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

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

• Question 31:

  Having identified their mission, overall strategy, and critical success factors, organizations often review the internal and external factors that will contribute to their success. This analysis is often referred to as:

  A. TOC evaluation.
  B. Brainstorming.
  C. Balanced scorecard review.
  D. SWOT analysis.
  D. SWOT analysis.

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  Choice "d" is correct. Evaluation of internal and external factors contributing to an organization's success is referred to as Strengths, Weaknesses, Opportunities and Threats (SWOT) analysis. Strengths and weaknesses focus on internal factors while opportunities and threats relate to external factors. Choice "a" is incorrect. The acronym TOC stands for Theory of Constraints, which is an evaluation technique for optimizing throughput time, it does not relate to overall strategy evaluation. Choice "b" is incorrect. Brainstorming is a meeting technique used to generate ideas. Although brainstorming could be used as part of an organization's approach to SWOT analysis, it is not, itself, the evaluation of internal and external factors. Choice "c" is incorrect. A review of the balanced scorecard, which summarizes measures of achievement of critical success factors, does not represent the objective review of internal and external factors that may impact achievement of strategy.

• Question 32:

  Which of the following formulas should be used to calculate the economic rate of return on common stock?

  A. (Dividends + change in price) divided by beginning price.
  B. (Net income - preferred dividend) divided by common shares outstanding.
  C. Market price per share divided by earnings per share.
  D. Dividends per share divided by market price per share.
  A. (Dividends + change in price) divided by beginning price.

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  Choice "a" is correct. The economic rate of return on common stock measures the dividend income and capital growth in relation to the initial investment, the beginning price of the stock. Choice "b" is incorrect. The proposed solution is earnings per share, a ratio generally computed as the earnings available to common shareholders (net income after payment of preferred shares) divided by the common shares outstanding. Choice "c" is incorrect. Market price per share divided by earnings per share is the price/earnings or P/E ratio, not the economic rate of return on common stock. Choice "d" is incorrect. The dividends per share divided by the market price per share does not represent the economic rate of return on common stock, the ratio includes change in stock value in the denominator rather than the numerator of the equation.

• Question 33:

  Which one of the following would increase the working capital of a firm?

  A. Purchase of a new plant financed by a 20-year mortgage.
  B. Cash collection of accounts receivable.
  C. Payment of a 20-year mortgage payable with cash.
  D. Refinancing a short-term note payable with a two-year note payable.
  D. Refinancing a short-term note payable with a two-year note payable.

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  Choice "d" is correct. Refinancing a short-term note payable with a two-year note payable would increase the working capital of a firm.

  

  Choice "a" is incorrect. The purchase of a new plant (fixed asset) financed by a 20-year mortgage (longterm debt with a one-year current portion) would reduce working capital because current liabilities would be increased. Choice "b" is incorrect. The cash collection of accounts receivable has no effect on working capital-cash increases by the amount that A/R decreases. Choice "c" is incorrect. The payment of a 20-year mortgage payable (long-term debt) would reduce cash and have no effect on current liabilities, thereby reducing working capital.

• Question 34:

  The CFO of a company is concerned about the company's accounts receivable turnover ratio. The company currently offers customers terms of 3/10, net 30. Which of the following strategies would most likely improve the company's accounts receivable turnover ratio?

  A. Pledging the accounts receivable to a finance company.
  B. Changing customer terms to 1/10, net 30.
  C. Entering into a factoring agreement with a finance company.
  D. Changing customer terms to 3/20, net 30.
  C. Entering into a factoring agreement with a finance company.

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  Choice "c" is correct. The accounts receivable turnover ratio is expressed as Sales ?Accounts Receivable. A reduction in accounts receivable would serve to improve (increase) the turnover ratio. Factoring (selling) receivables would serve to reduce the amount of accounts receivable (indicating more rapid collections) thereby increasing (improving) the company's accounts receivable. Choice "a" is incorrect. Pledging accounts receivable does not impact either sales or accounts receivable. There would be no improvement in the accounts receivable turnover ratio. Choice "b" is incorrect. Changing the customer terms from 3/10, net 30 to 1/10, net 30 would actually reduce discount incentives to pay timely. Accounts receivable would likely remain the same or be higher. There would be no improvement in the company's accounts receivable turnover ratio. Choice "d" is incorrect. Changing the customer terms from 3/10, net 30 to 3/20, net 30 would actually reduce incentives to pay timely by increasing the amount of time in which the customer could capitalize on the discount. Accounts receivable would likely remain the same or be higher. There would be no improvement in the company's accounts receivable turnover ratio.

• Question 35:

  Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%.

  If HES were a general partnership, who controls management?

  A. Heather, because she works the most.
  B. Erika and Shelby equally because they contributed the most.
  C. Heather, Erika, and Shelby equally because of state law.
  D. Erika and Shelby, because they originate most of the work.
  C. Heather, Erika, and Shelby equally because of state law.

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  Choice "c" is correct.

  Rule: Absent an agreement to the contrary, partners have equal management authority.

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

• Question 36:

  All of the following are characteristics of the strategic planning process, except the:

  A. Emphasis on both the short and long run.
  B. Review of the attributes and behavior of the organization's competition.
  C. Analysis and review of departmental budgets.
  D. Analysis of consumer demand.
  C. Analysis and review of departmental budgets.

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  Choice "c" is correct. Analysis and review of departmental budgets is not a part of the strategic planning process. Budgets are operational and much more specific than the things that are part of strategic planning. Choices "a", "b", and "d" are incorrect. All of these are part of the strategic planning process:

  A. Emphasis on both the short and long run.

  B. A review of competition.

  D. Analysis of consumer demand.

• Question 37:

  The internal rate of return is the:

  A. Rate of interest that equates the present value of cash outflows and the present value of cash inflows.
  B. Risk-adjusted rate of return.
  C. Required rate of return.
  D. Weighted average rate of return generated by internal funds.
  A. Rate of interest that equates the present value of cash outflows and the present value of cash inflows.

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  Choice "a" is correct. The internal rate of return is defined as the technique that determines the present value factor such that the present value of the after-tax cash flows equals the initial investment on the project. Alternately, the internal rate

  of return (IRR) is the discount rate that produces a NPV of zero.

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

• Question 38:

  The internal rate of return (IRR) is the:

  A. Hurdle rate.
  B. Rate of interest where the net present value is greater than 1.0.
  C. Rate of interest where the net present value is equal to zero.
  D. Rate of return generated from the operational cash flows.
  C. Rate of interest where the net present value is equal to zero.

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  Choice "c" is correct. IRR is the rate of interest where the NPV is zero.

  Choice "a" is incorrect. The hurdle rate is a desired or minimum rate of return, set by management, to evaluate investments.

  Choice "b" is incorrect. NPV will be greater than zero when the IRR is higher than the hurdle rate.

  Choice "d" is incorrect. IRR is the rate of return of all cash flows produced by the investment.

• Question 39:

  Which of the following inputs would be most beneficial to consider when management is developing the capital budget?

  A. Supply/demand for the company's products.
  B. Current product sales prices and costs.
  C. Wage trends.
  D. Profit center equipment requests.
  D. Profit center equipment requests.

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  Choice "d" is correct. In developing its capital budget, management would find the employee input associated with equipment requests from various profit centers most helpful. Departmental requests, appropriately justified, would provide key

  insights into the capital requirements of the business that are not otherwise known.

  Choice "a" is incorrect. Supply and demand for company products is a crucial strategic input in forecasting the future capital requirements. Current year capital budgeting would not benefit as directly from this information, however, as profit

  center equipment requests.

  Choice "b" is incorrect. Current product sales prices and costs represent operating data most relevant to operating rather than capital budgeting.

  Choice "c" is incorrect. Wage trends represent operating data most relevant to operating than capital budgeting.

  Comments:

  Some people have questioned why the answer is not choice "a." However, the answer to the question is very clear.

  The question really is what are the best (most beneficial to consider) inputs to a capital budget. The "supply and demand for the company's products" is very indirect. The demand for the company's products may or may not result in the

  company spending any capital money because the demand may be able to be satisfied with the current capital equipment. But, equipment requests, if approved, will most likely result in spending money (assuming that the money in the budget

  is actually spent) and thus should go into the capital budget. The supply and demand might affect future capital budgets if the demand is not able to be satisfied with the current capital equipment. But the question asks for the best inputs for

  presumably the current capital budget.

• Question 40:

  A perfectly inelastic supply curve in a competitive market:

  A. Means the equilibrium price must be zero.
  B. Implies a vertical demand curve.
  C. Exists when firms cannot vary input usage.
  D. Says the market supply curve is horizontal.
  C. Exists when firms cannot vary input usage.

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  Choice "c" is correct. Price elasticity of supply is calculated the same way as demand except that quantity supplied is measured:

  

  Perfectly inelastic supply curves are also vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes. Perfectly inelastic supply curves would exist if firms cannot vary input

  usage. Regardless of price, the firm has to use all inputs if it produces at all.

  Choices "a", "b", and "d" are incorrect, as they are far-out distractors.