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

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

• Question 351:

  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. 4.8 percent.
  B. 6.6 percent.
  C. 6.8 percent.
  D. 7.3 percent.

  B. 6.6 percent.

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  Choice "b" is correct. 6.6%. Williams' after tax cost of debt is 4.8% and cost of preferred stock is 8.4% ($105/share less issue costs of $5/share). The cost of equity (as calculated in a prior question) is 7.0%. This question pertains to the manner in which changes in the required amount of capital will impact the weighted average cost of capital governed by the target capital structure. The rates are given, and you must derive the weights. The company needs a total of $200,000. The question gives you the amount of Retained Earnings at $100,000, the source of 7% dividend payments on common shares. If all that is needed is $200,000, then, by definition, the target capital structure is "priced out" as shown with 7% common equity of $100,000 being equal to 50% of the target capital structure totaling $200,000 without any modification:

  

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

• Question 352:

  Monopolistic competition is characterized by:

  A. A relatively large group of sellers who produce differentiated products.
  B. A relatively small group of sellers who produce differentiated products.
  C. One or two companies producing similar products.
  D. A relatively large group of sellers who produce a homogeneous product.
  A. A relatively large group of sellers who produce differentiated products.

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  Choice "a" is correct. Monopolistic competition is characterized by a relatively large number of sellers who produce differentiated products. There are few barriers to entry and firms exert some influence over the price and the market. Best

  examples are brand name consumer products.

  Choice "b" is incorrect. Relatively few sellers with differentiated products would indicate an oligopoly.

  Choice "c" is incorrect. One company would be a monopoly, two an oligopoly.

  Choice "d" is incorrect. A relatively large number of sellers and a standardized product indicates perfect competition.

• Question 353:

  Gartshore Inc. is a mail-order book company. The Company recently changed its credit policy in an attempt to increase sales. Gartshore's variable cost ratio is 70 percent and its required rate of return is 12 percent. The company projects that annual sales will increase from the current level of $360,000 to $432,000, but the average collection period on receivables will go from 30 days to 40 days. Ignoring any tax implications, what is the cost of carrying the additional investment in accounts receivable, using a 360-day year?

  A. $1,512
  B. $2,000
  C. $2,160
  D. $12,600
  A. $1,512

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  Choice "a" is correct. The cost of carrying accounts receivable now is the variable cost of creating the account receivable times the cost of that capital during the collection period. The cost of the investment in accounts receivable is now:

  

  Choice "c" is incorrect. This considers the entire account receivable as a cost. Choices "b" and "d" are incorrect, per the above calculation.

• Question 354:

  An increase in the price of crude oil will have what affect on the equilibrium price and quantity of gasoline?

  A. Price will fall and quantity will rise.
  B. Price will rise and quantity will fall.
  C. Price will fall and quantity will fall.
  D. Price will rise and quantity will rise.
  B. Price will rise and quantity will fall.

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  Choice "b" is correct. Crude oil is an input to the production of gasoline. When the price of an input increases, supply shifts left, causing equilibrium price to rise and equilibrium quantity to fall.

  Choice "a" is incorrect, since price will rise and quantity will fall.

  Choice "c" is incorrect, since price will rise.

  Choice "d" is incorrect, since quantity will fall.

• Question 355:

  Which of the following decreases stockholder equity?

  A. Investments by owners.
  B. Distributions to owners.
  C. Issuance of stock.
  D. Acquisition of assets in a cash transaction.
  B. Distributions to owners.

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  Choice "b" is correct. Distributions to owners, typically in the form of dividends, will serve to reduce stockholders' equity. Choice "a" is incorrect. Investments by owners, typically in the form of stock purchases or contributions, will serve to increase shareholders' equity. Choice "c" is incorrect. Issuance of stock by sale will increase shareholders' equity, while issuance of stock dividends will have no effect on total shareholders' equity. Stock dividends will reduce the book value of each share outstanding. Choice "d" is incorrect. Acquisition of assets with cash will have no effect on total stockholders' equity. The acquisition of assets with cash will effectively reclassify assets from one type to another without impacting liabilities or equity.

• Question 356:

  Limitations of the information provided by total asset turnover include:

  A. A good measure for trend analysis of a particular company, but variable ways of calculating cost of goods sold limit its usefulness for comparative analysis.
  B. The calculation can be affected by varying accounting assumptions, which affect the calculation of net income.
  C. Because of differing costs of capital, the measure cannot be effectively used for comparative analysis.
  D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.
  D. When making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

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  Choice "d" is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

  Choice "a" is incorrect. This option pertains to gross profit margin.

  Choice "b" is incorrect. This option pertains to return on the investment in assets.

  Choice "c" is incorrect. This option pertains to residual income.

• Question 357:

  An industry that is oligopolistic would be best characterized by:

  A. One firm selling a product with no close substitutes.
  B. Significant barriers to entry.
  C. Horizontal or flat demand curves for the output of individual firms.
  D. The absence of significant economies of scale.
  B. Significant barriers to entry.

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  Choice "b" is correct. Oligopoly market conditions are characterized by:

  ?Few firms in the market

  ?Significant barriers to entry

  ?Differentiated products

  ?Fixed (or semi fixed) prices

  ?Kinked demand curves

  Choice "a" is incorrect. This is an example of monopoly.

  Choice "c" is incorrect. Horizontal demand curves represent demand that is perfectly price elastic (buyers will only pay one price for any quantity of a product). This occurs in perfectly competitive markets. Choice "d" is incorrect. This is

  characteristic of perfect competition, as there are no barriers to entry ("size doesn't matter") in perfect competition.

• Question 358:

  If an economy is currently experiencing both full employment and price stability, a major tax reduction will probably cause:

  A. An increase in the unemployment rate.
  B. An acceleration in the inflation rate, unless government expenditures are also reduced.
  C. No change in real GDP or the price level.
  D. A decrease in consumption.
  B. An acceleration in the inflation rate, unless government expenditures are also reduced.

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  Choice "b" is correct. A tax cut shifts the aggregate demand curve to the right causing the price level and therefore the inflation rate to rise.

  Choice "a" is incorrect. The unemployment rate would fall, not rise.

  Choice "c" is incorrect. The price level would rise, not remain unchanged.

  Choice "d" is incorrect. Consumption would rise as disposable income rises, not fall.

• Question 359:

  The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified a source of funds which is given below:

  Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80 percent of the face value of receivables at 10 percent and charge a fee of

  2 percent on all receivables purchaseD. The controller estimates that the firm would save $24,000 in collection expenses over the year. Assume the fee and interest are not deductible in advance.

  Assume a 360-day year in all of your calculations.

  The cost of factoring is:

  A. 12.0 percent.
  B. 14.8 percent.
  C. 16.0 percent.
  D. 20.0 percent.
  C. 16.0 percent.

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  Choice "c" is correct.

  

• Question 360:

  An example of a carrying cost is:

  A. Disruption of production schedules.
  B. Quantity discounts lost.
  C. Handling costs.
  D. Obsolescence.
  D. Obsolescence.

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  Choice "d" is correct. Obsolescence is an example of a carrying cost. Choices "a", "b", and "c" are incorrect. Carrying cost is not:

  A. Disruption of production schedules.

  B. Quantity discounts lost.

  C. Handling costs.