56 percent.

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  Choice "d" is correct. 8.56%. To calculate the effective annualized percentage cost of financing:

  

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

• Question 330:

  The three elements needed to estimate the cost of equity capital for use in determining a firm's weighted average cost of capital are:

  A. Current dividends per share, expected growth rate in earnings per share, and current market price per share of common stock.
  B. Current earnings per share, expected growth rate in dividends per share, and current market price per share of common stock.
  C. Current earnings per share, expected growth rate in earnings per share, and current book value per share of common stock.
  D. Current dividends per share, expected growth rate in dividends per share, and current market price per share of common stock.
  D. Current dividends per share, expected growth rate in dividends per share, and current market price per share of common stock.

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  Choice "d" is correct. The three elements needed to estimate the cost of equity capital are:

  1.

  Current dividends per share (D)

  2.

  Expected growth rate in dividends (g) and

  3.

  Current market price per share of common stock (P)

  The question asks the candidate to identify the three elements needed to estimate the cost of equity capital for use in determining a firm's weighted average cost of capital. The cost of equity capital is defined by the following mathematical expression where the cost of capital or return (R) is: R = D/P + g Choice "d" is consistent with our text, the and the Gordon Growth Model. Use of earnings per share, as suggested by choice "a" is sometimes referred to as the constant growth model and assumes that all earnings per share are either ultimately distributed or reinvested for the benefit of the shareholder. Earnings are anticipated to grow to infinity.