Becker BEC B2 final review Flashcards
MCQ-14757
Regardless of the industry in which a firm operates, the firm will maximize profits by
producing where:
A. Average total cost equals average revenue.
B. Average total cost equals marginal revenue.
C. Marginal cost equals marginal revenue.
D. Marginal cost equals average revenue.
Explanation
Choice “C” is correct.
Regardless of the industry in which a firm operates, a firm will maximize profits by producing where marginal revenue equals marginal cost (MR = MC).
Choice “A” is incorrect. If average total costs equals average revenue, then economic
profits are zero.
Choice “B” is incorrect. This is a zero profit condition for a competitive firm.
Choice “D” is incorrect. This would be a profit maximizing position for a competitive firm
only, as competitive firms operate where P = AR = MR = MC (because the firm faces a
horizontal demand curve)
MCQ-14758
At the equilibrium price, a firm that is in a competitive environment in which it is a pricetaker faces:
A. Significant barriers to entry.
B. A demand curve that is kinked.
C. A demand curve that is downward sloping.
D. A demand curve that is horizontal.
Choice “D” is correct.
A firm in a competitive environment is a price-taker that faces a horizontal demand
curve at the equilibrium price.
MCQ-14759
All of the following are characteristics of monopolistic competition, except:
A. Few barriers to entry.
B. Significant non-price competition in the market.
C. The ability of the firm to set output and prices.
D. Differentiated products sold by a large number of firms.
Explanation
Choice “C” is correct.
The ability of a firm to set output and prices is a characteristic of a monopoly. Other characteristics of a monopoly include a single firm in the market, significant barriers to entry, and the existence of no substitute products for the good.
Choices “A”, “B”, and “D” are incorrect. All of these characteristics are characteristics of
monopolistic competition. Under monopolistic competition, a relatively large number of
firms produce differentiated products in a market that has relatively few barriers to entry
and significant non-price competition.
A company operates in an environment where a slight decrease in price leads to a large
increase in quantity demanded for its primary product. The market structure this company
operates in is best described as:
A. A monopoly.
B. An oligopoly.
C. Monopolistic competition.
D. Perfect (pure) competition.
Choice “C” is correct. In a monopolistic competition market structure, the demand curve is highly elastic (sensitive to price changes) but still downward sloping. This implies that a slight change in price will lead to a larger change in quantity demanded.
Choice “A” is incorrect. In a monopoly, the demand curve is inelastic because there are no substitute products available. This implies a change in price will have minimal effect on quantity demanded.
Choice “B” is incorrect. In an oligopoly, the demand curve tends to be “kinked” such
that it is fairly inelastic below the prevailing market price and then elastic above that
price.
Choice “D” is incorrect. In a perfect (pure) competition structure, the demand curve is
perfectly elastic such that all firms are price takers (the price is set by the market) and
no firm has the ability to change prices.
MCQ-15087
A CFO and budget director are working together to create the sales budget for the upcoming fiscal year. In developing the sales forecasts for their main products, they want to get a read on where they think the economy is headed over the next year. Which of the following indicators are they most likely to consider in their forecast?
A. The M2 money supply.
B. The prime rate charged by banks.
C. The average duration of unemployment.
D. Industrial production as measured by GDP.
Choice “A” is correct. To forecast sales for the coming year, the CFO and budget director will look at leading indicators that are used to predict economic activity. The M2 money supply is the only option above that represents a leading indicator, as the others
are either coincident indicators (which change at the same time as the economy overall) or lagging indicators (which change after a given economic trend has already begun).
Choice “B” is incorrect. The prime rate charged by banks is a lagging indicator.
Choice “C” is incorrect. The average duration of unemployment is a lagging indicator,
while average new unemployment claims (which was not an option given) is a leading
indicator.
9/26/23, 11:01 PM MCQs | CPA
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Choice “D” is incorrect. Industrial production as measured by GDP (gross domestic
product) is a coincident indicator
Which of the following is an example of expansionary fiscal policy?
A. A decrease in the required reserve ratio.
B. An increase in the discount rate.
C. A decrease in government spending.
D. A decrease in taxes.
Choice “D” is correct.
Fiscal policy refers to government spending and tax policies. Expansionary fiscal policy consists of increases in government spending and/or decreases in taxes. When the government increases government spending and/or decreases taxes, the aggregate demand curve shifts right. As a result, real GDP increases, leading to an increase in, or
expansion of, economic activity.
Examples of MONETARY policy?
A change in the money supply and the impact that has on interest rates relates to monetary policy, which is used by a nation’s central bank to affect the
amount of money and credit available in the economy along with interest rates. An increase in money supply, along with a reduction in interest rates, reflects expansionary monetary policy.
The money supply will increase from one or all of the following actions: buying government securities, reducing the discount rate (the rate at which member banks borrow from the central bank), and reducing the required reserve ratio (the amount of
money banks have to hold). Given that the money supply has increased and rates have decreased, a decrease in the required reserve ratio is the only monetary policy choice that would have this effect.
What is the CAPM formula for required rate of return for a stock?
Required rate = Rf + (B * Mrp)
Rf = Risk free rate or 10 yr treasury note
B = Beta
Mrp = Market risk premium
A company’s current capital structure and associated pretax costs of capital are as follows:
Preferred stock: $25 million, 6 percent
Common stock: $35 million, 8 percent
Debt: $30 million, 4 percent
PAY ATTENTION —> The corporate tax rate is expected to be 25 percent next year. To take advantage of larger
tax deductions, the CFO decides to issue additional debt of $10 million. Assuming the costs
for each form of capital will increase by 25 basis points (0.25%) when the new debt is
issued, the weighted average cost of capital (WACC) next year will be closest to:
(.425 * .04 * .75 )+ (.35 * .0825) + (.25*.0625)
.01275 + .028875 + .015625 = .05725 = 5.73%
MCQ-09085
Gibson Enterprises issued 1,000 of its 8%, $50 par value preferred shares for $52 per
share and incurred $2,500 in flotation costs. What was Gibson’s cost of preferred stock?
A. 8.42%
B. 8.08%
C. 8.00%
D. 7.69%
Choice “B” is correct.
The cost of preferred stock is computed as using the formula below with the terms defined below:
Cost of preferred stock = Preferred stock dividends / Net proceeds of preferred stock
Cash dividends on preferred stock (1,000 shares × $50 × 8%) = $4000
DIVIDED BY
Proceeds of preferred stock sale net of fees and costs
Proceeds (1,000 shares × $52) = $52000
MINUS
Flotation costs (2,500)
Net proceeds = $49,500
Cost of preferred stock ($4,000 / $49,500) 8.08%
SmallCap Corp. is a relatively new company whose limited number of low-cost shares are
actively traded on the NASDAQ. The value of the company’s shares is fairly volatile and
has fluctuated by 25% more than the overall fluctuation of the values of the total exchange.
The expected return on the market is 12%. The company has the cash from accumulated
earnings necessary for its expansion and currently has the funds in highly liquid, risk-free,
federally insured securities yielding 2%. Management has elected to use the capital asset
pricing model (CAPM) to compute its cost of capital to assist in evaluating financing
alternatives. What is the cost of capital using the CAPM?
A. 2.00%
B. 12.00%
C. 14.50%
D. 10.00%
Cost of Equity = Risk-Free Rate of Return + Beta * (Market Rate of Return - Risk-Free Rate of Return).
COE = 2 + 1.25 (12-2)
= 2 + 1.25*10
= 2 + 12.5
= 14.5
MCQ-15123
From the prior year to the current year, a company reported the following changes in the three components of the cash conversion cycle:
Days of payables outstanding: Increase of 1 day
Days in inventory: Decrease of 3 days
Days sales in accounts receivable: Decrease of 5 days
Based on these changes, the cash conversion cycle this year relative to last year will be improved by:
A. 1 day.
B. 3 days.
C. 7 days.
D. 9 days
Choice “D” is correct. The cash conversion cycle is the length of time from the date expenditures are initially purchased to the date cash is collected upon sales to customers, offset by the length of time it takes to pay vendors for the initial expenditures. The calculation is equal to the days in inventory + Days sales in accounts receivable – The days of payables outstanding. The cash conversion cycle is
improved when the number of days overall decreases.
The calculation here is as follows: Decrease of 3 days + Decrease of 5 days - Increase
of 1 day = Overall change of 9 days, which is an improvement as it implies the
company is holding onto its cash for 9 days longer. Note that the subtraction of the
increase of 1 day has the same positive directional effect as the decreases of 3 and 5
days because the goal is to receive cash faster and to hold onto it longer. So cash is
coming in 8 days faster, and the company is holding onto it for 1 day longer.
What is the cash conversion cycle formula?
CCC = Days in inventory + Day sales in AR - Days of payables outstanding
What is the formula for EOQ?
EOQ = SQRT (2SO/C)
S= Annual Sales in Units
O = Cost per purchase order
C = Carrying cost per unit
What is the formula for Days sales in Accounts receivable?
Days sales in AR = Ending AR net / (Net Sales / 365)
