Q&A Hero

Q: The financial breakeven point for a firm is defined as the level of ____ that produces ____ equal to zero. a. sales; EBIT. b. sales; gross profit. c. EPS; sales. d. gross profit; EBIT. e. EBIT; EPS.

Q: The three primary sources of corporate funds are A) banks, friends, and family. B) government, other corporations, and the central bank. C) investment banks, brokerages, and insurance companies. D) stocks, bonds, and reinvestment of profits.

Q: In considering economic profit in a market economy, it is correct to say thatA) there should never be any economic profit.B) economic profit will only occur, even in the short run, as a result of imperfect competition. C) economic profit performs an important function in allocating resources to their most highly valued uses.D) economic profit tends to reduce the production efficiency of the economy, leading to wasted resources.

Q: Which of the following is a key determinant of financial leverage? a. Level of debt. b. Technology. c. Labor costs. d. Amount of fixed assets used by the firm. e. Variable cost of goods sold.

Q: The degree of financial leverage for ABC Inc. is 2.5, and the degree of financial leverage for XYZ Corporation is 1.5. According to this information, which firm is considered to have greater financial risk? a. ABC Inc. b. XYZ Corporation. c. The degree of financial leverage is not a measure of financial risk, so it is not possible to tell which firm has the greater financial risk given the above information. d. To determine which firm has the greater financial risk, we need to know the operating income (NOI or EBIT) of each firm. XYZ Corporation would have less financial risk if its operating income is at least twice that of ABC Inc. e. None of the above is a correct answer.

Q: The fact that the price of diamonds is higher than the price of waterA) cannot be explained by behavioral economics or consumer choice theory.B) is an outcome of irrational behavior in consumer choice theory.C) can be explained only by behavioral economics but not by consumer choice theory.D) can be explained as the outcome of a consumer optimum in consumer choice theory.

Q: The degree of operating leverage for ABC Inc. is 3.5, and the degree of operating leverage for XYZ Corporation is 7.0. According to this information, which firm is considered to have greater business risk? a. ABC Inc. b. XYZ Corporation. c. The degree of operating leverage is not a measure of business risk, so it is not possible to tell which firm has the greater business risk given the above information. d. To determine which firm has the greater business risk, we need to know the operating income (NOI or EBIT) of each firm. XYZ Corporation would have less business risk if its operating income is at least twice that of ABC Inc. e. None of the above is a correct answer.

Q: Utility analysis is the analysis ofA) the formation of tastes and preferences.B) the differences of tastes and preferences across individuals.C) the consumption decisions of people based on utility maximization.D) how consumers determine the utility they receive from consumption.

Q: Which of the following is a key determinant of operating leverage? a. Level of debt. b. Physical location of production facilities. c. Cost of debt. d. Technology. e. Capital structure.

Q: When the consumer spends a large portion of her income on a good, demand will beA) elastic.B) unit-elastic. C) inelastic.D) elastic, unit-elastic or inelastic depending upon supply.

Q: Assume a portion of a firm's long-term funds includes either debt or preferred stock. Which of the following statements is correct? a. The firm must possess operating leverage, which means that a change in net income will result in a greater percentage change in earnings before interest and taxes (EBIT). b. The firm has financial leverage, which means that a change in sales will result in a greater percentage change in EBIT. c. The firm has financial leverage, which means that a change in EBIT will result in a greater percentage change in earnings per share (EPS). d. The firm doesn't have leverage, because leverage is created through the use of common equity financing only. e. None of the above is a correct answer.

Q: The government is considering levying a tax on the pollution generated from two electric power plants (Plant A and Plant B). Plant A is located in a city with a high density of population, and Plant B is located in the rural area with a low density of population. The government shouldA) levy the same tax per unit of pollution on both plants.B) levy a higher tax per unit of pollution on Plant A because of its higher economic damage. C) levy a higher tax per unit of pollution on Plant B because of its lower economic damage. D) tax only Plant A but not Plant B because Plant B generates less revenue.

Q: Which of the following statements is correct? a. One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income. b. The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast. c. Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance. d. All else equal, if a firm operates at full capacity, the greater its payout ratio, the less additional funds that will be needed for a particular growth in sales. e. The projected balance sheet forecasting method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Q: Social Security is a pure transfer program becauseA) it transfers funds from current workers to the poor.B) the government transfers funds from middle -income workers to welfare recipients. C) current payroll taxes are used to pay the eligible retirees.D) the government subsidizes the medical bill of the poor.

Q: The projected balance sheet forecasting method produces accurate results unless which of the following condition(s) is (are) present? a. Fixed assets are "lumpy." b. Strong economies of scale are present. c. Excess capacity exists because of a temporary recession. d. Answers a, b, and c all make the projected balance sheet method inaccurate. e. Answers a and c make the projected balance sheet method inaccurate, but, as the text explains, the assumption of increasing economies of scale is built into the projected balance sheet method.

Q: When there is only one buyer in the market, A) a closed shop exists.B) a monopsony exists.C) then the market will be perfectly competitive.D) the supply curve for the good will be perfectly elastic.

Q: The projected balance sheet method of forecasting is based on which of the following assumptions? a. All balance sheet accounts are tied directly to sales. b. Most balance sheet accounts are tied directly to sales. c. The current level of total assets is optimal for the current sales level. d. Answers a and c above. e. Answers b and c above.

Q: When a firm has maximized profits, A) it has also minimized total costs.B) the marginal product of each input is also maximized.C) the marginal physical product is greater than the input price for all inputs. D) its marginal cost is zero.

Q: Determine the increase or decrease in cash for Rinky Supply Company for last year, given the following information. (Assume no other changes occurred during the past year.) Decrease in marketable securities = $25 Increase in accounts receivables = $50 Increase in notes payable = $30 Decrease in accounts payable = $20 Increase in accrued wages and taxes = $15 Increase in inventories = $35 Retained earnings = $ 5 a. −$50 b. +$40 c. −$30 d. +$20 e. −$10

Q: The change in output resulting from the addition of one more worker isA) marginal physical product. B) marginal revenue product.C) average physical product. D) average revenue product.

Q: According to the capture hypothesis, it appears that regulators eventually end upA) adopting policies that benefit the firms being regulated.B) adopting policies that benefit consumers at the expense of the regulated firms. C) adopting policies that benefit no one.D) satisfying neither producers nor consumers, but striving to control as much as possible.

Q: Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio? a. 2.4 b. 3.4 c. 3.6 d. 4.0 e. 5.0

Q: 5 = (CA − $100,000)/(CA/3.0).

Q: When there is a tendency for a particular product to fall out favor with additional consumers because other consumers have chosen not to purchase the product,A) negative market feedback occurs. B) positive market feedback occurs. C) the tit-for-tat strategy will begin. D) the network effect will increase.

Q: 5 = (CA − $100,000)/CL

Q: Average fixed cost for an information product wouldA) first decrease and then increase as quantity increases.B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases.

Q: Nolan Inc. has cost of goods sold of $1,000,000 and an inventory turnover of 10.0. The firm's current ratio is 3.0, while its quick ratio is 2.5. What are Nolan's current assets? a. $200,000 b. $300,000 c. $400,000 d. $500,000 e. $600,000

Q: The meaning of interdependence in a monopolistically competitive market isA) that it is difficult for firms to get together to collude.B) that products produced by firms will be good substitutes.C) that firms will not take into account the reaction of rival firms. D) that price rigging commonly occurs.

Q: A firm has total interest charges of $10,000 per year, sales of $1 million, a tax rate of 40 percent, and a net profit margin of 6 percent. What is the firm's times-interest-earned ratio? a. 16 times b. 10 times c. 7 times d. 11 times e. 20 times

Q: A privately owned monopoly will NEVER produce along a range of output for whichA) the demand curve is elastic.B) the demand curve is inelastic.C) the price elasticity of demand is greater than 1. D) the price elasticity of supply is greater than 1.

Q: 27 $2.50 = $18.175 = $18.18 per share.

Q: If an industryʹs long-run per-unit costs decrease as its output increases thenA) the firmʹs long-run economic profits must be less than zero. B) the firm is most likely a decreasing-cost industry.C) the firm is most likely an increasing -cost industry. D) the firm is most likely a constant-cost industry.

Q: Makeover Inc. believes that at its current stock price of $16.00 the firm is undervalued in the market. Makeover plans to repurchase 2.4 million of its 20 million shares outstanding. The firm's managers expect that they can repurchase the entire 2.4 million shares at the expected equilibrium price after repurchase. The firm's current earnings are $44 million. If management's assumptions hold, what is the expected market price after repurchase? a. $16.00 b. $17.26 c. $18.18 d. $20.00 e. $24.40

Q: In the above figure, at the profit-maximizing rate of production for the perfectly competitive firm total revenue isA) $100. B) $70. C) $30. D) $130.

Q: Ducheyne Electric recently declared a 15 percent stock dividend. On the date of the stock dividend Ducheyne had 16 million shares outstanding priced at $46 per share in the market. An accounting entry was required on the balance sheet transferring some retained earnings to the common stock account. If retained earnings were $280 million prior to the transaction, what was the dollar amount of retained earnings after the transfer? a. $280.0 million b. $110.4 million c. $20 million d. $277.6 million e. $169.6 million

Q: Refer to the above table. What are total fixed costs at an output of 3 units?A) $90 B) $120 C) $150 D) $270

Q: Velcraft Company has 20,000,000 shares of common stock authorized, but to date, has only 12,000,000 shares outstanding, each with a $1.00 par value. The company has $24,000,000 in additional paid-in capital and retained earnings are $96,000,000. What is Velcraft's current book value per share? a. $1.00 b. $3.00 c. $11.00 d. $6.60 e. $9.00

Q: A person who is willing to bear more risk will buyA) common stock. B) preferred stock.C) bonds. D) government bonds.

Q: Culver Inc. has earnings after interest but before taxes of $300. The company's before-tax times-interest-earned ratio is 7.00. Calculate the company's interest charges. a. $42.86 b. $50.00 c. $40.00 d. $60.00 e. $57.93

Q: In comparing accounting profit with economic profit, we generally find thatA) accounting profit is less than economic profit.B) economic profit and accounting profit are the same in the short run. C) accounting profit is greater than or equal to economic profit.D) economic profit exceeds accounting profit by the amount of opportunity costs.

Q: A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA? a. 8.4% b. 10.9% c. 12.0% d. 13.3% e. 15.1%

Q: Observations of violations of consumer optimum predicted by consumer choice theory could provide support forI. utility analysisII. bounded rationalityIII. behavioral economicsA) I only. B) III only. C) both I and II. D) both II and III.

Q: If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)? a. $194,444 b. $57,143 c. $5,556 d. $97,222 e. $285,714

Q: Assuming that the marginal utility of the first four pieces of candy was 30, 28, 24, and 18 respectively, how much total utility was derived from eating the first three pieces of candy?A) 58 B) 82 C) 54D) 100

Q: Other things being equal, demand is more elastic the A) less expensive the good. B) shorter the time period for adjustment. C) larger the percentage of a total budget that a family spends on the good. D) more unique the good is.

Q: You are given the following information: Stockholders' equity = $1,250; price/earnings ratio = 5; shares outstanding = 25; market/book ratio = 1.5. Calculate the market price of a share of the company's stock. a. $33.33 b. $75.00 c. $10.00 d. $166.67 e. $133.32

Q: All of the following are choices for the polluter when faced with additional costs to abate the externality EXCEPTA) ignore the government regulations. B) install pollution abatement equipment.C) reduce the pollution-causing activity. D) pay the price to pollute.

Q: The Charleston Company is a relatively small, privately owned firm. Last year the company had after-tax income of $15,000, and 10,000 shares were outstanding. The owners were trying to determine the market value for the stock, prior to taking the company public. A similar firm which is publicly traded had a price/earnings ratio of 5.0. Using only the information given, estimate the market value of one share of Charleston's stock. a. $10.00 b. $7.50 c. $5.00 d. $2.50 e. $1.50

Q: Pepsi Corporation's current ratio is 0.5, while Coke Company's current ratio is 1.5. Both firms want to "window dress" their coming end-of-year financial statements. As part of their window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Which of the statements below best describes the actual results of these transactions? a. The transactions will have no effect on the current ratios. b. The current ratios of both firms will be increased. c. The current ratios of both firms will be decreased. d. Only Pepsi Corporation's current ratio will be increased. e. Only Coke Company's current ratio will be increased.

Q: The Social Security Fund is designed as A) a pay-as-you-go system. B) an investment portfolio that individual contributors can make periodic payments into. C) an account that allows periodic withdrawals by contributors. D) an individual account with a federal reserve bank.

Q: Which of the following statements is correct? a. If Company A has a higher debt ratio than Company B, then we can be sure that A will have a lower times-interest-earned ratio than B. b. Suppose two companies have identical operations in terms of sales, cost of goods sold, interest rate on debt, and assets. However, Company A uses more debt than Company B; that is, Company A has a higher debt ratio. Under these conditions, we would expect B's profit margin to be higher than A's. c. The ROE of any company which is earning positive profits and which has a positive net worth (or common equity) must exceed the company's ROA. d. Statements a, b, and c are all true. e. Statements a, b, and c are all false.

Q: A monopsonist isA) a firm with monopoly power in the local area. B) a firm that has a unionized labor force.C) a single seller of an input. D) a single buyer of an input.

Q: Borg Security Systems is considering the sale of 12,000 shares of stock to finance development of a new security product. The firm has 40,000 shares of common stock outstanding, par value of $1.00 per share. The firm has $60,000 in additional paid-in capital and $80,000 in retained earnings. Borg's investment bankers estimate that new shares will bring in $5.15 per share. If Borg goes ahead with the new stock issue, what will be the change in book value per share? a. −$1.00 b. +$0.15 c. +$0.56 d. +$1.00 e. $0

Q: A perfectly competitive firm is hiring variable resources M and N. It will minimize total costsA) MRPm/MFCm = MRPn/MFCn. B) MRPm ∗ MFCm = MRPn ∗ MFCn.C) Pm/MPPm = Pn/MPPn. D) MPPm/Pm = MPPn/Pn.

Q: Micromain Company has 10,000,000 shares of common stock authorized and 8,000,000 shares outstanding, each with a $1.00 par value. The firm's additional paid-in capital account has a balance of $18,000,000. The previous year's retained earnings account was $124,000,000. In the year just ended, Micromain generated net income of $16,000,000 and the firm has a dividend payout ratio of 40 percent. What will Micromain's book value per share be when based on the final year-end balance sheet? a. $20.75 b. $15.00 c. $15.96 d. $19.95 e. $18.75

Q: Sam, who owns a carpentry shop, discovered that with 4 laborers he could produce 18 cabinets per day. With 5 laborers he produced 25 cabinets and with 6 laborers he produced 36 cabinets. What was the MPP of the 6th laborer?A) 11 cabinets B) 7 cabinets C) 36 cabinets D) 9 cabinets

Q: Which of the following statements is correct? a. The statement of cash flows should include changes in summary accounts, such as current assets and current liabilities, as well as changes in all individual accounts. b. If a firm sells equity to reduce long-term bonds, this is a capital financing transaction and does not appear on the statement of cash flows. However, if the firm sells equity in order to purchase assets, this transaction would be included in the statement of cash flows. c. Net income is normally the firm's primary operating cash flow, but changes in accounts payable, accounts receivable, inventories and accruals are also classified as operating cash flows. d. Each change on the balance sheet results from one of two types of transactions, either financing activities, such as issuing or retiring new stock or debt, or long-term investment, such as buying and selling assets. e. The change in the firm's liquidity position is measured by how much greater a firm's sources of funds are than its uses of funds.

Q: According to the capture hypothesis, A) regulators eventually support the views of consumers instead of the firms or the taxpayers, regardless of the reasons why the regulatory agency was established. B) regulators support the view of the regulated firms all along because that is the reason the regulatory agency was established. C) regulators eventually support the views of the regulated firms instead of the consumers or taxpayers, regardless of why the regulatory agency was established. D) regulators eventually support the views of either the firms or the consumers, but at the expense of the taxpayers, regardless of the reasons why the regulatory agency was established.

Q: As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt ratio TIE ratio a. 0.5 0.5 0.33 b. 1.0 1.0 0.50 c. 1.5 1.5 0.50 d. 2.0 1.0 0.67 e. 2.5 0.5 0.71

Q: When there is a tendency for a particular product to come into favor with additional consumers because other consumers have chosen to purchase the product,A) negative market feedback occurs. B) positive market feedback occurs. C) there is no dominant strategy. D) a price war must result.

Q: Which of the following statements is correct? a. In the text, depreciation is regarded as a use of cash because it reduces fixed assets, which then must be replaced. b. If a company uses some of its cash to pay off short-term debt, then its current ratio will always decline, given the way the ratio is calculated, other things held constant. c. During a recession, it is reasonable to think that most companies' inventory turnover ratios will change while their fixed asset turnover ratios will remain fairly constant. d. During a recession, we can be confident that most companies' DSOs (or ACPs) will decline because their sales will probably decline. e. Each of the above statements is false.

Q: Average total cost for an information product wouldA) first decrease and then increase as quantity increases.B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases.

Q: Which of the following actions will cause an increase in the quick ratio in the short run? a. $1,000 worth of inventory is sold, and an account receivable is created. The receivable exceeds the inventory by the amount of profit on the sale, which is added to retained earnings. b. A small subsidiary which was acquired for $100,000 two years ago and which was generating profits at the rate of 10 percent is sold for $100,000 cash. (Average company profits are 15 percent of assets.) c. Marketable securities are sold at cost. d. All of the above. e. Answers a and b above.

Q: In a monopolistically competitive market, having a large number of firms in the market means thatA) no firm attempts to take into account the reaction of rival firms.B) individual firms will have a large portion of the market giving them monopoly power. C) firms will get together and collude because this will be the only way to earn monopoly profits.D) firms will cooperate with each other to drive competitors out of the market.

Q: Recently the M&M Company has been having problems. As a result, its financial situation has deteriorated. M&M approached the First National Bank for a badly needed loan, but the loan officer insisted that the current ratio (now 0.5) be improved to at least 0.8 before the bank would even consider granting the credit. Which of the following actions would do the most to improve the ratio in the short run? a. Using some cash to pay off some current liabilities. b. Collecting some of the current accounts receivable. c. Paying off some long-term debt. d. Selling some of the existing inventory at cost. e. Purchasing additional inventory on credit (accounts payable).

Q: When the number of substitutes increase, the demand curve for a monopolist willA) not change. B) become more elastic.C) become more inelastic. D) become steeper.

Q: A firm's current ratio has steadily increased over the past 5 years, from 1.9 five years ago to 3.8 today. What would a financial analyst be most justified in concluding? a. The firm's fixed assets turnover probably has improved. b. The firm's liquidity position probably has improved. c. The firm's stock price probably has increased. d. Each of the above is likely to have occurred. e. The analyst would be unable to draw any conclusions from this information.

Q: If an industryʹs long-run per-unit costs increase as its output increases thenA) the firmʹs long-run economic profits must be greater than zero. B) the firm is most likely a decreasing-cost industry.C) the firm is most likely an increasing -cost industry. D) the firm is most likely a constant-cost industry.

Q: In the above figure, the profit-maximizing rate of production for the perfectly competitive firm isA) 5. B) 10.C) 13.D) none of the above.

Q: Which of the following statements is most correct? a. Cash flows and accounting profit are not at all related since no common elements are used in the calculation of either individual measure. b. The debt ratio measures that portion of fixed assets which is supported by common equity. c. High inflation can seriously distort firms' balance sheets, and since inflation also affects depreciation and inventory costs, profits can also be affected. d. Financial statement analysis is important from the investor's viewpoint in assessing past performance and predicting future performance. However, from a management perspective, financial statement analysis measures history and is merely a reporting requirement. It is not useful for planning future actions because it does not help determine future cash flows. e. When an action is taken at one point in time, but its full effects cannot be accurately measured until later, this has the potential to affect the firm's financial statements. However, as long as the firm keeps the same standard accounting period this timing problem can be avoided.

Q: Which of the following statements is correct? a. The annual report contains four basic financial statements: the income statement; balance sheet; statement of cash flows; and statement of changes in long-term financing. b. Although the annual report is geared toward the average stockholder, it represents financial analysts' most complete source of financial information about the firm. c. The key importance of annual report information is that it is used by investors when they form their expectations about the firm's future earnings and dividends and the riskiness of those cash flows. d. The annual report provides no relevant information for use by financial analysts or by the investing public. e. None of the above statements is correct.

Q: Refer to the above table. What are total costs at an output of 2 units?A) $50 B) $100 C) $150 D) $200

Q: Which of the following statements is correct? a. If two firms pay the same interest rate on their debt and have the same rate of return on assets, and if that ROA is positive, the firm with the higher debt ratio will also have a higher rate of return on common equity. b. One of the problems of ratio analysis is that the relationships are subject to manipulation. For example, we know that if we use some of our cash to pay off some of our current liabilities, the current ratio will always increase, especially if the current ratio is weak initially. c. Generally, firms with high profit margins have high asset turnover ratios, and firms with low profit margins have low turnover ratios; this result is exactly as predicted by the Du Pont equation. d. Firms A and B have identical earnings and identical dividend payout ratios. If Firm A's growth rate is higher than that of Firm B, Firm A's P/E ratio must be greater than Firm B's P/E ratio. e. None of the above statements is correct.

Q: The more profits are reinvested into the firm, theA) less there is available to distribute to bondholders. B) less there is available to distribute to stockholders.C) more the firm will be able to raise in sales of new issues to stock.D) more bonds the firm will sell in order to pay their required dividends to preferred stockholders.

Q: Accounting profit is equal toA) total revenue minus dividends and interest. B) dividends paid.C) total revenue minus implicit costs. D) total revenue minus explicit costs.

Q: Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in sales or operating costs, then a. the company might well end up with a higher debt ratio. b. the company might well end up with a lower debt ratio. c. the company would probably end up with a higher ROE. d. the company's total asset turnover ratio would probably decline. e. none of the above is a correct statement.

Q: Which of the following statements is most correct? a. An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. b. An increase in the DSO, other things held constant, would generally lead to an increase in the total asset turnover ratio. c. An increase in the DSO, other things held constant, would generally lead to an increase in the ROE. d. In a competitive economy, where all firms earn similar returns on equity, one would expect to find lower profit margins for airlines, which require a lot of fixed assets relative to sales, than for fresh fish markets. e. It is more important to adjust the Debt/Assets ratio than the inventory turnover ratio to account for seasonal fluctuations.

Q: Use the law of diminishing marginal utility to explain the diamond -water paradox.

Q: A stock dividend will, in and of itself, affect the amounts in which of the following accounts? (Assume the stock has a par value.) a. Common stock account. b. Paid-in capital account. c. Retained earnings account. d. Cash. e. Only answers a, b, and c above.

Q: If the total utility derived from consuming three oysters was 40 utils and the total utility derived from consuming four oysters was 52 utils, what was the marginal utility derived from the consumption of the fourth oyster?A) 92 utils B) 52 utilsC) 12 utils D) It is impossible to determine.