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

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

• Question 431:

  Capital investments require balancing risk and return. Managers have a responsibility to ensure that the investments that they make in their own firms increase shareholder value. Managers have met that responsibility if the return on the capital investment:

  A. Exceeds the rate of return associated with the firm's beta factor.
  B. Is less than the rate of return associated with the firm's beta factor.
  C. Is greater than the prime rate of return.
  D. Is less than the prime rate of return.
  A. Exceeds the rate of return associated with the firm's beta factor.

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  Choice "a" is correct. A capital investment whose rate of return exceeds the rate of return associated with the firm's beta factor will increase the value of the firm. Choice "b" is incorrect. A capital investment whose rate of return is less than the rate of return associated with the firm's beta factor will decrease the value of the firm. Choice "c" is incorrect. The return on a capital investment in relation to the prime rate of return will not necessarily indicate if the investment increases or decreases the value of the company without knowing the relative risk of the firm in relation to the market and its relationship to the prime rate. Choice "d" is incorrect. The return on a capital investment in relation to the prime rate of return will not necessarily indicate if the investment increases or decreases the value of the company without knowing the relative risk of the firm in relation to the market and its relationship to the prime rate.

• Question 432:

  Vested, Inc. made some changes in operations and provided the following information:

  

  What percentage represents the return on investment for year 3?

  A. 28.57%
  B. 25%
  C. 20.31%
  D. 20%
  B. 25%

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  Choice "b" is correct. Return on investment is the ratio of operating income to average operating assets and is computed as follows based on Year 2 and Year 3 data:

  

  Choice "a" is incorrect per the above computation.

  Choice "c is incorrect. The year 3 return on investment is not computed by combining revenues, expenses, and assets for all year's presented. Choice "d" is incorrect. The year 3 return on investment is based on the average assets

  (($1,200,000 + $2,000,000)/2 = $1,600,000), not simply on the total assets at the end of year 3 ($2,000,000).

• Question 433:

  Carlisle Company presently sells 400,000 bottles of perfume each year. Each bottle costs $.84 to produce and sells for $1.00. Fixed costs are $28,000 per year. The firm has annual interest expense of $6,000, preferred stock dividends of $2,000 per year, and a 40 percent tax rate. Carlisle uses the following formulas to determine the company's leverage.

  

  The degree of financial leverage for Carlisle Company is:

  A. 2.4
  B. 1.78
  C. 1.35
  D. 2.3
  C. 1.35

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  Choice "c" is correct. To calculate financial leverage, EBIT must first be calculated:

  

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

• Question 434:

  Management accountants are frequently asked to analyze various decision situations including the following.

  I. The cost of a special device that is necessary if a special order is accepted.

  II. The cost proposed annually for the plant service for the grounds at corporate headquarters.

  III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision.

  IV.

  The costs associated with alternative uses of plant space, to be considered in a make/buy decision.

  V.

  The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus disposal decision.

  The costs described in situations I and IV above are:

  A. Prime costs.
  B. Sunk costs.
  C. Discretionary costs.
  D. Relevant costs.
  I. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision. IV. The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
  D. Relevant costs.

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  Choice "d" is correct. Relevant costs.

  Both I and IV are costs that are relevant to a decision.

  Choice "a" is incorrect. Prime costs include direct material and direct labor.

  Choice "b" is incorrect. Sunk costs are costs previously incurred and not relevant to decision-making.

  Choice "c" is incorrect. Discretionary costs are discretionary. In I, the special device is necessary.

• Question 435:

  The imputed interest rate used in the residual income approach for performance measurement and evaluation can best be characterized as the:

  A. Historical weighted average cost of capital for the company.
  B. Average return on investment that has been earned by the company over a particular time period.
  C. Average return on assets employed over a particular time period.
  D. Average prime lending rate for the year being evaluated.
  A. Historical weighted average cost of capital for the company.

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  Choice "a" is correct. Historical weighted average cost of capital is usually used as the target or hurdle rate in the residual income approach. Choices "b", "c", and "d" are incorrect, per the above definition.

• Question 436:

  Para Co. is reviewing the following data relating to an energy saving investment proposal:

  

  What would be the annual savings needed to make the investment realize a 12% yield?

  A. $8,189
  B. $11,111
  C. $12,306
  D. $13,889
  C. $12,306

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  Choice "c" is correct. The annual savings needed to make the investment realize a 12% yield is where the present value of the cash savings/inflows equals the present value of the net cash outflows. Use algebra to calculate the annual savings, as follows:

  

  Choice "a" is incorrect. The annual savings needed to make the investment realize a 12% yield is where the present value of the cash savings/inflows equal the present value of the net cash outflows. Choice "b" is incorrect. Subtract the

  present value of $10,000 due in 5 years at 12%, or $10,000 ?.57 = $5,700. Don't subtract the entire $10,000.

  Choice "d" is incorrect. Subtract the present value of the $10,000 residual value from the $50,000 cost.

• Question 437:

  A stockholder's right to inspect books and records of a corporation will be properly denied if the stockholder:

  A. Wants to use corporate stockholder records for a personal business.
  B. Employs an agent to inspect the books and records.
  C. Intends to commence a stockholder's derivative suit.
  D. Is investigating management misconduct.
  A. Wants to use corporate stockholder records for a personal business.

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  Choice "a" is correct. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. This right will be properly denied where the purpose is not

  reasonably related to their status as a shareholder.

  Choice "b" is incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. A shareholder need not conduct the inspection personally; a

  shareholder may send an agent such as an attorney or an accountant.

  Choices "c" and "d" are incorrect. In general, a shareholder has a right to inspect the books and records of a corporation for purposes reasonably related to his or her status as a shareholder. Choices "c" and "d" are purposes reasonably

  related to the shareholder's status as a shareholder. Thus, the stockholder would have a right to inspect for those reasons.

• Question 438:

  The term underwriting spread refers to the:

  A. Commission percentage an investment banker receives for underwriting a security lease.
  B. Discount investment bankers receive on securities they purchase from the issuing company.
  C. Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.
  D. Commission a broker receives for either buying or selling a security on behalf of an investor.
  C. Difference between the price the investment banker pays for a new security issue and the price at which the securities are resold.

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  Choice "c" is correct. Investment bankers are paid their fees partly by being allowed to purchase the new securities they are underwriting for a discount and then reselling those securities on the market. This is known as the underwriting

  spread.

  Choices "a" and "d" are incorrect, as both of these describe either fees or commissions and not an underwriting spread.

  Choice "b" is incorrect. The underwriting spread is the difference between the discount price paid and the resale price.

• Question 439:

  For the next 2 years, a lease is estimated to have an operating net cash inflow of $7,500 per annum, before adjusting for $5,000 per annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of $1 per year at 10% for 2 years is $1.74. What is the lease's after-tax present value using a 10% discount factor?

  A. $2,610
  B. $4,350
  C. $9,570
  D. $11,310
  D. $11,310

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  Choice "d" is correct. Present value is based on the cash flows of an activity. Amortization is a non-cash expense that is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.

  

  After-tax PV $11,310 Choice "a" is incorrect. Amortization expense of $5,000 is a non-cash expense and is not used to compute after-tax present value. It is used to determine the cash paid for taxes. Choice "b" is incorrect. Amortization is a non-cash expense. It is not considered in the calculation, expecpt to the extent it creates a tax shield. The tax shield reduces the amount of taxes paid out by the company. Choice "c" is incorrect. Present value is based on the cash flows of an activity. Amortization is a noncash expense that is considered only for its tax shield; therefore, the only relevant amounts are the $7,500 operating net cash inflow and the tax paid.

• Question 440:

  Which of the following requirements must be met to have a valid partnership exist?

  I. Co-ownership of all property used in a business.

  II.

  Co-ownership of a business for profit.

  A. I only.
  B. II only.
  C. Both I and II.
  D. Neither I nor II.
  I. Co-ownership of all property used in a business. II. Co-ownership of a business for profit.
  B. II only.

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  Choice "b" is correct.

  Rule: A partnership is defined as an association of two or more persons who agree to carry on as coowners a business for profit. Thus, II is necessary. However, there is no requirement that all property used in the business be co-owned; it

  may be owned by individual partners. Thus I is not necessary.

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