How firms estimate their cost of capital: What proportion of the firm is financed with debt?

  1. Internal reports that review the actual impact of decisions are prepared by:

the controller

department heads

factory workers

management accountants

  1. Horizontal analysis is also known as:

trend analysis

vertical analysis

linear analysis

common size analysis

  1. Which of the following is an advantage of corporations relative to partnerships and sole proprietorships?

most common form of organization

reduced legal liability for investors

lower taxes

harder to transfer ownership

  1. Serox stock was selling for $20 two years ago. The stock sold for $25 one year ago, and it is currently selling for $28.  Serox pays a $1.10 dividend per year.  What was the rate of return for owning Serox in the most recent year? (Round to the nearest percent.)





  1. External financing needed: Jockey Company has total assets worth $4,417,665. At year-end it will have net income of $2,771,342 and pay out 60 percent as dividends. If the firm wants no external financing, what is the growth rate it can support?





  1. An unrealistic budget is more likely to result when it:

has been developed by all levels of management.

has been developed in a top down fashion.

has been developed in a bottom up fashion.

is developed with performance appraisal usages in mind.

  1. Which of the following financial statements is concerned with the company at a point in time?

balance sheet

retained earnings statement

statement of cash flows

income statement

  1. Next year Jenkins Traders will pay a dividend of $3.00.  It expects to increase its dividend by $0.25 in each of the following three years.  If their required rate of return if 14 percent, what is the present value of their dividends over the next four years?





  1. An activity that has a direct cause-effect relationship with the resources consumed is a(n):

product activity

cost driver

cost pool

overhead rate

  1. The major element in budgetary control is:

the approval of the budget by the stockholders

the valuation of inventories

the preparation of long-term plans

the comparison of actual results with planned objectives.

  1. Tule Time Comics is considering a new show that will generate annual cash flows of $100,000 into the infinite future. If the initial outlay for such a production is $1,500,000 and the appropriate discount rate is 6 percent for the cash flows, then what is the profitability index for the project?





  1. How firms estimate their cost of capital: The WACC for a firm is 13.00 percent. You know that the firm’s cost of debt capital is 10 percent and the cost of equity capital is 20%. What proportion of the firm is financed with debt?





  1. The most important information needed to determine if companies can pay their current obligations is the:

relationship between current assets and current liabilities

relationship between short-term and long-term liabilities

projected net income for next year

net income for this year

  1. Process costing is used when:

dissimilar products are involved

production is aimed at fulfilling a specific customer order.

the production process is continuous.

costs are to be assigned to specific jobs.

  1. A cost which remains constant per unit at various levels of activity is a:

fixed cost

mixed cost

manufacturing cost

variable cost

16.The group of users of accounting information charged with achieving the goals of the business is its:





  1. Teakap, Inc. has current assets of $1,456,312 and total assets of $4,812,369 for the year ending September 30, 2006.  It also has current liabilities of $1,041,012, common equity of $1,500,000 and retained earnings of $1,468,347. How much long-term debt does the firm have?





  1. The cash conversion cycle?

begins when the firm invests cash to purchase the raw materials that would be used to produce the goods that the firm manufactures.

estimates how long it takes on average for the firm to collect its outstanding accounts receivables balance.

begins when the firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

shows how long the firm keeps its inventory before selling it.

  1. Ajax Corp. is expecting the following cash flows – $79,000, $112,000, $164,000, $84,000, and $242,000 – over the next five years.  If the company’s opportunity cost is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)





  1. Jack Robbins is saving for a new car. He needs to have $21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar)





  1. Which of the following presents a summary of changes in a firm’s balance sheet from the beginning of an accounting period to the end of that accounting period?

the statement of net worth

the statement of cash flows

the statement of working capital

the statement of retained earnings

  1. M&M Proposition 1: Dynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock.

If Dynamo wishes to change its capital structure from 75 percent equity to 60 percent equity and use the debt proceeds to pay a special dividend to shareholders, how much debt should they use?






  1. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of time:

that has been arranged from the highest number to the lowest number.

to determine the amount and/or percentage increase or decrease that has taken place.

to determine which items are in error.

that has been arranged from the lowest number to the highest number.

  1. Jayadev Athreya has started his first job. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent.  How much will Jayadev have at the end of 45 years?





  1. Turnbull Corp. had an EBIT of $247 million in the last fiscal year.  Its depreciation and amortization expenses amounted to $84 million.  The firm has 135 million shares outstanding and a share price of $12.80. A competing firm that is very similar to Turnbull has an enterprise value/EBITDA multiple of 5.40.

What is the enterprise value of Turnbull Corp.? Round to the nearest million dollars.

$1,344 million

$453.6 million

$1,315 million

$1,787 million

  1. Firms that achieve higher growth rates without seeking external financing:

Have a low plowback ratio

are highly leveraged

have less equity and/or are able to generate high net income leading to a high ROE.

None of these

  1. In a process cost system, product costs are summarized:

on job cost sheets.

when the products are sold.

after each unit is produced.

on production cost reports.

  1. The convention of consistency refers to consistent use of accounting principles:

within industries

among accounting periods

throughout the accounting period

among firms

  1. If a company’s weighted average cost of capital is less than  the required return on equity, then the firm:

is financed with more than 50% debt

is perceived to be safe


has debt in its capital structure

  1. Your firm has an equity multiplier of 2.47.  What is the debt-to-equity ratio?





  1. The accumulation of accounting data on the basis of the individual manager who has the authority to make day-to-day decisions about activities in an area is called:

master budgeting

static reporting

responsibility accounting

flexible accounting

  1. Regatta, Inc., has six-year bonds outstanding that pay a 8.25 percent coupon rate. Investors buying the bond today can expect to earn a yield to maturity of 6.875 percent. What should the company’s bonds be priced at today? Assume annual coupon payments. (Round to the nearest dollar.)





  1. Variance reports are:

internal reports for management

SEC financial reports

external financial reports

all of these

  1. The break-even point is where:

contribution margin equals total fixed costs.

total sales equal total variable costs.

total sales equal total fixed costs.

total variable costs equal total fixed costs.

  1. When a company assigns the costs of direct materials, direct labor, and both variable and fixed manufacturing overhead to products, that company is using:

operations costing

product costing

absorption costing

variable costing

  1. Which of the following is considered a hybrid organizational form?

sole proprietorship


limited liability partnership


  1. Gateway, Corp.  has an inventory turnover of 5.6.  What is the firm’s days’s sales in inventory?





  1. The process of evaluating financial data that change under alternative courses of action is called:

incremental analysis

contribution margin analysis

cost-benefit analysis

double entry analysis

  1. What decision criteria should managers use in selecting projects when there is not enough capital to invest in all available positive NPV projects?

the modified internal rate of return

the profitability index

the discounted payback

the internal rate of return

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