QBank 25-33

Adjust Lifo to Fifo

add lifo reserve to inventory

Capitalizing interest costs related to a company's construction of assets for its own use is required by: A)both IFRS and U.S. GAAP. B)IFRS only. C)U.S. GAAP only.

A both!

Three years ago, Ranchero Corporation purchased equipment for a process used in production, for ₤3 million. At the end of last year, Ranchero determined the fair value of the equipment was greater than its book value. No impairment losses have been recognized on the equipment. Assuming Ranchero follows International Financial Reporting Standards, what is the impact on its total asset turnover ratio and return on equity of reporting the value of the equipment on the balance sheet at fair value? A)Both will decrease. B)Only one will increase. C)Both will increase.

A increase value of equipment means increase in assets and thus asset turnover ratio decrease, increase in equipment also increases equity because the equation must be balanced, this means lower ROE

If the price elasticity of demand is -1.5 and the price of the product increases 2%, the quantity demanded will: A)decrease approximately 3%. B)decrease approximately 1.5%. C)decrease approximately 0.75%.

A when price elasticity is negative it means price and demand move in opposite directions absolute value 1.5 means demand will more one-and-a-half times as much as price

A reconciliation of beginning and ending carrying values for each class of property, plant, and equipment is required for firms reporting under: A)IFRS. B)U.S. GAAP. C)both U.S. GAAP and IFRS.

A IFRS more extensive disclosures,

Patch Grove Nursery uses the LIFO inventory accounting method. Maria Huff, president, wants to determine the financial statement impact of changing to the FIFO accounting method. Selected company information follows: Year-end inventory: $22,000 LIFO reserve: $4,000 Change in LIFO reserve: $1,000 LIFO cost of goods sold: $18,000 After-tax income: $2,000 Tax rate: 40% Under FIFO, the nursery's ending inventory and after-tax profit for the year would have been: FIFO ending inventory, FIFO after-tax profit A)$26,000, $2,600 B)$18,000, $2,600 C)$26,000, $1,400

A, Fifo ending: lifo ending + lifo reserve Fifo after-tax profit: Lifo after tax profit + (change in reserve(1-t))

A mechanism to discipline financial reporting quality for securities that trade in the United States that is not typically imposed on security issuers elsewhere is that: A)management must attest to the effectiveness of the firm's internal controls. B)the firm must provide a signed statement by the person responsible for preparing the financial statements. C)financial statements must be audited by an independent party.

A, signed statement about effectiveness of internal control's is required by U.S regulators that trade in U.S (but not anywhere else)

A firm determines that inventory of manufactured goods with a cost of €10 million has a net realizable value of €9 million and writes down its carrying value to this amount. One period later, the firm determines that the net realizable value of this inventory has increased to €11 million. Under IFRS, the carrying value of this inventory: A)may be revalued up to €10 million. B)must remain valued at €9 million. C)may be revalued up to €11 million.

A, under IFRS, inventory is measures at lower of cost or NRV, you may also revalue upward to the extent that reverses write-down GAAP does not do revaluations

Compared to a firm that appropriately expenses recurring maintenance costs, a firm that capitalizes these costs will report greater cash flow from: A)operating activities. B)investing activities. C)financing activities.

A, when a firm capitalizes costs, it classifies the cash outflow as CFI rather CFO

Under the first-in-first-out (FIFO) inventory valuation method, ending inventory reflects the costs of the: A)most recent purchases. B)specific units available for sale. C)earliest purchases.

A, INVENTORY

With regard to a firm's financial reporting quality, an analyst should most likely interpret as a warning sign a focus by management on an increase in the firm's: A)pro forma earnings. B)asset turnover ratios. C)cash from operations.

A, pro forma = non-GAAP measure

Assuming inventory levels remain constant during the year and prices have been stable over time, COGS would be: A)higher under LIFO than FIFO or average cost. B)the same for both LIFO and FIFO. C)higher under the average cost than LIFO or FIFO.

B

Which of the following circumstances is most likely indicative of an increase in a company's future earnings? A)Finished goods inventory increasing faster than sales. B)Work-in-process inventory increasing faster than finished goods inventory. C)Finished goods inventory increasing faster than work-in-process inventory.

B

Which of the following statements regarding zero-coupon bonds is most accurate? A)The interest expense in each period is found by applying the discount rate to the book value of debt at the end of the period. B)A company should initially record zero-coupon bonds at their discounted present value. C)Interest expense is a combination of operating and financing cash flows.

B

Based on the concept of diminishing returns, as the quantity of output increases, the short-run marginal costs of production eventually: A)rise at a decreasing rate. B)rise at an increasing rate. C)fall at a decreasing rate.

B it will EVENTUALLY move to rise at a decreasing rate, but in the short run (like the question asks) it will increase at an increasing rate

Which of the following statements best justifies analyst scrutiny of valuation allowances? A)If differences in taxable and pretax incomes are never expected to reverse, a company's equity may be understated. B)Changes in valuation allowances can be used to manage reported net income. C)Increases in valuation allowances may be a signal that management expects earnings to improve in the future.

B valuation allowance is a contra account against DTA valuation allowance has direct impact on NI so mgmt can control earnings

Slovac Company purchased a machine that has an estimated useful life of eight years for $7,500. Its salvage value is estimated at $500. What is the depreciation expense for the second year, assuming Slovac uses the double-declining balance method of depreciation? A)$1,875. B)$1,438. C)$1,406.

C

Capitalized interest costs are typically reported in the cash flow statement as an outflow from: A)operating. B)financing. C)investing.

C included as part of the cost of constructed capital asset

ID: 1205527 · Advanced Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of $600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be utilized in the foreseeable future. Deferred tax items on the balance sheet are based on a tax rate of 30%. Based only on this information, an increase in future tax rates to 35% will cause Habel's total liabilities-to-equity ratio to: A)decrease. B)remain unchanged. C)increase.

C tax base < cv = DTL $200k x 30% = $60,000 but then the tax loss carryforward of $200 leads to DTA of same amount $60,000 because they are equal, DTA and DTL increase by same amounts and therefore liabilities to equity will increase

P/B Ratio

Stock price / Book value of equity per share Stock price / (common equity/outstanding shares)

Income Tax Expense

taxes payable + change in DTL - change in DTA financial reporting

When the market rate is greater than the coupon rate, the bond is called a: A)par bond. B)discount bond. C)premium bond.

B, market rate > coupon = discount

Unit Technologies uses accrual basis for financial reporting purposes and cash accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: A)liability of $10,880. B)liability of $16,320. C)asset of $10,880.

A, here, pretax exceeds taxable income deferred tax liability of (97,500-65,500)(0.34) reporting>tax = DTL

A dance club purchases new sound equipment for $25,352. It will work for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,384 over these five years. If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3? A)$1,039. B)$2,948. C)$3,144.

C find taxes payable and income tax expense up to year 3 for both financial and tax reporting, multiply the difference by the new 31% tax rate

La Crosse Partners LLC has a franchise agreement with Arnolds Crispy Fry that expires in seven years, but is renewable at each expiration date for a nominal fee. If the franchise agreement is initially valued at $60,000: A)an accelerated amortization method is more appropriate than the straight-line method. B)amortization expense in the first year will be one-seventh of $60,000. C)amortization expense in the sixth year will be zero.

C since it's a renewable franchise agreement, it's intangible asset so not amortized but tested for impairment

The inventory turnover ratio and the number of days in inventory are least likely used to evaluate the: A)age of a firm's inventory. B)effectiveness of a firm's inventory management. C)stability of a firm's inventory levels.

C stability comes from sales levels

A company's internal systems and practices for managing stakeholder relationships are most accurately described as its: A)governance infrastructure. B)contractual infrastructure. C)organizational infrastructure.

C, organizational is a company's corporate governance procedures and internal systems/practices for managing staekholder relations

Which of the following items is least likely an example of an intangible asset with an indefinite life? A)Goodwill. B)Trademarks that can be renewed at minimal cost. C)Acquired patents.

C, patents will be purchases and used over a specific period of time renewal means intangible

Interest Coverage Ratio

EBIT/ interest expense

beg bal 709, $2 Purchases 556, $6 Sales 959, $13 Sales Expenses $2,649 per annum what is profit using weighted avg method?

$6,213.98 {(709)(2)+(556)(6)}/(709+556) = $3.7881

All-Star Enterprises purchased a machine on January 1. The company uses straight-line depreciation for financial reporting and accelerated depreciation for tax purposes. Depreciation for tax purposes during the year was $36,000 greater than depreciation for financial reporting. Assuming a 30% tax rate will apply in the future, how much will be recorded as a deferred tax liability during the year? A)$10,800 B)$36,000 C)$25,200

A

The effect of a company announcement that they have begun a project with a current cost of $10 million that will generate future cash flows with a present value of $20 million is most likely to: A)only affect value of the firm's common shares if the project was unexpected. B)increase value of the firm's common shares by $10 million. C)increase the value of the firm's common shares by $20 million.

A

The effect of an inventory writedown on a firm's return on assets (ROA) is most accurately described as: A)lower ROA in the current period and higher ROA in later periods. B)lower ROA in the current period and no effect on ROA in later periods. C)higher ROA in the current period and lower ROA in later periods.

A

The expected annual dividend one year from today is $2.50 for a share of stock priced at $25. What is the cost of equity if the constant long-term growth in dividends is projected to be 8%? A)18%. B)19%. C)15%.

A

This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: A)liability of $21,760. B)asset of $21,760. C)liability of $16,320.

A

Which of the following factors is least likely to cause a difference between a firm's effective tax rate and statutory rate? A)Deductible expenses. B)Non-deductible expenses. C)Tax credits.

A Permanent tax differences like tax credits, non-deductible expenses, tax differences cause difference in rates

Deferred tax liabilities may result from: A)pretax income greater than taxable income due to temporary differences. B)pretax income less than taxable income due to temporary differences. C)pretax income greater than taxable income due to permanent differences.

A Pretax income (financial reporting) Taxable income (tax reporting)

A firm needs to adjust its financial statements for a change in the tax rate. Taxable income is $80,000 and pretax income is $120,000. The current tax rate is 50%, and the new tax rate is 40%. The effect on taxes payable of adjusting the tax rate is closest to: A)$8,000. B)$16,000. C)$4,000.

A Pretax income: financial reporting Taxable income: computing taxes payable

In accounting for PP&E using the cost model, companies are required to disclose both gross asset value and accumulated depreciation under: A)both IFRS and U.S. GAAP. B)U.S. GAAP but not IFRS. C)IFRS but not U.S. GAAP.

A disclosure of gross asset values and accumulated depreciation is required for both

If a company chooses to write down inventory, which ratio is most likely to improve? A)Total asset turnover. B)Operating profit margin. C)Debt-to-equity ratio.

A sales/total assets

A firm issues a $5 million zero coupon bond with a maturity of four years when market rates are 8%. Assuming semiannual compounding periods, the total interest on this bond is: A)$1,346,549. B)$1,600,000. C)$1,200,000.

A total interest paid on bond will be difference between FV of bond and proceeds of bond when it was originally issued just the difference between PV and FV here sir interest in a single period is PV x YTM

Barber Inc., which uses LIFO inventory accounting under U.S. GAAP, sells DVD recorders. On October 14, it purchased a large number of recorders at a cost of $90 each. Due to an oversupply of recorders remaining in the marketplace due to lower than anticipated demand during the Christmas season, the selling price at December 31 is $80 and the replacement cost is $73. The normal profit margin is 5 percent of the selling price and the selling costs are $2 per recorder. What is the value of the recorders on December 31? A)$74. B)$78. C)$73.

A under GAAP, a LIFO firm uses lower of cost or market, 1. upper bound is NRV which is selling price less selling costs, $78 2. lower bound is NRV less profit, $74 3. replacement here is $73 which is less than lower bound that means market is lower bound, 4. using lower of cost or market, $90<$74

Affluence Inc. is considering whether to expand its recreational sports division by embarking on a new project. Affluence's capital structure consists of 75% debt and 25% equity and its marginal tax rate is 30%. Aspire Brands is a publicly traded firm that specializes in recreational sports products. Aspire has a debt-to-equity ratio of 1.7, a beta of 0.8, and a marginal tax rate of 35%. Using the pure-play method with Aspire as the comparable firm, the project beta Affluence should use to calculate the cost of equity capital for this project is closest to: A)1.18. B)0.38. C)0.58.

A, Basset = Bequity * (1/(1+(1-t)(d/e) for asset make sure to use 2nd company Bproject = Basset * (1+(1-t)(d/e) for project make sure to use origional company bproject is the same thing as cost of equity capital for project

The expected dividend one year from today is $2.50 for a share of stock priced at $22.50. The long-term growth in dividends is projected at 8%. The cost of common equity is closest to: A)19.1%. B)15.6%. C)18.0%.

A, Kce = d1/p0 + g cost of equity

The before-tax cost of debt for Hardcastle Industries, Inc. is currently 8.0%, but it will increase to 8.25% when debt levels reach $600 million. The debt-to-total assets ratio for Hardcastle is 40% and its capital structure is composed of debt and common equity only. If Hardcastle changes its target capital structure to 50% debt / 50% equity, which of the following describes the effect on the level of new investment at which the cost of debt will increase? The level will: A)decrease. B)change, but can either increase or decrease. C)increase.

A, breakpoint costs decrease as weight of component increases

A company acquires an intangible asset for $100,000 and expects it to have a value of $20,000 at the end of its 5-year useful life. If the company amortizes the asset using the double-declining balance method, amortization expense in year 4 of the asset's useful life is closest to: A)$1,600. B)$8,640. C)$6,910.

A, cannot amortize below salvage value (20,000)

Justin Lopez, CFA, is the Chief Financial Officer of Waterbury Corporation. Lopez has just been informed that the U.S. Internal Revenue Code may be revised such that the maximum marginal corporate tax rate will be increased. Since Waterbury's taxable income is routinely in the highest marginal tax bracket, Lopez is concerned about the potential impact of the proposed change. Assuming that Waterbury maintains its target capital structure, which of the following is least likely to be affected by the proposed tax change? A)Waterbury's after-tax cost of noncallable, nonconvertible preferred stock. B)Waterbury's return on equity (ROE). C)Waterbury's after-tax cost of corporate debt.

A, corporate taxes do not affect cost of preferred stock to issuing firm,

A company issued a bond with a face value of $67,831, maturity of 4 years, and 7% annual-pay coupon, while the market interest rates are 8%. What is the unamortized discount when the bonds are issued? A)$2,246.65. B)$1,748.07. C)$498.58.

A, coupon payment $67,831 * 0.07 = $4,748.17 pv of bond: ~65k ~67-65

Elenore Rice, CFA, is asked to determine the appropriate weighted average cost of capital for Samson Brick Company. Rice is provided with the following data: Debt outstanding, market value $10 million Common stock outstanding, market value $30 million Marginal tax rate 40% Cost of common equity 12% Cost of debt 8% Samson has no preferred stock. Assuming Samson's ratios reflect the firm's target capital structure, Samson's weighted average cost of capital is closest to: A)10.2%. B)10.4%. C)9.8%.

A, find debt to capital 25% find equity to capital 75%

When using net present value (NPV) profiles: A)one should accept all independent projects with positive NPVs. B)the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return. C)one should accept all mutually exclusive projects with positive NPVs.

A, for mutually exclusive you select the higher npv at a given level of cost where NPV intersects the horizontal x-axis is the IRR

National Scooter Company and Continental Chopper Company are motorcycle manufacturing companies. National's target market includes consumers that are switching to motorcycles because of the high cost of operating automobiles and they compete on price with other manufacturers. The average age of National's customers is 24 years. Continental manufactures premium motorcycles and aftermarket accessories and competes on the basis of quality and innovative design. Continental is in the third year of a five-year project to develop a customized hybrid motorcycle. Which of the two firms would most likely report higher gross profit margin, and which firm would most likely report higher operating expense stated as a percentage of total cost? Higher gross profit margin Higher percentage operating expense A)Continental, Continental B)National, Continental C)Continental, National

A, has higher gross profit because it does not compete on price higher operating because R&D

Risks that may arise from ineffective corporate governance least likely include: A)reduced default risk. B)weaker financial performance. C)less effective decision making.

A, ineffective corporate gov is likely to INCREASE default risk

Steve Walker, CFA, is attending an economics lecture, during which the lecturer makes the following two statements about consumer price inflation: Statement 1: High-definition televisions are considerably more expensive than traditional models. This means consumers are spending more money per television unit, which represents a form of inflation. Statement 2: Employment contracts with automatic increases based on the Consumer Price Index fail to increase wages as much as the increase in the cost of living because of biases in the price index. Should Walker agree or disagree with these statements? Statement 1, Statement 2 A)Disagree, Disagree B)Disagree, Agree C)Agree, Agree

A, prices changes from quality of goods do not represent inflation wages with automatic increases in CPI will more than cover increase in cost of living

Costs that are included in the balance sheet value of inventory most likely include: A)Manufacturing overhead. B)Administrative overhead. C)Selling costs.

A, product costs: purchase costs, conversion/manufacturing costs period costs: abnormal waste expenses, storage costs, selling costs, admin overhead

In which of the following situations is management most likely to make conservative choices and estimates that reduce the quality of financial reports? A)Earnings for a period will be higher than analysts' expectations. B)The firm must meet accounting benchmarks to comply with debt covenants. C)Management's compensation is closely tied to near-term performance of the firm's stock.

A, they will make conservative choices because their earnings for the period are already higher than expected, so they want to lessen that to smooth earnings

A firm buys an asset with an estimated useful life of five years for $100,000 at the beginning of the year. The firm will depreciate the asset on a straight-line basis with no salvage value on its financial statements and will use double declining balance depreciation for tax. The tax base for this asset at the end of the first year is closest to: A)$40,000. B)$60,000. C)$80,000.

B

How value is used to measure capital structure? A) Book Value B) Market Value

B

In the context of stakeholder management, organizational infrastructure is most accurately described as: A)a framework for defining the rights and responsibilities of stakeholders. B)a company's internal procedures for addressing stakeholder relationships. C)contractual arrangements a company enters into with its stakeholders.

B

A $100 par, 8% preferred stock is currently selling for $80. What is the cost of preferred equity? A)10.8%. B)10.0%. C)8.0%.

B Kps = 8/80 = 10%

An analyst gathered the following information about a company: Pretax income = $10,000. Taxes payable = $2,500. Deferred taxes = $500. Tax expense = $3,000. What is the firm's reported effective tax rate? A)25%. B)5%. C)30%.

B Reported effective tax rate = Income tax expense / pretax income

Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax: A)liability of $17,000. B)asset of $17,000. C)asset of $48,960.

B cash from customers > accrued revenue = DTA

If money wages increase, other things equal, the most likely result is a: A)long-run inflationary gap. B)short-run recessionary gap. C)short-run inflationary gap

B decrease in supply, short-run recessionary

An IFRS-reporting firm reclassifies a building it owns from "owner-occupied" to "investment property." The fair value of the building is greater than its carrying value. Under the fair value model for investment property, the firm will recognize a gain: A)in other comprehensive income but not on the income statement. B)only if it reverses a previously recognized loss. C)equal to the difference between fair value and carrying value

B gain only if it reverses a loss

Nippon Post Corporation (NPC), a Japanese software development firm, has a capital structure that is comprised of 60% common equity and 40% debt. In order to finance several capital projects, NPC will raise USD1.6 million by issuing common equity and debt in proportion to its current capital structure. The debt will be issued at par with a 9% coupon and flotation costs on the equity issue will be 3.5%. NPC's common stock is currently selling for USD21.40 per share, and its last dividend was USD1.80 and is expected to grow at 7% forever. The company's tax rate is 40%. NPC's WACC based on the cost of new capital is closest to: A)13.1%. B)11.8%. C)9.6%.

B kd = 0.09(1-.4) = 5.4% ke = 1.8*1.07 / 21.4 + 0.07 = 16% 0.054*.4 + 0.16*.6

The optimal capital budget is the amount of capital determined by the: A)point of tangency between the marginal cost of capital curve and the investment opportunity schedule. B)upward sloping marginal cost of capital curve's intersection with a downward sloping investment opportunity schedule. C)downward sloping marginal cost of capital curve's intersection with a upward sloping investment opportunity schedule.

B mc curve increases as additional capital is raised (which means it's upward sloping) investment opportunity schedule slopes down (representing diminishing returns of additional capital invested)

Accelerated depreciation methods for financial reporting are most likely to have which of the following effects on a company's financial ratios during the early years of an asset's life? A)Lower current ratio. B)Higher asset turnover ratio. C)Lower debt-to-equity ratio.

B total assets will be lower current ratio current assets/liabilities

A building owned by a firm is most likely to be classified as investment property if: A)the building is a manufacturing plant or distribution center. B)space in the building is rented to other firms. C)the firm uses the building for its corporate headquarters.

B under IFRS, investment property: assets owned for purpose of earning income from rentals/capital appreciation

An analyst will most likely use the average age of depreciable assets to estimate the company's: A)earnings potential. B)near-term financing requirements. C)cash flows.

B used for estimating financing required for major capital expenditures

LIFO liquidation may result when: A)purchases are more than goods sold. B)purchases are less than goods sold. C)cost of goods sold is less than the available inventory.

B when more good are sold than purchased, we must dip into layers of older inventory

Which of the following stakeholders are most likely to benefit from a company's growth and excellent financial performance? A)Customers. B)Governments. C)Creditors.

B, Gov receives greater tax revenues when financial performance is good (those bitches),

Under which inventory cost flow assumption is a firm most likely to show an unusual increase in gross profit margin by sales in excess of current period production? A)Average cost. B)LIFO. C)FIFO.

B, LIFO, lifo liquidation here,

A firm has a debt-to-equity ratio of 0.50 and debt equal to $35 million. The firm acquires new equipment with a 3-year operating lease that has a present value of lease payments of $12 million. The most appropriate analyst treatment of this operating lease will: A)increase the debt-to-equity ratio to 0.57. B)increase the debt-to-equity ratio to 0.67. C)leave the debt-to-equity ratio unchanged at 0.5.

B, SE = 35/0.5 = $70m 35+12/70=0.6714

BPM Ltd. has the following capital structure: 40% debt and 60% equity. The cost of equity is 16%. Its before tax cost of debt is 8%, and its corporate tax rate is 40%. BPM is considering between two mutually exclusive projects that have the following cash flows: TodayYear 1Year 2Year 3Project XCost = 100 million+ 50 million+ 30 million+ 50 million Project YCost = 150 million+ 50 million+ 60 million+ 80 million Which project should BPM choose? A)Project Y because its NPV is $22 million. B)Project X because its NPV is $5 million. C)Project X because its NPV is $16 million.

B, WACC= wd + Kd * (1-t) + (we*ke) = 11.52% use this for "I" in NPV calculation

A publicly traded company has a beta of 1.2, a debt/equity ratio of 1.5, ROE of 8.1%, and a marginal tax rate of 40%. The unlevered beta for this company is closest to: A)1.071. B)0.632. C)0.832.

B, bunlevered = b(1/1+(1-t(d/e))

The stakeholders most likely to be concerned with their legal liabilities are: A)creditors. B)directors. C)regulators.

B, directors are legally responsible for their decisions and actions as board members creditors/regulators don't have to make any huge decisions

Axle Corporation earned £3.00 per share and paid a dividend of £2.40 on its common stock last year. Its common stock is trading at £40 per share. Axle is expected to have a return on equity of 15%, an effective tax rate of 34%, and to maintain its historic payout ratio going forward. In estimating Axle's after-tax cost of capital, an analyst's estimate of Axle's cost of common equity would be closest to: A)8.8%. B)9.2%. C)9.0%.

B, expected growth: ROE * (1-div payout) div payout = div per share / earning per share d1/p0 + g

Which of the following amounts is least likely to be subtracted from gross domestic product in order to calculate national income? A)Capital consumption allowance. B)Indirect business taxes. C)Statistical discrepancy.

B, indirect business taxes are not subtracted because they are INCLUDED as part of national income

A conflict of interest between corporate stakeholders is least likely to be mitigated by: A)covenants in debt indentures. B)issuing stock dividends. C)including stock options as part of manager compensation.

B, issuing stock dividends would favor neither group, this does not hurt value or earnings of the company

Which of the following actions is least likely to increase earnings for the current period? A)Selling more inventory than is purchased or produced. B)Decreasing the salvage value of depreciable assets. C)Recognizing revenue before fulfilling the terms of a sale.

B, leads to higher depreciation expense and lower earnings

Smith Company's board of directors assigns responsibilities to three committees. The committee that is most likely to be responsible for establishing the chief executive officer's compensation package is Smith's: A)investment and risk committee. B)nominations and remuneration committee. C)audit and governance committee.

B, renumeration/compensation committee controls executive compensation

The stakeholder theory of corporate governance is primarily focused on: A)increasing the value a company. B)resolving the competing interests of those who manage companies and other groups affected by a company's actions. C)the interests of various stakeholders rather than the interests of shareholders.

B, resolving conflicting interest of both shareholders/stakeholders is the focus of corporate governance

Vasco Ltd. purchased a unit of heavy equipment one year ago for £500,000 and capitalized it as a long-lived asset. Because demand for equipment of this type has grown significantly, Vasco believes the fair value of its equipment has increased to £600,000. If Vasco revalues its equipment to £600,000, what will be the most likely effect on Vasco's financial results, compared to not revaluing the equipment? A)Net income will be higher in the period of the revaluation. B)Net income will be lower in the periods following the revaluation. C)The debt-to-equity ratio will be unaffected by the revaluation.

B, revaluing asset to 600k will increase future depreciation expense and therefore reduce net income in subsequent periods

The relationship between a company's shareholders and its senior managers is best described as a(n): A)principal relationship. B)agency relationship. C)working partnership.

B, senior managers act as agents, who are hired to act in interest of the shareholders (principle)

The stakeholders of a company that prefer a relatively riskier company strategy that has the potential for superior company performance are: A)suppliers. B)shareholders. C)creditors.

B, suppliers in general have no preference for table business operations

Which of the following accounting warning signs is most likely to indicate manipulation of reported operating cash flows? A)More aggressive revenue recognition methods than comparable firms. B)Capitalizing purchases that comparable firms typically expense. C)Higher estimated salvage values than are typical in a firm's industry.

B, the other two don't directly relate to CFO

A firm can recognize a gain or loss on derecognition of a bond the firm has issued: A)at maturity, but not before maturity. B)before maturity, but not at maturity. C)either before maturity or at maturity.

B, there wouldn't be a gain or loss at maturity because it's par then

Which of the following is least likely a source of bias in CPI data? A)Substitution B)Sample selection C)Quality changes

B, three sources of bias are, new goods, quality changes, and substitutions

To finance a proposed project, Youngham Corporation would need to issue £25 million in common equity. Youngham would receive £23 million in net proceeds from the equity issuance. When analyzing the project, analysts at Youngham should: A)not consider the flotation cost because it is a sunk cost. B)add the £2 million flotation cost to the project's initial cash outflow. C)increase the cost of equity capital to account for the 8% flotation cost.

B, treat float costs as cash outflow at project initiation rather than as a component cost of equity

For balance sheet purposes, inventories based on: A)LIFO are preferable to those based on FIFO, as they more closely reflect the current costs. B)FIFO are preferable to those based on LIFO, as they more closely reflect current costs. C)LIFO are preferable to those based on average cost, as they more closely reflect the current costs.

B, INVENTORIES (not cogs) ending inventory shows most recent prices

Degen Company is considering a project in the commercial printing business. Its debt currently has a yield of 12%. Degen has a debt-to-equity ratio of 1.3 and a marginal tax rate of 30%. Hodgkins Inc., a publicly traded firm that operates only in the commercial printing business, has a marginal tax rate of 25%, a debt-to-equity ratio of 2.0, and an equity beta of 1.3. If the risk-free rate is 3% and the expected return on the market portfolio is 9%, the appropriate WACC to use in evaluating Degen's project is closest to: A)8.9%. B)8.6%. C)9.2%.

B. 1. find bproject 2. use that beta for wacc 3. find weights with d/e Wd = 1.3/1+1.3 We = 1/1+1.3

A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%. -The company's bonds pay 10% coupon (semi-annual payout), mature in 20 years, and sell for $849.54. -The company's stock beta is 1.2. -The company's marginal tax rate is 40%. -The risk-free rate is 10%. -The market risk premium is 5%. -The cost of equity using the capital asset pricing model (CAPM) approach and the discounted cash flow approach is: CAPM, Discounted cash flow A)16.6%, 15.4% B)16.0%, 15.4% C)16.0%, 16.0%

C

A firm is more solvent if it has: A)high leverage and coverage ratios. B)low leverage and coverage ratios. C)low leverage ratios and high coverage ratios.

C

Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax: A)asset of $48,960. B)liability of $8,500. C)asset of $8,500.

C

For a firm that uses the LIFO inventory cost method, a LIFO liquidation occurs if: A)sales decrease during a reporting period. B)the firm changes to a different inventory cost method. C)inventory quantity decreases during a reporting period.

C

A company has $5 million in debt outstanding with a coupon rate of 12%. Currently the YTM on these bonds is 14%. If the tax rate is 40%, what is the after tax cost of debt? A)5.6%. B)7.2%. C)8.4%.

C 0.14(1-0.4)

For price discrimination to work, the seller must face a market with all of the following characteristics EXCEPT: A)a way of preventing customers from purchasing the product at a lower price and reselling it at a higher price. B)a downward sloping demand curve. C)high barriers to entry.

C 1. must have downward sloping demand 2. at least two identifiable groups of customers with different price elasticities of demand 3. must be able to prevent customers in lower-price from reselling at higher price High barriers to entry don't matta

Dubois Company bought land for company use five years ago for €2 million and presents its balance sheet value as €2.2 million. If the fair value of the land decreases to €1.8 million, Dubois will: A)decrease shareholders' equity by €400,000 but will not recognize a loss. B)recognize a loss of €400,000 and decrease shareholders' equity by €200,000. C)recognize a loss of €200,000 and decrease shareholders' equity by €400,000.

C SE recognizes the 200k revaluation decrease in fair value reduces revaluation surplus to $0 and recognized in income statement the loss + removal of valuation surplus shrinks down SE

Which of the following statements comparing straight-line depreciation methods to alternative depreciation methods is least accurate? Companies that use: A)straight-line depreciation methods will have higher book values for the assets on the balance sheet than companies that use accelerated depreciation. B)accelerated depreciation methods for tax purposes will decrease the amount of taxes paid in early years. C)accelerated depreciation methods will have lower asset turnover ratios than if they used straight line depreciation.

C accelerated depreciation would lead to lower book values and therefore higher asset turnover ratio

Varin, Inc. purchases franchise rights with an estimated useful life of ten years and a trademark that can be renewed every five years for a nominal fee. Under IFRS, Varin will recognize amortization expense on: A)both of these assets. B)neither of these assets. C)only one of these assets.

C acquired intangible assets with finite expected useful lives are amortized intangible with indefinite lives are tested annually (renewal at trademark means indefinite life)

Which of the following statements is least accurate? When a bond is issued at a discount: A)the interest expense will increase over time. B)the interest expense will be equal to the coupon payment plus the amortization of the discount. C)cash flows from financing will be increased by the par value of the bond issue.

C cash flow from financing will be increased by the amount of the proceeds

Under U.S. GAAP, an asset is impaired when: A)the present value of future cash flows exceeds the carrying amount of the asset. B)accumulated depreciation plus salvage value exceeds acquisition costs. C)the firm can no longer fully recover the carrying amount of the asset.

C future cash flows are less than carrying value

The amortized cost of a trademark is least likely to appear on a firm's balance sheet if the trademark was: A)obtained in the acquisition of another firm. B)purchased from another firm. C)developed internally.

C it will be on balance sheet if it's purchased or obtained

Which of the following ratio levels would suggest that a company is holding obsolete inventory? A)Low number of days in inventory. B)Low inventory value compared to cost of goods sold. C)Low inventory turnover ratio.

C low inventory turnover = high # of days in inventory, which is a sign of slow-moving or obsolete inventory

When the economy enters an expansion phase, the most likely effect on external trade is a(n): A)decrease in exports. B)increase in exports. C)increase in imports.

C when domestic economy is expanding, demand for imports increases because domestic incomes will increase EXPORTS tend to be independent of domestic economic growth

A U.S. GAAP reporting firm changes its inventory cost flow assumption from average cost to LIFO. The firm must apply this change: A)retrospectively, because it is a change in accounting principle. B)prospectively, with LIFO layers calculated from past purchases and sales. C)prospectively, with the carrying value as the first LIFO layer.

C,

Crawford Corporation is a lessor. Crawford classifies a lease as a sales-type lease. It is most likely that Crawford: A)retains the leased asset on its balance sheet. B)has significant doubt about collecting the lease payments. C)reports under U.S. GAAP.

C, GAAP uses, sales-type, direct financing, or operating lease sales-type: risk of ownership transferred to lessee

For a firm to use the revaluation model for balance sheet reporting of long-lived assets: A)the firm must choose which assets of each type to revalue, and which to report at cost. B)the firm must report under U.S. GAAP. C)an active market must exist for the assets.

C, IFRS revaluation, must have active market GAAP uses cost model

For 2007, Morris Company had 73 days of inventory on hand. Morris would like to decrease its days of inventory on hand to 50. Morris' cost of goods sold for 2007 was $100 million. Morris expects cost of goods sold to be $124.1 million in 2008. Assuming a 365 day year, compute the impact on Morris' operating cash flow of the change in average inventory for 2008. A)$6.3 million source of cash. B)$3.0 million use of cash. C)$3.0 million source of cash.

C, Inventory turnover=365/73=5 365/50=7.3 Avg Inventory=100/5=20 124.1/7.3=17 20-17=3, inventory must decline $3M which is a source of cash

Which of the following statements regarding the internal rate of return (IRR) is most accurate? The IRR: A)can lead to multiple IRR rates if the cash flows extend past the payback period. B)assumes that the reinvestment rate of the cash flows is the cost of capital. C)and the net present value (NPV) method lead to the same accept/reject decision for independent projects.

C, NPV and IRR lead to same decision for INDEPENDENT projects, not necessarily for mutually exclusive IRR assumes cash flows are reinvested at IRR rate

A firm is considering a $200,000 project that will last 3 years and has the following financial data: Annual after-tax cash flows are expected to be $90,000. Target debt/equity ratio is 0.4. Cost of equity is 14%. Cost of debt is 7%. Tax rate is 34%. Determine the project's payback period and net present value (NPV). Payback Period, NPV A)2.43 years, $18,716 B)2.22 years, $21,872 C)2.22 years, $18,716

C, PB period 200,000/90,000 = 2.22 NPV wd+we = 1 do algebra (must take away one variable) to get weights wd=0.286 we=0.174 multiply wd(1-t)(kd)+(we*ke) and use this for wacc in solving for NPV

Hatch Corporation's target capital structure is 40% debt, 50% common stock, and 10% preferred stock. Information regarding the company's cost of capital can be summarized as follows: The company's bonds have a nominal yield to maturity of 7%. The company's preferred stock sells for $40 a share and pays an annual dividend of $4 a share. The company's common stock sells for $25 a share and is expected to pay a dividend of $2 a share at the end of the year (i.e., D1 = $2.00). The dividend is expected to grow at a constant rate of 7% a year. The company has no retained earnings. The company's tax rate is 40%. What is the company's weighted average cost of capital (WACC)? A)10.03%. B)10.59%. C)10.18%.

C, WACC wd=0.4 wce=0.5 wps=0.1 kd=0.07 kps=4/40=0.1 kce=2/25 + 0.07

Aggressive accounting choices include: A)increasing the valuation allowance of a deferred tax asset. B)decreasing the estimated useful life of an asset. C)classifying interest paid as an investing cash flow.

C, aggressive accounting choices are those that increase earnings, OCF, or asset values. classifying interest paid as investing cash flow would result in higher CFO (because that's where interest belongs)

A firm recognizes a goodwill impairment in its most recent financial statement, reducing goodwill from $50 million to $40 million. How should an analyst most appropriately adjust this financial statement for goodwill when calculating financial ratios? A)Make no adjustments to assets or earnings because both reflect the impairment. B)Decrease earnings but make no adjustment to assets. C)Decrease assets and increase earnings.

C, decreasing goodwill decreases assets you must then reverse any losses recognized due to goodwill which increases earnings

Comet Corporation is a capital intensive, growing firm. Comet operates in an inflationary environment and its inventory quantities are stable. Which of the following accounting methods will cause Comet to report a lower price-to-book ratio, all else equal? Inventory method, Depreciation method A)First-in, First-out, Accelerated B)Last-in, First-out, Accelerated C)First-in, First-out, Straight-line

C, fifo=higher assets and equity in inflationary environment (lower cogs and higher inventory) straight-line=higher assets and equity compared to accelerated depreciation higher equity means bigger denominator in p/b ratio

A company has a target capital structure of 40% debt and 60% equity. The company is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share, and has a growth rate of 8%. The company's bonds pay 10% coupon (semi-annual payout), mature in 20 years, and sell for $849.54. The company's stock beta is 1.2. The company's marginal tax rate is 40%. The risk-free rate is 10%. The market risk premium is 5%. The company's after-tax cost of debt is: A)7.2%. B)4.8%. C)12.0%.

C, find ytm (make sure to multiply by 2 because semi-annual) (also make sure fv and pmt are positive)

Julius, Inc., is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10%. The preferred stock has a fixed dividend of $4.00. The price of preferred stock is $31.50. The after-tax costs of debt and preferred stock are closest to: DebtPreferred stock A)6.0%, 7.6% B)10.0%, 7.6% C)6.0%, 12.7%

C, kd = .4*.1 ke = 4/31.5

Which of the following provisions would least likely be included in the bond covenants? The borrower must: A)not increase dividends to common shareholders while the bonds are outstanding. B)maintain insurance on the collateral that secures the bond. C)maintain a debt-to-equity ratio of no less than 2:1.

C, lender would want to prohibit borrower from becoming more leveraged, this lowers the lenders risk in getting paid back

Which of the following statements about corporate governance is most accurate? Corporate governance: A)best practices are essentially the same in developed economies. B)is defined in the same way in most countries. C)may be focused only on shareholder interests.

C, practices are primarily those that support shareholder interest

The estimated annual after-tax cash flows of a proposed investment are shown below: Year 1: $10,000 Year 2: $15,000 Year 3: $18,000 After-tax cash flow from sale of investment at the end of year 3 is $120,000 The initial cost of the investment is $100,000, and the required rate of return is 12%. The net present value (NPV) of the project is closest to: A)$63,000. B)-$66,301. C)$19,113.

C, t3 = 138k

Thematic investing is most accurately described as: A)excluding companies or sectors from consideration for investment based on environmental and social factors. B)identifying the best companies in each sector with respect to environmental and social factors. C)considering a single environmental or social factor when selecting investments.

C, thematic: picking investments based on a common theme (no weapons) best-in-class: best companies in each sector with respect to ESG negative screening: excluding sectors from consideration based on esg

Ferryville Radar Technologies has five-year, 7.5% notes outstanding that trade at a yield to maturity of 6.8%. The company's marginal tax rate is 35%. Ferryville plans to issue new five-year notes to finance an expansion. Ferryville's cost of debt capital is closest to: A)2.4%. B)4.9%. C)4.4%.

C, using YTM is a better approximation than coupon rate

Which of the following statements for a bond issued with a coupon rate above the market rate of interest is least accurate? A)The associated interest expense will be lower than that implied by the coupon rate. B)The bond will be shown on the balance sheet at the premium value. C)The value of the bond will be amortized toward zero over the life of the bond.

C, value of bond's PREMIUM will be amortized towards zero over life of bond, not the total VALUE of the bond...

In analyzing disclosures related to the financing liabilities of a company, which of the following disclosures would be least helpful to the analyst? A)Filings with the Securities and Exchange Commission (SEC) that disclose all outstanding securities and their features. B)The interest expense for the period as provided on the income statement or in a footnote. C)The present value of the future bond payments discounted at the coupon rate of the bonds.

C, would be discounted by the YTM not the coupon rate of bonds

If a firm pledges inventories as collateral for a loan, the firm must: A)offset the pledged inventories against current liabilities. B)create a contra asset account in the amount of the pledged inventories. C)disclose the carrying value of the pledged inventories.

C, CV of pledged inventory is one of the required disclosures for both IFRS and GAAP

The average age of a firm's property, plant, and equipment can be estimated by dividing: A)gross PP&E by depreciation expense. B)net PP&E by depreciation expense. C)accumulated depreciation by depreciation expense.

C, average age = accumulated dep / annual dep expense

For a firm that uses the LIFO inventory cost method, the LIFO reserve is: A)the difference between LIFO cost of sales and FIFO cost of sales. B)a provision for taxes when FIFO is required for tax reporting. C)the difference between LIFO inventory and FIFO inventory.

C, lifo reserve is difference between inventory under lifo cost method and inventory under fifo cost method

Consider the following statements: Statement 1: "The sum of consumer and producer surpluses is maximized under both monopoly and perfect competition." Statement 2: "All else being equal, a monopolist that practices price discrimination will be more allocatively efficient than a single-price monopolist." With respect to these statements: A)neither of these statements is accurate. B)both of these statements are accurate. C)only one of these statements is accurate.

C, stmt 1 is wrong because monopolies don't produce max quantity stmt 2 is true

DTL and DTA setup for Tax and Financial Reporting

Tax: Revenue Dep. Taxable Income Tax Rate Taxes Payable Financial: Revenue Dep. Pre-tax income Tax Rate Income Tax Expense

Taxes Payable, Income tax expense

Taxes due to government amount recognized on income statement DTL if income tax expense is greater than taxes payable DTA if taxes payable is greater than income tax expense Permanent difference would result in change to firm's adjusted tax rate

Externalities, cannibalization,

effects the acceptance of a project may have on other cash flows new project taking sales from existing product