Q&A Hero

Q: Assume Meyer Corporation is 100 percent equity financed. Calculate the return on equity, given the following information: (1) Earnings before taxes = $1,500; (2) Sales = $5,000; (3) Dividend payout ratio = 60%; (4) Total assets turnover = 2.0; (5) Applicable tax rate = 30%. a. 25% b. 30% c. 35% d. 42% e. 50%

Q: In a long-run equilibrium in a monopolistically competitive industry that produces information products, revenues are equal to the costs of developing, producing, and selling the product.A) total B) fixed C) variable D) marginal

Q: You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36. What is the return on equity (ROE)? a. 14.0% b. 12.5% c. 15.0% d. 2.5% e. 13.5%

Q: All of the following are assumptions of monopolistic competition EXCEPTA) many buyers and sellers. B) homogeneous product.C) easy entry of new firms in the long run. D) profit-maximizing behavior.

Q: A firm has a debt ratio of 40 percent. Currently, it has interest expense of $500,000 on $5,000,000 of total debt outstanding, and a tax rate of 40 percent. If the firm's ROA is 6 percent, by how many percentage points is the firm's ROE greater than its ROA? a. 0.0% b. 4.0% c. 5.8% d. 7.4% e. 10.0%

Q: What is true of the price elasticity of demand faced by a monopoly firm? A) Demand is inelastic. B) Demand is more elastic at lower prices and more inelastic at higher prices. C) Demand is perfectly elastic because the monopolist has no competition. D) Demand becomes more elastic as the range of imperfect substitutes expands.

Q: A firm has total assets of $1,000,000 and a debt ratio of 30 percent. Currently, it has sales of $2,500,000, total fixed costs of $1,000,000, and EBIT of $50,000. If the firm's before-tax cost of debt is 10 percent and the firm's tax rate is 40 percent, what is the firm's ROE? a. 1.7% b. 2.5% c. 6.0% d. 8.3% e. 9.8%

Q: In a perfectly competitive industry, which of the following is a market signal to resource owners? A) Economic profits B) Quality of goods C) The level of exports in the country D) The level of subsidies the industry receives

Q: Selzer Inc. sells all its merchandise on credit. It has a profit margin of 4 percent, days sales outstanding equal to 60 days, receivables of $150,000, total assets of $3 million, and a debt ratio of 0.64. What is the firm's return on equity (ROE)? a. 7.1% b. 33.3% c. 3.3% d. 71.0% e. 8.1%

Q: Why is the demand curve horizontal for a perfectly competitive firm?

Q: A fire has destroyed a large percentage of the financial records of the Carter Company. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18 percent. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what was the return on assets (ROA)? a. 10.8% b. 0.8% c. 1.25% d. 12.6% e. Insufficient information.

Q: Marginal cost is equal toA) change in total cost divided by change in output.B) change in total variable cost divided by change in output. C) total variable cost divided by quantity of output.D) Both A and B are correct.

Q: The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)? a. 8.0% b. 10.0% c. 12.0% d. 16.7% e. 20.0%

Q: Which legal claim comes with the most preferential treatment in the payment of dividends?A) Common stock B) Preferred stock C) Bond D) Reinvestment

Q: Cannon Company has enjoyed a rapid increase in sales in recent years, following a decision to sell on credit. However, the firm has noticed a recent increase in its collection period. Last year, total sales were $1 million, and $250,000 of these sales were on credit. During the year, the accounts receivable account averaged $41,664. It is expected that sales will increase in the forthcoming year by 50 percent, and, while credit sales should continue to be the same proportion of total sales, it is expected that the days sales outstanding will also increase by 50 percent. If the resulting increase in accounts receivable must be financed by external funds, how much external funding will Cannon need? a. $41,664 b. $52,086 c. $47,359 d. $106,471 e. $93,750

Q: Suppose a family-owned yogurt shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the shop areA) $24,000. B) less than $24,000.C) more than $24,000. D) $80,000.

Q: Stock price maximization should be the most important goal for the managers of a corporation. a. True b. False

Q: The average demand curve slopes downward due to all of the following EXCEPT A) the law of increasing relative costs.B) the laws of diminishing marginal utility. C) the real-income effect.D) the principle of substitution.

Q: The two major advantages of a limited liability company are flexibility of ownership structure and the ability to elect to be taxed either as a corporation or as a partnership while maintaining limited liability for the owners. a. True b. False

Q: Economists assume that people make decisions regarding consumption based on comparingA) additional units of satisfaction with additional costs.B) average satisfaction with additional costs. C) average satisfaction with average costs.D) additional units of satisfaction with average costs.

Q: In a limited liability partnership only the general partner can participate in the management of the business. a. True b. False

Q: Which of the following is NOT a factor that determines the price elasticity of demand? A) The amount that suppliers have made available B) The percentage of a consumerʹs total budget spent on the good C) The existence of substitutes D) The length of time allowed for adjustments to change in the price of the commodities

Q: Although corporations only represent 18% of the number of businesses they account for about 82% of the dollar value of sales. a. True b. False

Q: Output/HourPrivate MCMarginal BenefitExternal Marginal Costs1$10$200.20210.4018.500.40310.90170.70411.5016.501.20512.2014.001.80613.0013.002.80714.4012.004.00Use the above table. What will the output level be when external costs are internalized with a tax?A) 4 B) 5 C) 6 D) 7

Q: Actions that maximize the firm's current earnings per share will maximize the price of the firm's stock. a. True b. False

Q: Compare and contrast the two normative standards to income distribution discussed in the text: The productivity standard and the egalitarian principle.

Q: Voluntary socially responsible acts by businesses that raise costs are more likely in highly competitive industries. a. True b. False

Q: The monopsonist will employ labor to the point at which the A) marginal factor cost equals the marginal revenue product of labor. B) marginal revenue product equals the wage rate. C) marginal cost of output equals the marginal revenue. D) demand equals the supply of labor.

Q: Although over half of all corporations select the S corporation status when filing taxes, these firms generate only around 25 percent of the total revenues provided by corporations. a. True b. False

Q: For a firm in a perfectly competitive labor market,A) W > MFC. B) W < MFC. C) W > MRP. D) W = MFC.

Q: A firm's current value is related to its future growth opportunities, and corporations can attract funds more easily than unincorporated businesses to take advantage of growth opportunities. a. True b. False

Q: An increase in the productivity of labor inducesA) an increase in the demand for labor.B) an increase in the cost of labor.C) a firm to hire fewer workers since fewer workers are needed with the increase in productivity.D) a firm to offer a higher wage for workers since the workers are now more productive.

Q: In a limited partnership, the liability of the limited partners generally is restricted to the amount of funds that they have invested in the company but the general partners have unlimited liability. a. True b. False

Q: A creative response to regulations can be described asA) conforming to the letter of the law but undermining its spirit. B) totally conforming to the law.C) completely ignoring the law. D) none of the above.

Q: Most legal experts would recommend that partnership agreements should be written formal agreements filed with the secretary of state in which the partnership does business. a. True b. False

Q: Why would a member of a cartel cheat?

Q: The U.S. corporate tax rate is lower than most industrialized nations. a. True b. False

Q: There is no incentive for additional producers of an information product to enter the industry when the price charged for these products by each firm already in the industry is equal toA) marginal cost. B) average total cost.C) average fixed cost. D) average variable cost.

Q: Individual taxpayers can itemize allowed expenses if they have income of over $250,000, but they must take the standard deduction if their income is below $250,000. a. True b. False

Q: Entry into a monopolistic competitive industryA) is easy. B) is hard.C) requires governmental approval. D) requires collusion.

Q: In order to avoid double taxation and to escape the frequently higher tax rate applied to capital gains, stockholders generally prefer to have corporations pay dividends rather than to retain their earnings and reinvest the money in the business. Thus, earnings should be retained only if the firm needs capital very badly and would have difficulty raising it from external sources. a. True b. False

Q: The price elasticity of demand for a monopolistʹs product depends onA) the number and similarity of substitutes.B) the ATC of the item it produces. C) the AVC of the item it produces. D) the MC of the item it produces.

Q: Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations. a. True b. False

Q: The exiting of firms from a perfectly competitive industry occurs when A) opportunity costs cannot be covered. B) P = ATC. C) accounting profit is less than economic profit. D) MR equals MC.

Q: The disadvantages associated with a proprietorship are similar to those under a partnership. One exception to this is due to the formal nature of the partnership agreement and the commitment of the partners' personal assets. As a result, partnerships do not have difficulty raising large amounts of capital. a. True b. False

Q: Describe and explain how a perfectly competitive firmʹs demand curve is found.

Q: Although firms have ethical responsibilities to their employees and customers, they do not have a parallel social responsibility because socially responsible actions involve costs without corresponding benefits which are not wealth maximizing. a. True b. False

Q: Marginal cost equalsA) TC/Q. B) TVC/Q.C) TFC/Q. D) change in total cost/change in output.

Q: When considering the risk of foreign investment, higher risk could arise from exchange rate risk and political risk while lower risk might result from international diversification. a. True b. False

Q: Which legal claim has a fixed annual coupon payment?A) Common stock B) Preferred stock C) Bond D) Reinvestment

Q: Because political risk is seldom negotiable, it cannot be explicitly addressed in multinational corporate financial analysis. a. True b. False

Q: Which of the following statements is FALSE?A) A correct measure of a firmʹs economic cost includes both accounting and opportunity cost.B) The accounting profit earned by a firm will always be less than its economic profit.C) The major difference between accounting and economic profit is that accounting profit does not reflect the opportunity cost of using resources.D) The accounting profit of a firm is its total revenue minus total explicit costs.

Q: Legal and economic differences among countries, although important, do not pose significant problems for most multinational corporations when they coordinate and control worldwide operations of subsidiaries. a. True b. False

Q: Given the price of a good or service, what determines how much a person is willing to pay for that good or service?A) marginal utility B) total utilityC) the substitution effect D) average utility

Q: Multinational managerial finance requires that financial analyses consider the effects of changing currency values. a. True b. False

Q: A rational consumer will NEVER purchase a product when itsA) marginal utility is negative.B) total utility is increasing at a decreasing rate. C) marginal utility is decreasing.D) total utility is decreasing at an increasing rate.

Q: In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by groups who are more aligned with stockholder interests. a. True b. False

Q: Suppose two goods are perfect substitutes. The price elasticity of demand of one of the goods isA) 0. B) 1. C) 1000. D) infinity.

Q: The fact that a proprietorship, as a business, pays no corporate income tax and that it is easily and inexpensively formed are often cited as key advantages to that form of business. a. True b. False

Q: Output/HourPrivate MCMarginal BenefitExternal Marginal Costs1$10$200.20210.4018.500.40310.90170.70411.5016.501.20512.2014.001.80613.0013.002.80714.4012.004.00Use the above table. What will the price be before external costs are internalized with a tax?A) $14 B) $13 C) $12.20 D) $1.80

Q: Interest and dividends paid by a corporation are considered to be deductible operating expenses, hence they decrease the firm's tax liability. a. True b. False

Q: Explain the two theories of desired income distribution: the egalitarian principle and the productivity standard.

Q: If the tax laws stated that $0.50 out of every $1.00 of interest paid by a corporation was allowed as a tax-deductible expense, it would probably encourage companies to use more debt financing than they presently do, other things held constant. a. True b. False

Q: In the above figure, the monopsonist will employA) L2 at a wage of W2. B) L2 at a wage of W3. C) L1 at a wage of W1. D) L1 at a wage of W3.

Q: The fact that a percentage of the interest income received by one corporation is excluded from taxable income has encouraged firms to use more debt financing relative to equity financing. a. True b. False

Q: A profit-maximizing firm will hire workers up to the point at whichA) MRP < MFC. B) MRP = MFC. C) MRP > MFC. D) MRP = MPP.

Q: Under our current tax laws, when investors pay taxes on their corporate dividend income, they are being subjected to a form of double taxation. a. True b. False

Q: An increase in product price implies thatA) the firmʹs marginal factor cost will increase.B) the wage rate the firm pays will increase. C) the firmʹs demand for labor increases.D) the firmʹs demand for labor decreases.

Q: If a firm's managers want to maximize stock price it is in their best interests to operate efficient, low-cost plants, develop new and safe products that consumers want, and maintain good relationships with customers, suppliers, creditors, and the communities in which they operate. a. True b. False

Q: Which of the following statements can correctly be made about social regulation?I. Extensive social regulation may have an anticompetitive effect.II. The benefits of social regulation are easier to measure than are the costs of social regulation.A) I only B) II only C) Both I and II D) Neither I nor II

Q: The goal of maximizing stock price is a detriment to society in that few of the actions that result in maximization of stock price also benefit society. a. True b. False

Q: What are the main characteristics that make it more likely for a cartel to enforce agreements among participating members?

Q: Normal profits are those that result in rates of return that are just sufficient to attract new capital in financial markets. a. True b. False

Q: If the producer of an information product engages in marginal cost pricing, it earnsA) a normal profit. B) an economic loss.C) zero economic profits. D) positive economic profits.

Q: An agency problem exists between stockholders and managers. A second agency problem arises between stockholders and creditors. a. True b. False

Q: The theory of monopolistic competition was developed in two separate models byA) Adam Smith and David Ricardo.B) John Kenneth Galbraith and John Maynard Keynes. C) Edward Chamberlin and Joan Robinson.D) Roger Leroy Miller and Paul Samuelson.

Q: If a firm's stock price falls during the year, this indicates that the firm's managers are not acting in the shareholders' best interest. a. True b. False

Q: The profit-maximizing monopolist will operate in a price range over whichA) demand is elastic.B) demand is inelastic.C) the price elasticity of demand is less than 1. D) supply is elastic.

Q: Performance shares are dollar bonuses awarded to managers on the basis of corporate performance. a. True b. False

Q: If a perfect competitor faces P = ATC in the long run, the firm willA) earn economic profits. B) earn economic losses.C) leave the industry. D) remain in the industry.