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

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

• Question 81:

  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.

  

  If Carlisle Company did not have preferred stock, the degree of total leverage would:

  A. Decrease in proportion to a decrease in financial leverage.
  B. Increase in proportion to an increase in financial leverage.
  C. Decrease but not be proportional to the decrease in financial leverage.
  D. Decrease but not have an effect on financial leverage.
  A. Decrease in proportion to a decrease in financial leverage.

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  Choice "a" is correct. Without preferred stock, the denominator in the total leverage calculation would be larger (because preferred stock is subtracted to arrive at the denominator). The same holds true for financial leverage. Therefore, both

  financial and total leverage would decrease in proportion.

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

• Question 82:

  If a nation has superior conditions in which to grow coffee beans and firms are able to grow them at very low costs, which of the four major factors that Michael Porter has indicated impact the global competitive environment would allow this nation to fare better with respect to global competitive advantage?

  A. Conditions of the factors of production.
  B. Conditions of domestic demand.
  C. Related and supporting industries.
  D. Firm strategy, structure, and rivalry.
  A. Conditions of the factors of production.

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  Choice "a" is correct. If a nation has a strong set of factors of production (such as low cost, high quality raw material inputs), that are required in a given industry, it will fare better with regard to competitive advantage. Choice "b" is incorrect.

  Conditions of domestic demand relate to the nation's domestic demand for the product, which is directly related to the ability of the nation to fare better with regard to competitive advantage. Choice "c" is incorrect. The factor of related and

  supporting industries deals with whether there are suppliers of material inputs that exist within a nation or whether there are rival firms who are competitive in the international environment, both of which would increase the nation's competitive

  advantage.

  Choice "d" is incorrect. The factor of firm strategy, structure, and rivalry relates to the practices of a nation with respect to how the companies are managed and organized, long with the laws of the nation that regulate the formation of the

  companies, and how intense the rivalry is with respect to competing firms in the nation.

• Question 83:

  Capital budgeting decisions include all but which of the following?

  A. Selecting among long-term investment alternatives.
  B. Financing short-term working capital needs.
  C. Making investments that produce returns over a long period of time.
  D. Financing large expenditures.
  B. Financing short-term working capital needs.

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  Choice "b" is correct. Capital budgeting decisions do not include the financing of short-term working capital needs, which are more operational in nature. Choices "a", "c", and "d" are incorrect, as these are all types of capital budgeting decisions.

• Question 84:

  Gillie, Taft, and Dall are partners in an architectural firm. The partnership agreement is silent about the payment of salaries and the division of profits and losses. Gillie works full-time in the firm, and Taft and Dall each work half time. Taft invested $120,000 in the firm, and Gillie and Dall invested $60,000 each. Dall is responsible for bringing in 50% of the business, and Gillie and Taft 25% each. How should profits of $120,000 for the year be divided?

  A. Gillie $60,000, Taft $30,000, Dall $30,000.
  B. Gillie $40,000, Taft $40,000, Dall $40,000.
  C. Gillie $30,000, Taft $60,000, Dall $30,000.
  D. Gillie $30,000, Taft $30,000, Dall $60,000.
  B. Gillie $40,000, Taft $40,000, Dall $40,000.

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  Choice "b" is correct. $40,000 - $40,000 - $40,000 (equally).

  Rule: In the absence of an agreement to the contrary, the profits will be shared equally regardless of investment of money or time.

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

• Question 85:

  The method that divides a project's annual after-tax net income by the average investment cost to measure the estimated performance of a capital investment is the:

  A. Internal rate of return method.
  B. Accounting rate of return method.
  C. Payback method.
  D. Net present value method.
  B. Accounting rate of return method.

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  Choice "b" is correct. Accounting rate of return divides annual after-tax net income by average investment amount. Choices "a", "c", and "d" are incorrect. IRR, NPV and payback all use cash flows, not net income.

• Question 86:

  

  Additional Data

  A. 10.00 percent.
  B. 15.00 percent.
  C. 17.00 percent.
  D. 18.75 percent.

  C. 17.00 percent.

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  Choice "c" is correct. 17.00 percent. Using the CAPM model, Martin's current cost of common equity would be:

  Cost of equity = Capital risk free rate + Beta (market rate - risk free rate)

  Cost of equity = 7% + 1.25 (15% - 7%)

  Cost of equity = 7% + 1.25 (8%)

  Cost of equity = 7% + 10% Cost of equity = 17%

• Question 87:

  In the pharmaceutical industry where a diabetic must have insulin no matter what the cost, the diabetic's demand is considered to be:

  A. Perfectly elastic.
  B. Perfectly inelastic.
  C. Relatively elastic.
  D. Relatively inelastic.
  B. Perfectly inelastic.

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  Choice "b" is correct. When a good is demanded, no matter the price, demand is described as perfectly inelastic. The demand "curve" is a vertical line at the quantity demand with price making no difference. Choices "a" and "c" are incorrect.

  There is no such thing as perfect elasticity. However, the more elastic demand is, the greater the change in quantity demand for price changes.

  Choice "d" is incorrect. Insulin is an example of perfectly inelastic.

• Question 88:

  Which of the following statements is correct regarding both debt and common shares of a corporation?

  A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.
  B. Common shareholders and debt holders have an ownership interest in the corporation.
  C. Common shares typically have a fixed maturity date, but debt does not.
  D. Common shares have a higher priority on liquidation than debt.
  A. Common shares represent an ownership interest in the corporation, but debt holders do not have an ownership interest.

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  Choice "a" is correct. Common shares represent an investment in the corporation whereby the common shareholder becomes a part owner of the corporation. A debt holder is a creditor of the corporation. The corporation has borrowed money

  from the debt holder and promises to repay at a later date. A debt holder is not an owner of the corporation.

  Choice "b" is incorrect. Unlike a common shareholder, a debt holder does not have an ownership interest in the corporation.

  Choice "c" is incorrect. Common shares do not have a fixed maturity date, but debt securities do. This answer is backwards.

  Choice "d" is incorrect. Upon liquidation of a corporation, the creditors of the corporation are paid first.

  After the creditors are paid, the shareholders are paid on a pro rata basis. Thus, debt holders (creditors) have a higher priority than stockholders.

• Question 89:

  Youngsten Electric is contemplating new projects for the next year that will require $30,000,000 of new financing. In keeping with its capital structure, Youngsten plans to use debt and equity financing as follows:

  *

  Issue $10,000,000 of 20-year bonds at a price of 101.5, with a coupon of 10%, and flotation costs of 2.5% of par value.

  *

  Use internal funds generated from earnings of $20,000,000.

  The equity market is expected to earn 15%. U.S. treasury bonds currently are yielding 9%. The beta coefficient for Youngsten's common stock is estimated to be .8. Youngsten is subject to a 40% corporate income tax rate. Youngsten has a

  price/earnings ratio of 10, a constant dividend payout ratio of 40%, and an expected growth rate of 12%.

  An analysis of Youngsten's planned equity financing using Capital Asset Pricing Model (or Security Market Line) would incorporate only the:

  A. Expected market earnings, the current U.S. Treasury bond yield, and the beta coefficient.
  B. Expected market earnings and the price' earnings ratio.
  C. Current U.S. Treasury bond yield, the price/earnings ratio, and the beta coefficient.
  D. Current U.S. Treasury bond yield and the dividend payout ratio.
  A. Expected market earnings, the current U.S. Treasury bond yield, and the beta coefficient.

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  Choice "a" is correct. The capital asset pricing model formula is:

  R = RF + B (RM-RF)

  Where:

  R = Required return rate on equity

  RF = Risk free rate earned on U.S. treasury bonds.

  B = Beta coefficient

  RM = Expected market return (earnings).

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

• Question 90:

  Which one of the following is most likely to accompany a reduction in aggregate demand?

  A. An increase in the price level.
  B. A decrease in employment.
  C. An increase in real GDP.
  D. A decrease in the unemployment rate.
  B. A decrease in employment.

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  Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would decrease.

  Choice "a" is incorrect. The price level would fall, not rise.

  Choice "c" is incorrect. Real GDP would fall, not rise.

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