COMPRE 3 Flashcards
Kansas Office Supply had $24,000,000 in sales last year. The company’s net income was $400,000,
its total assets turnover was 5.0, and the company’s ROE was 15 percent. The company is financed
entirely with debt and common equity. What is the company’s debt ratio?
a.
0.44
b.
0.55
c.
0.20
d.
0.77
e.
0.60
f.
0.66
g.
0.30
h.
0.33
a.
0.44
Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects.
Brown is considering four independent projects with the following IRRs:
Project IRR
I 10%
II 12%
III 14%
IV 15%
Brown’s cost of capital is 13%. Considering these projects are risker than average, a 1.5%
adjustment is made to the cost of capital. Which one of the following project options should Brown
accept based on IRR?
a.
Project II, III and IV only.
b.
Project I, II and III only.
c.
Project IV only.
d.
Projects III and IV only.
e.
Projects I, II, III and IV.
f.
Projects I and II only.
c.
Project IV only.
A law office is considering taking on a major litigation case based on commission. The attorneys
determine the probability of three possible outcome scenarios as follows:
Scenario 1: Lose the case – 25% probability
Scenario 2: Settle the case – 60% probability
Scenario 3: Win the case – 15% probability
After estimating costs to litigate the case and expected commission on each scenario, a net present
value (NPV) was computed for each scenario as follows:
Scenario 1: –$300,000 negative NPV
Scenario 2: $100,000 positive NPV
Scenario 3: $750,000 positive NPV
Using scenario analysis, what is the expected net present value for the law office of litigating the
case?
a.
$123,667
b.
$125,500
c.
$100,000
d.
$97,500
e.
$183,333
f.
Cannot be determined
d.
$97,500
Consider the following financial information for the VanHorn Corporation from the prior year:
Earnings before interest and taxes $55 million
Interest expense $15 million
Preferred stock dividends $13 million
Common stock dividend-payout ratio 25%
Common shares outstanding 2,500,000
Effective corporate income tax rate 30%
Analysts estimate a $.50 EPS increase over the next 12 months. The current market price of the
stock is $25 per share. What is the trailing P/E ratio?
a.
5.68
b.
6.50
c.
4.17
d.
3.85
e.
2.60
f.
4.40
g.
6.00
h.
5.10
c.
4.17
Step Company produces toys and other items for use in beach and resort areas. A small inflatable
toy has come onto the market that the company is anxious to produce and sell. Enough capacity
exists in the company’s plant to produce 16 000 toys each month. Variable costs to manufacture and
sell one toy would be P12.50, and fixed costs associated with the toy would total P218 750 per
month.
The company’s Marketing Department predicts that demand for the new toy will exceed 16 000 units
that the company is able to produce. Additional manufacturing space can be rented from another
company at a fixed cost of P10 000 per month. Variable costs in the rented facility would total P14
per toy, due to somewhat less efficient operations than in the main plant. The new toy would sell for
P30 each.
How many units should the company need to sell in order to earn a before-tax profits of P131
250?
a.
21 000
b.
20 000
c.
35 000
d.
30 375
a.
21 000
A company belongs in a particular industry where the average forward P/E is 15.0x. If the
company’s earnings per share in the previous year was $20.00, and it is
expected to grow by 10.0% this year, what would be the estimated intrinsic
value for each share of the company?
a.
$18.00
b.
$270.00
c.
$2.00
d.
$330.00
e.
$300.00
f.
$22.00
g.
$360.00
h.
$240.00
d.
$330.00
Ring Company makes telephones. Currently, Ring makes all components of the telephones inhouse. An outside company has offered to supply one component, part number X76, for P12 each.
Ring uses 22,000 of these components per year. Costs of X76 are as follows
Direct materials P3.00
Direct labor P1.50
Variable overhead P2.75
Fixed overhead P5.00
Suppose that 30% of the fixed overhead is avoidable if part X76 is not made by Ring. Should Ring
purchase the part from the outside supplier?
a.
No, income will decrease by P15,000.
b.
Yes, income will increase by P74,500.
E. No, income will decrease by P10,500.
F. Yes, income will increase by P10,500.
c.
No, income will decrease by P71,500.
c.
No, income will decrease by P71,500.
Acme is considering the sale of a machine with a book value of P160,000 and 3 years remaining in
its useful life. Straight-line depreciation of P50,000 annually is available. The machine has a current
market value of P200,000. What is the cash flow from selling the machine if the tax rate
is 30%?
a.
P200,000
b.
P160,000
c.
P50,000
d.
P184,000
e.
P172,000
f.
P192,000
g.
P188,000
g.
P188,000
According to COSO, the difference between inherent risk and actual residual risk results because of
management’s
a.
Inability to share the actual residual risk.
b.
Inability to alter the severity of inherent risk.
c.
Actions to alter the severity of inherent risk.
d.
Actions to alter the severity of actual residual risk.
c.
Actions to alter the severity of inherent risk.
Statement 1. Elastic demand means that the percent change in price is exactly the same as the
percent change in quantity demanded.
Statement 2. Inelastic demand means that the percent change in price is larger than the percent
change in quantity demanded
a.
Both statements are true
b.
Statement 2 is true
c.
Statement 1 is true
d.
Both statements are false
b.
Statement 2 is true
Statement 1. The payback method neglects project profitability
Statement 2. The payback method ignores cash flows after the payback period
a.
Statement 1 is true
b.
Statement 2 is true
c.
Both statements are false
d.
Both statements are true
d.
Both statements are true
Which kind of real option will a firm most likely use if there is a chance of capturing additional future
cash flows outside the current estimates incorporated in the cash flow projections?
a.
Option to adopt
b.
Option to expand
c.
Option to abandon
d.
Option to put
e.
Option to delay
b.
Option to expand
The following data pertain to three products being produced and sold by Kenan Corporation in a
typical month:
Product A Product B Product C Total
Sales P50,000 P37,500 P31,250 P118,750
Variable Costs 23,750 18,750 12,500 55,000
Contrib Margin P26,250 P18,750 P18,750 P63,750
Direct Fx Cost 15,000 8,500 10,000 33,500
Product Margin P11,250 P10,250 P 8,750 P30,250
Alloc Fx Cost 8,250 10,500 6,250 25,000
Profit (loss) P 3,000 (P250) P 2,500 P 5,250
The company’s lease contract will expire at the end of the current month, and the lessor does not
want to renew the contract. As a result Kenan Corporation must move to another facility. It has found
a new, smaller place which the company will start occupying next month. Since the new place is
smaller, one of the products has to be eliminated and the total allocated fixed cost would be reduced
by 40%.
The company should eliminate
a.
Product B
b.
Product A, B, C.
c.
Product B, C
d.
Product A, C
e.
Product C.
f.
Product A, B
g.
Product A
e.
Product C.
Manning Company uses a joint process to produce products W, X, Y, and Z. Each product may be
sold at its split-off point or processed further. Additional processing costs of specific products are
entirely variable. Joint processing costs for a single batch of joint products are $120,000. Other
relevant data are as follows:
Sales Value Additional Sales Value of
Product at Split-Off Processing Costs Final Product
W P 40,000 P 60,000 P 80,000
X P 12,000 P 4,000 P 20,000
Y P 20,000 P 32,000 P 120,000
Z P 28,000 P 20,000 P 32,000
Total P 100,000 P 116,000 P 252,000
Which products should Manning process further?
a.
All
b.
Y and X
c.
all except Z
d.
X and W
e.
Y and Z
f.
W and Z
g.
None
b.
Y and X
The times interest earned ratio of McHugh Company is 4.5. The interest expense for the year was
P20,000, and the company’s tax rate is 35%. The company’s net income is:
a.
P24,500
b.
P70,000
c.
P45,500
d.
P42,000
e.
P49,000
f.
P28,000
g.
P54,000
h.
P21,000
c.
P45,500
Statement 1. A private market is one like the Philippine Stock Exchange, where transactions are
handled by members of the organization, while public markets are those in the black market, where
anyone can make transactions.
Statement 2. A common stock is not a derivative, but a futures contract to buy the stock is a
derivative because the value of the futures contract is derived from the value of the stock.
a.
Statement 1 is true
b.
Both Statements are false.
c.
Statement 2 is true
d.
Both Statements are true
c.
Statement 2 is true
A company determines that at a price of $14 it will sell 30,300 units and at a price of $10 it will sell
34,500 units. Using the midpoint formula, what is the price elasticity of demand?
a.
1.33
b.
0.39
c.
0.57
d.
1.75
e.
0.84
f.
1.89
g.
2.57
h.
1.33
b.
0.39
If a nation’s central bank suddenly reduces the interest rates, country’s currency will most likely:
a.
decrease in relative value.
b.
increase sharply in value at first and then return to its initial value.
c.
increase in relative value slowly.
d.
Can double its existing intrinsic value.
a.
decrease in relative value.
Statement 1. Pricing decisions should vary over the life of a product since competition vary over the
life of a product.
Statement 2. Pricing decisions should vary over the life of a product since sales volume vary over the
life of a product.
a.
Statement 2 is true.
b.
Both statements are true
c.
Statement 1 is true
d.
Both statements are false
b.
Both statements are true
Bruell Electronics Co. is developing a new product, surge protectors for high-voltage electrical flows.
The cost information below relates to the product:
Unit Costs
Direct materials 3.25
Direct labor 4.00
Distribution 0.75
The company will also be absorbing P120,000 of additional fixed costs associated with this new
product. A corporate fixed charge of P20,000 currently absorbed by other products will
be allocated to this new product. Bruell is subject to a tax rate of 30%.
How many surge protectors (rounded to the nearest hundred) must Bruell
Electronics sell at a selling price of P14 per unit to gain P30,000
additional income after taxes?
a.
27,100 units.
b.
20,000 units.
c.
25,000 units.
d.
12,100 units.
e.
30,400 units.
f.
28,300 units.
I. 31,700 units.
J. 31,600 units.
g.
10,700 units.
h.
30,500 units.
a.
27,100 units.
Step Company produces toys and other items for use in beach and resort areas. A small inflatable
toy has come onto the market that the company is anxious to produce and sell. Enough capacity
exists in the company’s plant to produce 16 000 toys each month. Variable costs to manufacture and
sell one toy would be P12.50, and fixed costs associated with the toy would total P218 750 per
month.
The company’s Marketing Department predicts that demand for the new toy will exceed 16 000 units
that the company is able to produce. Additional manufacturing space can be rented from another
company at a fixed cost of P10 000 per month. Variable costs in the rented facility would total P14
per toy, due to somewhat less efficient operations than in the main plant. The new toy would sell for
P30 each.
The breakeven units for the new toy would be:
a.
12 500
b.
18 000
c.
21 000
d.
20 000
a.
12 500
Assume that a firm has accurately calculated the net cash flows relating to an investment proposal. If
the net present value of this proposal is greater than zero and the firm is under the constraint of
capital rationing, then the firm should:
a.
calculate the bailout period to make certain that the initial cash outlay can be
recovered within an appropriate period of time.
b.
compare the profitability index of the investment to those of other possible
investments.
c.
accept the proposal, since the acceptance of value-creating investments should
increase shareholder wealth.
d.
calculate the IRR of this investment to be certain that the IRR is greater than the
cost of capital.
b.
compare the profitability index of the investment to those of other possible
investments.
A company in which of the following industries is most likely to utilize a market-based as opposed to
a cost-based approach to pricing decisions?
a.
Non-competitive market, competitors’ products homogeneous.
b.
Competitive market, competitors’ products heterogeneous.
c.
Non-competitive market, competitors’ products heterogeneous.
d.
Competitive market, competitors’ products homogeneous.
d.
Competitive market, competitors’ products homogeneous.
Ceteris paribus, which of the following will increase a company’s quick ratio?
a.
An increase in accounts payable.
b.
An increase in inventory and fixed assets
c.
An increase in accounts receivable and payable
d.
An increase in accounts receivable.
e.
An increase in accounts receivable and inventory
f.
An increase in net fixed assets.
g.
An increase in inventory
h.
All of the statements above are correct
d.
An increase in accounts receivable.