COMPRE 2

Question 1

The following data concern two products sold by Redding Corporation.
Product X Sales in dollars $50,000
Product Y $100,000
Contribution margin ratio 70%
If fixed expenses for the company as a whole are $120,000, the break-even point would be:

a.
$340,000
b.
$240,000
c.
$218,182
d.
$120,000
e.
$200,000
f.
$266,667
g.
$300,000

Answer 1

b.
$240,000

Question 2

Rogers & Sons, a manufacturing firm, reported the following sales revenues for the last four years. 20X1 20X2 20X3 20X4
$123,000 $132,500 $142,200 $146,350
All of the following information would be useful in evaluating the sales trend and stability of Rogers & Sons except:

a.
Supplier growth analysis
b.
Sales volume by salesperson
c.
Elasticity of demand
d.
Percentage of repeat customers
e.
percentage at which customers stop subscribing to its products or service

Answer 2

a.
Supplier growth analysis

Question 3

Suppose Buyson Corporation’s projected free cash flow for next year is FCF1 = P150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the firm’s total corporate value?

a.
P3,150,000
b.
P2,707,500
c.
P2,850,000
d.
P3,000,000
e.
P2,572,125

Answer 3

d.
P3,000,000

Question 4

As a company becomes more conservative in its working capital policy, it would tend to have a(n)

a.
None of the statements mentioned here are correct.
b.
Decrease in the ratio of current assets to units of output.
c.
Increase in its acid test ratio.
d.
Increase in funds invested in common stock and a decrease in funds invested in marketable securities.
e.
Increase in the ratio of current liabilities to noncurrent liabilities.
f.
Decrease its Times-Interest-earned ratio.
g.
Two of the statements mentioned here are correct.
h.
Increase its debt-to-equity ratio.

Answer 4

c.
Increase in its acid test ratio.

Question 5

A change in credit policy has caused an increase in sales, no discounts taken, an increase in the investment in accounts receivable, and an increase in the number of doubtful accounts. Based upon this information, we know that

a.
Days sales outstanding has increased.
b.
Net profit has decreased.
c.
Net profit has increased.
d.
The average collection period has decreased.
e.
The size of the discount offered has decreased.
f.
Gross profit has declined.

Answer 5

a.
Days sales outstanding has increased.

Question 6

Pau Inc. issues a $38.6 million IPO priced at $12.50 per share, and the offering price to the public is $19.30 per share. The firm’s legal fees, SEC registration fees, and other administrative costs are $270,000. The firm’s stock price increases 18% on the first day. What is the underwriting cost?

a.
$13.6 million
b.
$270,000
c.
$20.55 million
d.
$20.82 million

Answer 6

a.
$13.6 million

Question 7

Tamcon Industries has purchased equipment from a Brazilian firm for a total cost of 1,272,500 Brazilian reals (BR). The firm has to pay in 30 days. Citicorp has given the firm a 30-day forward quote of $0.6123/BR to purchase Brazilian reals forward, and a quote of $0.6421 to sell Brazilian reals forward. Tamcon decided to wait and purchase the Brazilian reals on the spot market on settlement date. On the day the payment is due, Tamcon purchases the Brazilian reals at the spot rate of $0.6317/BR. How much would Tamcon have saved or lost by hedging with a forward contract? (Round your final answer to the nearest dollar.)

a.
$24,686 loss
b.
$13,234 loss
c.
$13,234 savings
d.
$24,686 savings

Answer 7

d.
$24,686 savings

Question 8

Blonde, Inc., is considering dropping a certain product line if it does not have a margin of safety higher than 14.0%. The breakeven sales are P153,500, and the margin of safety is P26,500. Based on this information, the controller has recommended that Blonde keep this product line. Did the controller make the appropriate decision?

a.
Yes, since the margin of safety ratio of 17.3% is better than 14.0%.
b.
No, since the margin of safety ratio of 14.7% is not better than 14.0%.
c.
No, since the margin of safety ratio of 17.3% is not better than 14.0%.
d.
Yes, since the margin of safety ratio of 14.7% is better than 14.0%.

Answer 8

d.
Yes, since the margin of safety ratio of 14.7% is better than 14.0%.

Question 9

Which of the following costs is relevant in deciding whether to sell joint products at split-off or process them further?

a.
The cost of materials used to make the joint products.
b.
The variable cost of operating the joint process.
c.
The unavoidable costs of further processing.
d.
The avoidable costs of further processing.

Answer 9

d.
The avoidable costs of further processing.

Question 10

A highly cash convertible instrument with a maturity of 30 days would be traded in which market?

a.
Commodities market
b.
Money market
c.
Bond market
d.
Stock market
e.
Physical asset market

Answer 10

b.
Money market

Question 11

Hurst Co. manufacturers and sells a single product. Price and cost data regarding this product are as follows:
Selling price $40 per unit
Variable manufacturing costs $20 per unit Variable selling and admin. Expenses $ 6 per unit Fixed manuf. Overhead $208,000 per year Fixed selling and admin. Expenses $324,000 per year
In the current year, the company sold 43,000 units. Due to competition, management will be forced
to lower the selling price by 15% next year. How many units must be sold next year to earn the same income as was earned in the current year?

a.
60,200 units
b.
58,250 units
c.
50,000 units
d.
53,200 units
e.
75,250 units
f.
58,800 units

Answer 11

e.
75,250 units

Question 12

Which of the following is a type of business divestiture?

a.
Consolidation
b.
Net asset acquisition
c.
Merger
d.
Stock acquisition
e.
Spinoff
f.
Leveraged recapitalization

Answer 12

e.
Spinoff

Question 13

For an all-equity financed firm, a project whose expected rate of return plots should be rejected.

a.
below the security market line
b.
above the security market line
c.
above the characteristic line
d.
below the characteristic line

Answer 13

a.
below the security market line

Question 14

Banks whose forte is helping firms sell new debt and equity securities in the primary markets are called:

a.
Credit unions
b.
investment banks.
c.
Urban banks
d.
Commercial banks
e.
Rural banks
f.
Thrift banks

Answer 14

b.
investment banks.

Question 15

GMH Company manufactures 100,000 units of Part X annually for use in one of its main products. The total manufacturing cost for 100,000 units of Part X is as follows:
Direct materials $120,000 Direct labor 80,000
Variable overhead Fixed overhead
Total cost
40,000 160,000
$400,000

Sutton Company has offered to sell GMH 100,000 units of Part X per year.
If GMH accepts this offer, the facilities used to produce Part X can be used in the production of other components. This change would save GMH $10,000 in rent for the leased production facility used at present to support the production of other components. Furthermore, 60% of the fixed overhead will stop should GMH decide to proceed with the offer.
What is the maximum price that GMH should be willing to pay Sutton for part X?

a.
$3.36
b.
$2.00
c.
$2.40
d.
$2.50
e.
$3.04
f.
$3.46
g.
$3.14
h.
$1.20

Answer 15

f.
$3.46

Question 16

A study has been conducted to determine if one of the departments in Parry Company should be discontinued. The contribution margin in the department is $50,000 per year. Fixed expenses charged to the department are $65,000 per year. It is estimated that $50,000 of these fixed expenses could not be eliminated if the department is discontinued, while the rest are avoidable. These data indicate that if the department is discontinued, the company’s overall net operating income would:

f.
decrease by $10,000 per year decrease by $25,000 per year
b.
increase by $35,000 per year
c.
increase by $25,000 per year
d.
decrease by $35,000 per year
e.
increase by $10,000 per year
f.
decrease by $10,000 per year
g.
no change in profit

Answer 16

d.
decrease by $35,000 per year

Question 17

An acquisition takes places when a firm:

a.
buys another firm using debt to finance a significant portion of the transaction.
b.
buys any percentage of ownership in another firm.
c.
combines with another firm to create a new firm.
d.
buys a controlling interest in another firm.

Answer 17

d.
buys a controlling interest in another firm.

Question 18

The weak form of efficient market hypothesis contradicts:

a.
technical analysis, but supports technical analysis as valid
b.
both fundamental analysis and technical analysis
c.
fundamental analysis, but supports technical analysis as valid
d.
technical analysis, but does not say anything on the possibility of successful fundamental analysis
e.
fundamental analysis, but does not say anything on the possibility of successful technical analysis

Answer 18

d.
technical analysis, but does not say anything on the possibility of successful fundamental analysis

Question 19

The additional return we should expect to receive for being exposed to risk?

a.
Risk discount
b.
Risk free rate of return
c.
Par risk
d.
Risk premium

Answer 19

d.
Risk premium

Question 20

Goodheart Corp’s stock has a required rate of return of 11.50% on its equity, and it sells for P25.00 per share. Goode’s dividend is expected to grow at a constant rate of 7.00%. What was the last dividend, D0?

a.
P1.27
b.
P0.95
c.
P1.13
d.
P1.05
e.
P1.16

Answer 20

d.
P1.05

Question 21

The holder of a put option:

a.
will not gain from exercising if the strike price is greater than the stock price.
b.
has an obligation to exercise if the stock price is less than the strike price.
c.
pays the writer an amount equal to the strike price on the exercise date.
d.
may sell the option to another party prior to expiration.

Answer 21

d.
may sell the option to another party prior to expiration.

Question 22

Statement 1. “Gross profit” and “contribution margin” refer to different thing. Statement 2. A company that has no variable costs can never break even.

a.
Statement 1 is true.
b.
Both statements are true.
c.
Both statements are false.
d.
Statement 2 is true.

Answer 22

c.
Both statements are false.

Question 23

You have the following data on three stocks:
Stock A
B C
Standard Deviation Beta 10% 0.67 20% 0.51 14% 1.29
If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

a.
C; A.
b.
B; A.
c.
C; B.
d.
A; A.
e.
A; B

Answer 23

e.
A; B

Question 24

When two firms are combined that are from different industries, it is referred to as what type of merger?

a.
Net asset acquisition
b.
Stock acquisition
c.
Conglomerate merger
d.
Vertical merger
e.
Horizontal merger

Answer 24

c.
Conglomerate merger

Question 25

Ring Company makes telephones. Currently, Ring makes all components of the telephones in- house. An outside company has offered to supply one component, part number X76, for P12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows:
Direct materials Direct labor Variable overhead Fixed overhead
P3.00 P1.50
P2.75 P5.00
Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier?

a.
No, income will decrease by P71,500.
b.
No, income will decrease by P15,000.
c.
Yes, income will increase by P10,500.
d.
Yes, income will increase by P74,500.
e.
No, income will decrease by P10,500.

Answer 25

a.
No, income will decrease by P71,500.

Question 26

Of Peterson Enterprises’ $1.4 billion in assets, $150 million of those assets are in cash or can be readily converted to cash. Other companies in Peterson Enterprises’ industry have cash as a percentage of total assets of around 8%. This is an example of

a.
high liquidity.
b.
high solvency.
c.
low profitability
d.
low liquidity.
e.
high activity
f.
low solvency.

Answer 26

a.
high liquidity.

Question 27

Which of the following is a disadvantage of going public?

a.
All of the items mentioned.
b.
Paying the legal fees, auditing fees, consulting fees, and regulatory fees associated with the IPO process.
c.
Two of the items mentioned.
d.
Size of capital can be significantly larger.
e.
More disclosure requirements for publicly listed companies

Answer 27

c.
Two of the items mentioned.

Question 28

Temple is a newly established janitorial firm, and the owner is deciding what type of checking account to open. Temple plans to write roughly 80 checks per month. The bank charges $10 per month plus a $0.10 per check charge for a standard business checking account with no minimum balance. Temple also has the option of a premium business checking account that requires a $2,500 minimum balance but has no monthly fees or per check charges. If Temple’s cost of funds is 10%, which account should Temple choose?

a.
Premium account, because the savings is $16 per year
b.
Standard account, because the savings is $16 per year.
c.
Standard account, because the savings is $34 per year.
d.
Premium account, because the savings is $34 per year.

Answer 28

c.
Standard account, because the savings is $34 per year.

Question 29

Which of the following is true for a make-or-buy decision?

a.
Opportunity costs are irrelevant.
b.
The reliability of the outside supplier of the component is important to the decision; and the company should make the component if the purchase price is less than the per-unit variable cost to make the component.
c.
The company should make the component if the purchase price is less than the per- unit variable cost to make the component.
d.
Depreciation on equipment used in making the component and having no other use is the critical factor in the decision.
e.
The reliability of the outside supplier of the component is important to the decision; and depreciation on equipment used in making the component and having no other use is the critical factor in the decision.
f.
The reliability of the outside supplier of the component is important to the decision.

Answer 29

f.
The reliability of the outside supplier of the component is important to the decision.

Question 30

If the central bank of a country raises interest rates sharply, the country’s currency will most likely:

a.
increase in relative value.
b.
lose much of its intrinsic value.
c.
decrease sharply in value at first and then return to its initial value.
d.
decrease in relative value.

Answer 30

a.
increase in relative value.

Question 31

Country R’s currency would tend to depreciate relative to Country T’s currency when:

a.
Country R has real interest rates that are higher than real interest rates in T.
b.
Country T has a rapid rate of growth in income that causes imports to lag behind exports.
c.
Country R switches to a more restrictive monetary policy.
d.
Country R has a rate of inflation that is higher than the rate of inflation in Country T.

Answer 31

d.
Country R has a rate of inflation that is higher than the rate of inflation in Country T.

Question 32

The role of sunk costs in decision making can be summed up in which of the following sayings?

a.
There is no glory without sacrifice.
b.
Nothing ventured, nothing gained.
c.
The love of money is the root of all evil.
d.
It’s no use crying over spilled milk,
e.
Sticks and stones may break my bones but words will never hurt me.
f.
A penny saved is a penny earned.

Answer 32

d.
It’s no use crying over spilled milk,

Question 33

In which of the following types of business divestitures does a firm sell a minority interest in a newly created company usually via an IPO?

a.
Spinoff
b.
Split up
c.
Equity carve-out
d.
Leverage buyout
e.
Split on

Answer 33

c.
Equity carve-out

Question 34

Which of the following roles is considered a main objective of credit rating agencies?

a.
Receiving investments from capitalists.
b.
Underwriting securities
c.
Taking deposits from savers
d.
Granting loans to borrowers
e.
Lessen information asymmetry.

Answer 34

e. Lessen information asymmetry.

Question 35

If a company is a multiproduct firm.

a.
should use a separate CVP graph for each of its products.
b.
can only utilize CVP analysis if the contribution margin percentages on each product are the same.
c.
could earn a lower-than-expected profit even though the total number of units sold was greater than expected.
d.
cannot utilize CVP analysis.

Answer 35

c.
could earn a lower-than-expected profit even though the total number of units sold was greater than expected.

Question 36

The Taller Company has 400 obsolete desk calculators that are carried in inventory at a total cost of P16,800. If these calculators are upgraded at a total cost of P10,000, they can be sold for a total of P30,000. As an alternative, the calculators can be sold in their present condition for P10,200.
The sunk cost in this situation is:

a.
P11,200
b.
P0
c.
P10,000
d.
P26,800
e.
P16,800

Answer 36

e.
P16,800

Question 37

As volume decreases, average cost per unit

a.
remains constant.
b.
increases in proportion to the change in volume.
c.
increases.
d.
decreases.

Answer 37

c.
increases.

Question 38

Statement 1. Preferred stock is a hybrid–a sort of cross between a common stock and a bond–in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond.
Statement 2. From an investor’s perspective, a firm’s preferred stock is generally considered to be less risky than its common stock but more risky than its bonds. However, from a corporate issuer’s standpoint, these risk relationships are reversed: bonds are the most risky for the firm, preferred is next, and common is least risky.

a.
Both statements are false
b.
Statement 2 is true
c.
Both statements are true
d.
Statement 1 is true

Answer 38

b.
Statement 2 is true

Question 39

Ring Company makes telephones. Currently, Ring makes all components of the telephones in- house. An outside company has offered to supply one component, part number X76, for P12 each. Ring uses 22,000 of these components per year. Costs of X76 are as follows:
Direct materials Direct labor Variable overhead Fixed overhead
P3.00 P1.50
P2.75 P5.00
Suppose that only 30% of the fixed overhead is unavoidable even if part X76 is not made by Ring. Should Ring purchase the part from the outside supplier?

a.
No, income will decrease by P10,500.
b.
No, income will decrease by P27,500
c.
No, income will decrease by P15,000.
d.
No, income will decrease by P71,500.
e.
Yes, income will increase by P74,500.
f.
Yes, income will increase by P10,500.

Answer 39

b.
No, income will decrease by P27,500

Question 40

A professional association has arranged for a lockbox system to process annual conference registration fees. How will this decision affect cash collections?

a.
Mail float and clearing float are both shortened.
b.
Clearing float is reduced because deposits are handled on the day they are received.
c.
Mail float is reduced because checks are sent to the post office only rather than the company premises.
d.
Processing float and clearing float are both shortened.
e.
Mail float may be lengthened, but availability float is shortened.

Answer 40

c.
Mail float is reduced because checks are sent to the post office only rather than the company premises.

Question 41

The Taller Company has 400 obsolete desk calculators that are carried in inventory at a total cost of P16,800. If these calculators are upgraded at a total cost of P10,000, they can be sold for a total of P30,000. As an alternative, the calculators can be sold in their present condition for P10,200.
What is the net advantage or disadvantage to the company from upgrading the calculators?

a.
P20,000 advantage
b.
P9,800 advantage
c.
P18,800 disadvantage
d.
P8,000 disadvantage
e.
P8,800 advantage
f.
P19,800 advantage

Answer 41

b.
P9,800 advantage

Question 42

Which of the following is an example of an indirect exchange rate from a Japanese perspective?

a.
¥95/$
b.
$0.006900/¥
c.
€0.6395/$
d.
¥115.23/€

Answer 42

b.
$0.006900/¥

Question 43

In the case of a business with more than one product,

a.
it cannot use CVP analysis as such would be possible only if there is a single product.
b.
it can earn a higher-than-expected profit even if the total units sold was less than expectation.
c.
each of the products must use a separate CVP analysis.
d.
it can use CVP analysis only if the contribution margin percentages on each product are the same.

Answer 43

b.
it can earn a higher-than-expected profit even if the total units sold was less than expectation.

Question 44

Due to mismanagement of its domestic economic policies, country A is experiencing a drastic increase in inflation in relation to its neighbor country B, which happens to be its major trading partner. How will the increased inflation in country A affect the exchange rate between the two countries?

a.
Country A’s currency will depreciate against country B’s currency.
b.
Country A’s currency will appreciate against country B’s currency.
c.
There is insufficient information to determine the impact on the exchange rate
d.
Country A’s currency will not change against country B’s currency.

Answer 44

a.
Country A’s currency will depreciate against country B’s currency.

Question 45

Miley Flannery holds the following portfolio:
Stock A
B C D
Total
The portfolio’s beta is closest to:
Investment Beta P150,000 2.80
50,000 1.60 100,000 2.00 75,000 2.40
P375,000

a.
2.12
b.
2.58
c.
2.84
d.
2.35
e.
1.17

Answer 45

d.
2.35

Question 46

Which of the following statements is most correct?

a.
All of the statements above are correct.
b.
None of the statements above is correct.
c.
If a company follows a policy of “matching maturities,” this means that a firm should finance seasonal current assets with short-term liabilities; and permanent current assets and fixed assets with long term liabilities.
d.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks of using short term financing.
e. Net working capital may be defined as current assets minus current liabilities. But an increase in the current ratio will not automatically lead to an increase in net working capital.

Answer 46

a.
All of the statements above are correct.

Question 47

Fortune Hotels issues an IPO on a best-effort basis. The company’s investment bank demands a commission of 20 percent of the selling price. Five million shares are issued. The average selling price remains at $31. How much did the investment bank receive?

a.
$31.0 million
b.
$124.0 million
c.
$186.0 million
d.
$155.0 million

Answer 47

a.
$31.0 million

Question 48

Buchanan Company currently sells 4,000 units of product Q for $1 each. Capacity is 5,000 units. Variable costs are $0.40 and avoidable fixed costs are $400. A chain store has offered $0.80 per unit for 2,000 units of Q. If Buchanan accepts the order, the change in income will be a

a.
$80 decrease.
b.
$480 increase.
c.
$240 increase.
d.
$200 increase.
e.
$60 decrease.
f.
$160 increase.

Answer 48

d.
$200 increase.

Question 49

Which of the following is an example of a cross exchange rate from a Japanese perspective?

a.
$0.006900/¥
b.
¥115.23/€
c.
€0.6395/$
d.
¥95/$

Answer 49

c.
€0.6395/$

Question 50

A preferred stock will pay a dividend of P2.75 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock.

a.
P0.275
b.
P27.50
c.
P31.82
d.
P56.25
e.
None of these is correct

Answer 50

b.
P27.50

Question 51

A share of perpetual preferred stock pays an annual dividend of P6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock?

a.
P57.25
b.
P62.38
c.
P41.64
d.
P46.75
e.
P50.00

Answer 51

e.
P50.00

Question 52

Benson Company has 100 units of an obsolete part. The variable cost to produce them was $4 per unit. They could now be sold for $3 each and it would cost $6 to make them now. The parts could be reworked for $8 each and sold for $17. What is the monetary advantage of reworking the parts over the next-best action?

a.
$2,000.
b.
$1,000.
c.
$ 300.
d.
$1,200.
e.
$2,400.
f.
$ 600.

Answer 52

f.
$ 600.

Question 53

Medford Corporation operates a plant with a productive capacity to manufacture 20,000 units of its product per annum. The follow information pertains to the production costs at capacity:
Variable costs $160,000 Fixed costs 240,000
——–
Total costs $400,000
=========
A supplier has offered to sell 4,000 units to Medford annually. Assume no change in the fixed costs. What is the price per unit that makes Medford indifferent between the “make” and “buy” options?

a.
$18
b.
$20
c.
$4
d.
$8
e.
$12
f.
$0

Answer 53

d.
$8

Question 54

As production increases within the relevant range,

a.
fixed costs will vary in total.
b.
fixed costs will vary on a per unit basis.
c.
variable costs will vary on a per unit basis.
d.
None of the statements is true.

Answer 54

b.
fixed costs will vary on a per unit basis.

Question 55

A major factor in evaluating a special order is

a.
the expected contribution margin on the order.
b.
the possible effects on sales at regular prices.
c.
the availability of capacity to produce the additional units.
d.
all of the above.

Answer 55

d.
all of the above.

Question 56

Which of the following provides huge separation payments to executives released when they are fired as a result of an acquisition?

a.
Staggered board of directors
b.
Pacman defense
c.
Poison pill
d.
Selling of crown jewels
e.
White Squire defense
f.
Golden parachute
g.
Leveraged recapitalization
h.
White knight defense

Answer 56

f.
Golden parachute

Question 57

At December 31, 20x5 and 20x4, Rose Corp. had 180,000 shares of common stock and 10,000 shares of 6%, $100 par value noncumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 20x5 or 20x4. Net income for 20x5 was $375,000. For 20x5, what did the earnings per common share amount to?

a.
$2.08
b.
$1.42
c.
$1.80
d.
$1.97
e.
$1.75

Answer 57

a.
$2.08

Question 58

Mojo’s Coffee Cart currently has a variable cost ratio of 55%. The business operates in a resort area and expects a decline in revenue of $4,500 per month during the off season, while fixed costs will remain the same. Compute the monthly change in operating income that the company should anticipate.

a.
Operating income will increase by $2,025 per month.
b.
Operating income will increase by $2,625 per month.
c.
Operating income will increase by $1,875 per month.
d.
Operating income will decrease by $2,475 per month.
e.
Operating income will decrease by $2,250 per month.
f.
Operating income will increase by $2,890 per month.

Answer 58

d.
Operating income will decrease by $2,475 per month.

Question 59

If the U.S. dollar appreciated against the British pound, other things being equal, we would expect that:

a.
U.S. demand for British products would decrease.
b.
trade between the U.S. and Britain would decrease.
c.
the British demand for U.S. products would increase.
d.
U.S. demand for British products would increase.

Answer 59

d.
U.S. demand for British products would increase.

Question 60

Sheela Dairy Corporation buys unprocessed cows’ milk from local farmers. At the dairy, this unprocessed milk is broken down into cream and low-fat milk. The cream can be sold at this point or can be further processed into butter. Which of the following would be relevant in the decision to further process the cream into butter?

a.

the amount paid to the farmers to purchase the unprocessed milk.
b.
none of the choices mentioned.
c.
the portion of corporate fixed expenses that are currently being allocated to cream.
d.
The cost of agitating the cream so that the fat molecules get shaken out of position to make butter.
e.
the cost of breaking down the unprocessed milk into cream and low-fat milk.

Answer 60

d.
The cost of agitating the cream so that the fat molecules get shaken out of position to make butter.

Question 61

A Company is set to offer a plain vanilla senior bond at a spread of 75 basis points. B Company is also offering a plain vanilla senior bond at a spread of 100 basis points. Based on Moody’s, the credit rating of A and B companies are Aaa and A, respectively. Just a week after the issuance of the mentioned bonds, C Company offered a similar debt instrument and was rated by Moody’s as Aa. Which of the following best describes the spread that investors will likely take for C Company’s debt issuance?

a.
Less than 50 basis points
b.
Between 75 and 100 basis points
c.
Above 125 basis points
d.
Between 50 and 75 basis points
e.
Between 100 and 125 basis points

Answer 61

b.
Between 75 and 100 basis points

Question 62

Pueblo Company sells a product for $88. Variable cost is $32. Pueblo could accept a special order for 1,000 units at $46. If Pueblo accepted the order, how many units could it lose at the regular price before the decision became unwise?

a.
300.
b.
0.
c.
1,000.
d.
100.
e.
250.
f.
500.
g.
200.
h.
2,000.

Answer 62

e.
250.

Question 63

Sugar, Inc. reported the following on its most recent income statement:
An analysis of the income statement revealed that interest expense was $180,000. Sugar’s times interest earned was

Earnings before Income Taxes Income tax expense Earnings after tax
$900,000 225,000
$675,000

a.
7 times
b.
7.5 times.
c.
11 times.
d.
10 times.
e.
8.5 times.
f.
4 times.
g.
5 times.
h.
6 times

Answer 63

h.
6 times

Question 64

A division should be dropped if

a.
discontinuing it will reduce the company’s loses.
b.
it has a negative contribution margin.
c.
it is not essential to the company’s other product line.
d.
keeping it keeps the total profit of the company high.
e.
it has a negative operating profit.

Answer 64

a.
discontinuing it will reduce the company’s loses.

Question 65

S1. The costs of operating a joint process can be fixed or variable. S2. Incremental costs can be either fixed or variable.

a.
Both statements are false
b.
S1 is true
c.
S2 is false
d.
Both statements are true

Answer 65

a.
Both statements are false

Question 66

Technocrat Inc., located in Belgium, currently manufactures products at its domestic plant and exports them to the U.S. since it is less expensive to produce at home. The company is considering the possibility of setting up a plant in the U.S. All of the following factors would encourage the company to consider direct foreign investment in the U.S. except the:

a.
widening of the gap in production costs between the United States and Belgium locations.
b.
changing demand for the company’s exports to the U.S. due to exchange rate fluctuations.
c.
expectation of more stringent trade restrictions by the U.S.
d.
depreciation of the U.S. dollar against Belgium’s currency.

Answer 66

a.
widening of the gap in production costs between the United States and Belgium locations.

Question 67

The following monthly data are available for Seasons Company, which produces only one product: Selling price per unit, $42
Unit variable expenses, $14
Total fixed expenses, $42,000
Actual sales for the month of June, 4,000 units
How much is the margin of safety in units for the company for June?

a.
105,000
b.
70,000
c.
2,500
d.
63,000
e.
1,500

Answer 67

c.
2,500

Question 68

I. A downward-sloping yield curve indicates that it is generally cheaper to borrow from long-term sources than to borrow from short-term sources.
II. A flat yield curve indicates that it is generally cheaper to borrow from short-term sources than to borrow from long-term sources.

a.
Both statements are false.
b.
Both statements are true.
c.
Statement I is true.
d.
Statement II is true.

Answer 68

c.
Statement I is true.

Question 69

Greer Manufacturing used target costing on an existing product. It determined a desired selling price of $10.50 based on market conditions and existing competition. Greer’s current fixed costs are $9,000 and variable costs are $6.25. Its current tax rate is 35%. How many does Greer have to sell to reach its minimum desired before-tax profit of $33,000? (Round up your answer to the nearest whole number.)

a.
9,883 units
b.
9,828 units
c.
12,600 units
d.
14,064 units

Answer 69

b.
9,828 units

Question 70

There are two stocks with a constant growth rate that are (1) in equilibrium, (2) have the same price, and (3) have the same required rate of return. Which of the following statements is CORRECT?

a.
The two stocks must have the same dividend per share.
b.
The two stocks must have the same dividend growth rate.
c.
The two stocks must have the same dividend yield.
d.
If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
e.
If one stock has a higher dividend yield, it must also have a higher dividend growth rate.

Answer 70

d.
If one stock has a higher dividend yield, it must also have a lower dividend growth rate.

Question 71

What is the effect of the extensive usage of the internet with regards to efficient markets?

a.
New regulation comes in, marking markets less efficient.
b.
Volatility of security prices increases, thus making markets less efficient.
c.
Information becomes cheaper and more accessible thus making markets more efficient.
d.
Competition among brokers increases, thus making markets more efficient

Answer 71

c.
Information becomes cheaper and more accessible thus making markets more efficient.

Question 72

A finding that _______________would provide evidence AGAINST the semi-strong form of the EMT.

a.
Earnings announcement reactions take considerable time.
b.
Technical analysis is worthless in determining stock prices.
c.
Investors do not earn abnormal profits after merger announcement.
d.
The price decline of large secondary offerings is permanent when outsiders are selling.
e.
Money managers do not outperform the market as a whole.

Answer 72

a.
Earnings announcement reactions take considerable time.

Question 73

The Yellow Toy Company is considering purchasing Zevo Toys, currently owned by a private investment company. Which of the following is most important for Yellow to consider when formulating their bid?

a.
The projected cash flows Zevo will produce in the future.
b.
The mix of debt and equity of Zevo’s current owners.
c.
The price that Zevo trades for on the stock exchange.
d.
The possibility of future revenue growth of the combined entities.

Answer 73

a.
The projected cash flows Zevo will produce in the future.

Question 74

A 7-year bond with a 9% annual coupon rate has a yield (rd) of 8%. Which of the following statements is true?

a.
If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.
b.
The bond is selling below its par value.
c.
The bond is selling at a discount.
d.
The bond’s current yield is greater than 9%.
e.
If the yield to maturity remains constant, the bond’s price one year from now will be higher than its current price.

Answer 74

a.
If the yield to maturity remains constant, the bond’s price one year from now will be lower than its current price.

Question 75

The spot rate on the London market was £0.5434/$, while the 90-day forward rate was £0.5519/$. What is the annualized forward premium or discount on the U.S. dollar for the period? (Round your final answer to one decimal place.)

a.
1.6% premium
b.
6.3% premium
c.
1.6% discount
d.
6.3% discount

Answer 75

b.
6.3% premium

Question 76

The Board of Directors of MAT Corporation is planning to make a big acquisition in the next fiscal year. The company hired a merger and acquisition(M&A) consultant to conduct a financial feasibility study using what-if analysis. The consultant and the company’s financial analyst have developed the following data table for the four top target companies from the pre-final list.

Item Target Co. 1 EPS $2
Mkt Price $40
Target Co. 2 $10
$100
Target Co. 3 $5
$75
Target Co. 4 $3
$63

Based on the data table, which of the following target companies is the most expensive company to acquire using the price/earnings (P/E) ratio as the criteria?

a.
Target Co. 2
b.
Target Co. 4
c.
Target Co. 3
d.
Target Co. 1

Answer 76

b.
Target Co. 4

Question 77

Which of the following is true regarding the unit contribution margin of a single product company?

a.
If sales increase, the dollar increase in net operating income can be computed by multiplying the unit contribution margin by the dollar increase in sales.
b.
If sales increase, the dollar increase in net operating income can be computed by multiplying the unit contribution margin by the unit increase in sales.
c.
The unit contribution margin divided by the variable expense per unit equals the contribution margin ratio.
d.
As fixed expenses decrease, the unit contribution margin increases.
e.
The unit contribution margin increases as the number of units sold increases.

Answer 77

b.
If sales increase, the dollar increase in net operating income can be computed by multiplying the unit contribution margin by the unit increase in sales.

Question 78

A U.S. company has accounts receivable from a Swiss company for 100,000 Swiss francs (CHF) due in three months. At the time of contract, the exchange rate was 1.0 CHF =1.0 USD. The U.S. company wishes to manage its foreign exchange exposure and therefore

a.
buys U.S. dollar futures.
b.
sells U.S. dollar futures.
c.
sells a Swiss francs interest rate swap.
d.
buys a currency swap.

Answer 78

a.
buys U.S. dollar futures.

Question 79

The Furniture Company currently has three divisions: Maple, Oak, and Cherry. The oak furniture line does not seem to be doing well and the president of the company is considering dropping this line. If it is dropped, the revenues associated with the Oak Division will be lost and the related variable costs saved. Also, all of the fixed costs presented under the oak furniture line would be eliminated. The income statements, by divisions, are as follows.
Maple Oak Sales P55,000
Variable Costs 40,000
Contribution Margin 15,000 13,000 18,000 Fixed costs 10,000 14,000 10,200
Oper. profit(loss) P 5,000 P(1,000) P 7,800
Which one of the following options should be recommended to the president of the company?

a.
Continue operating the Oak Division as discontinuance would result in a total operating loss of P1,200.
b.
Discontinue the Oak Division which would result in a P1,000 increase in operating profits.
c.
Continue operating the Oak Division as discontinuance would result in a P13,000 decline in operating profits.
d.
Continue operating the Oak Division as discontinuance would result in a P6,000 decline in operating profits.
e.
Discontinue the Oak Division which would result in a P7,000 increase in operating profits.

Answer 79

b.
Discontinue the Oak Division which would result in a P1,000 increase in operating profits.

Question 80

Which of the following statements is true about broker markets?

a.
Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.
b.
Brokers’ extensive contacts provide them with a pool of price information that individual investors could easily duplicate themselves, and hence not really value adding.
c.
Brokers can guarantee an order because they have an inventory of securities.
d.
Brokers bring buyers and sellers together to earn a margin, called a bid-ask spread.

Answer 80

a.
Investors have an incentive to hire a broker because what they charge as a commission is less than the cost of direct search.

Question 81

Data concerning Sotero Corporation’s single product appear below:
Per Unit Selling price
Percent of Sales $140
100%
40%
60%
0 out of 1 points
Variable expenses Contribution margin
56 $ 84
The company is currently selling 5,000 units per month. Fixed expenses are $319,000 per month.
The marketing manager believes that a $12,000 increase in the monthly advertising budget would result in an 1,800 unit increase in annual sales. What should be the overall effect on the company’s annual net operating income of this change?

a.
increase of $3,120
b.
decrease of $3,120
c.
increase of $15,120
d.
increase of $7,200
e.
decrease of $7,200
f.
decrease of $12,000
g.
increase of $139,200

Answer 81

d.
increase of $7,200

Question 82

All of the following are advantages (generally) of a flexible floating exchange rate system except:

a.
floating exchange rates facilitate international adjustments to negative economic developments.
b.
floating exchange rates result in fluctuating exchange rates.
c.
None as all of the statements are generally correct.
d.
floating exchange rates are believed to have prevented severe economic turmoil.
e.
proponents believe that floating exchange rates prevent extreme pressures that a fixed rate system would cause.

Answer 82

c.
None as all of the statements are generally correct.

Question 83

Which of the following statements is most correct?

a.
Junk bonds typically have a higher yield to maturity relative to investment grade bonds.
b.
A debenture is a secured bond that is backed by some or all of the firm’s fixed assets.
c.
Subordinated debt has less default risk than senior debt.
d.
All of the statements above are correct.
e.
None of the statements above is correct.

Answer 83

a.
Junk bonds typically have a higher yield to maturity relative to investment grade bonds.

Question 84

What is insider trading?

a.
A legal practice where individuals with confidential or nonpublic information trade on investments for profits.
b.
An illegal practice where individuals with confidential or nonpublic information trade on investments for profits.
c.
An illegal practice where individuals with public information trade on investments for profits.
d.
A legal practice where individuals with public information trade on investments for profits.

Answer 84

b.
An illegal practice where individuals with confidential or nonpublic information trade on investments for profits.

Question 85

Charleston, Inc. had the following information:

Net Sales
Cost of goods sold Operating Expenses Net Income
Year 2 210,000 128,000 34,400 47,600
Year 1 194,800 140,600 23,000 31,200

Using vertical analysis for Year 1, what is the percentage of cost of goods sold and operating expenses, respectively?

a.
11.8% and 27.8%
b.
61.0% and 16.4%
c.
72.2% and 11.8%
d.
61.0% and 22.7%
e.
72.2% and 16.0%
f.
16.0% and 11.8%
g.
16.4% and 39.0%

Answer 85

c.
72.2% and 11.8%

Question 86

Bolger and Co. manufactures large gaskets for the turbine industry. Bolger’s per unit sales price and variable costs for the current year are as follows.
Sales price per unit $300 Variable costs per unit $210
Bolger’s total fixed costs aggregate $360,000. As Bolger’s labor agreement is expiring at the end of the year, management is concerned about the effect anew agreement will have on its unit breakeven point. The controller performed a sensitivity analysis to ascertain the estimated effect of a $10 per unit direct labor increase and a $10,000 increase in fixed costs. Based on these data, it was determined that the breakeven point would:

a.
Increase by 500 units.
b.
increase by 500 units.
c.
decrease by 111 units.
d.
increase by 375 units.
e.
decrease by 500 units.
f.
decrease by 1,000 units.
g.
increase by 625 units.
h.
decrease by 300 units.

Answer 86

g.
increase by 625 units.

Question 87

The Black-Scholes model is commonly used to price options. Which of the following is not an assumption of the Black-Scholes model?

a.
The stock’s returns are normally distributed.
b.
The option is an American option.
c.
There are no transaction costs, taxes, or commissions.
d.
The risk-free rate exists, is constant across the life of the option, and is the same for all maturity dates.

Answer 87

b.
The option is an American option.

Question 88

Hayes Hypermarket purchases $4,562,500 in goods over a 1-year period from its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50 days. If Hayes chooses to pay on time but not to take the discount, what is the average level of the company’s accounts payable, and what is the approximate annual cost of its trade credit? (Assume a 365- day year.)

a.
$208,333; 14.90%
b.
$625,000; 14.90%
c.
$416,667; 14.90%
d.
$625,000; 21.28%
e.
$437,500; 21.28%
f.
$437,500; 14.90%
g.
$416,667; 21.28%

Answer 88

d.
$625,000; 21.28%

Question 89

Which of the following is true for a make-or-buy decision?

a.
Depreciation on equipment used in making the component and having no other use is the critical factor in the decision.
b.
Opportunity costs are irrelevant.
c.
The company should make the component if the purchase price is less than the per-unit variable cost to make the component.
d.
The reliability of the outside supplier of the component is unimportant to the decision as this is not quantifiable.
e.
The quality of the component from the outside supplier is relevant in eventually making the decision.

Answer 89

e.
The quality of the component from the outside supplier is relevant in eventually making the decision.

Question 90

Using CAPM, the required rate of return for a firm with a beta of 1.25 when the market risk premium is 14% and the risk-free rate is 6% is:

a.
16%
b.
17.5%
c.
23.5%
d.
14%
e.
7.5%

Answer 90

c.
23.5%

Question 91

DEF Corporation breaks even at P60,000 sales and earns P6,000 at P70,000 sales. Which of the following is true?

a.
Contribution margin is 60% of sales.
b.
The selling price per unit is P6.
c.
Profit at sales of P80,000 would be P16,000.
d.
Fixed costs are P4,000.
e.
The selling price per unit is P5.
f.
Contribution margin is 50% of sales.

Answer 91

a.
Contribution margin is 60% of sales.

Question 92

Which of the following increases contribution margin ratio the most for a company currently earning a profit?

a.
A 10% increase in selling price.
b.
A 10% decrease in variable cost per unit.
c.
A 10% decrease in fixed cost per unit.
d.
A 10% decrease in fixed costs.

Answer 92

b.
A 10% decrease in variable cost per unit.

Question 93

Which good would be selected in a decision that involves the utilization of a limited resource?

a.
the good that uses the least amount of limited resource per unit.
b.
the good with the highest contribution margin per unit.
c.
the good with the highest contribution margin per unit of the limited resource.
d.
the good with the lowest variable cost per unit.
e.
the good with the lowest total cost per unit.

Answer 93

c.
the good with the highest contribution margin per unit of the limited resource.

Question 94

Ron Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year
3. What is the firm’s total corporate value, in millions?

Year 1 FCF -P15.0
2 3
P40.0

a.
P331.06
b.
P386.13
c.
P348.48
d.
P314.51
e.
P366.82

Answer 94

b.
P386.13

Question 95

Powell Industries deals with customers throughout the country and is attempting to more efficiently collect its accounts receivable. A major bank has offered to develop and operate a lockbox system for Powell at a cost of $90,000 per year. Powell averages 300 receipts per day at an average of $2,500 each. Its short-term interest cost is 6% per year. Using a 365-day year, what reduction in average collection time would be needed in order to justify the lockbox system?

a.
1.2 Days
b.
1.25 days
c.
1.5 Days
d.
1 day
e.
2 days
f.
0.67 days

Answer 95

e.
2 days

Question 96

Preferred stockholders’ claims on the assets, as well as income of a firm come <blank> those of creditors <blank> those of common shareholders.</blank></blank>

a.
after; and also after
b.
before; and also before
c.
equal to; and equal to
d.
after; but before

Answer 96

d.
after; but before

Question 97

Given that the spot rate is ¥106.74/$ and the 180-day forward quote is ¥100.37/$, we can say which of the following?

a.
The U.S. dollar is at a forward premium against the Yen.
b.
The Yen is at a forward discount against the U.S. dollar.
c.
The Yen is at a forward premium against the U.S. dollar.
d.
The U.S. dollar is at neither a premium nor a discount against the Yen.

Answer 97

c.
The Yen is at a forward premium against the U.S. dollar.

Question 98

Knedler Corporation is preparing a bid for a special order that would require 720 liters of material C01D. The company already has 200 liters of this raw material in stock that originally cost $9.90 per liter. Material C01D is used in the company’s main product and is replenished on a periodic basis. The resale value of the existing stock of the material is $9.60 per liter. New stocks of the material can be readily purchased for $10.20 per liter. What is the relevant cost of the 720 liters of the raw material when deciding how much to bid on the special order?

a.
$7,272
b.
$7,344
c.
$7,224
d.
$6,972
e.
$7,232
f.
$7,284
g.
$6,912

Answer 98

b.
$7,344

Question 99

Expected annual use of a particular raw material is 2,000,000 units, and the standard order size is 10,000 units. The invoice cost of each unit is $500, and the cost to place one purchase order is $80. Safety stocks of 2,500 units are maintained. The average inventory is:

a.
5,000 units.
b.
10,000 units.
c.
12,500 units
d.
1,000,000 units.
e.
7,500 units.

Answer 99

e.
7,500 units.

Question 100

A consultant recommends that a company hold funds for the following two reasons:
Reason #1: Cash is essential in the day-to-day needs of the business.
Reason #2: Prospects for buying at a low price may appear later during the year.
The cash balances used to address the reasons given above are correctly classified as Reason #1 and Reason #2 respectively

a.
Precautionary balances; Precautionary balances
b.
Speculative balances; Speculative balances
c.
Precautionary balances; Speculative balances
d.
Transactional balances; Speculative balances
e.
Precautionary balances; Transactional balances
f.
Speculative balances; Transactional balances
g.
Transactional balances; Precautionary balances
h.
Speculative balances; Precautionary balances

Answer 100

d.
Transactional balances; Speculative balances